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LOGO
FLAG INVESTORS
INTERNATIONAL FUND, INC.
(Class A Shares)
This mutual fund (the "Fund") is an open-end diversified management
investment company seeking long-term growth of capital primarily through
investment in a diversified portfolio of marketable equity securities of
issuers located outside of the United States.
Class A Shares of the Fund ("Class A Shares") are available through Alex.
Brown & Sons Incorporated, as well as through Participating Dealers and
Shareholder Servicing Agents. (See "How to Invest in the Fund.").
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing, and should be retained for future
reference. A Statement of Additional Information dated March 1, 1996 has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference. It is available upon request and without charge by
calling the Fund at (800) 767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is March 1, 1996
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FLAG INVESTORS
INTERNATIONAL FUND, INC.
(Class A Shares)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
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Page
1. Fee Table ........................................ 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 6
4. Investment Restrictions .......................... 9
5. How to Invest in the Fund ........................ 9
6. How to Redeem Shares ............................. 15
7. Telephone Transactions ........................... 16
8. Dividends and Taxes .............................. 17
9. Management of the Fund ........................... 19
10. Investment Advisor and Sub-Advisor ............... 19
11. Distributor ...................................... 21
12. Custodian, Transfer Agent, Accounting Services ... 22
13. Performance Information .......................... 22
14. General Information .............................. 23
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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the Fund or
by its distributor in any jurisdiction in which such offering may not
lawfully be made. Shares may be offered only to residents of those states
in which such shares are eligible for purchase.
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1. FEE TABLE
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Shareholder Transaction Expenses:
(as a percentage of offering price)
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Maximum Sales Charge Imposed on Purchases .............. 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None*
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Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average daily net assets)
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Management Fees (net of fee waivers) ................... .08%**
12b-1 Fees ............................................. .25%
Other Expenses ......................................... 1.17%
Total Fund Operating Expenses (net of fee waivers) ..... 1.50%**
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* Purchases of $1 million or more are not subject to an initial sales
charge, however, a contingent deferred sales charge of .50% may be
imposed on such purchases. (See "How to Invest in the Fund -- Offering
Price.")
** The Fund's investment advisor has agreed to voluntarily waive its fees to
the extent required so that Total Fund Operating Expenses do not exceed
1.50% of the Class A Shares' average net assets. Absent fee waivers,
Management Fees would be .75% and Total Fund Operating Expenses would be
2.17% of the Class A Shares' average net assets.
EXAMPLE:
You would pay the following
expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of
each time period:*
1 year 3 years 5 years 10 years
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$60 $91 $126 $230
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* Absent fee waivers, for the one, three, five and ten-year periods,
expenses would be higher.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Class A Shares through a financial institution may be
charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
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Fund -- Offering Price", "Investment Advisor and Sub-Advisor" and
"Distributor.") The Expenses and Example appearing in the table above are
based on the Fund's expenses for the Class A Shares for the fiscal year ended
October 31, 1995, which (net of fee waivers) were 1.50% of the Class A
Shares' average net assets.
The rules of the SEC require that the maximum sales charge (in the Class A
Shares' case, 4.50% of the offering price) be reflected in the above table.
However, certain investors may qualify for reduced sales charges. (See "How
to Invest in the Fund -- Offering Price.") Due to the continuous nature of
Rule 12b-1 fees, long-term shareholders of the Fund may pay more than the
equivalent of the maximum front-end sales charges permitted by the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. ("NASD
Rules"). The foregoing table has not been audited by Deloitte & Touche LLP,
the Fund's independent auditors.
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2. FINANCIAL HIGHLIGHTS
The financial highlights included in this table have been derived from the
Fund's financial statements for the periods indicated and have been audited
by Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the fiscal year ended October 31, 1995 and the independent
auditors' report thereon of Deloitte & Touche LLP are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended October 31,
1995, which can be obtained at no charge by calling the Fund at (800)
767-FLAG.
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(For a Class A Share outstanding throughout each period)
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For the Year
-----------------------------------------------
1995 1994 1993** 1992
--------- -------- --------- ---------
Per Share Operating
Performance:
Net asset value at
beginning of period $13.97 $13.05 $9.11 $10.63
--------- --------- --------- ----------
Income from Investment
Operations:
Net investment income 0.09 0.18 0.49 0.16
Net realized and
unrealized gain/(loss)
on investments(1) (1.37) 1.58 3.45 (1.62)
--------- --------- --------- ----------
Total from Investment
Operations (1.28) 1.76 3.94 (1.46)
Less Distributions:
Dividends from net
investment income and
short-term gains -- (0.84) -- (0.06)
Distributions from net
realized long-term
gains -- -- -- --
--------- --------- --------- ----------
Total distributions -- (0.84) -- (0.06)
--------- --------- --------- ----------
Net asset value at end of
period $12.69 $13.97 $13.05 $9.11
========= ========= ========= ==========
Total Return *** (9.16)% 13.98% 43.25% (13.80)%
Ratios to Average Net
Assets:
Expenses(2) 1.50% 1.50% 1.50% 1.50%
Net investment
income(3) 0.68% 0.75% 1.91% 0.73%
Supplemental Data:
Net assets at end of
period (000) $12,483 $15,487 $15,008 $19,780
Portfolio turnover rate 35% 43% 48% 63%
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* Annualized.
** Investment Company Capital Corp. and The Glenmede Trust Company became
the Fund's investment advisor and sub-advisor, respectively, on August
23, 1993.
*** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
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=============================================================================
November 18,
1986
(commence-
ment of
operations)
through
Ended October 31, October 31,
---------------------------------------------- -------------
1991 1990 1989 1988 1987
------- --------- --------- --------- -------------
$11.80 $13.71 $11.78 $10.81 $10.00
------ --------- --------- --------- -------------
0.15 0.60 0.10 0.11 0.03
(0.55) (1.33) 1.92 1.57 0.78
------ --------- --------- --------- -------------
(0.40) (0.73) 2.02 1.68 0.81
-- (0.57) (0.09) (0.16) --
(0.77) (0.61) -- (0.55) --
----- --------- --------- --------- -------------
(0.77) (1.18) (0.09) (0.71) --
----- ---------- --------- --------- -------------
$10.63 $11.80 $13.71 $11.78 $10.81
===== ========= ========= ========= =============
(3.15)% (6.63)% 17.25% 16.21% 8.1%
1.50% 1.50% 1.49% 1.46% 1.48%*
1.17% 1.48% 0.62% 0.87% 1.41%*
$38,830 $44,406 $32,325 $35,259 $38,227
73% 62% 95% 96% 72%
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(1) Current year and prior year includes net realized currency loss. Realized
currency gain (loss) is included in net income for the years ended
October 31, 1993, 1992 and 1991, respectively.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 2.17%, 1.97%, 2.13%, 1.92%, 1.90%, 1.75%, 1.82%,
1.79% and 1.85% during the periods ended October 31, 1995, 1994, 1993,
1992, 1991, 1990, 1989, 1988, and 1987, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 0.02%, 0.28%, 1.28%, 0.31%, 0.77%,
1.21%, 0.29%, 0.54%, and 0.78% during the periods ended October 31, 1995,
1994, 1993, 1992, 1991, 1990, 1989, 1988, and 1987, respectively.
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3. INVESTMENT PROGRAM
..............................................................................
INVESTMENT OBJECTIVES, POLICIES AND RISK
CONSIDERATIONS
The investment objective of the Fund is long-term growth of capital. The
foregoing investment objective is a fundamental policy of the Fund and cannot
be changed without shareholder approval. The Fund seeks to achieve this
objective by investing primarily in common stocks and other equity securities
of companies located outside the United States. The Fund's assets will
usually consist of issues listed on recognized foreign securities exchanges.
The Fund is, however, free to hold securities that are not so listed, and may
invest up to 15% of its net assets in such securities. There can be no
assurance the Fund will achieve its objective.
Investment Company Capital Corp., the Fund's investment advisor ("ICC"),
and The Glenmede Trust Company, the Fund's sub-advisor ("Glenmede")
(collectively, the "Advisors"), are responsible for managing the Fund's
investments. (See "Investment Advisor and Sub-Advisor.") Glenmede manages the
Fund's investments on a day-to-day basis and utilizes a disciplined,
value-based investment management style to construct the Fund's international
equity portfolio. Markets, and individual securities within each market, are
compared on the basis of fundamental value, quality, and prospective earnings
potential.
The Fund's assets will normally be invested primarily in equity securities
of companies located outside the United States. For these purposes, equity
securities consist of not only common stock but securities convertible into
common stock and American Depository Receipts, which are securities issued in
the United States that represent ownership rights in foreign countries. The
Fund diversifies investments by issuer and does not concentrate in any one
industry. In addition, the Fund allocates its investments among geographic
regions and individual countries and, normally, expects to have 65% of its
total assets invested in at least three different foreign countries. (See
"Investment Restrictions.")
If the Fund is not fully invested in equity securities, any assets not so
invested may be invested in securities issued or guaranteed by the United
States government or any of its agencies or instrumentalities; shares of
open- or closed-end investment companies that invest exclusively in such
securities; fixed income securities issued by U.S. or foreign corporations,
or by foreign governments, that are determined by the Advisors to be of high
6
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quality; U.S. and foreign short-term money market instruments (consisting of
government obligations; time deposits, bankers acceptances, and certificates
of deposit of creditworthy banks; commercial paper and short-term corporate
debt securities, which are rated in the top two categories published by
Moody's Investors Service, Inc. or by Standard & Poor's Ratings Group or, if
unrated, are of comparable quality as determined by the Advisors under
guidelines established by the Fund's Board of Directors; and repurchase
agreements with respect thereto). Under normal circumstances, no more than
35% of the Fund's assets may be invested in fixed income securities and money
market instruments. For defensive purposes, however, up to 100% of such
assets may be invested in money market instruments.
The Fund may also enter into forward currency exchange contracts in order
to hedge against uncertainty in the level of future foreign exchange rates in
the purchase and sale of investment securities, but it may not enter into
such contracts for speculative purposes. The Fund will use these instruments
primarily for transaction hedging (i.e., to protect against adverse currency
movements between a security's trade and settlement dates) but reserves the
right occasionally to use forward contracts to hedge the value of securities
denominated in a particular currency against a decline in the value of that
currency. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts may be
bought or sold to protect the Fund, to some degree, against a possible loss
resulting from an adverse change in the relationship between foreign
currencies and the U.S. dollar. This method of protecting the value of the
Fund's investment securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities.
It simply establishes a rate of exchange at some future point in time.
Additionally, although such contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain which might result should the value of the
currency increase.
The Fund may also invest in securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities") that have been determined to be liquid by the Advisors under
standards approved by the Fund's Board of Directors, and may invest up to 10%
of its net assets in Rule 144A Securities that are illiquid (see "Investment
Restrictions"). Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
7
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.............................................................................
SPECIAL RISK CONSIDERATIONS
Foreign investments involve substantial and different risks which should
be carefully considered by any potential investor. In general, less
information is publicly available about foreign companies than is available
about companies in the United States. Most foreign companies are not subject
to uniform audit and financial reporting standards, practices and
requirements comparable to those in the United States.
Foreign stock markets are generally not as developed or efficient as those
in the United States. In most foreign markets volume and liquidity are less
than in the United States and, at times, volatility of price can be greater
than in the United States. Fixed commissions on foreign stock exchanges are
generally higher than the negotiated commissions on U.S. exchanges. There is
generally less government supervision and regulation of foreign stock
exchanges, brokers and companies than in the United States. The settlement
periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity.
Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation
or confiscatory taxation, limitations on the removal of funds or other
assets, political or social instability, or diplomatic developments which
could adversely affect investments, assets or securities transactions of the
Fund in some foreign countries.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount available for distribution to the Fund's
shareholders. The expense ratio of the Fund can be expected to be higher than
those of investment companies investing in domestic securities due to the
additional cost of custody of foreign securities. A more detailed description
of the costs of operation of the Fund is contained under "Investment Advisor
and Sub-Advisor" and "Distributor" and in the Statement of Additional
Information. Portfolio securities held by the Fund which are listed on
foreign exchanges may be traded on days that the Fund does not value its
securities, such as Saturdays and the customary U.S. business holidays on
which the New York Stock Exchange is closed. As a result, the net asset value
of Class A Shares may be significantly affected on days when shareholders do
not have access to the Fund.
