<PAGE>
As Filed with the Securities and Exchange Commission on June 1, 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. 9 X
------- -------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-------
Amendment No. 15 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:
X
--- immediately upon filing pursuant to paragraph (b)
--- on________________ 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]
European Mid-Cap Fund
(Formerly Deutsche European Mid-Cap Fund)
Class A Shares, Class B Shares and Class C Shares
Prospectus
June 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION, AND AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to the section on
sales charges.)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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 .............................. 10
Investment Advisor and Sub-Advisor .................... 11
Administrator ......................................... 13
Financial Highlights .................................. 13
</TABLE>
<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 Fund's 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
foreign investing in a particular 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 foreign investment
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 the international equity markets.
FOREIGN INVESTING RISK. Foreign investing may entail different risks than
investing in the United States. 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
U.S. and could convey incomplete information when compared to information
typically provided by U.S. 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 U.S. 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 SPECIFIC REGIONS. 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 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.
[CHART]
<TABLE>
<CAPTION>
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
1998 1999
---- ----
<S> <C>
24.98% 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
March 31, 2000, the return for Class A Shares was 27.24%.
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>
1 YEAR MDAX(3) SINCE INCEPTION(1) MDAX(3)
------ ------- ------------------ -------
<S> <C> <C> <C> <C>
Class A Shares(2) ............................ 21.78% 4.58% 18.26% 5.44%
Class B Shares(2) ............................ 22.80% 4.58% 16.12% 20.81%
Class C Shares(2) ............................ 26.86% 4.58% 26.02% 2.70%
</TABLE>
--------
(1) Class A Shares: October 17, 1997
Class B Shares: March 30, 1998
Class C Shares: September 2, 1998
(2) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(3) The Midcap Index (MDAX) is a broad-based market index of 70 mid-sized German
companies with established operating histories.
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 ..................................................... 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees(5)......................... 0.25% 1.00% 1.00%
Other Expenses...................................................... 3.02% 2.52% 3.04%
----- ----- -----
Total Annual Fund Operating Expenses (before fee waivers and expense
reimbursements).................................................. 4.12% 4.37% 4.89%
Total Fee Waivers and Reimbursements of Fund Expenses .............. 2.52% 2.02% 2.54%
----- ----- -----
Total Net Annual Fund Operating Expenses (after fee waivers and
expense reimbursements)(6)....................................... 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. However, you may pay a contingent deferred sales charge when you
redeem your shares unless you are otherwise eligible for a sales charge
waiver or reduction. (See "Sales Charges -- Redemption Price.")
(2) Contingent deferred sales charges decline over time and reach zero after six
years. After seven years, Class B Shares convert automatically to Class A
Shares. (See "Sales Charges" and "How to Choose the Class That Is Right
for You.")
(3) You will be required to pay a contingent deferred sales charge if you redeem
your Class C 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. (A further discussion of the relationship between the Fund and the
Portfolio appears in the Organizational Structure section of this
Prospectus.)
(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 June 1, 2001 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 $1,516 $2,343 $4,474
Class B Shares ........................... $738 $1,441 $2,255 $4,316
Class C Shares ........................... $338 $1,243 $2,250 $4,778
You would pay the following expenses
if you did not redeem your shares:
Class A Shares ........................... $704 $1,516 $2,343 $4,474
Class B Shares ........................... $238 $1,441 $2,055 $4,316
Class C Shares ........................... $238 $1,243 $2,250 $4,778
</TABLE>
--------------------------------------------------------------------------------
*Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 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. (Refer to the section on 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, Czech Republic and Hungary.
The Fund's Advisors are responsible for managing the Fund's investments.
(Refer to the section on the 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-to-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.
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 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 markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by
developments, including political developments, that are unique to that
market. These developments may not affect the U.S. economy or the prices of
U.S. securities in the same manner. Therefore, the prices of foreign common
stocks may, at times, move in a different direction than the prices of U.S.
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 U.S. 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 U.S.
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 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. Small and mid-sized company
stocks 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. Small and mid-sized company managers may have less experience coping
with adversity or capitalizing on opportunity than their counterparts at larger
companies. Finally, small and mid-sized company stocks 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 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, 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. Read the
section on 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 p.m. Eastern Time,
it could be earlier 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
5
<PAGE>
that trade in foreign markets on days the Exchange is closed, the value of
the Fund's assets may change on days you cannot purchase, redeem or exchange
shares. The net asset value 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 outstanding shares of the class. Because the
different classes have different distribution or service fees, their net
asset values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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 invest in Class A Shares unless you are 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.
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 in this Fund 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. Refer to the section on the Fund's 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.
6
<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 less than $50,000) by
telephone. The Transfer Agent will mail your redemption check within seven
days after it receives your order in proper form. Refer to the section on
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 has the power to redeem the remaining shares after giving you
60 days' notice. The Fund 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 a.m. and 7:00 p.m. (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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which
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 % 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 C Shares,
you may pay a sales charge when you redeem your shares. Refer to the section
on 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 "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, B or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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.
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 % 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 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 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 eight 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. In addition, your
securities dealer is paid an annual fee as long as you hold your shares. For
Class A and B Shares, this fee begins when you purchase your shares. For Class C
Shares, this fee 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
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 and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
of the respective class and an annual shareholder servicing fee equal to 0.25%
of average daily net assets of the respective class. 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
taxable net investment income in the form of annual dividends and to distribute
taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal,
state and local taxation, depending on your tax situation. Distributions you
receive from the Fund may be taxable whether or not you reinvest them. Each
sale or exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state and local income taxes.
ORGANIZATIONAL STRUCTURE
-------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets in
the Portfolio. The Fund and the Portfolio have the same investment objective.
The Portfolio is advised by the Advisors. (See the section on 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 Board of Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Board withdraws the Fund's assets, the Board would then
consider whether the Fund should hire its own investment advisor, invest in a
different master portfolio, or take other action.
10
<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. 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 receives 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 June 1, 2001: 1.60% for Class A
Shares; and 2.35% for Class B Shares and 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 $874.8
billion and 90,850 employees as of June 30, 1999, 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 (DFH), a company with limited liability organized under the laws of
Germany. DFH subsidiaries include German-based DWS Investment GmbH (DWS
Investment) and others based in Luxembourg, Austria, Switzerland, France, Poland
and Italy. Together, DFH 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 $83.7 billion as of June 30, 1999. DFH, 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 DFH is DWS Investment. Founded in 1956, it is the
largest mutual fund company in Germany, holding a 23.9% share of the German
mutual fund market based on assets under management as of June 30, 1999. DFH and
its subsidiaries are known in the financial market as "DWS Group, Investment
Group of Deutsche Bank.
DFH subsidiaries have received widespread industry recognition in Europe.
For example, Micropal, Europe's leading fund rating organization, has accorded
DWS Investment the following awards: 1994: best fund manager for 1, 3, and
5-year periods; 1995: best fund manager for 1, 3, and 5-year periods; 1996: best
fund manager for 3 and 5-year periods; 1997: best fund manager for 3 and 5-year
periods; 1998: best fund manager for 1, 3 and 5-year periods. These awards were
given to fund managers having 10 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
subsidiary of Bankers Trust Corporation, announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and 1996. Bankers Trust plead guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and DWS
may not be able to continue to provide advisory services to the Funds. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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 CORRESPONDING DWS FUND
The Fund invests in an underlying Portfolio, the Provesta Portfolio. This
underlying Portfolio (and therefore the Fund) is designed to produce investment
results substantially the same as Provesta, which is a German-registered mutual
fund and will be referred to as the "DWS Fund." Provesta is the only fund
managed by DWS which has substantially similar investment objectives and
strategies as the Fund. The Provesta 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 underlying
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 counterpart DWS Fund. Also,
the investment objectives, policies and restrictions of the DWS Fund are the
same as those of its counterpart Provesta Portfolio except as noted below.
Information about the performance of the Fund and the counterpart 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 its counterpart DWS Fund. The DWS Fund operates under the German
regulatory and tax framework. The Fund and its underlying Portfolio operate
under the U.S. 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 U.S. 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 its counterpart Portfolio going forward. Investors
should note that the past performance of the DWS Fund is not predictive of the
future performance of the Fund or its underlying 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 August 31, 1999, and for the one-year period ended August 31, 1999. 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 counterpart DWS Fund for the one, three, five
and ten-year periods ended August 31, 1999. The performance of the Fund and its
counterpart 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 Provesta and the indices were not
adjusted to reflect the expense ratios 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 COUNTERPART PROVESTA(1)
Average Annual Total Return for the Periods Ended August 31, 1999
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE
IN U.S. DOLLARS
(UNAUDITED)
---------------------------
WITH SALES WITHOUT SALES CDAX INDEX MSCI EUROPE
EUROPEAN MID-CAP FUND LOAD(2) LOAD(3) (IN U.S. DOLLARS)(4) (IN U.S. DOLLARS)(5)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year ................ 2.9% 8.9% 2.4% 13.7%
10/17/97 to 8/31/99 ..... 8.7% 15.4% 16.5% 27.9%
PROVESTA(1)
One Year ................ 4.3% 10.4% 2.4% 13.7%
Three Years ............. 15.4% 17.6% 14.6% 21.3%
Five Years .............. 13.5% 14.8% 12.2% 18.1%
Ten Years ............... 13.8% 14.5% 11.23% 13.9%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Net Assets as of 8/31/99 were DM 1,508 million ($813 million). Provesta
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 "Sales Charges."
(4) The DAX Composite Index (CDAX) is a total rate of return index of all
domestic stocks traded on the Frankfurt Stock Exchange. It is a broad-based
index consisting of 16 industry groups. CDAX is a registered trademark of
Deutsche Borse AG.
(5) The Morgan Stanley Capital Market Europe Index (MSCI Europe) is an
unmanaged, capitalization-weighted securities index which represents 60%
of the market capitalization of 13 European countries.
The above results are shown in U.S. dollars on the basis of conversion at
the rate of DM values to U.S. dollars at the end of each month at the prevailing
rate. 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
12
<PAGE>
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 fund in DM
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 U.S. 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 counterpart DWS Fund was not eliminated); and (2) the DM returns (including
capital gains and income) were converted to U.S. 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 underlying Provesta Portfolio and its counterpart DWS
Fund and thus the investment characteristics of the underlying 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 its counterpart
DWS Fund. Consequently, there is no regulatory or tax difference between the
underlying Portfolio and its counterpart DWS Fund that would be expected to have
a material effect on the investment performance of the underlying Portfolio as
compared to its counterpart 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 its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year ended
August 31, 1999. The Annual Report is available upon request and accompanies the
Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August 31,
1999 under the name of the Fund in effect at that time (Deutsche Funds, Inc.).
13
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT
EACH PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<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) ............... (0.13) (0.01) 0.01
Net realized and unrealized gain on investments, future
contracts and foreign currency allocated from corresponding
Deutsche Portfolio .............................................. 10.54 1.26 1.71
----- ----- -----
Increase from investment operations ................................ 10.41 1.25 1.72
----- ----- -----
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ............................... -- -- --
Distributions from net realized gains .............................. (0.14) (0.19) --
----- ----- -----
Total distributions ................................................ (0.14) (0.19) --
----- ----- -----
Net asset value at end of period ................................... $25.55 $15.28 $14.22
----- ----- -----
----- ----- -----
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................ 68.57%* 8.86% 13.76%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) .................................. $22,187 $13,907 $2,402
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................ 1.60%** 1.60% 1.60%**
Net investment income (expenses in excess of income)(3) ............ (1.44)%** (0.10)% 0.23%**
Portfolio turnover of corresponding Deutsche Portfolio ............. 44%* 89% 82%*
</TABLE>
---------------------------
(1) Commencement of operations 10/17/97
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ............................... 2.83%** 4.12% 18.86%**
Expenses in excess of income to average net assets ........... (2.67)%** (2.62)% (17.03)%**
</TABLE>
* Not annualized
** Annualized
14
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT
EACH PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period ........................... $13.37 $12.55 $12.50
----- ----- -----
INVESTMENT OPERATIONS:
Expenses in excess of income ..................................... (0.17) (0.11) (0.02)
Net realized and unrealized gain on investments, future contracts
and foreign currency allocated from corresponding Deutsche
Portfolio ..................................................... 9.19 1.12 0.07
----- ----- -----
Increase from investment operations .............................. 9.02 1.01 0.05
----- ----- -----
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ............................. -- -- --
Distributions from net realized gains ............................ (0.14) (0.19) --
----- ----- -----
Total distributions .............................................. (0.14) (0.19) --
----- ----- -----
Net asset value at end of period ................................. $22.25 $13.37 $12.55
----- ----- -----
----- ----- -----
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) .......................... 67.96%* 8.12% 0.40%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................ $11,449 $6,940 $4,287
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ...................................................... 2.35%** 2.35% 2.35%**
Expenses in excess of income(3) .................................. (2.19)%** (1.06)% (0.70)%**
Portfolio turnover of corresponding Deutsche Portfolio ........... 44%* 89% 82%*
</TABLE>
----------------------
(1) Commencement of operations 3/30/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 .............................. 3.58%** 4.37% 19.61%**
Expenses in excess of income to average net assets .......... (3.42)%** (3.08)% (17.96)%**
</TABLE>
* Not annualized
** Annualized
15
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS C SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED ENDED(1)
FEBRUARY 29, AUGUST 31,
2000 1999
------------ --------------
(UNAUDITED)
<S> <C> <C>
Net asset value at beginning of period ....................................... $13.57 $12.50
----- -----
INVESTMENT OPERATIONS:
Expenses in excess of income ................................................. (0.17) (0.06)
Net realized and unrealized gain on investments, futures contracts and foreign
currency allocated from corresponding Deutsche Portfolio .................. 9.33 1.32
----- -----
Increase from investment operations .......................................... 9.16 1.26
----- -----
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ......................................... -- --
Distributions from net realized gains ........................................ (0.14) (0.19)
----- -----
Total distributions .......................................................... (0.14) (0.19)
----- -----
Net asset value at end of period ............................................. $22.59 $13.57
----- -----
----- -----
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ...................................... 67.99% 10.15%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................................ $2,841 $1,698
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) .................................................................. 2.35%** 2.35%**
Expenses in excess of income(3) .............................................. (2.19)%** (0.73)%**
Portfolio turnover of corresponding Deutsche Portfolio ....................... 44%* 89%*
</TABLE>
-------------------------
(1) Commencement of operations 9/2/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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>
Expenses to average net assets ..................... 3.59%** 4.89%**
Expenses in excess of income to average net assets.. (3.43)%** (3.27)%**
</TABLE>
* Not annualized
** 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 (06/00)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-Registered Trademark-
-------------------------------------------------
JAPANESE EQUITY FUND
(FORMERLY DEUTSCHE JAPANESE EQUITY FUND)
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JUNE 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to the section on
sales charges.)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C>
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
</TABLE>
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES 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 Fund's 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 Tokyo Stock
Price Index (TOPIX), 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
foreign investing in a particular 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 foreign investment
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 the international equity markets.
FOREIGN INVESTING RISK. Foreign investing may entail different risks than
investing in the United States. 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
U.S. and could convey incomplete information when compared to information
typically provided by U.S. 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 U.S. 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 SPECIFIC REGIONS. 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 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 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>
[CHART]
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
1998 4.70%
1999 169.29%
* 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
March 31, 2000, the return for Class A Shares was 0.68%.
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
1 YEAR INDEX(3) SINCE INCEPTION(1) INDEX(3)
------- -------- ------------------ --------
<S> <C> <C> <C> <C>
Class A Shares(2) .................................................... 154.44% 61.77% 45.08% 20.81%
Class B Shares(2) .................................................... 162.59% 61.77% 113.85% 68.22%
</TABLE>
-------------
(1) Class A Shares: October 20, 1997
Class B Shares: August 10, 1998
(2) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(3) The MSCI Japan Index is a broad-based market index of equity
securities listed on the Tokyo Stock Exchange.
No performance information is provided for the Class C Shares because they
were not offered prior to the date of this Prospectus. 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
INITIAL SALES DEFERRED DEFERRED
CHARGE SALES CHARGE SALES 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 ................................................ 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees(5) ................... 0.25% 1.00% 1.00%
Other Expenses ................................................ 4.78% 13.14% 1.37%
---- ----- ----
Total Annual Fund Operating Expenses (before fee
waivers and expense reimbursements) ........................ 5.88% 14.99% 3.22%
---- ----- ----
Total Fee Waivers and Reimbursements of Fund Expenses ......... 4.28% 12.64% 0.87%
---- ----- ----
Total Net Annual Fund Operating Expenses (after
fee waivers and expense reimbursements)(6) ................. 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. However, you may pay a contingent deferred sales charge when you
redeem your shares unless you are otherwise eligible for a sales charge
waiver or reduction. (See "Sales Charges-Redemption Price.")
(2) Contingent deferred sales charges decline over time and reach zero after
six years. After seven years, Class B Shares convert automatically to Class
A Shares. (See "Sales Charges" and "How to Choose the Class That Is Right
for You.")
(3) You will be required to pay a contingent deferred sales charge if you
redeem your Class C 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. (A further discussion of the relationship between the Fund and the
Portfolio appears in the Organizational Structure section of this
Prospectus.)
(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 June 1, 2001 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 $1,843 $2,962 $5,674
Class B Shares ............................................. $738 $3,316 $5,466 $8,040
Class C Shares ............................................. $338 $ 911 $1,608 $3,462
<CAPTION>
You would pay the following expenses if you did not redeem your shares:
<S> <C> <C> <C> <C>
Class A Shares ............................................. $704 $1,843 $2,962 $5,674
Class B Shares ............................................. $238 $3,016 $5,266 $8,040
Class C Shares ............................................. $238 $ 911 $1,608 $3,462
</TABLE>
-------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 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. (Refer to the section on 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 Fund's Advisors are responsible for managing the Fund's investments.
(Refer to the section on the 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 Tokyo Stock Price Index (TOPIX), 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 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 markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by developments,
including political developments, that are unique to that market. These
developments may not affect the U.S. economy or the prices of U.S. securities in
the same manner.
4
<PAGE>
Therefore, the prices of foreign common stocks may, at times, move in a
different direction than the prices of U.S. 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 U.S. 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 U.S.
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 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. Mid-sized company stocks 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. Mid-sized company managers may have less experience coping with
adversity or capitalizing on opportunity than their counterparts at larger
companies. Finally, mid-sized company stocks 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 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, 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. Read the
section on 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 p.m. Eastern Time,
it could be earlier 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 is closed, the value of the Fund's assets may change on days you cannot
purchase, redeem or exchange shares.
The net asset value 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 outstanding shares of the class. Because the
different classes have different distribution or service fees, their net asset
values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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.
5
<PAGE>
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 invest in Class A Shares unless you are 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.
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 in this Fund 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. Refer to the section on the Fund's 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 less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on 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.
6
<PAGE>
- 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 has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund 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 a.m. and 7:00 p.m. (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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which 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 % 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 C Shares, you
may pay a sales charge when you redeem your shares. Refer to the section on
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.
7
<PAGE>
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 "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, B or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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 % 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.
8
<PAGE>
- 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 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 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 eight 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. In addition, your
securities dealer is paid an annual fee as long as you hold your shares. For
Class A and B Shares, this fee begins when you purchase your shares. For Class C
Shares, this fee 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
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 and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
of the respective class and an annual shareholder servicing fee equal to 0.25%
of average daily net assets of the respective class. 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
taxable net investment income in the form of annual dividends and to distribute
taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local taxation, depending on your tax situation. Distributions you receive
from the Fund may be taxable whether or not you reinvest them. Each sale or
exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about
federal, state and local income taxes.