8
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4. INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. Accordingly, the Fund will
not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for these purposes, banks and insurance companies are
considered to be separate industries);
2) Invest more than 5% of its total assets in the securities of any single
issuer;
3) Invest in the securities of any single issuer if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of such
issuer;
4) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
5) Invest more than 10% of the value of its net assets in illiquid
securities, including time deposits of over seven days' duration.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. HOW TO INVEST IN THE FUND
Class A Shares may be purchased from Alex. Brown & Sons Incorporated, 135
East Baltimore Street, Baltimore, Maryland 21202 ("Alex. Brown"), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealer") or through any financial institution which has
entered into a shareholder servicing agreement with the Fund ("Shareholder
Servicing Agents"). Class A Shares may also be purchased by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price (including any applicable front-end sales
charge), to the address shown on the Application Form.
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The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases Through Automatic Investing Plan" below.) There
is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts.
The Fund reserves the right to suspend the sale of Class A Shares at any
time at the discretion of Alex. Brown and the Fund's investment advisor.
Orders for purchases of Class A Shares are accepted on any day on which the
New York Stock Exchange is open for business ("Business Day"). Purchase
orders for Class A Shares will be executed at the per share purchase price
equal to the net asset value next determined after receipt of the purchase
order plus any applicable front-end sales charge (the "Offering Price") on
the date such net asset value is determined (the "Purchase Date"). Purchases
made by mail must be accompanied by payment of the Offering Price. Purchases
made through Alex. Brown, a Participating Dealer or Shareholder Servicing
Agent must be in accordance with such entity's payment procedures. Alex.
Brown may, in its sole discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share is calculated by valuing all
assets held by the Fund, deducting liabilities, and dividing the resulting
amount by the number of then outstanding Class A Shares. For this purpose,
portfolio securities are given their market value where feasible. If a
portfolio security is traded on a national exchange, whether U.S. or foreign,
or on an automated dealer quotation system, on the valuation date, the last
quoted sale price is generally used. In the case of securities listed on more
than one exchange, the Fund will use the latest sale price on the exchange
where the stock is primarily traded as determined by the Advisors under
procedures established and monitored by the Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Advisors under procedures established from time to time and monitored by the
Fund's Board of Directors. Investments with maturities of less than 60
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days are valued at amortized cost, which constitutes fair value as determined
by the Fund's Board of Directors. Any assets and liabilities initially
expressed in foreign currency values will be translated into U.S. dollar
values at the prevailing market rates of such currencies against U.S. dollars
at the time of valuation.
.............................................................................
OFFERING PRICE
Class A Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and
decreases as the amount of the purchase increases, as shown below:
Sales Charge
as Percentage of Dealer
------------------------------ Retention
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
------------ ............ ------------ -------------- -----------------
Less than $ 50,000 .... 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999 .... 3.50% 3.63% 3.00%
$ 100,000 - $249,999..... 2.50% 2.56% 2.00%
$ 250,000 - $499,999..... 2.00% 2.04% 1.50%
$ 500,000 - $999,999..... 1.50% 1.52% 1.25%
$1,000,000 and over ..... None* None* None*
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* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In addition, an investor may obtain reduced sales charges as
set forth above through a right of accumulation of purchases of Class A
Shares and purchases of shares of other Flag Investors funds with the same
sales charge and purchases of shares of Flag Investors Intermediate-Term
Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. (the "Intermediate Funds"). The applicable sales charge will be
determined based on the total of (a) the shareholder's current purchase plus
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of all Class A Shares and of all Flag Investors shares described
above and any Flag Investors Class D shares held by the shareholder. To
obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a
Participating Dealer or Shareholder Servicing Agent, as applicable, with
sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.
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The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing Class A Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent, which states the investor's intention
to invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the
Offering Price applicable at the time of such purchase to the full amount
indicated on the Letter of Intent. A Letter of Intent is not a binding
obligation upon the investor to purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Class A Shares purchased with the first 5% of the full amount will be held in
escrow (while remaining registered in the name of the investor) to secure
payment of the higher sales charge applicable to the Class A Shares actually
purchased if the full amount indicated is not invested. Such escrowed shares
will be involuntarily redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
shares will be released. An investor who wishes to enter into a Letter of
Intent in conjunction with an investment in Class A Shares may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.
No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption
within 24 months following the purchase, at the rate of .50% on the lesser of
the value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.
The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors may
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be charged a fee if they effect transactions in Fund shares through a broker
or agent); (ii) qualified retirement plans; (iii) participants in a Flag
Investors fund payroll savings plan program; (iv) investors who have redeemed
Class A Shares, or shares of any other mutual fund in the Flag Investors
family of funds with the same sales charges, or who have redeemed shares of
the Intermediate Funds which they had held for at least 24 months prior to
redemption, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within 90 days after the redemption; and (v)
current or retired Directors of the Fund, and directors and employees (and
their immediate families) of Alex. Brown, the Advisors, Participating Dealers
and their respective affiliates.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
..............................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their Class A
shares of those funds for an equal dollar amount of Class A Shares. Except as
provided below, Class A Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of Flag Investors Cash Reserve Prime Class A Shares may exchange
into Class A Shares upon payment of the difference in sales charges, as
applicable.
When a shareholder acquires Class A Shares through an exchange from
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the Class A Shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares. Shareholders of the Intermediate Funds may
exchange into Class A Shares upon payment of the difference in sales charges,
as applicable, except that the exchange will be made at net asset value if
the shares of such funds have been held for more than 24 months.
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
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Shareholders of any mutual fund not affiliated with the Fund who have paid
a sales charge may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to Alex. Brown or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the
payment of a sales charge and the source of such proceeds. Class A Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange. The Fund may
modify or terminate this offer of exchange at any time on 60 days' prior
written notice to shareholders.
...............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Class A Shares regularly by means of an
Automatic Investing Plan with a pre-authorized check drawn on their checking
accounts. Under this plan, the shareholder may elect to have a specified
amount invested monthly or quarterly in Class A Shares. The amount specified
will be withdrawn from the shareholder's checking account using the
pre-authorized check and will be invested in Class A Shares at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan may
do so by completing the appropriate section of the Application Form attached
to this Prospectus.
...............................................................................
DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares.
A shareholder who wishes to enroll in the Dividend Reinvestment Plan should
check the appropriate box on the Application Form or call (800) 553-8080 for
additional information.
Alternately, shareholders may have their distributions invested in Class A
shares of other funds in the Flag Investors family of funds or in shares of the
Intermediate Funds. Shareholders who are interested in this option should call
(800) 553-8080 for additional information.
Reinvestments of distributions will be effected without a sales charge.
14
<PAGE>
===============================================================================
6. HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Fund's transfer agent (the "Transfer Agent"). Shareholders may also redeem
Class A Shares by telephone (in amounts up to $50,000). (See "Telephone
Transactions" below.) A redemption order is effected at the net asset value
per share (reduced by any applicable contingent deferred sales charge) next
determined after receipt of the order (or, if stock certificates have been
issued for the Class A Shares to be redeemed, after the tender of the stock
certificates for redemption). Redemption orders received after 4:00 p.m.
(Eastern Time) will be effected at the net asset value next determined on the
following Business Day. Payment for redeemed Class A Shares will be made by
check and will be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of Class A Shares or
dollar amount to be redeemed, signed by all owners of the Class A Shares
in the exact names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
3) If Class A Shares are held in certificate form, stock certificates either
properly endorsed or accompanied by a duly executed stock power for Class
A Shares to be redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Class A Shares will be
paid on the next dividend payable date. If all of the Class A Shares in a
shareholder's account have been redeemed on a dividend payable date, the
dividend will be remitted by check to the shareholder.
The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
15
<PAGE>
...............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares having a value of $10,000 or more may
arrange to have a portion of their Class A Shares redeemed monthly or
quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and, to the extent necessary, from share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of Class A Shares. A shareholder who wishes to enroll in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.
===============================================================================
7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Class A Shares in amounts up to $50,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business
Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular
or express mail at its address listed under "Custodian, Transfer Agent,
Accounting Services." Telephone transaction privileges are automatic.
Shareholders may specifically request that no telephone redemptions or
exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, telephone
transaction requests will be recorded and investors may be required to provide
16
<PAGE>
additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by regular or express
mail. Class A Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund--Purchases by
Exchange" and "How to Redeem Shares.")
===============================================================================
8. DIVIDENDS AND TAXES
...............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of annual dividends. The Fund
may distribute to shareholders any taxable net capital gains on an annual
basis or, alternatively, may elect to retain net capital gains and pay taxes
thereon.
Unless the shareholder elects otherwise, all dividends and net capital
gains distributions, if any, will be reinvested in additional Class A Shares
at net asset value. Shareholders may elect to have income dividends and
capital gains distributions paid in cash. Shareholders wishing to change
their election must give written notice to the Transfer Agent (see
"Custodian, Transfer Agent, Accounting Services"), either directly or through
their Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.
...............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
17
<PAGE>
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
U.S. shareholders, unless otherwise exempt, will pay federal income or
capital gains taxes on the amounts so distributed regardless of whether such
distributions are paid in cash or reinvested in additional Class A Shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, are
taxed to shareholders as long-term capital gains regardless of how long the
shareholder has held the shares. All other income distributions are taxed to
the shareholders as ordinary income. Shareholders will be advised annually as
to the tax status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that
time may reflect the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will nevertheless be taxable on the entire
amount of the distribution received.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To
the extent that the Fund is liable for foreign income taxes so withheld, it
intends to operate so as to meet the requirements of the Code to pass through
to its shareholders credit for foreign income taxes paid. Although the Fund
intends to meet the requirements of the Code to pass through such taxes,
there can be no assurance that it will be able to do so.
Distributions by the Fund to shareholders who are non-resident alien
individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to federal income tax treatment that differs from
the treatment described above. (See the Statement of Additional Information.)
The sale, exchange, or redemption of Class A Shares is a taxable event for
the shareholder.
18
<PAGE>
The Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and capital gain net income prior to the end of each
calendar year to avoid liability for federal excise tax.
Shareholders are urged to consult with their tax advisors concerning the
application of the rules described above to their particular circumstances
and the application of U.S. federal, state and local income taxes to an
investment in the Fund.
===============================================================================
9. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian,
accounting services agent and transfer agent. The day-to-day operations of
the Fund are delegated to the Fund's officers, to Alex. Brown, the Fund's
distributor, to ICC, the Fund's investment advisor, and to Glenmede, the
Fund's sub-advisor. Two Directors and all of the officers of the Fund are
officers or employees of Alex. Brown, ICC or Glenmede. The other Directors of
the Fund have no affiliation with Alex. Brown, ICC or Glenmede.
The Fund's Directors and officers are as follows:
* Truman T. Semans Chairman and Director
* Richard T. Hale Director
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Carl W. Vogt Director
Harry Woolf Director
John W. Church, Jr. President
Andrew B. Williams Executive Vice President
Gary V. Fearnow Vice President
Edward J. Veilleux Vice President
Brian C. Nelson Vice President and Secretary
Joseph A. Finelli Treasurer
Laurie D. DePrine Assistant Secretary
- ------
* Messrs. Semans and Hale are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").
===============================================================================
10. INVESTMENT ADVISOR AND SUB-ADVISOR
ICC is the Fund's investment advisor and Glenmede is the Fund's
sub-advisor. ICC is also the investment advisor to, and Alex. Brown acts as
distributor for, other mutual funds in the Flag Investors family of funds and
Alex. Brown Cash Reserve Fund, Inc., which funds had approximately $4.4
billion of net assets as of December 31, 1995. Glenmede provides fiduciary
and investment services to endowment funds, foundations, employee benefit
plans and other institutions and individuals. At December 31, 1995, Glenmede
had over $8.7 billion in assets in the accounts for which it serves in
various capacities including as executor, trustee, or investment advisor.
19
<PAGE>
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to Glenmede certain of its duties,
provided that ICC continues to supervise the performance of Glenmede and to
report thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, Glenmede is responsible for the decisions to buy and
sell securities for the Fund, for broker-dealer selection, and for
negotiation of commission rates under standards established and periodically
reviewed by the Board of Directors. The Board has established procedures
under which Glenmede may allocate transactions to Alex. Brown, provided that
compensation to Alex. Brown on each transaction is reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other broker-dealers in connection with comparable transactions
involving similar securities during a comparable period of time. In addition,
consistent with NASD Rules, and subject to seeking the most favorable price
and execution available and such other policies as the Board may determine,
Glenmede may consider services in connection with the sale of Shares as a
factor in the selection of broker-dealers to execute portfolio transactions
for the Fund.
ICC has voluntarily agreed to waive a portion of its advisory fees so that
the total operating expenses of the Fund do not exceed 1.50% of the Fund's
average daily net assets. (See "Fee Table.") Glenmede has also agreed to
waive, on a voluntary basis, a portion of its fee in an amount proportionate
to the amount by which ICC's fees may be reduced as described above. As
compensation for its services, for the fiscal year ended October 31, 1995,
ICC received a fee (net of fee waivers) equal to .08% of the Fund's average
daily net assets and from such fee paid Glenmede a fee (net of fee waivers)
equal to .06% of the Fund's average daily net assets.
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.") Glenmede, a limited purpose trust company, is a
wholly-owned subsidiary of The Glenmede Corporation. The address of ICC is
135 East Baltimore Street, Baltimore, Maryland 21202. The address of Glenmede
is One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19103.
...............................................................................
PORTFOLIO MANAGERS
Messrs. John W. Church, Jr., the Fund's President, and Andrew B. Williams,
CFA, the Fund's Executive Vice President, have shared primary responsibility
for managing the Fund's assets since August, 1993.
20
<PAGE>
Mr. Church is senior vice president and chief investment officer of
Glenmede. Prior to joining Glenmede, he was vice president in charge of
investment strategy at Girard (Mellon) Bank, where he was employed for
sixteen years. Before Girard Bank, Mr. Church spent two years at the
investment counseling firm of Franklin, Cole & Co., New York, and four years
at Chemical Bank, New York. Mr. Church received an A.B. in Economics from
Bowdoin College in 1954. He is a member and past president of the Financial
Analysts of Philadelphia, and a member of the Philadelphia Securities
Association.
Mr. Williams is vice president, equity analyst and international equity
manager of Glenmede. Before joining Glenmede, he served as vice president in
investment research at Shearson Lehman Brothers in New York. Before that, he
worked at Provident National Bank as a research analyst. Mr. Williams
received an M.B.A. in Finance from Temple University in 1981 and an A.B. in
History from Trinity College in 1976. He is a member of the Financial
Analysts of Philadelphia and is a Chartered Financial Analyst.
===============================================================================
11. DISTRIBUTOR
Alex. Brown acts as distributor of the Class A Shares. Alex. Brown is an
investment banking firm which offers a broad range of investment services to
individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated which has engaged
directly and through subsidiaries and affiliates in the investment business
since 1800. Alex. Brown is a member of the New York Stock Exchange and other
leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.
The Fund has adopted a Distribution Plan for the Class A Shares pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"). As compensation for providing
distribution services to the Class A Shares for the fiscal year ended October
31, 1995, Alex. Brown received a fee equal to .25% of the Class A Shares'
average daily net assets. This fee may be more or less than Alex. Brown's
actual expenses. Alex. Brown expects to allocate on a proportional basis most
of its annual distribution fee to its investment representatives or up to all
of its fee to Participating Dealers as compensation for their ongoing
shareholder services, including processing purchase and redemption requests
and responding to shareholder inquiries.
21
<PAGE>
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions such as banks, to act as Shareholder Servicing
Agents, pursuant to which Alex. Brown will allocate a portion of its
distribution fee as compensation for such financial institutions' ongoing
shareholder services. Such financial institutions may impose separate fees in
connection with these services and investors should review this Prospectus in
conjunction with any such institution's fee schedule. Amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Alex. Brown under the Plan.
Payments under the Plan are made as described above, regardless of Alex.
Brown's actual cost of providing distribution services. If the cost of
providing distribution services to the Fund in connection with the sale of
the Class A Shares is less than .25% of the Class A Shares' average daily net
assets for any period, the unexpended portion of the distribution fee may be
retained by Alex. Brown. Alex. Brown will from time to time and from its own
resources pay or allow additional discounts or promotional incentives in the
form of cash or other compensation (including merchandise or travel) to
Participating Dealers.
===============================================================================
12. CUSTODIAN, TRANSFER AGENT,
ACCOUNTING SERVICES
Boston Safe Deposit and Trust Company, located at One Boston Place,
Boston, Massachusetts 02108, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202 (telephone: (800) 553-8080) is the Fund's transfer and
dividend disbursing agent and, effective April 10, 1995, provides accounting
services to the Fund. As compensation for providing accounting services, ICC
receives from the Fund an annual fee equal to $25,000 plus a percentage of
the Fund's average daily net assets in excess of $10 million at a maximum
rate of .08% of net assets, and declining at various asset levels to a
minimum rate of .002% on assets in excess of $1 billion. (See the Statement
of Additional Information.) ICC also serves as the Fund's investment advisor.
===============================================================================
13. PERFORMANCE INFORMATION
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return, net of the Fund's maximum sales charge, over
one, five and ten year periods or, if such periods have not yet elapsed,
22
<PAGE>
shorter periods corresponding to the life of the Fund. Such total return
quotations will be computed by finding average annual compounded rates of
return over such periods that would equate an assumed initial investment of
$1,000 to the ending redeemable value, net of the maximum sales charge and
other fees according to the required standardized calculation. The
standardized calculation is required by the SEC to provide consistency and
comparability in investment company advertising and is not equivalent to a
yield calculation. If the Fund compares its performance to other funds or to
relevant indices, its performance will be stated in the same terms in which
such comparative data and indices are stated, which is normally total return
rather than yield. For these purposes, the performance of the Fund, as well
as the performance of such investment companies or indices, may not reflect
sales charges, which, if reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Europe, Australia and Far
East Index, an unmanaged foreign securities index monitored by Morgan Stanley
Capital International, S.A. and to the Standard & Poor's 500 Stock Index and
the Dow Jones Industrial Average, both of which are recognized indices of
domestic market performance. The Fund may also use total return performance
data as reported in the following national financial and industry
publications that monitor the performance of mutual funds: Money Magazine,
Forbes, Business Week, Barron's, IBC/Donoghue's Money Fund Report, Investor's
Daily and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Class A Shares may be purchased, although not included
in calculations of performance, will reduce performance results.
===============================================================================
14. GENERAL INFORMATION
...............................................................................
CAPITAL SHARES
The Fund was organized as a Massachusetts business trust on September 3,
1986 and reorganized as a Maryland corporation on August 16, 1993, pursuant to
an Agreement and Plan of Reorganization and Liquidation approved by
23
<PAGE>
shareholders on June 16, 1993. The Fund is authorized to issue ten million
shares of capital stock, with a par value of $.001 per share. Shares of the
Fund have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the Fund,
each share is entitled to its portion of the Fund's assets after all debts and
expenses have been paid. The fiscal year end of the Fund is October 31.
The Board of Directors may classify any authorized but unissued shares
into classes and may establish certain distinctions between classes relating
to additional voting rights, payments of dividends, rights upon liquidation
or distribution of the assets of the Fund and any other restrictions
permitted by law and the Fund's charter.
...............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with
shareholder communications in connection with the meeting.
...............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual and annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors, Deloitte
& Touche LLP.
...............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
...............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
24
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors International Fund, Inc."
and mail with this application to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
Attn: Flag Investors International Fund, Inc.
For assistance in completing this application please call: 1-800-553-8080,
8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday
To open an IRA account, call 1-800-767-3524 to request an IRA application
I enclose a check for $____________ payable to "Flag Investors International
Fund, Inc." for the purchase of Class A Shares of the Fund. The minimum
initial purchase is $2,000, except that the minimum initial purchase for
shareholders of any other Flag Investors Fund or class is $500 and the
minimum initial purchase for participants in the Fund's Automatic Investing
Plan is $250. Each subsequent purchase requires a $100 minimum, except that
the minimum subsequent purchase under the Fund's Automatic Investing Plan is
$250 for quarterly purchases and $100 for monthly purchases. The Fund
reserves the right not to accept checks for more than $50,000 that are not
certified or bank checks.
- ------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: ________________________________________________
INDIVIDUAL OR JOINT TENANT
______________________________________________________________________________
First Name Initial Last Name
______________________________________________________________________________
Social Security Number
______________________________________________________________________________
Joint Tenant Initial Last Name
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
Name of Corporation, Trust or Partnership
______________________________________________________________________________
Tax ID Number Date of Trust
______________________________________________________________________________
Name of Trustees (If to be included in the Registration)
______________________________________________________________________________
For the Benefit of
GIFTS TO MINORS
______________________________________________________________________________
Custodian's Name (only one allowed by law)
______________________________________________________________________________
Minor's Name (only one)
______________________________________________________________________________
Social Security Number of Minor
under the ___________________Uniform Gifts to Minors Act
State of Residence
MAILING ADDRESS
______________________________________________________________________________
Street
______________________________________________________________________________
City State Zip
( )
______________________________________________________________________________
Daytime Phone
<PAGE>
==============================================================================
LETTER OF INTENT--(OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares of Flag Investors
International Fund, Inc. in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
==============================================================================
RIGHT OF ACCUMULATION--(OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
<PAGE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the Fund at no sales
charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
Call (800)553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
- ------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ for me, on a monthly or quarterly basis, on or
about the 20th of each month or if quarterly, the 20th of January, April,
July and October, and to draw a bank draft in payment of the investment
against my checking account. (Bank drafts may be drawn on commercial banks
only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
______________________________________________________________________________
Bank Name
______________________________________________________________________________
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
______________________________________________________________________________
Depositor's Signature Date
______________________________________________________________________________
Depositor's Signature Date
(if joint acct., both must sign)
- ------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of ______, 19____ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $______ from
Class A Shares that I own, payable to the account registration address as
shown above. (Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)
<PAGE>
- ------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below.
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: _________________________ Bank Account No: _________________
Address: _________________________ Bank Account Name: _______________
- ------------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated March 1, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:______
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
______________________________________________________________________________
Signature Date
______________________________________________________________________________
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name: ____________________ Dealer Code: __________________________
Dealer's Address: ____________________ Branch Code: __________________________
____________________
Representative: ____________________ Rep. No. __________________________
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------
FLAG INVESTORS INTERNATIONAL FUND, INC.
135 East Baltimore Street
Baltimore, Maryland 21202
-----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, 135 EAST BALTIMORE STREET, BALTIMORE,
MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated: March 1, 1996
Relating to the Prospectus Dated: March 1, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
1. General Information and History............................................................... 1
2. Investment Objective and Policies............................................................. 1
3. Valuation of Shares and Redemption............................................................ 3
4. Federal Tax Treatment of Dividends and Distributions.......................................... 4
5. Management of the Fund........................................................................ 8
6. Investment Advisory and Other Services........................................................ 12
7. Distribution of Fund Shares................................................................... 14
8. Brokerage..................................................................................... 17
9. Capital Shares................................................................................ 18
10. Reports....................................................................................... 19
11. Custodian, Accounting Services and Transfer Agent............................................. 19
12. Independent Auditors.......................................................................... 20
13. Performance Information....................................................................... 20
14. Control Persons and Principal Holders of Securities........................................... 21
15. Financial Statements.......................................................................... 21
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors International Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required
to furnish prospective investors with certain information concerning the
activities of the company being considered for investment. The Fund currently
offers one class of shares: Flag Investors International Fund Class A Shares
(the "Shares").