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets in
the Portfolio. The Fund and the Portfolio have the same investment objective.
The Portfolio is advised by the Advisors. (See the section on 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 Board of Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Board withdraws the Fund's assets, the Board 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 receives 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 June 1, 2001: 1.60% for Class A
Shares; and 2.35% for Class B Shares and 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 $874.8
billion and 90,850 employees as of June 30, 1999, 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 (DFH), a company with limited liability organized under the laws of
Germany. DFH subsidiaries include German-based DWS Investment GmbH (DWS
Investment) and others based in Luxembourg, Austria, Switzerland, France, Poland
and Italy. Together, DFH 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 $83.7 billion as of June 30, 1999. DFH, 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 DFH is DWS Investment. Founded in 1956, it is the
largest mutual fund company in Germany, holding a 23.9% share of the German
mutual fund market based on assets under management as of June 30, 1999. DFH and
its subsidiaries
10
<PAGE>
are known in the financial market as "DWS Group, Investment Group of Deutsche
Bank."
DFH subsidiaries have received widespread industry recognition in Europe.
For example, Micropal, Europe's leading fund rating organization, has accorded
DWS Investment the following awards: 1994: best fund manager for 1-, 3-, and
5-year periods; 1995: best fund manager for 1-, 3-, and 5-year periods; 1996:
best fund manager for 3- and 5-year periods; 1997: best fund manager for 3- and
5-year periods; 1998: best fund manager for 1-, 3- and 5-year periods. These
awards were given to fund managers having 10 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
subsidiary of Bankers Trust Corporation, announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and 1996. Bankers Trust plead guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and DWS
may not be able to continue to provide advisory services to the Funds. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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 its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year ended
August 31, 1999. The Annual Report is available upon request and accompanies the
Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August 31,
1999 under the name of the Fund in effect at that time (Deutsche Funds, Inc.).
Class C Shares were not offered to the public prior to August 31, 1999.
11
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<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) ............. (0.18) 0.00(2) (0.07)
Net realized and unrealized gain (loss) on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio ............................................ 9.40 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 ................................. $23.53 $ 20.12 $ 9.85
----- ----- -----
----- ----- -----
TOTAL RETURN (BASED ON NET ASSET VALUE)(3) ....................... 48.85%* 104.26% (21.20)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................ $4,156 $11,010 $ 14
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) ...................................................... 1.60%** 1.60% 1.60%**
Expenses in excess of income(4) .................................. (1.29)%** (1.29)% (1.00)%**
Portfolio turnover of corresponding Deutsche Portfolio ........... 78%* 133% 95%*
</TABLE>
--------------------------------------------------------------------------------
(1) Commencement of operations 10/20/97
(2) Amount rounds to less than $0.01.
(3) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(4) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ............................... 3.72%** 5.88% 454.24%**
Expenses in excess of income to average net assets ........... (3.41)%** (5.57)% (453.64)%**
</TABLE>
* Not annualized
** Annualized
12
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period .......................... $ 24.58 $12.11 $12.50
------- ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .................................... (0.22) (0.12) (0.01)
Net realized and unrealized gain (loss) on investments,
futures contracts and foreign currency allocated from
corresponding Deutsche Portfolio ............................. 11.48 12.59 (0.38)
------- ------ ------
Increase (decrease) from investment operations .................. 11.26 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 ................................ $ 30.03 $24.58 $12.11
------- ------ ------
------- ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ...................... 48.23%* 102.97% (3.12)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................... $10,195 $4,604 $ 283
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ..................................................... 2.35%** 2.35% 2.35%**
Expenses in excess of income(3) ................................. (1.93)%** (1.74)% (1.25)%**
Portfolio turnover of corresponding Deutsche Portfolio .......... 78%* 133% 95%*
</TABLE>
--------------
(1) Commencement of operations 8/10/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning
of each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager
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 ............................ 4.65%** 14.99% 454.99%**
Expenses in excess of income to average net assets ........ (4.23)%** (14.38)% (453.89)%**
</TABLE>
* Not annualized
** Annualized
13
<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 (06/00)
<PAGE>
[LOGO]
TOP 50 ASIA
(Formerly Deutsche Top 50 Asia)
Class A Shares, Class B Shares and
Class C Shares
PROSPECTUS
JUNE 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION, AND AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to the section on sales charges.)
TABLE OF CONTENTS
-------------------
<TABLE>
<S> <C>
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....................................10
INVESTMENT ADVISOR AND SUB-ADVISOR..........................11
ADMINISTRATOR...............................................12
FINANCIAL HIGHLIGHTS........................................12
</TABLE>
<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 Fund's 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
- generally 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 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 foreign investment
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 the international equity markets.
FOREIGN INVESTING RISK. Foreign investing may entail different risks
than investing in the United States. 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 U.S. and could convey incomplete information when compared to
information typically provided by U.S. 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 U.S. 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 SPECIFIC REGIONS. 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 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.
<TABLE>
<CAPTION>
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
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 March
31, 2000, the return for Class A Shares was 5.04%.
During the two-year period shown in the bar chart, the highest return
for a quarter was 38.92% (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
1 YEAR INDEX(3) SINCE INCEPTION(1) INDEX(3)
------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Class A Shares(2) 109.92% 43.20% 34.74% 13.04%
Class B Shares(2) 115.58% 43.20% 63.65% 19.58%
</TABLE>
----------------
1 Class A Shares: October 14, 1997
Class B Shares: May 5, 1998
2 These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
3 The MSCI Pacific ex-Japan Index is a broad-based market index of
Asia-Pacific (except Japan) equity securities.
No performance information is provided for the Class C Shares because
they have not been offered prior to the date of this Prospectus. 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 2.25% 1.75% 0.84%
Total Annual Fund Operating Expenses (before fee waivers and expense
reimbursements) 3.50% 3.75% 2.84%
Total Fee Waivers and Reimbursements of Fund Expenses 1.90% 1.40% 0.49%
Total Net Annual Fund Operating Expenses (after fee waivers and
expense reimbursements)(6) 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. However, you may pay a contingent deferred sales charge when you
redeem your shares unless you are otherwise eligible for a sales charge
waiver or reduction. (See "Sales Charges -- Redemption Price.")
2 Contingent deferred sales charges decline over time and reach zero after six
years. After seven years, Class B Shares convert automatically to Class A
Shares. (See "Sales Charges" and "How to Choose the Class That Is Right for
You.")
3 You will be required to pay a contingent deferred sales charge if you redeem
your Class C 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. (A further discussion of the relationship between the Fund and the
Portfolio appears in the Organizational Structure section of this
Prospectus.)
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 June 1, 2001 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 $1,398 $2,113 $3,998
Class B Shares $738 $1,318 $2,017 $3,824
Class C Shares $338 $834 $1,456 $3,131
You would pay the following expenses if you
did not redeem your shares:
Class A Shares $704 $1,398 $2,113 $3,998
Class B Shares $238 $1,018 $1,817 $3,824
Class C Shares $238 $ 834 $1,456 $3,131
</TABLE>
------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 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. (Refer to the section on 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 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. Some of the countries in which
the Fund invests may be considered emerging market countries.
The Fund's Advisors are responsible for managing the Fund's investments.
(Refer to the section on the 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
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 markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by
developments, including political developments, that are unique to that
market. These developments may not affect the U.S. economy or the prices of
U.S. securities in the same manner. Therefore, the prices of foreign common
stocks may, at times, move in a different direction than the prices of U.S.
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
U.S. 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
U.S. 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 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 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, 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.
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.
Read the section on 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 p.m.
Eastern Time, it could be earlier 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 is closed, the value of the Fund's
assets may change on days you cannot purchase, redeem or exchange shares. The
net asset value 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 outstanding shares of the class. Because the different classes
have different distribution or service fees, their net asset values may
differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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 invest in Class A Shares unless you are 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.
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 in this Fund 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. Refer to the section on the Fund's Automatic Investing Plan
for details.
- There is no minimum investment requirement for qualified retirement plans
such as 401(k), pen- sion 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 less than $50,000) by
telephone. The Transfer Agent will mail your redemption check within seven
days after it receives your order in proper form. Refer to the section on
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 has the power to redeem the remaining shares after giving you
60 days' notice. The Fund 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 a.m. and 7:00 p.m. (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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which
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 % 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
C Shares, you may pay a sales charge when you redeem your shares. Refer to
the section on 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 "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, B or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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.
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 % 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 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 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 eight 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. In addition,
your securities dealer is paid an annual fee as long as you hold your shares.
For Class A and B Shares, this fee begins when you purchase your shares. For
Class C Shares, this fee 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
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 and for shareholder service. Class A Shares
pay an annual distribution fee equal to 0.25% of average daily net assets.
Class B and C Shares pay an annual distribution fee equal to 0.75% of average
daily net assets of the respective class and an annual shareholder servicing
fee equal to 0.25% of average daily net assets of the respective class.
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 taxable net investment income in the form of annual dividends and to
distribute taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal,
state and local taxation, depending on your tax situation. Distributions you
receive from the Fund may be taxable whether or not you reinvest them. Each
sale or exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
ORGANIZATIONAL STRUCTURE
-----------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets
in the Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by the Advisors. (See the section on
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 Board of Directors to withdraw
the Fund's assets from the Portfolio if they believe doing so is in the
shareholder's best interests. If the Board withdraws the Fund's assets, the
Board would then consider whether the Fund should hire its own investment
advisor, invest in a different master portfolio, or take other action.
10
<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. 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 receives 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 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 June 1,
2001: 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
$874.8 billion and 90,850 employees as of June 30, 1999, 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 (DFH), a company with limited liability organized under the laws
of Germany. DFH subsidiaries include German-based DWS Investment GmbH (DWS
Investment) and others based in Luxembourg, Austria, Switzerland, France,
Poland and Italy. Together, DFH 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 US $83.7 billion as of June
30, 1999. DFH, 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 DFH is DWS Investment. Founded in 1956, it is
the largest mutual fund company in Germany, holding a 23.9% share of the
German mutual fund market based on assets under management as of June 30,
1999. DFH and its subsidiaries are known in the financial market as "DWS
Group, Investment Group of Deutsche Bank."
DFH subsidiaries have received widespread industry recognition in
Europe. For example, Micropal, Europe's leading fund rating organization, has
accorded DWS Investment the following awards: 1994: best fund manager for 1-,
3-, and 5-year periods; 1995: best fund manager for 1-, 3-, and 5-year
periods; 1996: best fund manager for 3- and 5-year periods; 1997: best fund
manager for 3- and 5-year periods; 1998: best fund manager for 1-, 3- and
5-year periods. These awards were given to fund managers having 10 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
separate subsidiary of Bankers Trust Corporation, announced that it had
reached an agreement with the United States Attorney's Office in the Southern
District of New York to resolve an investigation concerning inappropriate
transfers of unclaimed funds and related record-keeping problems that
occurred between 1994 and 1996. Bankers Trust plead guilty to misstating
entries in the bank's books and records and agreed to pay a $63.5 million
fine to state and federal authorities. On July 26, 1999, the federal criminal
proceedings were concluded with Bankers Trust's formal sentencing. The events
leading up to the guilty pleas did not arise out of the investment advisory
or mutual fund management activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and
DWS may not be able to continue to provide advisory services to the Funds.
The SEC has granted a temporary order to permit Bankers Trust and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a
permanent order.
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 its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year
ended August 31, 1999. The Annual Report is available upon request and
accompanies the Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August
31, 1999 under the name of the Fund in effect at that time (Deutsche Funds,
Inc.) Class C Shares were not offered to the public prior to August 31, 1999.
12
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period $ 18.79 $ 8.18 $12.50
--------- --------- -------
INVESTMENT OPERATIONS:
Net investment income (expenses in excess of income) (0.09) (0.10) 0.01
Net realized and unrealized gain (loss) on investments,
futures contracts and foreign currency allocated from
corresponding Deutsche Portfolio 7.90 10.72 (4.33)
--------- --------- -------
Increase (decrease) from investment operations 7.81 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 $ 25.51 $ 18.79 $ 8.18
--------- --------- -------
--------- --------- -------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) 42.37%* 130.00% (34.56)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 36,358 $ 23,954 $ 41
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 1.60%** 1.60% 1.60%**
Net investment income (expenses in excess of income)(3) (1.13)%** (0.34)% 0.15%**
Portfolio turnover of corresponding Deutsche Portfolio 28%* 51% 54%*
</TABLE>
-------------------
(1) Commencement of operations 10/14/97
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning
of each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 2.22%** 3.50% 247.05%**
Expenses in excess of income to average net assets (1.75)%** (2.24)% (245.30)%**
</TABLE>
*Not annualized
**Annualized
13
<PAGE>
FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period $21.21 $ 9.28 $12.50
--------- --------- -------
INVESTMENT OPERATIONS:
Expenses in excess of income (0.15) (0.12) (0.02)
Net realized and unrealized gain (loss) on investments,
futures contracts and foreign currency allocated from
corresponding Deutsche Portfolio 8.89 12.06 (3.20)
--------- --------- -------
Increase (decrease) from investment operations 8.74 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 $28.92 $21.21 $ 9.28
--------- --------- -------
--------- --------- -------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) 41.90%* 128.65% (25.76)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) $8,124 $3,667 $ 50
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 2.35%** 2.35% 2.35%**
Expenses in excess of income(3) (1.90)%** (1.32)% (0.51)%**
Portfolio turnover of corresponding Deutsche Portfolio 28%* 51% 54%*
</TABLE>
-----------------
(1) Commencement of operations 5/5/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning
of each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 2.96%** 3.75% 247.80%**
Expenses in excess of income to average net assets (2.51)%** (2.72)% (245.96)%**
</TABLE>
*Not annualized
**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 - 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 (06/00)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-REGISTERED TRADEMARK-
TOP 50 WORLD
(FORMERLY DEUTSCHE TOP 50 WORLD)
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
Prospectus
June 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION, AND AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to
the section on sales charges.)
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
<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. The Fund's 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
- generally 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 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 foreign investment
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 the international equity markets.
FOREIGN INVESTING RISK. Foreign investing may entail different risks than
investing in the United States. 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
U.S. and could convey incomplete information when compared to information
typically provided by U.S. 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 U.S. 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 SPECIFIC REGIONS. 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 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 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 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,
[Edgar Representation of Data Points Used in Printed Graphic]
<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 March 31,
2000, the return for Class A Shares was 1.24%.
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
1 YEAR INDEX(3) SINCE INCEPTION(1) INDEX(3)
------ -------- ------------------ --------
<S> <C> <C> <C> <C>
Class A Shares(2) .............................................. 23.34% 25.34% 21.49% 20.71%
Class B Shares(2) .............................................. 24.51% 25.34% 23.28% 19.88%
</TABLE>
---------------------
(1) Class A Shares: October 2, 1997
Class B Shares: May 4, 1998
(2) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(3) The MSCI World Index is a broad-based market index of foreign equity
securities.
No performance information is provided for the Class C Shares because they
were not offered prior to the date of this Prospectus. 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 ................................................................ 9.31% 10.29% 1.37%
----- ----- -----
Total Annual Fund Operating Expenses (before fee waivers and
expense reimbursements) .................................................... 10.56% 12.29% 3.37%
Total Fee Waivers and Reimbursements of Fund Expenses ......................... 8.96% 9.94% 1.02%
----- ----- -----
Total Net Annual Fund Operating Expenses (after fee waivers and
expense reimbursements)(6) ................................................. 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. However, you may pay a contingent deferred sales charge when
you redeem your shares unless you are otherwise eligible for a sales
charge waiver or reduction. (See "Sales Charges -- Redemption Price.")
(2) Contingent deferred sales charges decline over time and reach zero
after six years. After seven years, Class B Shares convert automatically
to Class A Shares. (See "Sales Charges" and "How to Choose the Class That
Is Right for You.")
(3) You will be required to pay a contingent deferred sales charge if you
redeem your Class C 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. (A further discussion of the relationship between the
Fund and the Portfolio appears in the Organizational Structure section of
this Prospectus.)
(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 June 1, 2001 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 $2,654 $4,394 $7,964
Class B Shares .............................................. $738 $2,881 $4,794 $8,223
Class C Shares .............................................. $338 $ 941 $1,668 $3,589
You would pay the following expenses if you did not redeem your shares:
Class A Shares .............................................. $704 $2,654 $4,394 $7,964
Class B Shares .............................................. $238 $2,581 $4,594 $8,223
Class C Shares .............................................. $238 $ 941 $1,668 $3,589
</TABLE>
-------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and
expense reimbursements for year 1 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. (Refer to the section on 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) 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, 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 Fund's Advisors are responsible for managing the Fund's investments.
(Refer to the section on the 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.
The Fund seeks international 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 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 main-
4
<PAGE>
tain 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
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 markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by
developments, including political developments, that are unique to that
market. These developments may not affect the U.S. economy or the prices of
U.S. securities in the same manner. Therefore, the prices of foreign common
stocks may, at times, move in a different direction than the prices of U.S.
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
U.S. 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
U.S. 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 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. Mid-sized company stocks 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. Mid-sized company managers may have less experience
coping with adversity or capitalizing on opportunity than their counterparts
at larger companies. Finally, mid-sized company stocks are typically less
liquid than large company stocks.
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency
5
<PAGE>
transactions, will depend on the ability of the Advisors to predict the
direction of the market and 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, 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.
Read the section on 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 p.m. Eastern Time, it could be earlier 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 is closed, the
value of the Fund's assets may change on days you cannot purchase, redeem or
exchange shares. The net asset value 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 outstanding shares of the class.
Because the different classes have different distribution or service fees,
their net asset values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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 invest in Class A Shares unless you are 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.
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 in this Fund may be as low as $500.
6
<PAGE>
- 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. Refer to the section on the Fund's 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 less than $50,000) by
telephone. The Transfer Agent will mail your redemption check within seven
days after it receives your order in proper form. Refer to the section on
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 has the power to redeem the remaining shares after giving you
60 days' notice. The Fund 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 a.m. and 7:00 p.m. (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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which
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:
CLASS A SALES
CHARGE AS % OF
------------------------------------------------------------------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
------------------------------------------------------------------------------
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
------------------------------------------------------------------------------
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
C Shares, you may pay a sales charge when you redeem your shares. Refer to
the section on 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 "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 affili-
8
<PAGE>
ates): 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, B or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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.
SALES CHARGE AS A PERCENTAGE OF THE
DOLLAR AMOUNT SUBJECT TO CHARGE
(AS % OF COST OR VALUE)
------------------------------------------------------------------------------
CLASS A SALES CLASS B SALES CLASS C SALES
YEAR SINCE PURCHASE CHARGE CHARGE CHARGE
------------------------------------------------------------------------------
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
------------------------------------------------------------------------------
* 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 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 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 eight 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. In addition,
your securities dealer is paid an annual fee as long as you hold your shares.
For Class A and B Shares, this fee begins when you purchase your shares. For
Class C Shares, this fee 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
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 and for shareholder service. Class A Shares
pay an annual distribution fee equal to 0.25% of average daily net assets.
Class B and C Shares pay an annual distribution fee equal to 0.75% of average
daily net assets of the respective class and an annual shareholder servicing
fee equal to 0.25% of average daily net assets of the respective class.