Important information concerning the Fund is included in the Fund's
Prospectus which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202, (telephone: (800) 767-FLAG) or from Participating Dealers that offer
Shares to prospective investors. Prospectuses may also be obtained from
Shareholder Servicing Agents. Some of the information required to be in this
Statement of Additional Information is also included in the Fund's current
Prospectus. To avoid unnecessary repetition, references are made to related
sections of the Prospectus. In addition, the Prospectus and this Statement of
Additional Information omit certain information about the Fund and its
business that is contained in the Registration Statement relating to the Fund
and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying
the charges prescribed under its rules and regulations.
The Fund was organized as a Massachusetts business trust on
September 3, 1986. The Fund filed a registration statement with the SEC
registering itself as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and commenced operations on November 18, 1986. On August
16, 1993, the Fund reorganized as a Maryland corporation pursuant to an
Agreement and Plan of Reorganization and Liquidation approved by shareholders
on June 16, 1993.
Under a license agreement dated August 16, 1993, between the
Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the
Fund the "Flag Investors" name and logo but retains the rights to that name
and logo, including the right to permit other investment companies to use
them.
2. INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is long-term growth of
capital. As more fully described in the Fund's Prospectus, the Fund seeks to
achieve this objective primarily through investment in a diversified portfolio
of marketable equity securities of issuers domiciled outside of the United
States.
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as
federal and state regulatory limitations. The investment restrictions recited
below are in addition to those described in the Fund's Prospectus, and are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the Fund's outstanding Shares. The percentage
limitations contained in these restrictions apply at the time of purchase of
securities. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate;
<PAGE>
2. Purchase or sell commodities or commodities contracts,
except that the Fund may enter into forward currency exchange
contracts;
3. Purchase a security if, as a result, more than 5% of the
value of the Fund's total assets would be invested in securities with
legal or contractual restrictions on resale ("restricted
securities");
4. Act as an underwriter of securities within the meaning of
the federal securities laws except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities
acquired within the limitation on purchases of restricted securities;
5. Issue senior securities;
6. Make loans of money or portfolio securities, except that
the Fund may purchase or hold debt instruments, including time
deposits, in accordance with its investment objectives and policies;
7. Effect short sales of securities;
8. Purchase securities on margin (but the Fund may obtain
such short-term credits as may be necessary for the clearance of
transactions); or
9. Purchase participations or other direct interests in oil,
gas or other mineral exploration or development programs.
The following are investment restrictions that may be
changed by a vote of the majority of the Board of Directors. The Fund will
not:
1. Purchase any securities of unseasoned issuers which have
been in operation directly or through predecessors for less than
three years (for this purpose, the Fund's management considers
certain privatized government companies to be seasoned issuers);
2. Invest in shares of any other open-end investment company
registered under the Investment Company Act, unless otherwise
permitted by law. (If the Board of Directors votes to approve
investments in shares of any other investment company, the Fund might
incur sales charges, management fees and other expenses in connection
with any such investment, which charges would be a Fund expense and
accordingly might have some impact on the Fund's net asset value);
3. Purchase or retain the securities of any issuer if to the
knowledge of the Fund any officer or Director of the Fund or its
investment advisor or sub-advisor owns beneficially more than .5% of
the outstanding securities of such issuer and together they own
beneficially more than 5% of the securities of such issuer;
4. Invest in companies for the purpose of exercising
management or control;
5. Invest in puts or calls or any combination thereof,
except that the Fund may enter into forward foreign currency
contracts; or
6. Purchase warrants, if by reason of such purchase more
than 5% of the Fund's net assets (taken at market value) will be
invested in warrants, valued at the lower of cost or market. Included
within this amount, but not to exceed 2% of the value of the Fund's
net assets, may be warrants that are not listed on the New York
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<PAGE>
or American Stock Exchange. For the purpose of the foregoing
calculations, warrants acquired by the Fund in units or attached to
securities will be deemed to be without value and therefore not
included within the limitations of the preceding sentence;
7. Invest in real estate limited partnerships or oil, gas or
mineral leases.
Other Considerations
The Fund's investments in convertible securities rated below
investment grade will not exceed 5% of the value of its total assets.
3. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined once daily as of
4:00 p.m. (Eastern Time), each day on which the New York Stock Exchange is
open for business (a "Business Day"). The New York Stock Exchange is open for
business on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the price at which Shares are
redeemed, the net asset value per share is calculated by valuing all
securities held by the Fund, deducting the Fund's actual and accrued
liabilities (including liability for dividends declared) and dividing the
resulting amount by the number of outstanding Shares. For this purpose,
securities which are listed on a securities exchange are valued on the basis
of their last quoted sale price (or, in the absence of recorded sales, at the
last available bid price). If a security is listed on more than one exchange,
the last quoted sale on the exchange where the security is primarily traded is
used. Securities or other assets for which market quotations are not readily
available are valued at their fair value so determined in good faith by the
Advisor under procedures established and monitored by the Board of Directors.
Short-term obligations with maturities of 60 days or less will be valued at
amortized cost, which constitutes fair value as determined by the Directors.
Redemption
The Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by
check as described in the Prospectus. However, if the Board of Directors
determines that it would be in the best interests of the remaining
shareholders to make payment of the redemption price in whole or in part by a
distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash, in conformity with applicable rules of the SEC, the
Fund will make such distributions in kind. In the unlikely event that Shares
are redeemed in kind, the redeeming shareholder, will incur brokerage costs in
later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares," and such valuation will
be made as of the same time the redemption price is determined. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act pursuant to which the Fund is obligated to redeem Shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund during any
-3-
<PAGE>
90-day period for any one shareholder. A corporate shareholder requesting a
redemption must have on file with the Fund's Transfer Agent, Alex. Brown, a
Participating Dealer or Shareholder Servicing Agent all required resolutions
and certificates, such as resolutions authorizing the redemption and
secretary's certificates.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following discussion of federal income tax consequences
is based on the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, as well as administrative changes
or court decisions, may significantly change the conclusions expressed herein,
and may have a retroactive effect with respect to the transactions
contemplated herein.
The following is only a summary of certain additional
federal tax considerations generally affecting the Fund and its shareholders
that are not described in the Fund's Prospectus. No attempt is made to present
a detailed explanation of the tax treatment of the Fund or its shareholders,
and the discussion here and in the Fund's Prospectus is not intended as a
substitute for careful tax planning.
Qualification as Regulated Investment Company
The Fund has been and expects to be taxed as a regulated
investment company ("RIC") under Subchapter M of the Code. As a RIC, the Fund
is exempt from federal income tax on its net investment income and capital
gains which it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (net investment income and
the excess of net short-term capital gains over net long-term capital losses)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions of
investment company taxable income made during the taxable year or, under
certain specified circumstances, within 12 months after the close of the
taxable year, will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if the Fund establishes to the
satisfaction of the Internal Revenue Service that it is unable to satisfy the
Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax (as discussed below).
In addition to satisfaction of the Distribution Requirement,
in order to qualify as a RIC the Fund must (1) derive at least 90% of its
gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, and other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such stocks, securities or currencies (the
"Income Requirement"); and (2) derive less than 30% of its gross income
(exclusive of certain gains from designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from gains on
the sale or other disposition of any of the following investments if such
investments are held for less than three months (the "Short-Short Gain Test"):
(a) stock or securities (as defined in Section 2(a)(36) of the Investment
Company Act); (b) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies); and (c) foreign
currencies (or options, futures, or forward contracts on foreign currencies)
but only if such currencies (or options, futures, or forward contracts) are
not directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stock or securities).
Income derived by the Fund from a partnership or trust
satisfies the Income Requirement only to the extent such income is
attributable to items of income of the partnership or trust that would satisfy
the Income Requirement if they were realized by the Fund in the same manner as
realized by the partnership or trust. Future Treasury regulations may provide
that foreign currency gains that are not "directly related" to the Fund's
-4-
<PAGE>
principal business of investing in stock or securities (or in options and
futures with respect to stock or securities) will not satisfy the Income
Requirement. It is unclear to what extent gross income from certain currency
related transactions will be treated as not satisfying the Income Requirement
under these Treasury regulations or whether the Treasury regulations, when
issued, will have only prospective effect. Consequently, the Fund will attempt
to operate so that its gross income from certain currency related transactions
will be less than 10% of the gross income of the Fund in any taxable year that
could be subject to these Treasury regulations until such time as the
applicable Treasury regulations are issued or the Fund receives a satisfactory
opinion of counsel or private letter ruling from the Service that income from
such currency transactions may be considered "qualifying income" for purposes
of the Income Requirement.
Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities or currencies that it has held for
less than three months. In addition, until such time as Treasury regulations
are issued indicating in which circumstances the writing and purchasing of
options on foreign currency and the investment in forward foreign currency
exchange contracts and currencies is directly related to a regulated
investment company's principal business of investing in stock or securities
(or options and futures with respect to stock or securities), the Fund may
have to limit (1) the sale or offsetting of forward foreign currency exchange
contracts that it has held for less than three months; (2) the exercise or
closing of appreciated options on foreign currency that it has held for less
than three months; and (3) certain other transactions involving foreign
currencies.
Many of the forward foreign currency exchange contracts that
the Fund enters into will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, regardless of
whether a taxpayer's obligations (or rights) thereunder have terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of
such date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is combined with any other gain or loss
that was previously recognized upon the termination of other Section 1256
contracts during that taxable year and is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The Fund may
elect not to have the year-end deemed sale rule apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Fund that are not Section 1256 contracts (the "Mixed Straddle Election").
Gains and losses with respect to certain foreign currency contracts are
treated as ordinary income or loss pursuant to Section 988 of the Code.
In order to qualify as a RIC, at the close of each quarter
of its taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of
other RICs, and securities of other issuers (as to which the Fund has not
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other RICs), or in two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses (the "Asset Diversification Test"). The above
limitations are imposed on the Fund as investment restrictions as set forth in
the Prospectus under the heading "Investment Restrictions." Generally, the
Fund will not lose its status as a RIC if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of portfolio
assets not attributable to a purchase.
For purposes of the Asset Diversification Test, it is
unclear under present law who should be treated as the issuers of options on
foreign currencies and of forward foreign currency exchange contracts,
although it has been suggested that the issuer in each case would be the
foreign central bank or foreign government backing the particular currency.
-5-
<PAGE>
Fund Distributions
The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year. Such
distributions will generally be taxable to shareholders as ordinary income,
regardless of whether such distributions are paid in cash or are reinvested in
Shares. Shareholders receiving any distribution from the Fund in the form of
additional Shares will generally be treated as receiving a taxable
distribution in an amount equal to the fair market value of the Shares
received, determined as of the reinvestment date.
Corporate shareholders will be entitled to the 70% dividends
received deduction on Fund distributions to the extent of qualifying dividends
received by the Fund each year. Generally, a dividend will be treated as a
qualifying dividend if it has been received from a domestic corporation.
Because most of the Fund's income will be from foreign securities, only a
small portion, if any, of the Fund's distributions will qualify for the
dividends received deduction. Moreover, for the purposes of the alternative
minimum tax and the environmental tax, corporate shareholders will generally
be required to take the full amount of any dividend received from the Fund
into account in determining "adjusted current earnings."
The Fund may either retain or distribute to shareholders as
a capital gains distribution the excess of its net long-term capital gains
over its net short-term capital losses ("net capital gains") for each taxable
year. If such gains are distributed as a capital gains distribution, they are
taxable to shareholders as long-term capital gains, regardless of the length
of time the shareholder has held Shares, whether such gains were recognized by
the Fund prior to the date on which a shareholder acquired Shares and whether
the distribution was paid in cash or reinvested in Shares. The aggregate
amount of distributions designated by the Fund as capital gains distributions
may not exceed the net capital gains of the Fund for any taxable year,
determined by excluding any net capital losses or net long-term capital losses
attributable to transactions occurring after October 31 of such year and by
treating any such losses as if they arose on the first day of the following
taxable year. Shareholders will be advised annually as to the U.S. federal
income tax status of distributions made during the year.
Conversely, if the Fund elects to retain its net capital
gains for any taxable year it will be taxed thereon (except to the extent of
any available capital loss carryovers) at the corporate tax rate. In such
event, it is expected that the Fund also will elect to have shareholders
treated as having received a distribution of such gains, with the result that
they will be required to report their respective shares of such gains on their
returns as long-term capital gains, will receive a refundable tax credit for
their allocable share of tax paid by the Fund on the gains, and will increase
the tax basis for their Shares by an amount equal to 65 percent of the deemed
distribution.
Investors should be careful to consider the tax implications
of purchasing Shares just prior to the next dividend date of any ordinary
income dividend or capital gains distribution. Those purchasing just prior to
an ordinary income dividend or capital gains distribution will be taxable on
the entire amount of the distribution received, even though the net asset
value per share on the date of such purchase reflected the amount of such
distribution.
If for any taxable year the Fund does not qualify as a RIC,
all of its taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to shareholders, and such
distributions will be taxable to shareholders as ordinary dividends to the
extent of the Fund's current and accumulated earnings and profits. Such
distributions will generally be eligible for the dividends received deduction
in the case of corporate shareholders.
The Fund will be required in certain cases to withhold and
remit to the United States Treasury 31% of distributions paid to any
shareholder (1) who has provided either an incorrect tax identification number
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<PAGE>
or no number at all, (2) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend
income properly, or (3) who has failed to certify to the Fund that such
shareholder is not subject to backup withholding.
Miscellaneous Considerations
A 4% non-deductible federal excise tax is imposed on RICs
that fail to distribute in each calendar year an amount equal to 98% of
ordinary income for the calendar year and 98% of "capital gain net income"
(excess of long and short-term capital gains over long and short-term capital
losses) for the one-year period ending on October 31 of such calendar year.
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a RIC is treated as having distributed any amount
on which it is subject to income tax for any taxable year ending in such
calendar year.
The Fund intends to make sufficient distributions of its
ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the federal excise tax. However,
investors should note that the Fund may in certain circumstances be required
to liquidate portfolio investments in order to make sufficient distributions
to avoid excise tax liability and, in addition, that the liquidation of
investments in such circumstances may affect the ability of the Fund to
satisfy the Short-Short Gain test.
Generally, gain or loss on the sale of Shares will be
capital gain or loss, which will be long-term if the Shares have been held for
more than one year and otherwise will be short-term. However, investors should
be aware that any loss realized upon the sale, exchange or redemption of
Shares held for six months or less will be treated as a long-term capital loss
to the extent any capital gains distributions have been paid with respect to
such Shares (or any undistributed net capital gains of the Fund with respect
to such Shares have been included in determining the investor's long-term
capital gains). In addition, any loss realized on a sale or other disposition
of Shares will be disallowed to the extent an investor repurchases (or enters
into a contract or option to repurchase) Shares within a period of 61 days
(beginning 30 days before and ending 30 days after the disposition of the
Shares). Investors should particularly note that this loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
Foreign Income Taxes
As described in the Prospectus, investment income received
by the Fund from sources within foreign countries may be subject to foreign
income taxes withheld at the source. The United States has entered into tax
treaties with many foreign countries which entitle the Fund to a reduced rate
of, or exemption from, taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the Fund's assets
to be invested in various countries is not known.
If more than 50% of the value of the Fund's total assets at
the close of its taxable year consists of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign income taxes paid by the Fund (the "Foreign Tax
Election"). Pursuant to the Foreign Tax Election, shareholders would be
required (i) to include in gross income, even though not actually received,
their respective pro-rata shares of the foreign income taxes paid by the Fund;
(ii) either to deduct their pro-rata share of foreign taxes in computing their
taxable income, or to use such share (subject to various Code limitations) as
a foreign tax credit against federal income tax (but not both). In determining
the source and character of distributions received from the Fund for purposes
of the foreign tax credit limitation rules of the Code, shareholders would, if
the Fund makes the Foreign Tax Election, be required to treat their pro-rata
shares of such foreign taxes and allocable portions of Fund distributions as
foreign source income.
-7-
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, foreign corporation,
or foreign partnership ("Foreign Shareholder"), depends on whether the income
from the Fund is "effectively connected" with a U.S. trade or business carried
on by such shareholder.
If the income from the Fund is not effectively connected
with a U.S. trade or business carried on by a Foreign Shareholder,
distributions of net investment income will be subject to U.S. withholding tax
at the rate of 30% (or such lower treaty rate as may be applicable) upon the
gross amount of the distribution. Furthermore, Foreign Shareholders will
generally be exempt from U.S. federal income tax on gains realized on the sale
of Shares, distributions of net long-term capital gains, and amounts retained
by the Fund which are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a
U.S. trade or business carried on by a Foreign Shareholder, then distributions
of net investment income and net long-term capital gains, and any gains
realized upon the sale of Shares, will be subject to U.S. federal income tax
at the rates applicable to U.S. citizens or domestic corporations.
The Fund may be required to withhold U.S. federal income tax
on distributions that are otherwise exempt from withholding tax (or taxable at
a reduced treaty rate) if the Foreign Shareholder does not comply with
Internal Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Furthermore, Foreign Shareholders are strongly urged to
consult their own tax advisors with respect to the particular tax consequences
to them of an investment in the Fund. For various reasons dependent upon the
application of specific U.S. tax rules, Foreign Shareholders may determine
that an investment in the Fund results in adverse tax consequences.
Local Tax Considerations
Rules of U.S. state and local taxation of dividend and
capital gains distributions from regulated investment companies often differ
from the rules for U.S. federal income taxation described above. Shareholders
are urged to consult their tax advisers as to the consequences of these and
other U.S. state and local tax rules regarding an investment in the Fund.
5. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are the
responsibility of the Board of Directors. The Board approves all significant
agreements between the Fund and persons or companies furnishing services to
the Fund, including the Fund's agreements with its investment advisor,
sub-advisor, custodian, accounting services agent and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's executive
officers and to its investment advisor, Investment Company Capital Corp.
("ICC"), and sub-advisor, The Glenmede Trust Company ("Glenmede")
(collectively, the "Advisors"). Two Directors and all of the officers of the
Fund are officers or employees of Alex. Brown, ICC or Glenmede. The other
Directors of the Fund have no affiliation with Alex. Brown, ICC or Glenmede.
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<PAGE>
Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 135 East Baltimore Street, Baltimore,
Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Formerly,
Vice Chairman, Alex. Brown & Sons Incorporated.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered
Financial Analyst.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (merchant banking), 1993-Present;
Formerly, Senior Vice-President and Chief Financial Officer, General
Dynamics Corporation (defense) 1989-1993 and Director, The Arch Fund
(registered investment company).
JOHN F. KROEGER, Director (8/11/24)
P.O. Box 464, 24875 Swan Road - Martingham, St. Michaels,
Maryland 21663. Director/Trustee, AIM Funds; Formerly, Consultant,
Wendell & Stockel Associates, Inc. (consulting firm) and
General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public
Accountants; Formerly, Trustee, Merrill Lynch Funds for Institutions,
1991-1993; Adjunct Professor, Columbia University-Graduate School of
Business, 1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and healthcare).
CARL W. VOGT, Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2604. Senior Partner, Fulbright & Jaworski
L.L.P. (law); Formerly, Chairman National Transportation
Safety Board; Director, National Railroad Passenger Corporation
(Amtrak) and Member, Aviation System Capacity Advisory Committee
(Federal Aviation Administration).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, ATL and Spacelabs Medical Corp. (medical equipment) and
Family Health International (non-profit research and education);
Trustee, Reed College (education); Director, Research America
(non-profit medical research); Formerly, Trustee, Rockefeller
Foundation; and Director, Merrill Lynch Cluster C Funds (registered
investment companies).
- --------
* A director who is an "interested person" of the Fund as that term is
defined in Section 2(a)(19) of the Investment Company Act.
-9-
<PAGE>
JOHN W. CHURCH, JR., President (11/25/32)
The Glenmede Trust Company, One Liberty Place, 1650 Market Street,
Philadelphia, Pennsylvania 19103. Senior Vice President and Chief
Investment Officer, The Glenmede Trust Company.
ANDREW B. WILLIAMS, Executive Vice President (4/28/54)
The Glenmede Trust Company, One Liberty Place, 1650 Market Street,
Philadelphia, Pennsylvania 19103. Vice President, The Glenmede Trust
Company.
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); Vice
President, Armata Financial Corp. (registered broker-dealer).
BRIAN C. NELSON, Vice President and Secretary (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial
Corp. (registered broker-dealer); Assistant Secretary, The Glenmede
Fund, Inc. and The Glenmede Portfolios (registered investment
companies).
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September
1995-Present; Treasurer, The Glenmede Fund, Inc. and The Glenmede
Portfolios (registered investment companies), December 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company Inc., 1980-August 1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student, 1989-1991.
Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed,
administered, advised or distributed by Alex. Brown or its affiliates. There
are currently 12 funds in the Flag Investors/ISI Funds and Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as a
Director of eight funds in the Fund Complex. Mr. Hale serves as President and
Director of one fund, Vice President and Director of one fund and as a
Director of 10 other funds in the Fund Complex. Messrs. Cunnane, Kroeger,
Levy, McDonald and Woolf serve as Directors of each fund in the Fund Complex.
Mr. Vogt serves as a director of four funds in the Fund Complex. Mr. Church and
Mr. Williams serve as President and Vice President, respectively, of the Fund.
Mr. Fearnow serves as Vice President of 10 funds in the Fund Complex. Mr.
Veilleux serves as Executive Vice President of one fund and as Vice President
of each of the other funds in the Fund Complex. Mr. Nelson serves as Vice
President and Secretary, Mr. Finelli serves as Treasurer, and Ms. DePrine
serves as Assistant Secretary, respectively, for each of the funds in the Fund
Complex.
-10-
<PAGE>
Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated
persons. Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown or Glenmede may be considered to have received
remuneration indirectly. As compensation for his services as director, each
Director who is not an "interested person" of the Fund (as defined in the
Investment Company Act) (a "Non-Interested Director") receives an aggregate
annual fee (plus reimbursement for reasonable out-of-pocket expenses incurred
in connection with his attendance at board and committee meetings) from all
Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he
serves. In addition, the Chairman of the Fund Complex's Audit Committee
receives an aggregate annual fee from the Fund Complex. Payment of such fees
and expenses is allocated among all such funds described above in direct
proportion to their relative net assets. For the fiscal year ended October 31,
1994, Non-Interested Directors' fees attributable to the assets of the Fund
totalled approximately $2,004. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, in the fiscal year ended October 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Total Compensation From the
Aggregate Compensation From Fund and Fund Complex Paid to
Name of Person, the Fund for the Fiscal Year Directors for the Fiscal Year
Position Ended October 31, 1995 Ended October 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Truman T. Semans $0 $0
Chairman
*Richard T. Hale $0 $0
Director
James J. Cunnane $89(1) $29,250 for service on 13
Director Boards in the Fund Complex(2)
N. Bruce Hannay** $127(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
John F. Kroeger $139(1) $42,900 for service on 13
Director Boards in the Fund Complex(2)
Louis E. Levy $127(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
Eugene J. McDonald $127(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
Carl W. Vogt*** N/A N/A
Director
Harry Woolf $127(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
</TABLE>
-11-
<PAGE>
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired effective January 31, 1996.
*** Appointed to the Board on January 30, 1996.
(1) Of the amounts paid to Messrs. Cunnane, Hannay, Kroeger, Levy,
McDonald and Woolf, no portion of such amounts was deferred pursuant
to the Fund's deferred compensation plan.
(2) One of these funds ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion
of five years of service, each Participant will be entitled to receive an
annual retirement benefit equal to a percentage of the fee earned by him in
his last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by
him in his last year of service. The fee will be paid quarterly, for life, by
each Fund for which he serves. The Retirement Plan is unfunded and unvested.
Messrs. Kroeger and Woolf have qualified but have not yet received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994 and a Director who retired effective January 31, 1996, each of whom has
qualified for the Retirement Plan and who will be paid a quarterly fee of
$4,875 by the Fund Complex for the rest of his life. Such fee is allocated to
each fund in the Fund Complex based upon the relative net assets of such fund
to the Fund Complex.