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 taxable net investment income in the form of annual dividends and to
distribute taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal,
state and local taxation, depending on your tax situation. Distributions you
receive from the Fund may be taxable whether or not you reinvest them. Each
sale or exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
ORGANIZATIONAL STRUCTURE
------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets
in the Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by the Advisors. (See the section on
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 Board of Directors to withdraw
the Fund's assets from the Portfolio if they believe doing so is in the
shareholder's best interests. If the Board withdraws the Fund's assets, the
Board 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 receives 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 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 June 1,
2001: 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
$874.8 billion and 90,850 employees as of June 30, 1999, 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 (DFH), a company with limited liability organized under the laws
of Germany. DFH subsidiaries include German-based DWS Investment GmbH (DWS
Investment) and others based in Luxembourg, Austria, Switzerland, France,
Poland and Italy. Together, DFH 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 US $83.7 billion as of June
30, 1999. DFH, 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 DFH is DWS Investment. Founded in 1956, it is
the largest mutual fund company in Germany, holding a 23.9% share of the
German mutual fund market based on assets under management as of June 30,
1999. DFH and its subsidiaries are known in the financial market as "DWS
Group, Investment Group of Deutsche Bank."
11
<PAGE>
DFH subsidiaries have received widespread industry recognition in
Europe. For example, Micropal, Europe's leading fund rating organization, has
accorded DWS Investment the following awards: 1994: best fund manager for 1,
3, and 5-year periods; 1995: best fund manager for 1, 3, and 5-year periods;
1996: best fund manager for 3 and 5-year periods; 1997: best fund manager for
3 and 5-year periods; 1998: best fund manager for 1, 3 and 5-year periods.
These awards were given to fund managers having 10 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
separate subsidiary of Bankers Trust Corporation, announced that it had
reached an agreement with the United States Attorney's Office in the Southern
District of New York to resolve an investigation concerning inappropriate
transfers of unclaimed funds and related record-keeping problems that
occurred between 1994 and 1996. Bankers Trust plead guilty to misstating
entries in the bank's books and records and agreed to pay a $63.5 million
fine to state and federal authorities. On July 26, 1999, the federal criminal
proceedings were concluded with Bankers Trust's formal sentencing. The events
leading up to the guilty pleas did not arise out of the investment advisory
or mutual fund management activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and
DWS may not be able to continue to provide advisory services to the Funds.
The SEC has granted a temporary order to permit Bankers Trust and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a
permanent order.
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 its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year
ended August 31, 1999. The Annual Report is available upon request and
accompanies the Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August
31, 1999 under the name of the Fund in effect at that time (Deutsche Funds,
Inc.) Class C Shares were not offered to the public prior to August 31, 1999.
12
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------- ------------- ---------------
(UNAUDITED)
<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) (0.06) 0.01 0.01
Net realized and unrealized gain (loss) on investments,
futures contracts and foreign currency allocated from
corresponding Deutsche Portfolio 2.49 5.18 (0.16)
------ ------ ------
Increase (decrease) from investment operations 2.43 5.19 (0.15)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income -- (0.00)(2) --
Distributions from net realized gains (0.16) (0.19) --
------ ------ ------
Total distributions (0.16) (0.19) --
------ ------ ------
Net asset value at end of period $19.62 $17.35 $12.35
------ ------ ------
------ ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(3) 14.06%* 42.19% (1.20)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) $3,350 $2,776 $181
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 1.60%** 1.60% 1.60%**
Net investment income (expenses in excess of income)(4) (0.68)%** 0.13% 0.13%**
Portfolio turnover of corresponding Deutsche Portfolio 51%* 79% 125%*
</TABLE>
-------------------
(1) Commencement of operations 10/2/97
(2) Amount rounds to less than $0.01.
(3) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning
of each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(4) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ................................. 6.19%** 10.56% 127.49%**
Net investment income (expenses in excess of income)
to average net assets ......................................... (5.27)%** (8.83)% (125.76)%**
</TABLE>
* Not annualized
** Annualized
13
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT
EACH PERIOD.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period .............................. $15.43 $11.08 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ........................................ (0.11) (0.02) (0.01)
Net realized and unrealized gain (loss) on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio ............................................... 2.20 4.56 (1.41)
------ ------ ------
Increase (decrease) from investment operations ...................... 2.09 4.54 (1.42)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ................................ -- (0.00)(2) --
Distributions from net realized gains ............................... (0.16) (0.19) --
------ ------ ------
Total distributions ................................................. (0.16) (0.19) --
------ ------ ------
Net asset value at end of period .................................... $17.36 $15.43 $11.08
------ ------ ------
------ ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(3) .......................... 13.60%* 41.14% (11.36)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................... $2,453 $2,131 $90
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) ......................................................... 2.35%** 2.35% 2.35%**
Expenses in excess of income(4) ..................................... (1.43)%** (0.64)% (0.84)%**
Portfolio turnover of corresponding Deutsche Portfolio .............. 51%* 79% 125%*
</TABLE>
-------------------
(1) Commencement of operations 5/4/98
(2) Amount rounds to less than $0.01.
(3) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning
of each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value.
During the period, total return would have been lower had certain
expenses not been reimbursed by the Manager.
(4) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ............................ 6.90%** 12.29% 128.24%**
Net investment income (expenses in excess of income)
to average net assets .................................. (5.98)%** (10.58)% (126.73)%**
</TABLE>
* Not annualized
** 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 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 (06/00)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-Registered Trademark-
TOP 50 US
(FORMERLY DEUTSCHE TOP 50 US)
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
Prospectus
June 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION, AND AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to the section on
sales charges.)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C>
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 ..........................9
Administrator ..............................................10
Financial Highlights .......................................11
</TABLE>
<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 U.S. companies. The Fund generally owns equity securities of 50 companies.
The Fund's 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
- generally 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 investment 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
other sectors or the market as a whole.
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 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,
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<S> <C>
1998 1999
33.88% 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
March 31, 2000, the return for Class A Shares was 1.88%.
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 SINCE S&P
1 YEAR 500 INDEX(3) INCEPTION(1) 500 INDEX(3)
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class A Shares(2)............. 20.98% 21.04% 24.86% 23.27%
Class B Shares(2)............. 22.01% 21.04% 23.55% 19.50%
Class C Shares(2)............. 25.61% 21.04% 44.78% 39.83%
</TABLE>
----------------
(1) Class A Shares: October 2, 1997
Class B Shares: March 18, 1998
Class C Shares: September 2, 1998.
(2) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(3) The Standard & Poor's (S&P) 500 Index is a broad-based market index of U.S.
equity securities.
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 DEFERRED
CHARGE SALES CHARGE SALES 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 ............................................................. 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees(5) ................................ 0.25% 1.00% 1.00%
----- ----- -----
Other Expenses ............................................................. 4.61% 4.98% 5.30%
----- ----- -----
Total Annual Fund Operating Expenses (before fee waivers and
expense reimbursement) .................................................. 5.71% 6.83% 7.15%
Total Fee Waivers and Reimbursement of Fund Expenses ....................... 4.56% 4.93% 5.25%
----- ----- -----
Total Net Annual Fund Operating Expenses (after fee waivers and
expense reimbursements)(6) .............................................. 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. However, you may pay a contingent deferred sales charge when you redeem
your shares unless you are otherwise eligible for a sales charge waiver or
reduction. (See "Sales Charges -- Redemption Price.")
(2) Contingent deferred sales charges decline over time and reach zero after six
years. After seven years, Class B shares convert automatically to Class A
shares. (See "Sales Charges" and "How to Choose the Class That Is Right for
You.")
(3) You will be required to pay a contingent deferred sales charge if you redeem
your Class C 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. (A further discussion of the relationship between the Fund and the
Portfolio appears in the Organizational Structure section of this Prospectus.)
(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 June 1, 2001 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 ................................................ $661 $1,774 $2,871 $5,546
Class B Shares ................................................ $693 $1,876 $3,108 $5,756
Class C Shares ................................................ $293 $1,636 $3,017 $6,219
You would pay the following expenses if you did not redeem your shares:
Class A Shares ................................................ $661 $1,774 $2,871 $5,546
Class B Shares ................................................ $193 $1,576 $2,908 $5,756
Class C Shares ................................................ $193 $1,636 $3,017 $6,219
</TABLE>
-----------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 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. (Refer to the section on 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 U.S. companies. The Fund's Advisors are responsible for managing the Fund's
investments. (Refer to the section on the 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 are located or headquartered in the United States, but
may also conduct a substantial part of their business outside the U.S. 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, and are
generally referred to as "Bulldogs." These companies are leading-edge U.S.
corporations and have a "no-holds-barred" attitude geared toward market share
dominance.
In selecting investments, the Advisors will also emphasize the market
valuation of a company's earnings (i.e., 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;
- if the size of a particular holding is too large relative to the
Fund's overall holdings; and
- whether the target price of a particular holding has been met.
The Advisors monitor the companies selected for the Fund to assess risk
by analyzing possible changes in
3
<PAGE>
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, 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 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
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, 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. Read the
section on 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 p.m. Eastern Time,
it could be earlier on the day before a holiday. Contact the Transfer Agent to
determine whether the Fund will close early before a particular holiday. The net
asset value is calculated by subtract-
4
<PAGE>
ing the liabilities attributable to a class from its proportionate share of the
Fund's assets and dividing the result by the outstanding shares of the class.
Because the different classes have different distribution or service fees, their
net asset values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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 invest in Class A Shares unless you are 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.
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 in this Fund 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. Refer to the section
on the Fund's 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 less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on 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 has the power to redeem the remaining shares after giving you 60
days' notice. The Fund 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 a.m. and 7:00 p.m. (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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which
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 % 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 C
Shares, you may pay a sales charge when you redeem your shares. Refer to the
section on 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 "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, B or C Shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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 % 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 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 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 eight 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. In addition,
your securities dealer is paid an annual fee as long as you hold your shares.
For Class A and B Shares, this fee begins when you purchase your shares. For
Class C Shares, this fee 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
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 and for shareholder service. Class A Shares pay
an annual distribution fee equal to 0.25% of average daily net assets. Class B
and C Shares pay an annual distribution fee equal to 0.75% of average daily net
assets of the respective class and an annual shareholder servicing fee equal to
0.25% of average daily net assets of the respective class. 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 taxable net investment income in the form of annual dividends and to
distribute taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local taxation, depending on your tax situation. Distributions you receive
from the Fund may be taxable whether or not you reinvest them. Each sale or
exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state and local income taxes.
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets
in the Portfolio. The Fund and the Portfolio have the same investment objective.
The Portfolio is advised by the Advisors. (See the section on 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 Board of Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Board withdraws the Fund's assets, the Board 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. Deutsche Asset Management, Inc. (DeAM,
Inc.) is the Portfolio's Sub-Advisor. The address for the Advisor is 280 Park
Avenue, New York, NY 10017. The address for
9
<PAGE>
DeAM, Inc. is 885 Third Avenue, 32nd Floor, New York, New York 10022.
The Advisor receives 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 June 1, 2001: 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 $874.8
billion and 90,850 employees as of June 30, 1999, 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
separate subsidiary of Bankers Trust Corporation, announced that it had reached
an agreement with the United States Attorney's Office in the Southern District
of New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and 1996. Bankers Trust plead guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and DeAM,
Inc. may not be able to continue to provide advisory services to the Funds. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
PORTFOLIO MANAGERS
Following are the portfolio managers who are primarily responsible for
the day-to-day management of the Portfolio that is the underlying investments 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 has served as the
Managing Director and Head of Investment Management for the Trust and Investment
Advisory Group through 1999. He is 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 $22.5 billion as
of June 30, 1999. 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 billion as of June 30,
1999. 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.
10
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year ended
August 31, 1999. The Annual Report is available upon request and accompanies the
Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August
31, 1999 under the name of the Fund in effect at that time (Deutsche Funds,
Inc.).
11
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period ........................ $17.89 $12.62 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .................................. (0.08) (0.08) (0.03)
Net realized and unrealized gain (loss) on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio ......................................... 3.17 5.35 0.15
------ ------ ------
Increase (Decrease) from Investment Operations ................ 3.09 5.27 0.12
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .......................... -- -- --
Distributions from net realized gains ......................... -- -- --
------ ------ ------
Total distributions ........................................... -- -- --
------ ------ ------
Net asset value at end of period .............................. $20.98 $17.89 $12.62
------ ------ ------
------ ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ....................... 17.27%* 41.76% 0.96%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................. $4,350 $3,370 $2,056
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ................................................... 1.50%** 1.50% 1.50%**
Expenses in excess of income(3) ............................... (0.80)%** (0.52)% (0.44)%**
Portfolio turnover of corresponding Deutsche Portfolio ........ 30%* 58% 24%*
</TABLE>
-----------------
(1) Commencement of operations 10/2/97
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ................................... 5.05%** 5.71% 11.58%**
Expenses in excess of income to average net assets ............... (4.35)%** (4.73)% (10.52)%**
</TABLE>
* Not annualized
** Annualized
12
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period ........................ $15.44 $10.96 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .................................. (0.12) (0.12) (0.06)
Net realized and unrealized gain (loss) on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio ......................................... 2.71 4.60 (1.48)
------ ------ ------
Increase (Decrease) from Investment Operations ................ 2.59 4.48 (1.54)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .......................... -- -- --
Distributions from net realized gains ......................... -- -- --
------ ------ ------
Total distributions ........................................... -- -- --
------ ------ ------
Net asset value at end of period .............................. $18.03 $15.44 $10.96
------ ------ ------
------ ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2)..................... 16.77%* 40.88% (12.32)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................. $3,436 $2,764 $ 436
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ................................................... 2.25%** 2.25% 2.25%**
Expenses in excess of income(3) ............................... (1.54)%** (1.30)% (1.35)%**
Portfolio turnover of corresponding Deutsche Portfolio ........ 30%* 58% 24%*
</TABLE>
-----------------
(1) Commencement of operations 3/18/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ...................................... 5.80%** 6.83% 12.33%**
Expenses in excess of income to average net assets .................. (5.09)%** (5.88)% (11.43)%**
</TABLE>
* Not annualized
** Annualized
13
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS C SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED ENDED(1)
FEBRUARY 29, AUGUST 31,
2000 1999
------------ --------------
(UNAUDITED)
<S> <C> <C>
Net asset value at beginning of period ................................... $16.83 $12.50
------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ............................................. (0.12) (0.09)
Net realized and unrealized gain on investments, futures contracts and
foreign currency allocated from corresponding Deutsche Portfolio ...... 2.96 4.42
------ ------
Increase from investment operations ...................................... 2.84 4.33
------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ..................................... -- --
Distributions from net realized gains .................................... -- --
------ ------
Total distributions ...................................................... -- --
------ ------
Net asset value at end of period ......................................... $19.67 $16.83
------ ------
------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 16.87%* 34.64%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........................................ $208 $136
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) .............................................................. 2.25%** 2.25%**
Expenses in excess of income(3) .......................................... (1.55)%** (1.31)%**
Portfolio turnover of corresponding Deutsche Portfolio ................... 30%* 58%*
</TABLE>
-----------------
(1) Commencement of operations 9/2/98
(2) Total Return based on net asset value, excluding transaction charges,
assumes a purchase of common stock at net asset value at the beginning of
each period, reinvestment of distributions at net asset value and a
redemption on the last day of the period, also at net asset value. During
the period, total return would have been lower had certain expenses not
been reimbursed by the Manager.
(3) Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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>
Expenses to average net assets ................................................ 5.78%** 7.15%**
Expenses in excess of income to average net assets ............................ (5.08)%** (6.21)%**
</TABLE>
* Not annualized
** Annualized
14
<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 (06/00)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-REGISTERED TRADEMARK-
TOP 50 EUROPE
(FORMERLY DEUTSCHE TOP 50 EUROPE)
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
PROSPECTUS
JUNE 1, 2000
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>
THIS MUTUAL FUND (THE "FUND") SEEKS HIGH CAPITAL APPRECIATION, AND AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME.
The Fund invests all of its assets in a corresponding 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 its corresponding 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. (Refer to
the section on 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 ...................................10
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 Fund's 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
- generally 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 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 foreign investment
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 the international equity markets.
FOREIGN INVESTING RISK. Foreign investing may entail different risks than
investing in the United States. 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
U.S. and could convey incomplete information when compared to information
typically provided by U.S. 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 U.S. 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 SPECIFIC REGIONS. 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 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 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.
[CHART]
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
* 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 March 31, 2000, the return for Class A Shares was 6.87%.
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
EUROPE SINCE EUROPE
1 YEAR INDEX(3) INCEPTION(1) INDEX(3)
------ ------- ----------- --------
<S> <C> <C> <C> <C>
Class A Shares(2) ............ 13.90% 16.23% 9.75% 19.76%
Class B Shares(2) ............ 14.55% 16.23% 6.35% 13.32%
Class C Shares(2) ............ 18.54% 16.23% 18.78% 23.64%
-----------------
</TABLE>
(1) Class A Shares: October 2, 1997
Class B Shares: March 30, 1998
Class C Shares: September 2, 1998
(2) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(3) The MSCI Europe Index is a broad-based market index of European equity
securities.
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 .................................................................. 3.48% 3.39% 3.97%
----- ----- -----
Total Annual Fund Operating Expenses (before fee waivers and
expense reimbursements) ...................................................... 4.73% 5.39% 5.97%
Total Fee Waivers and Reimbursements of Fund Expenses ........................... 3.13% 3.04% 3.62%
----- ----- -----
Total Net Annual Fund Operating Expenses (after fee waivers and
expense reimbursements)(6) ................................................... 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. However, you may pay a contingent deferred sales charge when you
redeem your shares unless you are otherwise eligible for a sales charge
waiver or reduction. (See "Sales Charges -- Redemption Price.")
(2) Contingent deferred sales charges decline over time and reach zero after
six years. After seven years, Class B Shares convert automatically to Class
A Shares. (See "Sales Charges" and "How to Choose the Class That Is Right
for You.")
(3) You will be required to pay a contingent deferred sales charge if you
redeem your Class C 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. (A further discussion of the relationship between the Fund and the
Portfolio appears in the Organizational Structure section of this
Prospectus.)
(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 June 1, 2001 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 $1,631 $2,563 $4,914
Class B Shares .......................................... $738 $1,640 $2,634 $4,948
Class C Shares .......................................... $338 $1,452 $2,642 $5,519
You would pay the following expenses if you did not redeem your shares:
Class A Shares .......................................... $704 $1,631 $2,563 $4,914
Class B Shares .......................................... $238 $1,340 $2,434 $4,948
Class C Shares .......................................... $238 $1,452 $2,642 $5,519
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 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. (Refer to the section on 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 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, Czech Republic and Hungary.
The Fund's Advisors are responsible for managing the Fund's investments.
(Refer to the section on the 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.
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 which 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 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 markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by developments,
including political developments, that are unique to that market. These
developments may not affect the U.S. economy or the prices of U.S. securities in
the same manner. Therefore, the prices of foreign common stocks may, at times,
move in a different direction than the prices of U.S. 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 U.S. 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 U.S.
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 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. Mid-sized company stocks 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. Mid-sized company managers may have less experience coping with
adversity or capitalizing on opportunity than their counterparts at larger
companies. Finally, mid-sized company stocks 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 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.
5
<PAGE>
To reduce the Fund's risk, 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. Read the
section on 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 p.m. Eastern Time,
it could be earlier 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 is closed, the value of the Fund's assets may change on days you cannot
purchase, redeem or exchange shares. The net asset value 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 outstanding shares of the
class. Because the different classes have different distribution or service
fees, their net asset values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
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 invest in Class A Shares unless you are 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.
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 in this Fund 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. Refer to the section on the Fund's Automatic
Investing Plan for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
6
<PAGE>
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 less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on 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 has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund 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 a.m. and 7:00 p.m. (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.
7
<PAGE>
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 effect 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 extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail or facsimile.