Beginning in December, 1994, any Director who receives fees
from the Fund is permitted to defer a minimum of 50%, or up to all, of his
annual compensation pursuant to a Deferred Compensation Plan.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Code of
Ethics significantly restricts the personal investing activities of all
employees of the Advisors and the directors and officers of Alex. Brown. As
described below, the Code of Ethics imposes additional, more onerous,
restrictions on the Fund's investment personnel, including the portfolio
managers and employees who execute or help execute a portfolio manager's
decisions or who obtain contemporaneous information regarding the purchase or
sale of a security by the Fund.
The Code of Ethics requires that all employees of the
Advisors, any director or officer of Alex. Brown, and all Non-Interested
Directors, preclear any personal securities investments (with limited
exceptions, such as non-volitional purchases or purchases which are part of an
automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities
in an initial public offering, a prohibition from profiting on short-term
trading in securities and preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On March 24, 1993, the Board of Directors of the Fund and
Bessemer Trust Company, N.A. ("Bessemer") mutually agreed that Bessemer would
resign as advisor to the Fund at such time as a new advisory agreement with
ICC became effective. Bessemer had acted as the Fund's advisor since November
6, 1986, the date of commencement of operations of the Fund. The Board
approved an Investment Advisory Agreement between the Fund and ICC and a
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<PAGE>
Sub-Advisory Agreement between the Fund and Glenmede on March 24, 1993 and on
June 16, 1993, the shareholders of the Fund approved these agreements,
effective August 16, 1993.
The Advisors
ICC is a wholly owned subsidiary of Alex. Brown, the Fund's
distributor. ICC is also the investment advisor to Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Telephone Income Fund, Inc., Flag Investors
Emerging Growth Fund, Inc., Flag Investors Value Builder Fund, Inc., Flag
Investors Intermediate-Term Income Fund, Inc., Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc., Flag Investors Real Estate Securities
Fund, Inc. and Flag Investors Equity Partners Fund, Inc., which are also
distributed by Alex. Brown. Glenmede, a limited purpose trust company,
provides fiduciary and investment services to individuals, endowment funds,
foundations, employee benefit plans and other institutions. At December 31,
1995, Glenmede had over $8.7 billion in assets in the accounts for which it
serves in various capacities, including as executor, trustee or investment
advisor. Glenmede is a wholly-owned subsidiary of The Glenmede Corporation.
Under the Investment Advisory Agreement, ICC supervises and
manages all aspects of the Fund's operations, except for distribution
services; formulates and implements continuing programs for the purchase and
sale of securities, consistent with the investment objective and policies of
the Fund; provides the Fund with such executive, administrative and clerical
services as are deemed advisable by the Fund's Board of Directors; provides
the Fund with, or obtains for it, adequate office space and all necessary
office equipment and services, including telephone service, utilities,
stationery, supplies and similar items for the Fund's principal office;
obtains and evaluates pertinent information about significant developments and
economic, statistical and financial data, domestic, foreign or otherwise,
whether affecting the economy generally or the Fund, and whether concerning
the individual issuers whose securities are included in the Fund's portfolio
or the activities in which they engage, or with respect to securities which
the Advisor considers desirable for inclusion in the Fund's portfolio;
determines which issuers and securities shall be represented in the Fund's
portfolio and regularly report thereon to the Fund's Board of Directors; takes
all actions necessary to carry into effect the Fund's purchase and sale
programs; supervises the operations of the Fund's custodian, transfer and
dividend disbursing agent, and accounting services agent; provides the Fund
with such administrative and clerical services for the maintenance of certain
shareholder records, as are deemed advisable by the Fund's Board of Directors;
and arranges, but does not pay for, the periodic updating of Prospectuses and
supplements thereto, proxy material, tax returns, reports to the Fund's
shareholders and reports to and filings with the SEC and state Blue Sky
authorities. ICC has delegated certain of these responsibilities to Glenmede.
Any investment program undertaken by ICC or Glenmede will at all times be
subject to the policies and control of the Fund's Board of Directors. Neither
ICC nor Glenmede shall be liable to the Fund or its shareholders for any act
or omission by ICC or Glenmede or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
As compensation for its services, ICC is entitled to receive
a fee from the Fund, calculated daily and paid monthly, at the annual rate of
.75% of the Fund's average daily net assets. This fee is higher than that paid
by most mutual funds, however, in ICC's opinion, is comparable to fees paid by
other investment companies with similar investment objectives and policies. As
compensation for its services, Glenmede is entitled to receive a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly, at the
annual rate of .55% of the Fund's average daily net assets. The services of
the Advisors to the Fund are not exclusive and the Advisors are free to, and
do, render similar services to others.
-13-
<PAGE>
Each of the Investment Advisory Agreement and Sub-Advisory
Agreement will continue in effect for an initial term of two years and from
year to year thereafter as specifically approved (a) at least annually by the
Fund's Board of Directors or by a vote of a majority of the outstanding Shares
(as defined under "Capital Shares") and (b) by the affirmative vote of a
majority of the Non-Interested Directors who have no direct or indirect
financial interest in each of such agreements by votes cast in person at a
meeting called for such purpose. Each of the Investment Advisory Agreement and
Sub-Advisory Agreement was most recently approved in the foregoing manner by
the Fund's Board of Directors on September 25, 1995. The Fund or ICC may
terminate the Investment Advisory Agreement upon sixty days' written notice,
without penalty, by the vote of a majority of the Directors who are not
parties to the Investment Advisory Agreement or interested persons of any such
party or by the vote of a majority of the outstanding Shares (as defined under
"Capital Shares"). The Investment Advisory Agreement will terminate
automatically in the event of its assignment. The Sub-Advisory Agreement has
similar termination provisions. As compensation for investment advisory
services for the fiscal years ended October 31, 1995 and October 31, 1994, ICC
was entitled to receive fees of $98,840 and $114,033, respectively, and from
such amounts waived fees of $68,946 and $19,363, respectively, and paid
Glenmede fees of $26,600 and $31,274, respectively. During the same period,
Glenmede waived fees of $19,020 and $52,350, respectively. For the period from
August 23, 1993 through October 31, 1993, ICC waived all advisory fees
($63,646). For the same period, Glenmede waived all sub-advisory fees
($3,995). For the fiscal period from November 1, 1992 through August 22, 1993,
Bessemer (the Fund's advisor during this period) received fees from the Fund
in the aggregate amount of $125,061 and waived fees of $34,411.
ICC has agreed, if necessary, to waive a portion of its fees
in order to limit the overall expense ratio of the Fund to comply with state
expense limitations. Currently, the most restrictive of such limitations would
require ICC to reduce its fees or reimburse the Fund, to the extent required,
so that the ordinary expenses of the Fund (excluding brokerage commissions,
interest, taxes and extraordinary expenses such as legal claims, liabilities,
litigation costs and indemnification related thereto) do not exceed 2.5% of
the first $30 million of the Fund's average daily net assets, 2.0% of the next
$70 million of the Fund's average daily net assets and 1.5% of the Fund's
average daily net assets in excess of $100 million. In addition, if required
to do so by any applicable state securities laws or regulations, ICC will
reimburse the Fund to the extent required to prevent the expense limitations
of any state law or regulation from being exceeded. ICC has also agreed to
reduce its annual advisory fees, if necessary, so that the Fund's annual
operating expenses do not exceed 1.50% of the Fund's average daily net assets.
Glenmede has agreed to reduce its aggregate fees for any fiscal year in an
amount proportionate to the amount by which ICC's fees may be reduced as
described above.
ICC also serves as the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. (See
"Custodian, Accounting Services, Transfer Agent.")
7. DISTRIBUTION OF FUND SHARES
The Distribution Agreement provides that Alex. Brown has the
exclusive right to distribute Shares either directly or through other
broker-dealers and further provides that Alex. Brown will: solicit and receive
orders for the purchase of Shares, accept or reject such orders on behalf of
the Fund in accordance with the Fund's currently effective Prospectus and
transmit such orders as are accepted to the Fund's transfer agent as promptly
as possible, receive requests for redemption and transmit such redemption
requests to the Fund's transfer agent as promptly as possible, respond to
inquiries from the Fund's shareholders concerning the status of their accounts
with the Fund, provide the Fund's Board of Directors with quarterly reports
required by Rule 12b-1, and take all actions deemed necessary to carry into
effect the distribution of the Shares. Alex. Brown has not undertaken to sell
any specific number of Shares. The Distribution Agreement further provides
that, in connection with the distribution of Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services by Alex. Brown
-14-
<PAGE>
to the Fund are not exclusive, and Alex. Brown shall not be liable to the Fund
or its shareholders for any act or omission by Alex. Brown or any losses
sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating
Dealers") have entered into Sub-Distribution Agreements with respect to the
Shares ("Sub-Distribution Agreements") pursuant to which Participating Dealers
have agreed to process investor purchase and redemption orders and to respond
to inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
As compensation for providing distribution services for the
Shares as described above, Alex. Brown receives an annual fee, paid monthly,
equal to .25% of the average daily net assets of the Class A Shares. Alex.
Brown expects to allocate a substantial portion of the annual distribution fee
to its investment representatives and up to all of its fee to Participating
Dealers. For the fiscal years ended October 31, 1995, October 31, 1994 and
October 31, 1993, Alex. Brown received 12b-1 fees in the amount of $32,947,
$38,112 and $39,514, respectively, and paid from such fees approximately
$90,337, $32,794, and $37,197 respectively, to its investment representatives
as compensation and $4,889, $1,872 and $0, respectively, to Participating
Dealers and financial institutions as compensation. In addition, in the fiscal
year ended October 31, 1995, Alex. Brown incurred expenses of $0 for
advertising and $8,235 for printing and mailing prospectuses to prospective
shareholders.
Pursuant to Rule 12b-1 under the Investment Company Act,
which provides that investment companies may pay distribution expenses,
directly or indirectly, only pursuant to a plan adopted by the investment
company's Board of Directors and approved by its shareholders, the Fund has
adopted a Plan of Distribution (the "Plan"). The maximum amount payable under
the Plan to Alex. Brown for distribution and other shareholder servicing
assistance is an amount calculated on an average net asset basis and paid
monthly, equal to .25% of the Shares' average daily net assets, unless and
until a change in payment is authorized and approved by the Board of
Directors. Alex. Brown is authorized to make payments out of its fee to its
investment representatives, Participating Dealers and Shareholder Servicing
Agents. Payments to Participating Dealers and Shareholder Servicing Agents may
not exceed fees payable to Alex. Brown under the Plan.
The Distribution Agreement, including the form of
Sub-Distribution Agreement, and the Plan was most recently approved by the
Fund's Board of Directors, including a majority of the Non-Interested
Directors, on September 25, 1995. The Distribution Agreement and the Plan will
remain in effect from year to year as specifically approved (a) at least
annually by the Fund's Board of Directors or by a vote of a majority of the
outstanding Shares and (b) by the affirmative vote of a majority of the
Non-Interested Directors, by votes cast in person at a meeting called for such
purpose.
In approving the Plan, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable
likelihood that the Plan would benefit the Fund and its shareholders. The Plan
will be renewed only if the Directors make a similar determination in each
subsequent year. The Plan may not be amended to increase materially the fee to
be paid pursuant to the Distribution Agreement without the approval of the
shareholders of the Fund. The Plan may be terminated at any time and the
Distribution Agreement may be terminated at any time upon 60 days' notice, in
either case without penalty, by a vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Shares"). Any Shareholder Servicing
Agreement may be terminated at any time, without penalty, upon ten days'
notice. Any Sub-Distribution Agreement may be terminated at any time, without
penalty, upon 10 days' notice or by the vote of a majority of the Fund's
Non-Interested Directors. The Distribution Agreement, the Plan, any
Sub-Distribution Agreement and any Shareholder Servicing Agreement shall
automatically terminate in the event of assignment.
-15-
<PAGE>
During the continuance of the Plan, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plan to Alex. Brown pursuant to
the Distribution Agreement, to any Participating Dealers pursuant to
Sub-Distribution Agreements and to any Shareholder Servicing Agents pursuant
to Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plan, the selection and nomination of the Fund's Non-Interested Directors
shall be committed to the discretion of the Non-Interested Directors then in
office.