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, which 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 % 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 C Shares, you
may pay a sales charge when you redeem your shares. Refer to the section on
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 "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, B or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or 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 Class A shares of a Flag Investors money
market fund into the Fund without payment of the sales charge 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 % 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 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 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 eight 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. In addition, your
securities dealer is paid an annual fee as long as you hold your shares. For
Class A and B Shares, this fee begins when you purchase your shares. For Class C
Shares, this fee 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
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 and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
of the respective class and an annual shareholder servicing fee equal to 0.25%
of average daily net assets of the respective class. 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
taxable net investment income in the form of annual dividends and to distribute
taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local taxation, depending on your tax situation. Distributions you receive
from the Fund may be taxable whether or not you reinvest them. Each sale or
exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state and local income taxes.
ORGANIZATIONAL STRUCTURE
-------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets in
the Portfolio. The Fund and the Portfolio have the same investment objective.
The Portfolio is advised by the Advisors. (See the section on 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 Board of Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Board withdraws the Fund's assets, the Board would then
consider whether the Fund should hire its own investment advisor, invest in a
different master portfolio, or take other action.
10
<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. 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 receives 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 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 June 1, 2001: 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 $874.8
billion and 90,850 employees as of June 30, 1999, 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 (DFH), a company with limited liability organized under the laws of
Germany. DFH subsidiaries include German-based DWS Investment GmbH (DWS
Investment) and others based in Luxembourg, Austria, Switzerland, France, Poland
and Italy. Together, DFH 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 US $83.7 billion as of June 30, 1999. DFH, 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 DFH is DWS Investment. Founded in 1956, it is the
largest mutual fund company in Germany, holding a 23.9% share of the German
mutual fund market based on assets under management as of June 30, 1999. DFH and
its subsidiaries are known in the financial market as "DWS Group, Investment
Group of Deutsche Bank."
DFH subsidiaries have received widespread industry recognition in Europe.
For example, Micropal, Europe's leading fund rating organization, has accorded
DWS Investment the following awards: 1994: best fund manager for 1, 3, and
5-year periods; 1995: best fund manager for 1, 3, and 5-year periods; 1996: best
fund manager for 3 and 5-year periods; 1997: best fund manager for 3 and 5-year
periods; 1998: best fund manager for 1, 3 and 5-year periods. These awards were
given to fund managers having 10 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.
On June 4, 1999, Deutsche Bank AG (Deutsche Bank) acquired Bankers Trust
Corporation. On March 11, 1999, Bankers Trust Company (Bankers Trust), a
separate subsidiary of Bankers Trust Corporation, announced that it had reached
an agreement with the United States Attorney's Office in the Southern District
of New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and 1996. Bankers Trust plead guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
Deutsche Bank's acquisition of Bankers Trust occurred after these events
took place. As a result of the plea, absent an order from the SEC, DFM and DWS
may not be able to continue to provide advisory services to the Funds. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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 its inception in October 1997. Some of the
information is presented on a per share basis. 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 (except as noted) has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's audited
financial statements, is included in the Annual Report for the fiscal year ended
August 31, 1999. The Annual Report is available upon request and accompanies the
Fund's Statement of Additional Information.
The financial information is presented for the fiscal year ended August 31,
1999 under the name of the Fund in effect at that time (Deutsche Funds, Inc.).
12
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------- ------------ ---------------
(UNAUDITED)
<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) ................... (0.06) 0.04 0.02
Net realized and unrealized gain on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio .................................................. 4.24 0.33 0.51
------- ------- -------
Increase from investment operations ................................. 4.18 0.37 0.53
------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .................................. -- -- --
Distributions from net realized gains ................................. -- -- --
------- ------- -------
Total distributions ................................................... -- -- --
------- ------- -------
Net asset value at end of period ...................................... $17.58 $13.40 $13.03
====== ====== =======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 31.19%* 2.84% 4.24%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................... $5,869 $3,796 $1,208
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................... 1.60%** 1.60% 1.60%**
Net investment income (expenses in excess of income)(3) ............... (0.72)%** 0.44% 0.50%**
Portfolio turnover of corresponding Deutsche Portfolio ................ 32%* 61% 27%*
</TABLE>
-------------------------------
(1)Commencement of operations 10/2/97
(2)Total Return based on net asset value, excluding transaction charges, assumes
a purchase of common stock at net asset value at the beginning of each
period, reinvestment of distributions at net asset value and a redemption
on the last day of the period, also at net asset value. During the period,
total return would have been lower had certain expenses not been reimbursed
by the Manager.
(3)Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 ................................... 3.86%** 4.73% 16.53%**
Expenses in excess of income to average net assets ............... (2.98)%** (2.69)% (14.43)%**
</TABLE>
* Not annualized
** Annualized
13
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS B SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE PERIOD
MONTHS ENDED ENDED ENDED(1)
FEBRUARY 29, AUGUST 31, AUGUST 31,
2000 1999 1998
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value at beginning of period ............................ $11.89 $11.65 $12.50
------- ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ...................................... (0.10) (0.04) (0.01)
Net realized and unrealized gain (loss) on investments, futures
contracts and foreign currency allocated from corresponding
Deutsche Portfolio ............................................. 3.75 0.28 (0.84)
------- ------ ------
Increase (decrease) from investment operations .................... 3.65 0.24 (0.85)
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .............................. -- -- --
Distributions from net realized gains ............................. -- -- --
------- ------ ------
Total distributions ............................................... -- -- --
------- ------ ------
Net asset value at end of period .................................. $15.54 $11.89 $11.65
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ........................... 30.70%* 2.06% (6.80)%*
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................. $7,962 $6,395 $3,120
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ....................................................... 2.35%** 2.35% 2.35%**
Expenses in excess of income(3) ................................... (1.41)%** (0.46)% (0.46)%**
Portfolio turnover of corresponding Deutsche Portfolio ............ 32%* 61% 27%*
</TABLE>
----------------------------------
(1)Commencement of operations 3/30/98
(2)Total Return based on net asset value, excluding transaction charges, assumes
a purchase of common stock at net asset value at the beginning of each
period, reinvestment of distributions at net asset value and a redemption
on the last day of the period, also at net asset value. During the period,
total return would have been lower had certain expenses not been reimbursed
by the Manager.
(3)Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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 .................................. 4.63%** 5.39% 17.28%**
Expenses in excess of income to average net assets .............. (3.69)%** (3.50)% (15.39)%**
</TABLE>
*Not annualized
**Annualized
14
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
SELECTED DATA FOR A CLASS C SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH
PERIOD.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED ENDED(1)
FEBRUARY 29, AUGUST 31,
2000 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
Net asset value at beginning of period ....................................... $12.95 $12.50
------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ................................................. (0.10) (0.03)
Net realized and unrealized gain on investments, futures contracts and
foreign currency allocated from corresponding Deutsche Portfolio .......... 4.08 0.48
------ ------
Increase from investment operations .......................................... 3.98 0.45
------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ......................................... -- --
Distributions from net realized gains ........................................ -- --
------ ------
Total distributions .......................................................... -- --
------ ------
Net asset value at end of period ............................................. $16.93 $12.95
====== =======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ...................................... 30.73% 3.60%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................................ $1,235 $967
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)** ................................................................ 2.35% 2.35%
Expenses in excess of income(3)** ............................................ (1.41)% (0.31)%
Portfolio turnover of corresponding Deutsche Portfolio* ...................... 32% 61%
</TABLE>
-------------------------
(1)Commencement of operations 9/2/98
(2)Total Return based on net asset value, excluding transaction charges, assumes
a purchase of common stock at net asset value at the beginning of each
period, reinvestment of distributions at net asset value and a redemption
on the last day of the period, also at net asset value. During the period,
total return would have been lower had certain expenses not been reimbursed
by the Manager.
(3)Includes the Fund's allocated portion of the corresponding Deutsche
Portfolio's expenses net of expense reimbursements. Had the Manager 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>
Expenses to average net assets** ......................... 4.61%** 5.97%
Expenses in excess of income to average net assets** ..... (3.67)%** (3.93)%
</TABLE>
*Not annualized
**Annualized
<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 (06/00)
<PAGE>
FLAG INVESTORS FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
- FLAG INVESTORS TOP 50 WORLD - FLAG INVESTORS TOP 50 US
(Class A Shares, Class B Shares and Class C Shares) (Class A Shares, Class B Shares and Class C Shares)
- FLAG INVESTORS TOP 50 EUROPE - FLAG INVESTORS EUROPEAN MID-CAP FUND
(Class A Shares, Class B Shares and Class C Shares) (Class A Shares, Class B Shares and Class C Shares)
- FLAG INVESTORS TOP 50 ASIA - FLAG INVESTORS JAPANESE EQUITY FUND
(Class A Shares, Class B Shares and Class C Shares) (Class A Shares, Class B Shares and Class C Shares)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Each Fund formerly named "Deutsche" rather than "Flag Investors.")
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the individual Prospectus for each Flag Investors Funds,
Inc. (formerly Deutsche Funds, Inc.), dated June 1, 2000. This SAI uses the same
terms as defined in the Prospectus. This SAI incorporates by reference and is
accompanied by the Funds' Annual Report for the fiscal year ended August 31,
1999. You may obtain the Prospectus without charge by written request to the
Funds, or by calling toll-free 1-800-767-FLAG.
P.O. BOX 515
BALTIMORE, MARYLAND 21203
JUNE 1, 2000
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Organization 1
Securities in Which the Portfolios Invest 2
Securities Descriptions, Techniques and Risks 3
What Do Shares Cost? 22
How are the Funds Sold? 23
Redemption 24
Account and Share Information 25
Tax Information 27
Who Manages and Provides Services to the Funds? 28
How Do the Funds Measure Performance? 35
Financial Information 39
Appendices 40
Addresses 53
</TABLE>
COMBFLAGSAI (6/00)
ICC DISTRIBUTORS, INC.
--------------------------------------------------
Distributor
<PAGE>
ORGANIZATION
Flag Investors Funds, Inc. (Corporation) is an open-end, management investment
company that was established as a Maryland corporation on May 22, 1997. The
Corporation changed its name from Deutsche Funds, Inc. effective January 18,
2000. The Corporation currently offers six Funds. Unlike other mutual funds
which directly acquire and manage their own portfolio of securities, each Fund
seeks to achieve its investment objective by investing all of its assets in a
corresponding portfolio of Flag Investors Portfolios Trust (renamed from
Deutsche Portfolios effective January 18, 2000) through a master-feeder
investment fund structure.
Flag Investors Portfolios Trust (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 as Portfolio or Portfolios).
The chart below lists each Fund, its classes of shares and the corresponding
Portfolio in which it invests. All of the Funds and Portfolios are
non-diversified.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
FUND NAME CORRESPONDING PORTFOLIO
(SHARE CLASSES)
------------------------------------------------------------------------------------
<S> <C>
TOP 50 WORLD Top 50 World Portfolio (US Dollar)
(Class A Shares, Class B Shares and Class C
Shares)
------------------------------------------------------------------------------------
TOP 50 EUROPE Top 50 Europe Portfolio (US Dollar)
(Class A Shares, Class B Shares and Class C
Shares)
------------------------------------------------------------------------------------
TOP 50 ASIA Top 50 Asia Portfolio (US Dollar)
(Class A Shares, Class B Shares and Class C
Shares)
------------------------------------------------------------------------------------
TOP 50 US Top 50 US Portfolio (US Dollar)
(Class A Shares, Class B Shares and Class C
Shares)
------------------------------------------------------------------------------------
EUROPEAN MID-CAP FUND Provesta Portfolio (US Dollar)
(Class A Shares, Class B Shares and Class C
Shares)
------------------------------------------------------------------------------------
JAPANESE EQUITY FUND Japanese Equity Portfolio (US
(Class A Shares, Class B Shares and Class C Dollar)
Shares)
------------------------------------------------------------------------------------
</TABLE>
None of the Funds has hired an investment advisor. Each Portfolio's investment
manager is Deutsche Fund Management, Inc. (DFM or Manager), a registered
investment advisor. DFM has retained the services of an affiliate to serve as
investment sub-adviser for the Portfolios. DWS International Portfolio
Management GmbH (DWS) is the investment sub-advisor of each Portfolio except the
Top 50 US Portfolio (US Dollar), for which Deutsche Asset Management, Inc.
(DeAM, Inc.) is the investment sub-advisor (DWS and DeAM, Inc. are individually
or collectively referred to as the Sub-Advisor).
<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(s) and its
(their) acceptable investments.
Following is a table that indicates which types of securities are a:
- P = PRINCIPAL investment of a Fund and its corresponding Portfolio; (shaded
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
--------------------------------------------------------------------------------------------------------------------------
FIXED INCOME SECURITIES A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Treasury Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Agency Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Corporate Debt Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Commercial Paper A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Demand Instruments A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Insurance Contracts A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Brady Bonds A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Taxable Municipal Securities N N N N N N
--------------------------------------------------------------------------------------------------------------------------
Mortgage Backed Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Zero Coupon Securities A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Bank Instruments A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Credit Enhancement A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand A A A A A A
Instruments
--------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES A A A A A A
--------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES P P P A P P
--------------------------------------------------------------------------------------------------------------------------
Depository Receipts A A A A A A
--------------------------------------------------------------------------------------------------------------------------
DERIVATIVE CONTRACTS A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Futures Contracts A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Options A A A A A A
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<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>
SPECIAL TRANSACTIONS
--------------------------------------------------------------------------------------------------------------------------
Borrowing A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Delayed Delivery Transactions A A A A A A
--------------------------------------------------------------------------------------------------------------------------
Securities Lending A A A A A A
--------------------------------------------------------------------------------------------------------------------------
INVESTING IN SECURITIES OF OTHER A A A A A A
INVESTMENT COMPANIES
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES DESCRIPTIONS, TECHNIQUES AND RISKS
The following information supplements the Prospectus disclosure regarding the
investment strategies, investments and risks of the Funds (as well as their
underlying corresponding Portfolios). Each Portfolio underlying the identified
Fund(s) may invest in the type of security and its related subtype unless
otherwise noted. The descriptions are general and may not be applicable in
certain countries in which the underlying Portfolios invest.
Although not a principal investment strategy, the TOP 50 WORLD PORTFOLIO (and
the TOP 50 WORLD) is able to invest up to 20% of its net assets in investment
grade fixed income securities (excluding bank deposits and money market
instruments).
The TOP 50 EUROPE PORTFOLIO pursues its (and the TOP 50 EUROPE's) investment
objective by investing at least 65% of its total assets in the equity securities
of issuers located in European countries, including those which are member
states of the European Union ("Member States"), those which are party to the
Convention on the European Economic Area (CEEA), Poland, Switzerland, Slovakia,
Czech Republic, and Hungary. Although not a principal investment strategy, the
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).
The TOP 50 ASIA PORTFOLIO pursues its (and the TOP 50 ASIA's) investment
objective by investing at least 65% of its total assets in the equity securities
of issuers with a domicile or business focus in Asian countries, including
China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines,
Singapore, Taiwan, and Thailand. A company has its business focus in Asia when
the majority of its profits or sales are made there. Although not a principal
investment strategy, the 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).
Although not a principal investment strategy, the TOP 50 US PORTFOLIOS (and the
TOP 50 US) is able to invest up to 20% of its net assets in investment grade
fixed income securities (excluding bank deposits and money market instruments).
The PROVESTA PORTFOLIO pursues its (and the EUROPEAN MID-CAP FUND's) investment
objective by investing primarily in the equity securities of issuers located in
European countries, including those which are member states of the European
Union, those which are party to the CEEA, Poland, Switzerland, Slovakia, Czech
Republic, and Hungary. While the Portfolio intends to be fully invested in
equity securities, it may invest up to 20% of its net assets in fixed income
securities (other than bank deposits and money market instruments).
The JAPANESE EQUITY PORTFOLIO pursues its (and the JAPANESE EQUITY FUND's)
investment objective by investing primarily in the equity securities of Japanese
issuers. Under normal circumstances, at least 65% of the Portfolio's total
assets are invested in equity securities issued by Japanese companies, which may
include, for the purpose of meeting such 65% minimum, up to 5% of total assets
in securities that grant the right to acquire Japanese securities. While the
Portfolio intends to be fully invested in equity securities, it may invest up to
30% of its net assets in fixed income securities (other than bank deposits and
money market instruments).
3
<PAGE>
EQUITY SECURITIES
As discussed in the Funds' Prospectus, each Portfolio underlying the Funds may
invest in the equity securities of domestic and foreign issuers to the extent
consistent with its investment objectives and policies. Equity investments may
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure. The
provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible securities, the
holder's claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of common shareholders.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the
stock. The Portfolios may also treat such redeemable preferred stock as a
fixed income security.
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.
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; however, 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)
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.
WARRANTS
Warrants give the Portfolios the option to buy the issuer's equity
securities at a specified price (the exercise price) at a specified future
date (the expiration date). The Portfolios may buy the designated
securities by paying the exercise price before the expiration date.
Warrants may become worthless if the price of the stock does not rise above
the exercise price by the expiration date. This increases the market risks
of warrants as compared to the underlying security. Rights are the same as
warrants, except companies typically issue rights to existing stockholders.
Each Portfolio underlying the Funds may purchase warrants in value of up to
10% of the Portfolio's net assets. 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. Also the
value of the warrant does not necessarily change with the value of the
underlying securities.
FIXED INCOME SECURITIES
DEMAND INSTRUMENTS
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 and Fund treats demand instruments as short-term securities,
even though their stated maturity may extend beyond one year.
INSURANCE CONTRACTS
Insurance contracts include guaranteed investment contracts, funding
agreements and annuities. Each Portfolio and Fund treats these contracts as
fixed income securities.
BRADY BONDS
Brady Bonds are U.S. dollar denominated debt obligations that foreign
governments issue in exchange for commercial bank loans. 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.
MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates. Interests in pools
4
<PAGE>
of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer
deducts its fees and expenses and passes the balance of the payments onto
the certificate holders once a month. Holders of pass-through certificates
receive a pro rata share of all payments and pre-payments from the
underlying mortgages. As a result, the holders assume all the prepayment
risks of the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
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
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
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
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
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
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 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.
The degree of increased or decreased prepayment risks depends upon the
structure of the CMOs. However, the actual returns on any type of mortgage
backed security depend upon the performance of the underlying pool of
mortgages, which no one can predict and will vary among pools.
ASSET BACKED SECURITIES
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial
debts with maturities of less than ten years. However, almost any type of
fixed income assets (including other fixed income securities) may be used
to create an asset backed security. Asset backed securities may take the
form of commercial paper, notes, or pass through certificates. Asset backed
securities have prepayment risks. Like CMOs, asset backed securities may be
structured like Floaters, Inverse Floaters, IOs and POs.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some
cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer.
Normally, the credit enhancer has greater financial resources and
5
<PAGE>
liquidity than the issuer. For this reason, the Advisor usually evaluates
the credit risk of a fixed income security based solely upon its credit
enhancement.
Common types of credit enhancement include guarantees, letters of credit,
bond insurance and surety bonds. Credit enhancement also includes
arrangements where securities or other liquid assets secure payment of a
fixed income security. If a default occurs, these assets may be sold and
the proceeds paid to security's holders. Either form of credit enhancement
reduces credit risks by providing another source of payment for a fixed
income security.
INVESTMENT RATINGS
The fixed income securities in which the underlying Portfolios invest 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.
The Advisor determines whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating service. 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, the Portfolio must rely entirely upon the
Advisor's credit assessment that the security is comparable to investment grade.
Securities rated BBB have speculative characteristics.
LISTED SECURITIES
Each Portfolio underlying the Funds 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 in a Member State or in another state party
to the CEEA which 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 B or included on one of the regulated markets
listed in Appendix B; 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
Up to a total of 10% of the net assets of each Portfolio underlying the Funds
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 Portfolio underlying the JAPANESE EQUITY FUND and
20% for all other Portfolios underlying the Funds).