In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which Alex. Brown will allocate a
portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting
in other capacities for investment companies, such as the shareholder
servicing capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review
the Prospectus and this Statement of Additional Information in conjunction
with any such institution's fee schedule. In addition, state securities laws
on this issue may differ from the interpretations of federal law expressed
herein, and banks and financial institutions may be required to register as
dealers pursuant to state law.
In the fiscal years ended October 31, 1995, October 31, 1994
and October 31, 1993, Alex. Brown received sales commissions of $21,396,
$41,462 and $14,136 and from such amounts retained $12,184, $27,986 and
$12,995 in each such year, respectively.
Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory and distribution fees; the charges and expenses of any
registrar, any custodian or depository appointed by the Fund for the
safekeeping of its cash, portfolio securities and other property, and any
transfer, dividend or accounting agent or agents appointed by the Fund;
brokers' commissions chargeable to the Fund in connection with portfolio
securities transactions to which the Fund is a party; all taxes, including
securities issuance and transfer taxes, and corporate fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing certificates representing Shares; all costs and expenses
in connection with the registration and maintenance of registration of the
Fund and its Shares with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs
and expenses of printing, including typesetting, and distributing Prospectuses
and statements of additional information of the Fund and supplements thereto
to the Fund's shareholders; all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing proxy statements and reports
to shareholders; fees and travel expenses of Non-Interested Directors and
Non-Interested members of any advisory board or committee; all expenses
incident to the payment of any dividend, distribution, withdrawal or
redemption, whether in Shares or in cash; charges and expenses of any outside
service used for pricing of the Shares; fees and expenses of legal counsel,
including counsel to the Non-Interested Directors, and independent
accountants, in connection with any matter relating to the Fund; membership
dues of industry associations; interest payable on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and Directors)
of the Fund which inure to its benefit; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of the
Fund's operations unless otherwise explicitly assumed by ICC or Alex. Brown.
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<PAGE>
8. BROKERAGE
Glenmede is responsible for decisions to buy and sell
securities for the Fund, for the broker-dealer selection, and for negotiation
of commission rates, subject to the supervision of ICC. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
commission for their services. If the transaction is completed on a United
States securities exchange, the brokerage commissions are subject to
negotiation between Glenmede and the broker. Commission rates for brokerage
commissions on foreign stock exchanges are, however, generally fixed. Glenmede
may direct purchase and sale orders to any broker, including, to the extent
and in the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions orders are placed directly
with a principal market maker and such purchases normally include a mark-up
over the bid to the broker-dealer based on the spread between the bid and
asked price for the security. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter. On occasion, certain money market investments may be purchased
directly from an issuer without payment of a commission or concession. The
Fund will not deal with Alex. Brown in any transaction in which Alex. Brown
acts as a principal, that is, an order will not be placed with Alex. Brown if
execution of the trade involves Alex. Brown serving as a principal with
respect to any part of the Fund's order, nor will the Fund buy or sell
over-the-counter securities with Alex. Brown acting as market maker.
If Alex. Brown is participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation
will not affect its ability to carry out its present investment objective.
Glenmede's primary consideration in effecting securities
transactions is to obtain the best price and execution of orders on an overall
basis. As described below, however, to the extent that the prices and
execution offered by more than one broker-dealer are comparable, Glenmede may,
in its discretion, effect transactions with dealers that furnish statistical
research or other information or services which are deemed by Glenmede to be
beneficial to the Fund's investment program. Certain research services
furnished by broker-dealers may be useful to Glenmede with clients other than
the Fund. Similarly, any research services received by Glenmede through
placement of portfolio transactions of other clients may be of value to
Glenmede in fulfilling its obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to
Glenmede by a broker-dealer. Glenmede is of the opinion that, because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing the Advisors'
research and analysis. Therefore, such services may tend to benefit the Fund
by improving Glenmede's investment advice. Glenmede's policy is to pay a
broker-dealer higher commissions for particular transactions than might be
charged if a different broker had been chosen when, in the Advisor's opinion,
this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors,
Glenmede is also authorized to pay broker-dealers other than Alex. Brown
higher commissions on brokerage transactions for the Fund in order to secure
research and investment services described above. The allocation of orders
among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board. For the fiscal year ended October 31,
1995, Glenmede directed $10,471,945 in principal value of brokerage
transactions to broker dealers and paid $40,660 of related commissions because
of research services provided to the Fund.
Subject to the above considerations, the Board of Directors
has authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown pursuant to certain policies and procedures incorporating
the standards of Rule 17e-1 of the SEC under the Investment Company Act which
requires that the commissions paid Alex. Brown must be "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
-17-
<PAGE>
similar securities during a comparable period of time." Rule 17e-1 also
contains requirements for the review of such transactions by the Board of
Directors and requires ICC and Glenmede to furnish reports and to maintain
records in connection with such reviews. The Class A Distribution Agreement
between Alex. Brown and the Fund does not provide for any reduction in the
fees to be received by Alex. Brown from the Fund as a result of profits
resulting from brokerage commissions on transactions of the Fund effected
through Alex. Brown. For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, the Fund paid no brokerage commissions to Alex.
Brown. The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of October 31, 1995,
the Fund held a 5.75% repurchase agreement issued by Goldman Sachs & Co.
valued at $297,000. Goldman Sachs & Co. is a "regular broker or dealer" of the
Fund.
The Advisors manage other investment accounts. It is
possible that, at times, identical securities will be acceptable for the Fund
and one or more of such other accounts; however, the position of each account
in the securities of the same issuer may vary and the length of time that each
account may choose to hold its investment in such securities may likewise
vary. The timing and amount of purchase by each account will also be
determined by its cash position. If the purchase or sale of securities
consistent with the investment policies of the Fund or one or more of these
accounts is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable
by the Advisors. The Advisors may combine such transactions, in accordance
with applicable laws and regulations, in order to obtain the best net price
and most favorable execution. Such simultaneous transactions, however, could
adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security which it seeks to purchase or sell and may favorably or
unfavorably affect the price received on the purchase or sale of portfolio
securities.
9. CAPITAL SHARES
Under the Fund's Articles of Incorporation, the Fund has 10
million authorized Shares of common stock, par value of $.001 per share. The
Board of Directors may increase or decrease the number of authorized Shares
without shareholder approval.
The Fund's Articles of Incorporation provide for the
establishment of separate series or separate classes of Shares by the
Directors at any time without shareholder approval. The Fund currently has one
Series and the Board has designated two classes of shares: Flag Investors
International Fund Class A Shares (formerly known as the Flag Investors
International Fund Shares) and Flag Investors International Fund Class B
Shares. The Class B Shares are not currently being offered. Shares of the
Fund, regardless of series or class, would have equal rights with respect to
voting, except that with respect to any matter affecting the rights of the
holders of a particular series or class, the holders of each series or class,
would vote separately. In general, each such series would be managed
separately and shareholders of each series would have an undivided interest in
the net assets of that series. For tax purposes, the series would be treated
as separate entities. Generally, each class of Shares would be identical to
every other class in a particular series and expenses of the Fund (other than
12b-1 and any applicable service fees) are prorated between all classes of a
series based upon the relative net assets of each class. Any matters affecting
any class exclusively would be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting
rights, and therefore the holders of more than 50% of the outstanding Shares
voting together for election of Directors may elect all the members of the
Board of Directors of the Fund. In such event, the remaining holders cannot
elect any members of the Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights
applicable to any of the Shares. The Fund's issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
-18-
<PAGE>
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series)
after all debts and expenses have been paid.
As used in this Statement of Additional Information the term
"majority of the outstanding Shares" means the vote of the lesser of (i) 67%
or more of the Shares present at the meeting if the holders of more than 50%
of the outstanding Shares are present or represented by proxy, or (ii) more
than 50% of the outstanding Shares.
10. REPORTS
The Fund furnishes shareholders with semi-annual and annual
reports containing information about the Fund and its operations, including a
list of investments held in the Fund's portfolio and financial statements. The
annual financial statements are audited by the Fund's independent auditors.
11. CUSTODIAN, ACCOUNTING SERVICES AND TRANSFER AGENT
Boston Safe Deposit and Trust Company ("Boston Safe
Deposit"), located at One Boston Place, Boston, Massachusetts 02108, acts as
custodian of the Fund's assets. Boston Safe Deposit has presented information
to the Fund's Board of Directors regarding any non-branch correspondent
institutions with which it may enter into agreements to hold the Fund's assets
abroad and, based upon its review of such information, the Board has found
such arrangements to comply with the requirements of Rule 17f-5 under the
Investment Company Act and to be consistent with the best interests of the
Fund and its shareholders. Boston Safe Deposit receives such compensation from
the Fund for its services as may be agreed to from time to time by Boston Safe
Deposit and the Fund. Investment Company Capital Corp., 135 East Baltimore
Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080) has been
retained to act as the Fund's transfer and dividend disbursing agent. As
compensation for providing these services, the Fund pays ICC up to $10.12 per
account per year, plus reimbursement for out-of-pocket expenses incurred in
connection therewith. For the fiscal year ended October 31, 1995, such fees
totalled $17,002.
Effective April 10, 1995, ICC also provides certain
accounting services to the Fund. As compensation for these services, ICC
receives an annual fee, calculated daily and paid monthly as shown below.
Incremental Annual
Average Net Assets Accounting Fee
- ------------------ --------------------------
0 - $10,000,000 $25,000 (fixed fee)
$10,000,001 - $24,999,999 0.080%
$25,000,001 - $50,000,000 0.060%
$50,000,001 - $75,000,000 0.040%
$75,000,001 - $99,999,999 0.035%
$100,000,000 - $500,000,000 0.017%
$500,000,000 - $1,000,000,000 0.006%
over $1,000,000,000 0.002%
For the period from April 10, 1995 through October 31, 1995,
ICC received accounting fees of $15,370.
ICC also serves as the Fund's investment advisor.
-19-
<PAGE>
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by
Deloitte & Touche LLP. Deloitte & Touche LLP has offices at 2 Hilton Court,
P.O. Box 319, Parsippany, New Jersey 07054.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the
Fund to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return
quotations, under the rules of the SEC must be calculated according to the
following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of
the 1, 5, or 10 year periods (or
fractional portion thereof) of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods.
Under the foregoing formula the time periods used in
advertising will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertising for
publication, and will cover one, five, and ten year periods or a shorter
period dating from the effectiveness of the Fund's registration statement. In
calculating the ending redeemable value, the maximum sales load is deducted
from the initial $1,000 payment and all dividends and distributions by the
Fund are assumed to have been reinvested at net asset value as described in
the Prospectus on the reinvestment dates during the period. Total return, or T
in the formula above, is computed by finding the average annual compounded
rates of return over the 1, 5 and 10 year periods (or fractional portion
thereof) that would equate the initial amount invested to the ending
redeemable value. Any sales loads that might in the future be made applicable
at the time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
The Fund may also from time to time include in such
advertising a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in
comparing the Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Morningstar, Inc., or
with the performance of the Europe, Australia and Far East Index, the Standard
& Poor's 500 Stock Index or the Dow Jones Industrial Average, the Fund
calculates its annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment
date. For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges (as distinguished from the
computation required by the SEC where the $1,000 payment is reduced by sales
charges before being invested in Shares). The Fund will, however, disclose the
maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under
SEC rules and all advertisements containing performance data will include a
legend disclosing that such performance data represent past performance and
that the investment return and principal value of an investment will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
-20-
<PAGE>
Calculated according to the SEC rules, for the one year
period ended September 30, 1995, the ending redeemable value of a hypothetical
$1,000 payment for Shares was $892, resulting in a total return for such
Shares equal to (10.8)%. For the five year period ended September 30, 1995,
the ending redeemable value of a hypothetical $1,000 payment for Shares was
$1,284, resulting in an average annual total return for such Shares equal to
5.1%. For the period from the effectiveness of the Fund's registration
statement on November 18, 1986 through the end of the Fund's most recent
calendar quarter on September 30, 1995, the ending redeemable value of a
hypothetical $1,000 payment for Shares was $1,659, resulting in an average
annual total return for such Shares equal to 5.9%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the one
year period ended October 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in Shares was $9,071, resulting in a total
return equal to (9.3)%. For the five year period ended October 31, 1995, the
ending redeemable value of a hypothetical $10,000 investment in Shares was
$12,381, resulting in an average annual total return equal to 4.4%. For the
period from the effectiveness of the Fund's registration statement on November
18, 1986 through the end of the Fund's most recent fiscal year on October 31,
1995, the ending redeemable value of a hypothetical $10,000 investment in
Shares was $17,027, resulting in an average annual total return equal to 6.1%.