The current Member States, the states party to the CEEA, and OECD Members are
listed in Appendix B.
6
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities (and may include preferred
stock) that the Portfolios underlying the Funds have the option to exchange for
equity securities at a specified conversion price. 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 its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Portfolios to realize some of the potential appreciation of the underlying
equity securities with less risk of losing their initial investment.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States.
The Portfolios underlying the Funds (except Top 50 US) 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
- 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 in another country.
The Portfolio underlying Top 50 U.S. 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 B for a listing of the countries included in each of the
above organizations and the additional markets and exchanges where the
Portfolios may invest.
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market as
the underlying security. The foreign securities underlying American
Depositary Receipts (ADRs) are traded in the United States. ADRs provide a
way to buy shares of foreign-based companies in the United States rather
than in overseas markets. ADRs are also traded in U.S. dollars, eliminating
the need for foreign exchange transactions. The foreign securities
underlying European Depositary Receipts (EDRs), Global Depositary Receipts
(GDRs), and International Depositary Receipts (IDRs), are traded globally
or outside the United States. Depositary receipts involve many of the same
risks of investing directly in foreign securities, including currency risks
and risks of foreign investing.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations
of supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the
International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Investment Bank and the Inter-American
Development Bank.
Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by
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entities owned by a national, state or equivalent government or are
obligations of a political unit that are not backed by the national
government's full faith and credit. Further, foreign government securities
include mortgage-related securities issued or guaranteed by national, state
or provincial governmental instrumentalities, including quasi-governmental
agencies.
SHORT-TERM INSTRUMENTS
Although it is intended that the assets of each Portfolio underlying the
Funds stay invested in the equity and fixed income securities described
above and in each Fund's Prospectus to the extent practical in light of
each Portfolio's investment objective and long-term investment perspective,
assets of each Portfolio may be invested in bank deposits and money market
instruments maturing in less than 12 months to meet anticipated expenses or
for day-to-day operating purposes and when, in the Advisor's opinion, it is
advisable to adopt a temporary defensive position because of unusual and
adverse conditions affecting the equity or fixed income markets. In
addition, when a Portfolio experiences large cash inflows through
additional investments by its investors or the sale of portfolio
securities, and desirable securities that are consistent with its
investment objective are unavailable in sufficient quantities, assets may
be held in short-term investments for a limited time pending availability
of such securities. Bank deposits and money market instruments include
credit balances and bank certificates of deposit, discounted treasury notes
and bills issued by the Federal Republic of Germany ("Germany"), the states
of Germany, the European Union, other member states of the Organization for
Economic Cooperation and Development ("OECD") or quasi-government entities
of any of the foregoing. To the extent a Portfolio engages in short-term
trading, it may realize short-term capital gains or losses and incur
increased transaction costs.
See Appendix B for a listing of the countries included in each of the above
organizations and the additional markets and exchanges where the Portfolios
may invest.
DERIVATIVE CONTRACTS
Many derivative contracts are traded on securities or commodities exchanges.
Derivative contracts bought and sold by the Portfolios underlying the Funds must
be admitted to official listing on a recognized futures or securities exchange.
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 Portfolio.
For example, a Portfolio could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Portfolio realizes a gain; if it is less, the Portfolio realizes a
loss. Exchanges may limit the amount of open contracts permitted at any one
time. Such limits may prevent the Portfolio from closing out a position. If this
happens, the Portfolio will be required to keep the contract open (even if it is
losing money on the contract), and to make any payments required under the
contract (even if it has to sell portfolio securities at unfavorable prices to
do so). Inability to close out a contract could also harm the Portfolio by
preventing it from disposing of or trading any assets it has been using to
secure its obligations under the contract.
Depending upon how the Portfolios use derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Portfolios' exposure to market
and currency risks, and may also expose the Portfolios to liquidity and leverage
risks.
The Portfolios may use derivative contracts for hedging risk management purposes
or for obtaining exposure to certain securities or markets. In addition, these
Portfolios (other than Top 50 US Portfolio) may enter into derivative
transactions for non-hedging purposes subject to certain percentage limits and
only to the extent that they relate to categories of assets which the Portfolio
is permitted to hold. Top 50 US Portfolio does not have the limitation on its
derivatives contracts.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the market and credit risks of a zero coupon security. A zero coupon
step-up security converts to a coupon security before final maturity.
There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's coupon
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payments from the right to receive the bond's principal due at maturity, a
process known as coupon stripping. Treasury STRIPs, IOs and POs are the most
common forms of stripped zero coupon securities. In addition, some securities
give the issuer the option to deliver additional securities in place of cash
interest payments, thereby increasing the amount payable at maturity. These are
referred to as pay-in-kind or PIK securities. In order to pay cash distributions
representing income on zero coupon obligations, a Portfolio may have to sell
other securities on unfavorable terms, and these sales may generate taxable
gains for investors in the corresponding Fund.
OPTIONS
Options are rights 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 holder (buyer) the right to buy the underlying asset from the seller
(writer) of the option. A put option gives the holder the right to sell the
underlying asset to the writer of the option. The writer of the option receives
a payment, or premium, from the buyer, which the writer keeps regardless of
whether the buyer uses (or exercises) the option.
Put options on securities may be purchased only if the securities underlying the
option transaction are held by a Portfolio at the time of the purchase of the
put option. Call options on securities may be sold (written) only if the
securities underlying the option transaction are held by a Portfolio at the time
of the sale. These securities may not be sold during the maturity of the call
option and may not be the subject of a securities loan.
The Portfolios underlying the Funds also may:
- Buy call options on futures contracts and securities indices in
anticipation of an increase in the value of the underlying asset;
- Buy put options on futures contracts, securities indices, currencies, and
currency futures contracts in anticipation of a decrease in the value of
the underlying asset; and
- Buy option rights to buy or sell currencies or currency futures contracts.
A Portfolio will write options on securities for the purpose of increasing its
return on such securities and/or to protect the values of its portfolio.
The buyer of a typical put option can expect to realize a gain if the price of
the underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs). A call buyer
typically attempts to participate in potential price increases of the instrument
underlying the option with risk limited to the cost of the option if security
prices fall. At the same time, the buyer can expect to suffer a loss if security
prices do not rise sufficiently to offset the cost of the option (limited to the
amount of the premium paid, plus related transaction costs). A Portfolio may
seek to terminate its position in a put option it writes before exercise by
purchasing an offsetting option in the market at its current price. If the
market is not liquid for a put option the Portfolio has written, however, the
Portfolio must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to post margin as
discussed below.
If the price of the underlying instrument rises, a put writer would generally
expect to profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would expect to
suffer a loss. This loss should be less than the loss from purchasing and
holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline. The
characteristics of writing call options are similar to those of writing put
options, except that writing calls generally is a profitable strategy if prices
remain the same or fall. Through receipt of the option premium a call writer
offsets part of the effect of a price decline. At the same time, because a call
writer must be prepared to deliver the underlying instrument in return for the
strike price, even if its current value is greater, a call writer gives up some
ability to participate in security price increases.
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.
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.
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The staff of the Securities and Exchange Commission ("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 only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
OPTIONS TRANSACTIONS ON SECURITIES
Options transactions may be carried out for each Portfolio underlying the Funds
if the securities options are admitted to official listing on a recognized
futures or securities exchange and the securities underlying the options are
within the applicable investment objective and policies of the Portfolio. Each
of these instruments is a derivative instrument as its value derives from the
underlying asset. Each Portfolio may use options for hedging and risk management
purposes and may purchase call options and sell put options for speculation.
By purchasing a put option, a Portfolio obtains the right (but not the
obligation) to sell the instrument underlying the option at a fixed strike
price. In return for this right, the Portfolio pays the current market price for
the option (known as the option premium). The purchaser of a call option obtains
the right to purchase, rather than sell, the instrument underlying the option at
the option's strike price.
Put options on securities may be purchased only if the securities underlying the
option transaction are held by a Portfolio at the time of the purchase of the
put option.
When a Portfolio writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Portfolio assumes the obligation to pay the strike price for the instrument
underlying the option if the other party to the option chooses to exercise it.
Writing a call option obligates a Portfolio to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option.
Call options on securities may be sold (written) only if the securities
underlying the option transaction are held by a Portfolio at the time of the
sale. These securities may not be sold during the maturity of the call option
and may not be the subject of a securities loan.
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 net assets of the Portfolio. With respect to the Portfolio
underlying the EUROPEAN MID-CAP FUND, 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 only be purchased or granted to a third
party 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 only be written (sold) 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.
FUTURES CONTRACTS, OPTIONS ON FUTURES AND SECURITIES INDICES AND WARRANTS
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.
Each Portfolio underlying the Funds may purchase and sell stock index futures
contracts and interest rate futures contracts and may purchase put and call
options on futures contracts, options on securities indices, options and
warrants on futures contracts and stock indices. A Portfolio will engage in
transactions in such instruments only if they are admitted to official listing
on a recognized domestic or foreign futures or securities exchange and meet
certain other requirements stated below. A Portfolio may use these techniques
for hedging or risk management purposes or, subject to certain limitations, for
the purposes of obtaining desired exposure to certain securities or markets.
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
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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.
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.
Put and call options on futures contracts may be purchased by each Portfolio in
order to protect against declines in values of portfolio securities or against
increases in the cost of securities to be acquired. Unlike a futures contract,
which requires parties to buy or sell the underlying financial instrument or
make a cash settlement payment based on changes in the price of the financial
instrument on an agreed date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to exercise its option, the holder may close
out the option position by entering into an offsetting transaction or may decide
to let the option expire and forfeit the premium thereon. The purchaser of an
option on a futures contract pays a premium for the option but makes no initial
margin payments or daily payments of cash in the nature of "variation" margin
payments to reflect the change in the value of the underlying contract as does a
purchaser or seller of a futures contract. The seller of an option on a futures
contract receives the premium paid by the purchaser and may be required to pay
initial margin. Amounts equal to the initial margin and any additional
collateral required on any options on futures contracts sold by a Portfolio are
paid by that Portfolio into a segregated account as required by the 1940 Act and
the SEC's interpretations thereunder.
Purchase of options on futures contracts may present less risk in hedging a
Portfolio than the purchase or sale of the underlying futures contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs.
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 the 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 the 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 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.
Each Portfolio 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 other than the TOP 50
US Portfolio may enter into 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,
with respect to the Portfolio underlying the EUROPEAN MID-CAP FUND, 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).
CURRENCY FORWARD CONTRACTS, OPTION RIGHTS AND WARRANTS ON CURRENCIES AND
CURRENCY FUTURES CONTRACTS (ALL FUNDS EXCEPT TOP 50 US) Each Portfolio
underlying the Funds (except the Top 50 US) 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 Portfolio
may also enter into foreign currency transactions to hedge currency risks
associated with the assets of the Portfolio denominated in foreign currencies or
(in the case of the Portfolios underlying the EUROPEAN MID-CAP FUND and JAPANESE
EQUITY FUND) principally traded in foreign currencies. The Portfolio underlying
the EUROPEAN MID-CAP Fund, however, does not presently intend to engage in such
hedging activity but reserves the ability to do so under circumstances in which
the Advisor believes that one or more currencies in which such Portfolio's
assets are denominated may suffer a substantial decline against the U.S. dollar.
All the Portfolios (except the Portfolio underlying the EUROPEAN MID CAP FUND)
may also enter into foreign currency transactions to hedge against
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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 Advisor desires to protect the value of the
Portfolio. A Portfolio may also 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.
Each Portfolio underlying the TOP 50 FUNDS does not currently intend to engage
in foreign currency transactions as an investment strategy. However, each of
these Portfolios (except for 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.
COMBINED POSITIONS
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.
OPTIONS ON SECURITIES INDICES
Each Portfolio underlying the Funds is also permitted to purchase call and
put options on any securities index based on securities in which the
Portfolio may invest. Options on securities indices are similar to options
on securities, except that the exercise of securities index options is
settled by cash payment and does not involve the actual purchase or sale of
securities. In addition, these options are designed to reflect price
fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. A Portfolio, in
purchasing index options for hedging purposes, is subject to the risk that
the value of its portfolio securities may not change as much as that of an
index because the Portfolio's investments generally will not match the
composition of an index.
WARRANTS ON FUTURES CONTRACTS
Each Portfolio underlying the Funds 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.
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, each Portfolio will not 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 Commodity
Futures Trading Commission (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.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
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.
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POSITION LIMITS
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 Advisor 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.
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.
SWAPS
Swaps are contracts in which two parties agree to pay each other (swap) the
returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party,
and the parties might not own the assets underlying the swap. The payments
are usually made on a net basis so that, on any given day, the Portfolio
would receive (or pay) only the amount by which its payment under the
contract is less than (or exceeds) the amount of the other party's payment.
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 Portfolio may use include:
INTEREST RATE SWAPS
Interest rate swaps are contracts in which one party agrees to make
regular payments equal to a fixed or floating interest rate times a
stated principal amount of fixed income securities, in return for
payments equal to a different fixed or floating rate times 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
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
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.
BORROWING
Each Portfolio underlying the Funds may borrow money from banks for temporary or
short-term purposes and then only in amounts not to exceed 10% of each
Portfolio's total assets, except the TOP 50 US, at the time of such borrowing.
The Portfolio underlying the TOP 50 US may take up short-term loans up to a
limit of one-third of the Portfolio's total assets.
BANK DEPOSITS AND MONEY MARKET INSTRUMENTS
Each Portfolio underlying the Funds may invest in bank deposits and money market
instruments maturing in less than 12 months. These instruments 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.
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, each Portfolio may temporarily invest in bank
deposits and money market instruments, up to 49% of its net assets, as a measure
taken in the Advisor's judgment during, or in anticipation of, adverse market
conditions. For each Portfolio, except the Portfolio underlying the TOP 50 US,
certificates of deposit from the same credit institution may not account for
more than 10% of a Portfolio's total assets.
REPURCHASE AGREEMENTS
Repurchase agreements may be entered into for the 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 the 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
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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. The 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 the Portfolio only upon
physical delivery or evidence of book-entry transfer to the account of IBT, the
Portfolio's Custodian. If the Lender defaults, the 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 the 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 the Portfolio if, as a result, more
than 10% of the Portfolio's net assets would be invested in such repurchase
agreement together with any other investment for which market quotations are not
readily available.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements may be entered into 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 Portfolio agrees to repurchase
securities sold by it 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 the Portfolio as well as the value of
securities purchased with the proceeds will decline. In these circumstances, the
Portfolio's entering into reverse repurchase agreements may have a negative
impact on the ability to maintain the Funds' net asset value of $1.00 per share.
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 the 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 its 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.
SECURITIES LENDING
All of the Funds may lend portfolio securities to borrowers that the Advisor
deems creditworthy. In return, the Funds receive 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 Funds the equivalent of any dividends or interest received on the loaned
securities.
The Funds will reinvest cash collateral in securities that qualify as an
acceptable investment for the Funds. However, the Funds 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 the Funds or the borrower. The
Funds 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 Funds 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.
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 conferring voting rights and adversely affecting the investment
occurs. 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 underlying the Funds may lend its portfolio securities up to one-third
of
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the value of its total assets.
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 inures to the Portfolio and its investors.
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.
ASSET COVERAGE
In order to secure their obligations in connection with derivatives contracts or
special transactions, the Fund 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 Fund's obligations. Unless a Fund 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 Fund to miss favorable
trading opportunities or to realize losses on derivative contracts or special
transactions.
INVESTMENT COMPANIES
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 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 and 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.
Subject to the foregoing limitations, shares of another securities investment
fund managed by the Manager or the Advisor or by another investment advisor
affiliated with the Manager or the Advisor through a substantial direct or
indirect interest may be purchased, subject to certain limitations, if the other
investment fund according to its investment policies is specialized in a
specific geographic area or economic sector. A Portfolio would not, however, pay
a sales charge when investing in an investment company managed by the Manager,
the Advisor or their affiliates. In addition, no management or advisory fees
would be paid by a Portfolio with respect to its assets which are invested in
investment companies managed by the Manager, the Advisor or their affiliates.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which an underlying Portfolio buys securities for a set
price, with payment and delivery of the securities scheduled for a future
time. During the period between purchase and settlement, no payment is made
by the Portfolio to the issuer and no interest accrues to the Portfolio.
The Portfolio records the transaction when it agrees to buy the securities
and reflects their value in determining the price of its shares. Settlement
dates may be a month or more after entering into these transactions so that
the market values of the securities bought may vary from the purchase
prices. Therefore, delayed delivery transactions create interest rate risks
for the Portfolio. These transactions may create leverage risks.
TO BE ANNOUNCED SECURITIES (TBAS)
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, the Portfolio agrees to
accept any security that meets specified terms. For example, in a TBA
mortgage backed transaction, the 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 the Portfolio.
INVESTMENT RISKS
There are many factors which may affect an investment in a Portfolio underlying
a Fund. The principal risks of a Fund and its underlying Portfolio are described
in the prospectus. Additional information about risk factors is outlined below.
LIQUIDITY RISKS
- OTC derivative contracts are considered to be illiquid and generally carry
greater liquidity risk than exchange-traded contracts.
FOREIGN INVESTMENTS
- Each Portfolio underlying the Funds (except TOP 50 US), invests primarily
in foreign securities. Investment in securities of
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foreign issuers involves somewhat different investment risks from those
affecting securities of U.S. domestic issuers.
- Investors should realize that the value of a Portfolio's investments 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 control 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, the
Portfolios' 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
Portfolios underlying the TOP 50 EUROPE and EUROPEAN MID-CAP FUND do not
presently intend to engage in currency transactions to hedge currency
risks, these Portfolios may be more exposed to the aforementioned currency
risks.
- Certain of the risks associated with foreign investments are heightened for
the Portfolios underlying TOP 50 ASIA and TOP 50 WORLD, 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 Portfolios underlying TOP 50 ASIA or the TOP 50 WORLD
is invested. The Portfolios underlying TOP 50 ASIA may invest in Hong Kong,
which reverted to Chinese administration in 1997. Investments in Hong Kong
may be subject to expropriation, nationalization or confiscation, and to
the risk that the Hong Kong dollar will be devalued. The Corporation cannot
predict the effects of a possible loss of investor confidence in the
currency or stock market of Hong Kong.
EURO RISKS (ALL FUNDS EXCEPT TOP 50 US)
- The Portfolios underlying the Funds (except the TOP 50 US, TOP 50 ASIA and
JAPANESE EQUITY FUNDS) may make significant investments in securities
denominated in the Euro, the new single currency of the European Monetary
Union (EMU). Therefore, the exchange rate between the Euro and the U.S.
dollar will have a significant impact on the value of these Portfolios'
investments. On January 1, 1999, eleven of the fifteen Member States had
their currency exchange rate irrevocably fixed to a single European
currency, the Euro. The Euro became legal tender in those countries on this
date. National currencies will continue to circulate until they are
replaced by Euro coins and bank notes on July 1, 2002. The unification of
European currency and decision by certain countries not to participate are
likely to create uncertainty in the European markets and thereby increase
volatility of the various currencies and securities. The European
securities markets may become less liquid. These events can adversely
affect the Portfolios' investment and performance.
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EMERGING MARKETS (TOP 50 WORLD, TOP 50 EUROPE, TOP 50 ASIA, AND EUROPEAN MID-CAP
FUND )
- 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 the
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 risks of expropriation, confiscatory taxation, nationalization, and
less social, political and economic stability.
- The risks involved in making investments 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. Last year, 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.
CURRENCY RISKS (ALL FUNDS EXCEPT TOP 50 US)
- The Advisor attempts to manage currency risk by limiting the amount the
Portfolio invests in securities denominated in a particular currency.
However, diversification will not protect the Portfolio against a general
increase in the value of the U.S. dollar relative to other currencies.
LEVERAGE RISKS
- Leverage risk is created when an investment exposes a Portfolio underlying
a Fund to a level of risk that exceeds the amount invested. Changes in the
value of such an investment magnify the Portfolios' risk of loss and
potential for gain. Leverage risk may exist when a Portfolio purchases
securities while it also has borrowed money.
RISK MANAGEMENT
- Each Portfolio underlying the Funds 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 Advisor wishes 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 Advisor wishes 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, they
include, as do all leveraged transactions, the possibility of losses as
well as gains that are greater than if these techniques involved the
purchase and sale of the securities themselves rather than their synthetic
derivatives.
CREDIT RISKS
- 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 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.
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- 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.
INTEREST RATE RISKS
- Interest rate risks apply to the Portfolios underlying the Funds 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.
PREPAYMENT RISKS
- 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 values of mortgage backed
securities generally rise. However, when interest rates decline,
unscheduled prepayments can be expected to accelerate, and the 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.
RISKS ASSOCIATED WITH COMPLEX CMOS
- 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.
FUTURES, OPTIONS AND WARRANTS
- The successful use of futures, options and warrants depends on the ability
of the Advisor of the Portfolios underlying the Funds 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
Portfolio's 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
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addition, the markets for such instruments may be volatile from time to
time, which could increase the risk incurred by a Portfolio in entering
into such transactions. The ability of a Portfolio to close out a futures,
options or warrants position depends on a liquid secondary market.
- The use of futures contracts potentially exposes the Portfolios to the
effects of "leveraging," which occurs when futures are used so a
Portfolio's exposure to the market is greater than it would have been if
the Portfolio had invested directly in the underlying instruments.
Leveraging increases a Portfolio's potential for both gain and loss. 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
- 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
- The Portfolios' Declaration of Trust provides that the Funds and other
entities investing in the 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
the Funds in the Portfolio.
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 objective 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.
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
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investment, in net or total assets, in the securities rating of the investment,
or any other later change.
FUNDAMENTAL INVESTMENT POLICIES
For purposes of fundamental investment policies regarding industry
concentration, the Advisor may classify issuers by industry based on
classifications used by Micropal, a leading company offering a comprehensive and
accurate performance measurement service specializing in collective investment
vehicles. Micropal monitors all the world's major fund markets and has a range
of clients from financial institutions to individual investors. In the absence
of such classification or if the Advisor determines in good faith based on its
own information that the economic characteristics affecting a particular issuer
make it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
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
the Internal Revenue Code of 1986, as amended (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.
The TOP 50 WORLD will invest at least 65% of its total assets in equity
securities. The TOP 50 EUROPE will invest at least 65% of its total assets in
the equity securities of issuers located in European countries. The 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. The 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 Provesta 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").
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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 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 (1) lend portfolio securities
with a value not exceeding one-third of the Portfolio's total assets, (2)
enter into repurchase agreements, and (3) 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. Acquire securities of other investment companies, except as permitted by
the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange, provided that Provesta Portfolio shall be
limited to 5% in the amount of its total assets that may be invested in the
aggregate in securities of investment companies as a group. Currently the
1940 Act prohibits a Portfolio from acquiring securities of other
investment companies if as a result (i) more than 5% of the value of a
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as
a group, or (iii) more than 3% of the outstanding voting stock of any one
investment company will be owned by a Portfolio;
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 Fund's net assets would be in investments that are
illiquid;
10. Invest more than 10% of its net assets in unlisted securities and Notes (as
defined in the Fund's prospectus);
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.
The DWS Fund is subject to regulation under the German Investment Companies Act.
Therefore, in addition to the investment policies discussed herein and in the
Prospectus, each Fund, except the 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);
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;
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;
and
16. Borrow money, except in amounts not to exceed 10% of the Fund's total
assets (including the amount borrowed).
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PORTFOLIO TURNOVER
Although each Portfolio does not intend to invest for the purpose of seeking
short-term profits, securities in the Portfolios will be sold whenever the
Advisor believes 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, Provesta Portfolio, and Japanese Equity
Portfolio is generally not expected to exceed 80%, 80%, 100%, 80%, 180%, and
150%, respectively. 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 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.
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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.
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.
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.
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.
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.
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
a Fund represented by 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 a Fund represented by 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
23
<PAGE>
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.
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.
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). Also, investment professionals may be paid cash or
promotional incentives, such as reimbursement of certain expenses relating to
attendance at informational meetings about the Funds or other special events at
recreational-type facilities, or items of material value. These payments will be
based upon the amount of Shares the investment professional sells or may sell
and/or upon the type and nature of sales or marketing support furnished by the
investment professional.
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.
REDEMPTION
The Fund may suspend the right of redemption or postpone the date of payment
during any period when (a) trading on the New York Stock Exchange is restricted
by applicable rules and regulations of the SEC; (b) the New York Stock Exchange
is closed for other than customary weekend and holiday closings; (c) the SEC has
by order permitted such suspension; or (d) an emergency exists as determined by
the SEC so that valuation of the net assets of the Fund is not reasonably
practicable.
Under normal circumstances, the Fund will redeem Shares by check or 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 to 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.
24
<PAGE>
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 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 June __, 2000, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares:
25
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
SHAREHOLDER NAME
FUND ADDRESS SHARE CLASS PERCENTAGE OWNED
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Top 50 World Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
Top 50 Europe Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
Top 50 Asia Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
Top 50 US Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
European Mid-Cap Fund Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
Japanese Equity Fund Class A ___%
Class B ___%
Class C ___%
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
</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
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.
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TAX INFORMATION
FEDERAL INCOME TAX
Each Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
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. TOP
50 EUROPE, TOP 50 ASIA, TOP 50 US, and JAPANESE EQUITY FUND are entitled to a
loss carry-forward, which may reduce the taxable gain that those Funds would
realize, and to which the shareholder would be subject, in the future.
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
If the Portfolios purchase foreign securities, the investment income of their
corresponding Fund 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 Funds 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 intends to
operate so as to qualify for treaty-reduced tax rates when applicable.
Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the coupon income generated by the
portfolio, whereas tax basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of fixed
income securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations cannot be anticipated, a portion of distributions to shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.
If a Portfolio invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon the Portfolio's disposition of PFIC
investments.
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 Fund
shareholders 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 shareholders in those states that have income tax laws might differ from
treatment under the federal income tax laws. Shareholders should consult their
own tax advisors with respect to any state or local taxes.
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.
THE FOREGOING DISCUSSION IS A SUMMARY ONLY AND IS NOT INTENDED AS A SUBSTITUTE
FOR CAREFUL TAX PLANNING. PROSPECTIVE INVESTORS IN SHARES OF A FUND SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF INVESTING IN SUCH
SHARES, INCLUDING THE CONSEQUENCES UNDER STATE, LOCAL AND OTHER TAX LAWS.
27
<PAGE>
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. Information about
each Director, Trustee and the executive officers is provided below and includes
each person's: name, address, birth date, present position(s) held with the
Corporation and Portfolio Trust, principal occupations for the past five years
and positions held prior to the past five years, total compensation received as
a Director and Trustee from the Corporation and Portfolio Trust for its most
recent fiscal year ended August 31, 1999, and the total compensation received
from the Corporation, the Portfolio Trust and the Fund Complex for the most
recent calendar year, December 31, 1999. As of that date, the Fund Complex
consisted of the Corporation, the Portfolio Trust, The New Germany Fund, Inc.,
The Central European Equity Fund, Inc. and The Germany Fund, Inc. As of March
28, 2000, the Corporation and Portfolio Trust joined the Flag Fund Complex, as
described below. Unless otherwise indicated, the address of each
Director/Trustee and executive officer is One South Street, Baltimore, Maryland
21202.
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.
As of May 25, 2000, the Corporation's Board and Officers as a group owned less
than 1% of the each Funds' outstanding Class A, Class B, and Class C Shares.
An asterisk (*) denotes a Director /Trustee who is deemed to be an interested
person as defined in the Investment Company Act of 1940.
Brian A. Lee resigned as President effective January 31, 2000, Christian
Strenger* resigned as Director/Trustee effective October 14, 1999, G. Richard
Stamberger* resigned as Director/Trustee effective August 6, 1999 and Werner
Walbroel resigned as Director/Trustee effective March 22, 2000. Edward C.
Schmults completed his term as Director/Trustee effective March 22, 2000.
Neither Mr. Lee, Mr. Strenger nor Mr. Stamberger received compensation from the
Corporation, the Portfolio Trust, or the Fund Complex during the fiscal year
ended August 31, 1999. Messrs. Walbroel and Schmults received $ 14,000 and
$13,500, respectively, in compensation from the Corporation and Portfolio Trust
and $45,250 and $41,500, respectively, in compensation from the Corporation, the
Portfolio Trust and the Fund Complex.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
NAME
POSITION WITH CORPORATION AND AGGREGATE
PORTFOLIO TRUST AGGREGATE COMPENSATION FROM
COMPENSATION FROM THE CORPORATION,
BIRTHDATE THE CORPORATION THE PORTFOLIO
AND THE PORTFOLIO TRUST AND THE FUND
ADDRESS OCCUPATIONS FOR PAST 5 YEARS TRUST COMPLEX
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RICHARD R. BURT Chairman, IEP Advisors, LLP.; Chairman of the Board, $14,000 $27,000
DIRECTOR/TRUSTEE Weirton Steel Corporation; Member of the Board, Archer
(since 1998) Daniels Midland Company (agribusiness operations),
February 3, 1947 Hollinger International Inc. (publishing), Homestake
IEP Advisers LLP Mining Company (mining and exploration), HCL
1275 Pennsylvania Avenue NW, Technologies (information technology) and Anchor
10th Floor Technologies (gaming software and equipment); Director,
Washington, DC 20004 Mitchell Hutchins family of funds (registered investment
companies) and Member, Textron Corporation International
Advisory Council.
Previous Positions: Partner, McKinsey & Company
(consulting), 1991-1994; and U.S. Chief Negotiator in
Strategic Arms Reduction Talks (START) with the former
Soviet Union and U.S. Ambassador to the Federal Republic
of Germany, 1985-1991
----------------------------------------------------------------------------------------------------------------------------------
RICHARD T. HALE* Managing Director, DB Alex. Brown LLC (formerly BT N/A N/A
DIRECTOR/TRUSTEE Alex. Brown Incorporated); Director and President,
(since March 28, 2000) Investment Company Capital Corp. (registered investment
PRESIDENT advisor). Director or President, Deutsche Asset
(since January 31, 2000) Management Mutual Funds (registered investment
July 17, 1945 companies) Chartered Financial Analyst.
Previous Positions: Director, ISI Family of Funds
(registered investment companies).
----------------------------------------------------------------------------------------------------------------------------------
28
<PAGE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JOSEPH R. HARDIMAN Private Equity Investor and Capital Markets Consultant; N/A N/A
DIRECTOR/TRUSTEE Director, Wit Capital Group (registered broker-dealer),
(since March 28, 2000) The Nevis Fund and ISI Family of Funds (registered
May 27, 1937 investment companies).
8 Bowen Mill Road
Baltimore, Maryland 21212 Previous Positions: 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; and Chief Operating Officer (1985-1987)
and General Partner (1976-1985) of Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC).
----------------------------------------------------------------------------------------------------------------------------------
LOUIS E. LEVY Director Kimberly-Clark Corporation (personal consumer N/A N/A
DIRECTOR/TRUSTEE products), Household International (finance and banking)
(since March 28, 2000) and ISI Family of Funds (registered investment
November 16, 1932 companies).
26 Farmstead Road
Short Hills, New Jersey 07078 Previous Positions: Chairman of the Quality Control
Inquiry Committee and American Institute of Certified
Public Accountants, 1992-1998; Trustee, Merrill Lunch
Funds for Institutions, 1991-1993; Adjunct Professor,
Columbia University-Graduate School of Business,
1991-1992; and Partner, KPMG Peat Marwick, retired
1990
----------------------------------------------------------------------------------------------------------------------------------
EUGENE J. MCDONALD President, Duke Management Company (investments); N/A N/A
DIRECTOR/TRUSTEE Executive Vice President, Duke University (education,
(since March 28, 2000) research and health care); Executive Vice Chairman and
July 14, 1932 Director, Central Carolina Bank & Trust (banking); and
Duke Management Company Director, Victory Funds (registered investment
Erwin Square companies).
Suite 1000
2200 West Main Street Previous Positions: Director, AMBAC Treasurers Trust
Durham, North Carolina 27705 (registered investment company), DP Mann Holdings
(insurance) and ISI Family of Funds (registered
investment companies).
----------------------------------------------------------------------------------------------------------------------------------
REBECCA W. RIMEL President and Chief Executive Officer, The Pew N/A N/A
DIRECTOR/TRUSTEE Charitable Trusts (charitable foundation); and Director
(since March 28, 2000) and Executive Vice President, The Glenmede Trust Company
April 10, 1951 (investment trust and wealth management).
The Pew Charitable Trusts
One Commerce Square Previous Positions: Executive Director, The Pew
2005 Market Street Charitable Trusts and Director, ISI Family of Funds
Suite 1700 (registered investment companies).
Philadelphia, Pennsylvania
19103-7017
----------------------------------------------------------------------------------------------------------------------------------
TRUMAN T. SEMANS* Vice Chairman, Brown Investment Advisory & Trust Company N/A N/A
DIRECTOR/TRUSTEE (formerly, Alex. Brown Capital Advisory & Trust
(since March 28, 2000) Company); Director, Investment Company Capital Corp.
October 27, 1926 (registered investment advisor); and Director and
Brown Investment Advisory & Chairman, the Executive Committee of Virginia Hot
Trust Company Springs, Inc. (property management).
19 South Street
Balitmore, Maryland 21202 Previous Positions: Managing Director and Vice
Chairman, Alex. Brown & Sons Incorporated (now DB Alex.
Brown LLC) and Director, ISI Family of Funds (registered
investment company).
----------------------------------------------------------------------------------------------------------------------------------
ROBERT H. WADSWORTH President, Investment Company Administration, LLC; $14,500 $64,000
DIRECTOR/TRUSTEE President and Director, First Fund Distributors, Inc.
(since March 28, 2000) (registered broker-dealer); Director, The Germany Fund,
January 29, 1940 Inc., The New Germany Fund, Inc. and The Central
4455 E. Camelback Road European Equity Fund, Inc.; and Vice President,
Suite 261 E. Professionally Managed Portfolios and Advisors Series
Phoenix, Arizona 85018 Trust (registered investment companies).
Previous Positions: Director, Guinness Flight
Investment Funds, Inc. (registered broker-dealer) and
President, The Wadsworth Group (registered investment
advisor).
----------------------------------------------------------------------------------------------------------------------------------
29
<PAGE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ROBERT R. GAMBEE Director, Deutsche Bank Securities, Inc., since 1992; $0 $0
SECRETARY Chief Operating Officer and Secretary, The Germany Fund,
(since inception) Inc., The Central European Equity Fund, Inc. and The New
August 26, 1942 Germany Fund, Inc., since 1997; and Secretary, Deutsche
280 Park Avenue Bank Investment Management Inc.
7th Floor, East
New York, New York 10017 Previous Positions: Secretary and Treasurer, The Germany
Fund, Inc. (1986-1997), The New Germany Fund (1990-1997)
and The Central European Equity Fund, Inc. (1990-1997);
and First Vice President, Deutsche Bank Securities,
Inc., 1985-1991.
----------------------------------------------------------------------------------------------------------------------------------
DANIEL O. HIRSCH Director, Deutsche Asset Management, since 1999. $0 $0
ASSISTANT SECRETARY Principal, BT Alex. Brown Incorporated (now DB Alex.
(since 1999) Brown LLC), 1998-1999.
March 27, 1954
Previous Positions: Assistant General Counsel, United
States Securities and Exchange Commission, 1993-1998.
----------------------------------------------------------------------------------------------------------------------------------
AMY OLMERT Director, Deutsche Asset Management, and Vice $0 $0
ASSISTANT SECRETARY President, BT Alex. Brown Incorporated (now DB Alex.
(since 1999) Brown LLC), 1997-1999.
May 14, 1963
Previous Positions: Senior Manager, Coopers & Lybrand
L.L.P., (now PricewaterhouseCoopers LLP) 1988-1997.
----------------------------------------------------------------------------------------------------------------------------------
HOLGER NAUMANN Director, DFM, since 1997 and Head of Participations, $0 $0
ASSISTANT TREASURER OF THE DWS Deutsche Gesellschaft fuer Wertpapiersparen mbH,
PORTFOLIO TRUST since 1995.
(since inception)
May 17, 1962 Previous Positions: Group Strategy Department, Deutsche
DWS Deutsche Gesellschaft fuer Bank AG, 1992-1995.
Wertpapiersparen mbH
Gruneburgweg 113-115
Frankfurt am Main, Germany
60323
----------------------------------------------------------------------------------------------------------------------------------
JOSEPH BERNHART Participations Department, DWS Deutsche Gesellschaft $0 $0
ASSISTANT TREASURER OF THE fuer Wertpapiersparen mbH, since 1997.
PORTFOLIO TRUST
(since inception) Previous Positions: DIH Deutsche Industrie-Holding GmbH
May 7, 1966 & Co. KG (affiliate to Deutsche Bank AG), 1995-1997 and
DWS Deutsche Gesellschaft Trainee, Deutsche Bank AG, 1994-1995.
fuer Wertpapiersparen mbH
Gruneburgweg 113-115
Frankfurt am Main, Germany
60323
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Directors and officers of the Corporation are also directors and officers of
some or all of the other investment companies managed, administered or advised
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 "Flag Fund Complex"). Mr. Semans
serves as Chairman of five funds and as a Director of three other funds in the
Flag Fund Complex. Mr. Hale serves as Chairman of three funds and as Director of
four funds in the Fund Complex. Ms. Rimel and Messrs. Burt, Hardiman, Levy,
McDonald and Wadsworth serve as Directors of each of the funds in the Flag Fund
Complex. Mr. Rizzo serves as Treasurer, Ms. Olmert serves as Secretary, and Mr.
Hirsch serves as Assistant Secretary, for each of the other funds in the Flag
Fund Complex.
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
<PAGE>
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, 1999 are as follows: for Mr. Levy, 5 years; for Mr. McDonald, 7
years; for Ms. Rimel and Mr. Vogt, 4 years; for Mr. Hardiman, 1 year; and for
Mr. Burt and Mr. Wadsworth, 0 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
---------------- -----------------------------------------------------------------
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 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 advisor's Codes
of Ethics permit access persons 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 advisor's 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
advisor's 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.
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
31
<PAGE>
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 objective by investing all of
its investable assets in its corresponding Portfolio.
The advisor (manager) to each Portfolio is 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.
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, and 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 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, but not
prohibiting a holding company (or such a foreign bank) 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 advisory
agreement (Advisory Agreement) with DWS for each Portfolio (other than 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: 0.75% for TOP 50 WORLD
PORTFOLIO, TOP 50 EUROPE PORTFOLIO and TOP 50 ASIA PORTFOLIO; and 0.60% for TOP
50 US PORTFOLIO, PROVESTA PORTFOLIO, and JAPANESE EQUITY PORTFOLIO.
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,
32
<PAGE>
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.
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.
For the fiscal year ended, August 31, 1999, Deutsche Bank Investment Management
Inc. (DBIM), the former Advisor to TOP 50 US PORTFOLIO AND US MONEY MARKET
PORTFOLIO, directed brokerage transactions to certain brokers due to research
services they provided. The total amount of these transactions directed by DBIM
was $168,093,236 for which the Portfolios paid $89,992 in brokerage commissions.
On August 31, 1999, the Portfolios (including the three Portfolios that
liquidated and closed) owned securities of the following regular broker/dealers:
$388,050, Merrill Lynch & Co., Inc.; and $2,564,249, Nomura Securities Co., Ltd.
For the fiscal year ended August 31, 1999, and 1998, the Portfolios (including
the three Portfolios that liquidated and closed) paid $13,670 and $52,582.83 in
brokerage commissions to Deutsche Bank AG, an affiliated broker, which
represents 2.60% and 12.42% of the aggregate brokerage commissions paid and
22.81% and 16.06% of the aggregate principal amount of trades by affiliated
brokers.
For the fiscal year ended August 31, 1999, and 1998, the Portfolios (including
the three Portfolios that liquidated and closed) paid $6,781 and $46,008.34 in
brokerage commissions to Deutsche Bank Securities, New York, an affiliated
broker, which represents 1.29% and 10.87% of the aggregate brokerage commissions
paid and 1.38% and 21.13% of the aggregate principal amount of trades by
affiliated brokers.
For the fiscal year ended August 31, 1999, and 1998, the Portfolios (including
the three Portfolios that liquidated and closed) paid $0 and $8,815.65 in
brokerage commissions to Morgan Grenfell Asia Securities, Ltd., an affiliated
broker, which represents 0% and 2.08% of the aggregate brokerage commissions
paid and 0% and 2.06% of the aggregate principal amount of trades by affiliated
brokers.
For the fiscal year ended August 31, 1999, and 1998, the Portfolios (including
the three Portfolios that liquidated and closed) paid $69,541 and $2,937.36 in
brokerage commissions to Deutsche Morgan Grenfell, an affiliated broker, which
represents 13.21% and 0.69% of the aggregate brokerage commissions paid and
26.69% and 0.78% of the aggregate principal amount of
33
<PAGE>
trades by affiliated brokers.
ADMINISTRATOR
Investment Company Capital Corp. (ICC), 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 (ix)
prepares shareholder meeting materials. ICC 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, except
that during the first two years of the agreement (commencing in 1997) a minimum
aggregate fee for each Portfolio, corresponding Fund and any other fund
investing in the Portfolio, taken together, of $75,000 for the first year of the
Fund's operation and $125,000 for the second year will be paid to the Operations
Agent (as defined below) and the Administrator.
OPERATIONS AGENT
ICC 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.
ICC provides these services at the annual rate of 0.035% of the average daily
net assets of each Portfolio.
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
IBT Trust Company (Cayman) Ltd. (IBT (Cayman)) 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. IBT
(Cayman) provides these services at the following annual rate of the average
aggregate daily net assets of each Portfolio as specified below:
<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 $40,000 for the first year of the Portfolio's operation, $45,000
for the second year, and $50,000 for the third year.
-
CUSTODIAN
Investors Bank & Trust Company is custodian for the securities and cash of each
Funds' and each Portfolio's assets. Foreign instruments purchased by the Fund
are held by various subcustodial arrangements employed by Investors Bank & Trust
Company.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
ICC 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.
34
<PAGE>
FUND ACCOUNTANT
IBT Fund Services (Canada) Inc., One First Canadian Place, King Street West,
Suite 2800, P.O. Box 231, Toronto, Ontario M5X1C8, 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.
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.
<TABLE>
<CAPTION>
FEES PAID BY THE PORTFOLIO TRUST FOR SERVICES FOR FISCAL YEAR/PERIODS ENDED
AUGUST 31
----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME MANAGER FEE PAID SUB-ADVISORY FEE PAID** OPERATIONS AGENT ADMINISTRATIVE AGENT
FEE PAID FEE PAID
----------------------------------------------------------------------------------------------------------
1999 1998* 1999 1998* 1999 1998* 1999 1998*
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Top 50 World $153,724 $76,939 $23,057 $57,704 $120,354 $67,036 $44,697 $36,556
Portfolio
----------------------------------------------------------------------------------------------------------------------------
Top 50 Europe $272,729 $87,638 $47,461 $65,728 $114,606 $66,445 $44,583 $36,556
Portfolio
----------------------------------------------------------------------------------------------------------------------------
Top 50 Asia $389,911 $189,797 $57,526 $142,347 $110,830 $61,738 $44,582 $35,112
Portfolio
----------------------------------------------------------------------------------------------------------------------------
Top 50 US $210,939 $70,740 $107,156 $49,934 $116,881 $66,335 $44,583 $36,556
Portfolio
----------------------------------------------------------------------------------------------------------------------------
Provesta $188,736 $31,021 $26,595 $21,897 $112,867 $64,498 $44,583 $34,889
Portfolio
----------------------------------------------------------------------------------------------------------------------------
Japanese Equity $54,632 $11,948 $7,713 $8,433 $121,732 $65,332 $44,583 $34,445
Portfolio
----------------------------------------------------------------------------------------------------------------------------
</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: PROVESTA
OCTOBER 20, 1997: JAPANESE EQUITY
** THE ADVISORY FEE WAS PAID BY DFM OUT OF THE MANAGER 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
---------------------------------------------------------------------
1999 1998* 1999 1998*
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Top 50 World $1,305 $226 $45,307 $46,910
--------------------------------------------------------------------------------------------------
Top 50 Europe $5,807 $700 $86,609 $39,913
--------------------------------------------------------------------------------------------------
35
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C>
Top 50 Asia $7,197 $197 $214,463 $233,262
--------------------------------------------------------------------------------------------------
Top 50 US $3,116 $1,064 $39,461 $24,027
--------------------------------------------------------------------------------------------------
European Mid-Cap Fund $10,716 $941 $70,019 $41,688
--------------------------------------------------------------------------------------------------
Japanese Equity Fund $2,699 $182 $55,077 $16,547
--------------------------------------------------------------------------------------------------
</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 FUND
OCTOBER 20, 1997: JAPANESE EQUITY FUND
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
FUND NAME FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
-----------------------------------------------------------------------------
12B-1 FEE SHAREHOLDER SERVICES FEE
-----------------------------------------------------------------------------
CLASS B CLASS C CLASS A SHARES CLASS B CLASS C
SHARES SHARES SHARES SHARES
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Top 50 World $6,809 N/A $2,750 $2,270 N/A
-----------------------------------------------------------------------------------------------------------------
Top 50 Europe $39,389 $4,776 $7,613 $13,130 $1,592
-----------------------------------------------------------------------------------------------------------------
Top 50 Asia $6,194 N/A $25,618 $2,065 N/A
-----------------------------------------------------------------------------------------------------------------
Top 50 US $14,492 $425 $7,012 $4,831 $141
-----------------------------------------------------------------------------------------------------------------
European Mid-Cap Fund $44,243 $7,486 $23,973 $14,748 $2,495
-----------------------------------------------------------------------------------------------------------------
Japanese Equity Fund $9,653 N/A $7,163 $3,218 N/A
-----------------------------------------------------------------------------------------------------------------
</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 Securities and Exchange
Commission's (SEC) 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, 1999.
36
<PAGE>
<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 42.19% 41.14% N/A 34.35% 36.14% N/A
19.42%(A) 18.36%(G) 15.93%(A) 15.50%(G)
-----------------------------------------------------------------------------------------------------------------------------------
Top 50 Europe 2.84% 2.06% N/A -2.83% -2.94% N/A
3.70%(A) -3.45%(F) 3.60%(K) 0.67%(A) -6.17%(F) 2.60%(K)
-----------------------------------------------------------------------------------------------------------------------------------
Top 50 Asia 130.00% 128.65% N/A 117.25% 123.65% N/A
24.26%(B) 49.04%(H) 20.57%(B) 46.38%(H)
-----------------------------------------------------------------------------------------------------------------------------------
Top 50 US 41.76% 40.88% N/A 34.01% 35.88% N/A
20.59%(A) 15.60%(E) 34.64%(K) 17.07%(A) 13.01%(E) 33.64%(K)
-----------------------------------------------------------------------------------------------------------------------------------
European Mid-Cap Fund 8.86% 8.12% N/A 2.86% 3.12% N/A
12.09%(C) 5.93%(F) 10.15%(K) 8.74%(C) 3.17%(F) 9.15%(K)
-----------------------------------------------------------------------------------------------------------------------------------
Japanese Equity Fund 104.26% 102.97% N/A 93.09% 97.97% N/A
29.06%(D) 89.22%(J) 25.19%(D) 85.59%(J)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) OCTOBER 2, 1997; (B) OCTOBER 14, 1997; (C) OCTOBER 17, 1997; (D) OCTOBER 20,
1997; (E) MARCH 18, 1998; (F) MARCH 30, 1998; (G) MAY 4, 1998; (H) MAY 5, 1998;
(I) OCTOBER 9, 1998; (J) AUGUST 10, 1998; (K) SEPTEMBER 2, 1998.
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.
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
37
<PAGE>
- 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
Analytical Services, Inc., 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.
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, stock 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 fund) or mutual
funds such as those reported by Lipper Analytical Services, 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
38
<PAGE>
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. So, 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 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"), 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 Funds and may exclude,
for example, dividends paid, 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, 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.
39
<PAGE>
FINANCIAL INFORMATION
The Financial Statements for the Funds for the fiscal year ended August 31,
1999, were audited by PricewaterhouseCoopers LLP and are incorporated herein by
reference to the Annual Report to Shareholders of Deutsche Funds, Inc. (renamed
as Flag Investors Funds, Inc. effective January 18, 2000), dated August 31,
1999.
40
<PAGE>
APPENDIX A
THE GERMAN SECURITIES MARKETS
EQUITY MARKETS
Equity securities trade on the country's eight regional stock exchanges
(Frankfurt, Dusseldorf, Munich, Hamburg, Berlin, Stuttgart, Hannover and
Bremen), of which Frankfurt accounted for approximately 40% of the total volume
as of August 31, 1999. While trading in listed securities is not legally or
otherwise confined to the exchanges, they are believed to handle the largest
part of trading volume in equity transactions.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
MARKET CAPITALIZATION AND TRADING VOLUME
OF EQUITY SECURITIES ON GERMAN STOCK EXCHANGES(1)
(IN BILLIONS)
-------------------------------------------------------------------------
MARKET TRADING VOLUME FOR
CAPITALIZATION AS OF THE YEAR ENDED
DECEMBER 31(2) DECEMBER 31(2)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 $348.14 DM 561.89 $ 876.8 DM 1,415.2
1993 463.48 800.10 1,150.3 1,985.8
1994 499.25 773.88 1,302.9 2,017.9
1995 544.89 781.10 1,146.8 1,643.9
1996 635.95 988.77 1,487.6 2,312.9
1997 825.23 1,483.85 2,067.4 3,717.4
1998 1,089.12 1,822.10 3,220.5 5,397.50
1999* 1,180.90 EUR 2,190.07 1,927.90 EUR 3,575.50
-------------------------------------------------------------------------
</TABLE>
(1) EXCLUDING STOCKS OF FOREIGN-DOMICILED COMPANIES AND INVESTMENT COMPANIES.
(2) U.S. DOLLAR EQUIVALENTS CALCULATED AT YEAR-END EXCHANGE RATES. THE FIGURES
FOR 1992 THROUGH 1994 INCLUDE WARRANTS.
* YEAR-TO-DATE AS OF AUGUST 31, 1999.
SOURCES: DEUTSCHE BORSE AG AND THE DEUTSCHE BUNDESBANK.
German stock exchanges offer three different market segments within which stocks
are traded:
(i) The official market (Amtlicher Handel) comprises trading in shares
which have been formally admitted to official listing by the admissions
committee of the stock exchange concerned, based upon disclosure in the
listing application or "prospectus."
(ii) The regulated, unlisted market (Neuer Markt) comprises trading in
shares not admitted to official listing. Companies admitted to this
market segment are exempt from publishing a full listing prospectus,
but are required to submit an offering memorandum. Admission is granted
by a special committee which is also responsible for the supervision of
the establishment of prices.
(iii)The unofficial unregulated telephone or over-the-counter market
(Freiverkehr) comprises trading in securities that have not followed
any special listing procedure. It includes trading in securities by
telephone or on the stock exchange premises, between banks or through
floor brokers prior to or after official trading hours.
For an official listing, the German stock exchanges and pertinent legislation
require public disclosure of all information about an issuer considered material
to an evaluation of the securities to be listed. Applications must further
provide the latest annual financial statements of the issuer with explanatory
notes, including disclosure of any liabilities not shown therein. They must also
furnish details of the issuer to be listed. Generally, DM 0.5 million par value
(i.e., 10,000 shares of DM 50 par value) is considered to be the minimum amount
suitable for full listing. Applications for admission to regulated unlisted
trading must contain essentially similar information as that required for full
listing, but in a condensed form that may be submitted as a memorandum. However,
the document, in lieu of being published, may be deposited with paying agents so
long as reference is made in one of the official stock exchange publications.
41
<PAGE>
Markets in listed securities are generally of the auction type, but a
substantial amount of listed securities also changes hands in inter-bank dealer
markets both on and off the stock exchanges. Prices for active stocks, including
those of larger companies, are quoted continuously during stock exchange hours.
Less active listed and stocks admitted to trading in the regulated unlisted
market are quoted only once a day.
Options on both domestic and foreign stocks have been traded since 1970 although
trading activity is relatively low. There is also active trading in share
warrants, generally issued in conjunction with bonds.
As set forth below under "Role of Banks in German Capital Markets," German
banks, brokers and selected domestic investment trusts are regular members of
the stock exchanges. Banks may deal on a net basis for their own account, as
well as for accounts of domestic and foreign institutional customers during or
after regular stock exchange hours.
STOCK INDICES
Two principal stock indices in Germany are the DAX Index (Deutscher Aktienindex;
i.e., German Stock Index) and the CDAX German Composite Index (Composite
Deutscher Aktienindex). The DAX Index is composed of the 30 most actively traded
German blue-chip stocks. It represents approximately 70% of the total equity
capital of German exchange-listed companies. Trading in these shares accounts
for approximately 80% of the stock volume traded on the German exchanges. The
CDAX German Composite Index comprises all German stocks listed in the official
market at the Frankfurt Stock Exchange.
Set forth in the table below is information concerning the total return of the
DAX Index and CDAX Index for each of the periods indicated. Share prices of
companies traded on German stock exchanges declined in 1991 and 1992 as the
German economy entered a recessionary period following unification of Eastern
and Western Germany in 1990.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
ANNUAL TOTAL RETURN(1)
----------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DAX -2.09% 46.71% -7.06% 6.99% 28.17% 47.11% 16.28% 4.22%
CDAX -6.39% 44.56% -5.83% 4.75% 22.14% 40.83% 13.99% 3.94%
Dollar-adjusted DAX -8.33% 36.85% 4.12% 15.60% 18.17% 27.63% 24.27% -5.81%
Dollar-adjusted CDAX -12.36% 34.85% 5.50% 13.17% 12.61% 22.18% 21.82% -6.07%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) BASED ON U.S. DOLLAR RETURNS.
* YEAR-TO-DATE AS OF AUGUST 31, 1999.
Trading volume tends to concentrate on the relatively few companies having both
large market capitalization and a broad distribution of their stock with few or
no large holders. The five companies having the largest annual trading volume of
their stock as of August 31, 1999 represented 45% of total trading volume on the
German stock exchanges: Daimler-Chrysler AG with EUR 4.4 billion, Mannesmann AG
with EUR 3.4 billion, Deutsche Bank AG with EUR 3.3 billion, Deutsche Telekom AG
with EUR 3.1 billion, and Allianz AG with EUR 2.1 billion.
The actual float available for public trading is significantly smaller than the
aggregate market value cited above because of the large extent of long-term
holdings by non-financial corporations, family groups and banks. However, the
number of publicly traded shares has been increasing in recent years due to a
reduction in such holdings on the part of certain insurance companies and public
authorities. In addition, the continuing public offerings of equity securities
previously controlled by the federal government have contributed to the growing
size of the float.
Domestic institutional ownership of German equities, while large relative to
that by individuals, is less than that in certain other industrial countries.
The German government is encouraging the expansion of private participation in
the equity markets, and
has contributed to this process both directly, through public sale of
government-owned enterprises, as well as indirectly through fiscal measures.
Set forth in the following table is information concerning the industry
composition of the DAX Index and CDAX Index.
42
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------
INDUSTRY COMPOSITION OF DAX(1) AND CDAX(2)
INDEX AS OF AUGUST 31, 1999
------------------------------------------------------------
DAX CDAX
------------------------------------------------------------
<S> <C> <C>
Automobile and Transportation 13.54% 18.36%
Banks and Financial Services 11.99% 17.89%
Chemicals and Pharmaceuticals 8.87% 11.72%
Consumer and Retail 3.35% 4.26%
Insurances 11.67% 7.32%
Machinery and Industry 12.19% 10.39%
Software & Technology 13.83% 9.61%
Utilities and Telecommunications 24.56% 20.46%
------------------------------------------------------------
Total 100.00% 100.00%
------------------------------------------------------------
</TABLE>
(1) THE DAX INDEX IS COMPRISED OF 30 STOCKS REPRESENTING
APPROXIMATELY 75% OF THE MARKET CAPITALIZATION OF THE
FRANKFURT STOCK EXCHANGE.
(2) THE CDAX INDEX IS COMPRISED OF 371STOCKS (SUBJECT TO
ADJUSTMENTS).
PRIMARY MARKETS
The amount of funds raised in equity financings in 1999 as of August 31, was
equal to EUR 17,802.9 million while the number of financings was 113. The total
value of primary offerings for each of the previous five years of listed equity
issues is shown in the table below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
PRIMARY OFFERINGS OF LISTED EQUITY SECURITIES
BY DOMESTIC ISSUERS
(MILLIONS OF DM)
-------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999*
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Value 804 833 1,246 6,495 24,807 4,961 6,439
EUR17,802
-------------------------------------------------------------------------------------------------------
</TABLE>
* AS OF AUGUST 31, 1999.
SOURCE: DEUTSCHE BORSE AG.
ROLE OF BANKS IN GERMAN CAPITAL MARKETS
As is the case in other continental European developed countries, German
commercial and banking laws permit commercial banks to act, either directly or
indirectly, as investment bankers/underwriters, managers of mutual and other
investment funds and investment advisors, as well as securities broker/dealers.
Many German banks, including Deutsche Bank AG ("Deutsche Bank"), are members of
stock exchanges in their respective countries. Moreover, they may, directly or
indirectly, also provide other financial services such as life insurance,
mortgage lending and installment financing. Lastly, they may, and frequently do,
maintain long-term equity participations in industrial, commercial or financial
enterprises, including enterprises whose voting and other equity securities may
be publicly traded and/or listed on national securities exchanges. Recent
legislation requires notification of the newly established Securities Trading
Supervisory Office and publication if certain thresholds of participating in the
voting capital of a stock exchange listed corporation are passed.
Deutsche Bank, the parent of the Manager and the Advisor, holds significant
participation in five listed German companies. The term "significant" denotes
direct ownership of over 25% of the voting equity which, under German law,
provides the holder with veto power in policy decisions, such as a change of
business objectives or major acquisitions. Deutsche Bank owns equity interests
ranging from 25% to 50% in holding companies that own participations of 25% or
more in an additional five listed German companies, most of which are publicly
owned. In addition, Deutsche Bank may maintain trading positions in the
securities of these and other (domestic and foreign) companies, and may make
trading markets in some of them, subject to limitations imposed by applicable
law, including the limitations of the German Stock Exchange Law (Borsengesetz)
of 1896, as amended. Deutsche Bank directors or officers may, by virtue of such
ownership or otherwise, be elected to the Supervisory Boards of these and other
companies. Deutsche Bank and its affiliates may also have commercial lending
relationships with companies whose securities a Portfolio may acquire.
In their capacity as underwriters, German banks originate and manage new issues
of domestic and international fixed income and equity securities both in their
respective domestic primary market and in the Euromarket. Deutsche Bank
frequently acts as lead manager for domestic underwritten offerings of both debt
and equity securities. Under an SEC rule, the Portfolios may purchase securities
in offerings in which Deutsche Bank or one of its affiliates is the principal
underwriter, subject to certain conditions. Directly and through its various
wholly-owned affiliates abroad, Deutsche Bank is a major player in the Eurobond
43
<PAGE>
market. Although the Portfolio will not purchase securities from or sell
securities to Deutsche Bank, the trading activities of Deutsche Bank as well
as the investment positions and underwriting activities in such securities
could have either an adverse or beneficial effect on the price of those
securities already held in the Portfolio or contemplated for purchase and,
depending on the size of Deutsche Bank's position, may or may not affect the
availability of the securities for investment by the Portfolio.
JAPANESE EQUITY SECURITIES MARKETS
Listed securities in Japan trade on three Main Japanese Exchanges (the Nagoya
Stock Exchange, the Osaka Securities Exchange and the Tokyo Stock Exchange (the
"TSE")) and five regional stock exchanges (the Fukuoka Stock Exchange, the
Hiroshima Stock Exchange, the Kyoto Stock Exchange, the Niigata Stock Exchange
and the Sapporo Stock Exchange). The TSE is the largest and most prestigious of
the exchanges and is widely regarded as the central marketplace for all of
Japan.
There are two widely followed price indices in Japan for listed securities. The
Nikkei Stock Average ("NSA") is the arithmetic average of 225 selected stocks
computed by a private corporation. The Tokyo Stock Price Index ("TOPIX"),
published by the TSE, is the composite index of all common stock listed on the
First Section of the TSE. TOPIX reflects the change in the aggregate market
value of the common stocks as compared to the aggregate market value of those
stocks as of the close on January 4, 1968.
The following table sets forth the NSA and TOPIX for 1987 through August 31,
1999 and yen and dollar-adjusted total return information for those time
periods.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
NSA TOPIX
---------------------------------------------------------------------------------------------------
TOTAL RETURN(1) TOTAL RETURN(1)
---------------------------------------------------------------------------------------------------
DOLLAR DOLLAR
INDEX (Y) ADJUSTED INDEX (Y) ADJUSTED
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 21,564.00 15.31% 50.54% 1,725.83 10.89% 44.77%
1988 30,159.00 39.86% 35.61% 2,357.03 36.57% 32.42%
1989 38,915.87 29.04% 12.21% 2,881.37 22.25% 6.31%
1990 23,848.71 -38.72% -35.08% 1,733.83 -39.83% -36.26%
1991 22,983.77 -3.63% 4.75% 1,714.68 -1.10% 7.49%
1992 16,924.95 -26.36% -26.33% 1,307.66 -23.74% -23.71%
1993 17,417.24 2.91% 15.02% 1,439.31 10.07% 23.03%
1994 19,723.06 13.24% 27.00% 1,559.09 8.32% 21.48%
1995 19,868.15 0.74% -2.85% 1,577.70 1.19% -2.41%
1996 19,361.35 -2.55% -13.06% 1,470.94 -6.77% -16.83%
1997 15,258.74 -21.19% -29.65% 1,175.03 -20.12% -28.69%
1998 13,842.17 -9.28% 3.93% 1,086.99 -7.49% 5.98%
1999* 17,436.56 25.97% 30.55% 1,457.02 34.04% 38.92%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) TOTAL RETURN IS THE PERCENT CHANGE IN THE INDEX FROM THE START OF THE YEAR
TO THE END.
* YEAR-TO-DATE AS OF AUGUST 31, 1999.
SOURCES: TOKYO STOCK EXCHANGE, ANNUAL SECURITIES STATISTICS (1998); MONTHLY
STATISTICS REPORT (DEC. 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994,
1995, 1996, 1997, 1998, AUGUST 1999).
The Japanese stock and real estate markets of the late 1980s have been dubbed
"bubble" markets because they were characterized by dramatic increases in the
volume of trading and transactions as well as in prices of stock and land. Such
increases were driven by investors' expectations that stock and land prices
would rise even further for the foreseeable future, thereby justifying (in their
minds) their over-priced investments in Japanese stock and real estate. Many of
such investments were financed with secured loans from Japan's banks and
so-called "non-bank banks" (i.e., companies that are not licensed by the
Minister of Finance to engage in the business of commercial banking but that are
primarily engaged in the business of commercial lending).
Share prices of companies traded on Japanese stock exchanges reached historical
peaks in 1989 and 1990. Afterwards, stock prices decreased significantly (with
the Nikkei index of 225 stocks at 14309 in 1992). After stabilizing at low
levels during the next six years, new low levels were once again reached in 1998
(with the Nikkei attaining a new twelve year low of 12879 in early October,
1998). The collapse of the "bubble" stock market in 1990 had a material adverse
impact on the financial situation of various participants therein. Such collapse
also led to various problems involving irregular practices in the securities
business, such as compensation to favored customers by securities companies for
trading and other losses. Japanese
44
<PAGE>
banks have experienced, and may continue to experience, substantial levels of
non-performing loans, making the nationalization of some institutions a
significant concern. The decline in stock prices after 1989 has raised the cost
of capital for industry and has reduced the value of stock holdings by banks and
corporations. These effects have, in turn, contributed to the recent weakness in
Japan's economy and could continue to have an adverse impact in the future.
Further, recent events, not only in Japan but in other countries in the Asian
region, as well as in Russia, may negatively impact the Funds. Such events
include currency volatility and depreciation, high interest rates, banking
sector crises, market volatility, political instability and declining asset
values. Taken together, these and other factors are likely to: (1) have a
material adverse effect on economic growth and (2) increase volatility in the
prices at which securities and other financial instruments are traded. As a
result, there can be no assurance that the political and economic developments
in this and other parts of the world will not have a material adverse effect on
the net asset value of the Funds investing a significant portion of their assets
in the securities of issuers domiciled in, or deriving a large percentage of
their revenues from, such countries.
The following table sets forth the aggregate trading volume and the value of
Japanese stocks on the eight Japanese stock exchanges for the years 1989 through
1998, and year-to-date as of August 31, 1999. Trading on the TSE represented
over 89% of trading volume in each year.
<TABLE>
<CAPTION>
--------------------------------------------------------------
VOLUME VALUE
YEAR (MILLIONS OF SHARES) ((Y) BILS.)
--------------------------------------------------------------
<S> <C> <C>
1989 256,296 386,395
1990 145,837 231,837
1991 107,844 134,160
1992 82,563 80,456
1993 101,172 106,123
1994 105,936 114,622
1995 120,148 115,840
1996 126,496 136,170
1997 130,657 151,450
1998 123,220 97,480
1999* 103,454 104,710
--------------------------------------------------------------
</TABLE>
* YEAR-TO-DATE AS OF AUGUST 31, 1999.
SOURCE: TOKYO STOCK EXCHANGE, FACT BOOK 1999.
The Main Japanese Exchanges divide listed companies into First and Second
Sections. Generally, larger, established companies are assigned to the First
Section. Such companies meet more stringent listing criteria relating to the
size and business condition of the issuing company, the liquidity of its
securities and other factors pertinent to investor protection. At the end of
August 31, 1999, 1,341 Japanese companies were listed on the First Section of
the TSE. Newly listed and smaller companies are assigned to the Second Section.
At the end of August 31, 1999, 519 Japanese companies were listed on the Second
Section of the TSE. In an effort to increase the number of companies listed on
the Second Section, the Second Section listing requirements prescribed by each
of the Main Japanese Exchanges were lowered in 1996.
The 10 leading Japanese companies on the TSE, by market value, represented 29%
of the total market value of the TSE at August 31, 1999. As of August 31, 1999,
three industrial groups accounted for approximately 35.37% of the total market
value of the TSE: electric appliances, 14.64%; chemicals, 11.99%; and
transportation equipment, 8.74%. The following table sets forth the number of
companies listed on the TSE and market value by industrial group for year-end
1998.
45
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
NUMBER OF MARKET VALUES
COMPANIES ((Y) BILS.)
------------------------------------------------------------------------------
<S> <C> <C>
Fishery, Agriculture & Forestry 7 244,000
Mining 9 278,000
Construction 149 7,185,000
Foods 92 9,376,000
Textiles & Apparels 66 3,691,000
Pulp & Paper 23 1,666,000
Chemicals 130 13,810,000
Pharmaceutical 39 12,803,000
Oil & Coal Products 13 1,646,000
Rubber Products 15 2,688,000
Glass & Ceramics Products 39 3,299,000
Iron & Steel 50 4,056,000
Nonferrous Metals 34 2,984,000
Metal Products 51 1,829,000
Machinery 154 9,490,000
Electric Appliances 186 40,275,000
Transportation Equipment 87 24,039,000
Precision Instruments 28 2,456,000
Other Products 55 6,792,000
Electric Power & Gas 17 14,152,000
Land Transportation 39 12,065,00
Marine Transportation 20 862,000
Air Transportation 5 1,148,000
Warehousing & Harbor
Transportation Services 23 660,000
Communication 5 16,229,000
Wholesale Trade 125 7,814,000
Retail Trade 103 15,001,000
Banks 99 32,979,000
Securities 23 3,615,000
Insurance 14 4,803,000
Other Financing Businesses 26 6,518,000
Real Estate 29 2,834,000
Services 83 7,878,000
------------------------------------------------------------------------------
Total 1,838 275,165,000
------------------------------------------------------------------------------
Manufacturing 960 129,478,000
Non-Manufacturing 878 145,687,000
------------------------------------------------------------------------------
Total 1,838 275,165,000
------------------------------------------------------------------------------
</TABLE>
SOURCE: TOKYO STOCK EXCHANGE, FACT BOOK 1999.
The amount of funds raised in equity financings by all the companies listed on
all eight Japanese stock exchanges for the calendar year 1998, as compared to
calendar year 1997, increased by 378 billion yen to 1,540 billion yen while the
number of financings decreased by 56 to 88. The following table sets forth the
number of equity financings by companies listed on all eight of the Japanese
stock exchanges and the amount raised for each of 1992 through 1998.
46
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
RIGHTS PUBLIC PRIVATE EXERCISE
OFFERINGS OFFERINGS PLACEMENTS OF WARRANTS TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT AMOUNT
OF RAISED OF RAISED OF RAISED OF RAISED RAISED
FINANCINGS ((Y)BILS.) FINANCINGS ((Y)BILS.) FINANCINGS ((Y)BILS.) FINANCINGS ((Y)BILS.) ((Y)BILS.)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 20 111 3 4 22 102 127 203 419
1993 9 48 4 7 14 150 184 617 822
1994 2 10 18 237 8 239 180 451 935
1995 12 96 8 33 19 160 118 299 588
1996 9 337 36 305 20 218 187 673 1,533
1997 9 73 26 128 19 369 88 368 938
1998 1 0.3 12 284 35 696 35 88 1,068
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE: TOKYO STOCK EXCHANGE, FACT BOOK 1998.
47
<PAGE>
APPENDIX B
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 OF THE 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
Hong Kong Stock Exchange
INDIA***
Mumbai, Calcutta, Delhi, Madras
INDONESIA
Jakarta Stock Exchange
JAPAN
Tokyo, Osaka, Nagoya, Kyoto, Fukuoto, Niigata, Sapporo, Hiroshima
MALAYSIA
Kuala Lumpur
48
<PAGE>
MEXICO
Mexico City
NEW ZEALAND
Wellington Christchurch/Invercargill, Auckland
PERU
Lima
PHILIPPINES
Manila
SINGAPORE
Singapore Stock Exchange
SOUTH AFRICA
Johannesburg
SOUTH KOREA
Seoul
TAIWAN***
Taipei
THAILAND
Bangkok
USA
American Stock Exchange (AMEX), Boston, Chicago, Cincinnati, New York, 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
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.
*** NOT APPLICABLE TO THE GERMAN EQUITY FUND.
**** EUROPEAN MID-CAP FUND ONLY
49
<PAGE>
APPENDIX C
STANDARD & POOR'S
LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it 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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has 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. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is 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, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C 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--This highest category 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 on issues with this designation 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.
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
50
<PAGE>
(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--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as gilt
edged. Interest payments are protected by a large or 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--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are 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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their 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--Bonds which are rated 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--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are 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--Issuers rated Prime-1 (or related supporting institutions) have 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.
P-2--Issuers rated Prime-2 (or related supporting institutions) have 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--This designation 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--This designation 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
51
<PAGE>
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 IBCA, INC./FITCH INVESTORS SERVICE, L.P.
LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be 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--Bonds 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--Bonds 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--Bonds 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--Bonds are 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--Bonds are 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--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are 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) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an 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.
52
<PAGE>
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.
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 MANAGER
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.
855 Third Avenue, 32nd Floor
New York, New York 10022
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
<PAGE>
PART C. OTHER INFORMATION.
ITEM 23. EXHIBITS:
(a) (i) Copy of Articles of Amendment and Restatement of the
Registrant; (3)
(ii) Conformed copy of Articles of Amendment; (9)
(iii) Conformed copy of Articles Supplementary of Registrant;
(9)
(iv) Conformed copy of Articles of Amendment Certificate of
Correction; (9)
(v) Conformed copy of Articles of Amendment; (12)
(b) (i) Copy of By-Laws of the Registrant; (1)
(ii) Copy of Amendment #1 to the By-Laws; (2)
(c) Copy of Specimen Certificate for shares of common stock
of the Registrant; (7)
(d) (i) Copy of Investment Advisory Agreement of the Registrant;
(3)
(ii) Copy of Investment Management Agreement; (5)
(iii) Conformed copy of Amended Letter Agreement regarding
Expense Ratio Caps; +
(e) (i) Conformed copy of Distributor's Contract including
Exhibits A and B thereto; (6)
(ii) Conformed copy of Exhibit C to the Distributor's
Contract; (9)
(iii) Form of Distribution Agreement including Appendix A and
B thereto; (11)
(iv) Conformed copy of Mutual Funds Sales and Service
Agreement; (6)
(f) Not applicable;
(g) (i) Conformed copy of Custodian Agreement between Investors
Bank and Trust and the Registrant; (6)
(ii) Custodian Agreement between Deutsche Portfolios and
Investors Bank and Trust Company; (3)
(iii) Conformed copy of Delegation Agreement between Deutsche
Portfolios and Investors Bank and Trust Company including
Appendix A-D; (9)
(h) (i) Conformed copy of Master Agreement for Administration
Services between Investment Company Capital Corporation
and the Registrant;+
(ii) Not Applicable;
(iii) Not Applicable;
(iv) Administration Agreement between Deutsche Portfolios
and IBT Trust Company (Cayman) Ltd.; (3)
(v) Conformed copy of Fund Accounting Agreement between IBT
Fund Services (Canada) Inc. and the Registrant; (6)
(vi) Conformed copy of Appendix A-C to Fund Accounting
Agreement between IBT Fund Services (Canada) Inc. and
the Registrant; (9)
(vii) Copy of Fund Accounting Agreement between Deutsche
Portfolios and IBT Funds Services (Canada) Inc.; (3)
<PAGE>
(viii)Conformed copy of Services Agreement; (6)
(ix) Form of Amendment #1 to Exhibit 1 of the Services
Agreement; (9)
(i) Copy of Opinion and Consent of Counsel as to legality of
shares being registered; (5)
(j) Conformed copy of consent of Independent Accountants;+
(k) Not applicable;
(l) Copy of investment representation letters from initial
shareholders; (5)
(m) (i) Conformed copy of Distribution and Services Plan; (6)
(ii) Conformed copy of Exhibit C to the Distribution and
Service Plan; (9)
(n) Conformed copy of Amended and Restated Multiple Class
Plan including Exhibit A;+
(o) Conformed copy of Powers of Attorney. (2)
(p) Codes of Ethics
(i) Code of Ethics of Registrant; +
(ii) Deutsche Funds Management, Inc.; +
(iii) DWS International Portfolio Management;+
(iv) Deutsche Asset Management;+
--------------------------------------------
+All exhibits have been filed electronically
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 Post-Effective
Amendment No. 8 on Form N-1A filed on March 31, 2000. (File Nos.
333-7008 and 811-8227)
3. 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)
5. 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)
6. 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)
7. 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)
9. 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)
11. 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)
12. 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)
<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.
Deutsche Funds Holding GmbH ("DFH"), a holding company organized under German
law, 93% owned by Deutsche Bank AG; sole shareholder of DFM (since 1/97); sole
shareholder of DWS-IPM (since 5/97).
Deutsche Bank AG, a publicly-held global financial institution, trading on the
Frankfurt Stock Exchange); sole shareholder of DFH (since 9/94).
Deutsche Bank North America Holding Corp. ("DBNAH"), a holding company organized
under US law, 100% owned by Deutsche Bank AG; sole shareholder of Deutsche Bank
U.S. Financial Markets Holding Corporation. Deutsche Bank U.S. Financial Markets
Holding Corporation, a holding company organized under US law, 100% owned by
DBNAH; sole shareholder of DMGIM.
Udo Behrenwaldt, Director of DFM (since (5/97); Managing Director of DFH (since
9/94); Manager 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 Participations at
DWS-DGW(since 12/95); Group Strategy Department at Deutsche Bank AG (prior to
12/95).
Axel-Guenther Benkner, Managing Director of DWS-IPM (since 5/97); Managing
Director of DFH (since 9/94); Managing Director of Deutsche
Vermoegensbildungsgesellschaft mbH (since 12/90); Managing Director of DWS-DGW
(since 2/91).
Heinz-Wilheim Fesser, Senior Portfolio Manager of DWS-IPM (since 5/97); Fixed
Income-Global at DWS-DGW (since 12/87).
Klaus Kaldmorgen, Senior Portfolio Manager of DWS-IPM (since 5/97);
Equities-Global at DWS-DGW (since 12/82).
Klaus Martini, Senior Portfolio Manager of DWS-IPM (since 6/97); Head of
Equities - Europe at DWS-DGW (since 7/84).
Elisabeth Weisenhorn, Senior Portfolio Manager of DWS-IPM (since 6/97); Head of
Equities - Germany at DWS-DGW (since 11/85).
Reinhold Volk, Chief Financial Officer of DWS-IPM (since 6/97); Head of
Controlling at DWS-DGW (since 10/86).
Mathias Geuckler, Chief Compliance Officer of DWS-IPM (since 6/97), Chief
Compliance Officer of DWS-DGW (since 11/92).
Gerhard Seifried, Chief Operations Officer of DWS-IPM (since 6/97); Head of Fund
Administration at DWS-DGW (since 10/85).
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 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
Frederick Skillin Assistant Treasurer, --
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 and the Investment
Company Act, 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 1st day of June, 2000.
FLAG INVESTORS FUNDS, INC.
BY: /s/ Richard T. Hale
Richard T. Hale, President
June 1, 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
(Chief Executive Officer and
Acting Principal Financial
Officer)
Eugene J. McDonald* Director
Louis E. Levy* Director
Richard R. Burt* Director
Robert H. Wadsworth* Director
Truman T. Semans* Director
Joseph R. Hardiman* Director
* By Power of Attorney
By: /s/ Daniel O. Hirsch Attorney In Fact June 1, 2000
Daniel O. Hirsch For the Persons
Listed Above
</TABLE>