The Fund's annual portfolio turnover rate (the lesser of the
value of the purchases or sales for the year divided by the average monthly
market value of the portfolio during the year, excluding securities with
maturities of one year or less) may vary from year to year, as well as within
a year, depending on market conditions. The Fund's portfolio turnover rate for
the fiscal years ended October 31, 1995 and October 31, 1994 was 35% and 43%,
respectively.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 8, 1996, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
outstanding Shares.
Name and Address Percentage of Ownership
- ---------------- -----------------------
Alex. Brown & Sons Incorporated 75.15%*
135 East Baltimore Street
Baltimore, MD 21202
- ------
*As of such date, to Fund management's knowledge, Alex. Brown owned beneficially
less than 1% of such shares.
As of February 8, 1996, the Directors and executive officers
as a group owned less than 1% of the Fund's total outstanding Shares.
15. FINANCIAL STATEMENTS
See next page.
-21-
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1995
<TABLE>
<CAPTION>
<C> <S> <C> <C>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
- ------------------------------------------------------------
COMMON STOCK--96.6%
AUSTRALIA--3.5%
40,000 Burns Philip & Co. $ 89,529 0.7 %
25,422 Lend Lease Corp. 353,400 2.8
442,929 3.5
CANADA--1.7%
70 Bank of Nova Scotia* 1,474 --
5,000 Magna International 216,250 1.7
217,724 1.7
FINLAND--0.6%
5,000 Outokumpu Oy 'A' 79,500 0.6
FRANCE--7.6%
4,258 Elf Aquitaine 290,342 2.3
2,549 Generale des Eaux 237,227 1.9
4,356 Lafarge Coppee SA 289,086 2.3
9,680 Lagardere Groupe,
Warrants Expiring
6/30/97* 3,370 --
4,000 Technip ADR 129,984 1.1
950,009 7.6
GERMANY--5.6%
10,000 Deutsche Bank AG 450,674 3.6
6,000 Veba AG 245,408 2.0
696,082 5.6
HONG KONG--3.3%
50,000 Dao Heng Bank
Group Ltd. 183,357 1.5
125,000 Hong Kong 225,000 1.8
Land Holdings
408,357 3.3
<PAGE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- ------------------------------------------------------------
ITALY--3.4%
8,756 Assicurazioni Generali $ 204,453 1.6 %
21,300 Benetton Group SpA 220,832 1.8
425,285 3.4
JAPAN--27.0%
6,600 Acom Co., Ltd. 215,112 1.7
5,000 Amway 190,858 1.5
2,000 Aoyama ADR 54,028 0.4
10,000 Canon, Inc. 171,283 1.4
600 Chukyo Coca-Cola 5,814 --
10,000 Daiwa House 149,750 1.2
50 East Japan Railway Co. 236,371 1.9
25,000 Hitachi Ltd. 256,925 2.1
12,000 Honda Motor Co. 209,063 1.7
20,000 Kao Corp. 242,733 1.9
1,500 Kyocera Corp. ADR 248,250 2.0
14,000 Matsushita Electric 198,689 1.6
20,000 Nishimatsu Construction
Co. 225,115 1.8
4,000 Rohm Company 243,124 2.0
11,000 Sankyo Co. 242,243 1.9
7,000 Sharp Corp. 97,288 0.8
20,000 Toda Construction 163,649 1.3
10,000 Yamanouchi 223,158 1.8
Pharmaceutical
3,373,453 27.0
MALAYSIA--2.0%
94,666 Malaysian International 249,808 2.0
Shipping Corp. Berhad
'F'
MEXICO--0.9%
33,750 Cementos Astsk 'B' SA 108,940 0.9
</TABLE>
[LOGO]
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONCLUDED) October 31, 1995
<TABLE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -----------------------------------------------------------------
COMMON STOCK (CONTINUED)
NETHERLANDS--9.4%
13,114 Algemene Bank Nederland 4.4%
Amsterdam-Rotterdam $ 550,848
10,100 Bols Wessanew 199,645 1.6
15,000 IHC Caland NV Holdings 426,698 3.4
1,177,191 9.4
NORWAY--1.5%
4,300 Kvaerner 180,820 1.5
SPAIN--7.0%
10,000 Banco Central Hispano 207,377 1.7
25,000 Dragados & Construcciones
SA 327,869 2.6
6,000 Repsol SA 179,262 1.4
10,000 Vallehermoso SA 161,885 1.3
876,393 7.0
SWEDEN--3.1%
11,000 Pharmacia Aktiebolag ADR 385,000 3.1
SWITZERLAND--2.1%
1,260 Schweizerischer Bankverein 258,269 2.1
(Swiss Bank Corp.),
Registered Shares
THAILAND--2.8%
30,000 Siam Commercial 350,556 2.8
Bank Ltd. 'F'
UNITED KINGDOM--15.1%
22,967 Argyll Group PLC 116,973 0.9
16,149 The Boots Co. PLC 143,040 1.2
20,000 Grand Metropolitan PLC 138,557 1.1
174,000 Mirror Group Newspapers
PLC* 459,610 3.7
25,000 National Power PLC 194,945 1.6
50,000 Scottish Power PLC 276,007 2.2
80,000 Tomkins PLC ADS 315,707 2.5
40,000 WH Smith, Class A 240,419 1.9
1,885,258 15.1
<PAGE>
<CAPTION>
NO. OF
SHARES/ PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -----------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $10,816,426) $ 12,065,574 96.6%
PREFERRED STOCK--0.1%
HONG KONG
16 Dairy Farm International
Holdings Ltd., Cvt. (Cost
$16,000) 12,380 0.1
------------- -----
REPURCHASE AGREEMENT--2.4%
$297 GOLDMAN SACHS & CO., 5.75%
Dated 10/31/95, to be
repurchased on 11/1/95,
collateralized by U.S.
Treasury Notes with a
market value of $303,540.
(Cost $297,000) 297,000 2.4
------------- -----
TOTAL INVESTMENT IN
SECURITIES
(Cost $11,129,426)** 12,374,954 99.1
OTHER ASSETS IN EXCESS OF
LIABILITIES, NET 108,190 0.9
------------- -----
NET ASSETS $ 12,483,144 100.0%
------------- -----
------------- -----
NET ASSET VALUE AND
REDEMPTION VALUE
PER SHARE
($12,483,144 DIVIDED BY
983,508
shares outstanding) $12.69
MAXIMUM OFFERING PRICE PER
SHARE
($12.69 DIVIDED BY .955) $13.29
</TABLE>
- --------------------------------------------------------------------------------
*Non-income producing security.
**Also, aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Dividends.......................................................... $ 372,311
Interest........................................................... 21,951
Less: Foreign taxes withheld..................................... (105,880)
------------
Total income................................................... 288,382
------------
EXPENSES:
Investment advisory fee (Note B)................................... 98,840
Distribution fee (Note B).......................................... 32,947
Printing and postage............................................... 29,502
Audit.............................................................. 28,499
Legal.............................................................. 24,999
Accounting fee (Note B)............................................ 24,531
Transfer agent fees (Note B)....................................... 17,002
Custodian fees..................................................... 10,998
Miscellaneous...................................................... 8,150
Registration fees.................................................. 8,001
Directors' fees.................................................... 2,004
Insurance.......................................................... 608
------------
Total expenses................................................... 286,081
Less: Fees waived (Note B)......................................... (87,966)
------------
Net expenses..................................................... 198,115
------------
Net investment income.............................................. 90,267
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions....................... 790,584
Net realized foreign exchange loss................................. (123,605)
Change in unrealized appreciation/(depreciation) of investments.... (2,231,677)
Change in unrealized appreciation/(depreciation) on translation of
assets and liabilities denominated in foreign currencies......... 41,662
------------
Net loss on investments.......................................... (1,523,036)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $ (1,432,769)
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------
<S> <C> <C>
1995 1994
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................... $ 90,267 $ 113,910
Net realized gain from security transactions
and foreign exchange transactions............................................. 666,979 2,076,386
Change in unrealized appreciation/(depreciation) of investments................. (2,231,677) (260,712)
Change in unrealized appreciation/(depreciation) on translation
of assets and liabilities denominated in foreign currencies................... 41,662 (35,059)
-------------- -----------------
Net increase/(decrease) in net assets resulting from operations................. (1,432,769) 1,894,525
-------------- -----------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income........................................................... -- (876,034)
-------------- -----------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 99,262 and 258,474 shares, respectively................... 1,243,444 3,528,455
Value of 58,430 shares issued in reinvestment of dividends...................... -- 758,523
Cost of 224,000 and 358,707 shares repurchased, respectively.................... (2,814,795) (4,826,680)
-------------- -----------------
Total decrease in net assets derived from capital share transactions............ (1,571,351) (539,702)
-------------- -----------------
Total increase/(decrease) in net assets......................................... (3,004,120) 478,789
NET ASSETS:
Beginning of period............................................................. 15,487,264 15,008,475
-------------- -----------------
End of period................................................................... $ 12,483,144 $ 15,487,264
-------------- -----------------
-------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each year)*
<TABLE>
<CAPTION>
For the Year Ended October 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of the year.............................. $ 13.97 $ 13.05 $ 9.11 $ 10.63 $ 11.80
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income................................................. 0.09 0.18 0.49 0.16 0.15
Net realized and unrealized gain/(loss) on investments(1)............. (1.37) 1.58 3.45 (1.62) (0.55)
------- ------- ------- ------- -------
Total from Investment Operations...................................... (1.28) 1.76 3.94 (1.46) (0.40)
Less Distributions:
Dividends from net investment income
and short-term gains................................................ -- (0.84) -- (0.06) --
Distributions from net realized
long-term gains..................................................... -- -- -- -- (0.77)
------- ------- ------- ------- -------
Total distributions .................................................. -- (0.84) -- (0.06) (0.77)
------- ------- ------- ------- -------
Net asset value at end of year........................................ $ 12.69 $ 13.97 $ 13.05 $ 9.11 $ 10.63
======= ======= ======= ======= =======
Total Return............................................................ (9.16)% 13.98% 43.25% (13.80)% (3.15)%
Ratio to Average Net Assets:
Expenses(2)........................................................... 1.50% 1.50% 1.50% 1.50% 1.50%
Net investment income(3).............................................. 0.68% 0.75% 1.91% 0.73% 1.17%
Supplemental Data:
Net assets at end of the year (000)................................... $12,483 $15,487 $15,008 $19,780 $38,830
Portfolio turnover ratio.............................................. 35% 43% 48% 63% 73%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Computed based upon average shares outstanding.
(1)Current year and prior year includes net realized currency loss. Realized
currency gain/(loss) is included in net income for the years ended
October 31, 1993, 1992 and 1991, respectively.
(2)Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 2.17%, 1.97%, 2.13%, 1.92% and 1.90%
for the years ended October 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
(3)Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 0.02%, 0.28%, 1.28%, 0.31%
and 0.77% for the years ended October 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
See accompanying Notes to Financial Statements.
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag
Investors International Fund, Inc. ("the Fund") was organized as a
Massachusetts business trust on September 3, 1986 and commenced operations
November 18, 1986. The Fund was reorganized as a Maryland corporation on
August 16, 1993. The Fund is registered under the Investment Company Act of
1940 as a diversified, open-end management investment company seeking
long-term growth of capital primarily through investment in a diversified
portfolio of marketable equity securities of issuers domiciled outside of the
United States. Significant accounting policies are as follows:
SECURITY VALUATION - Securities that are listed on a securities exchange are
valued on the basis of their last quoted sale price (or, in the absence of
recorded sales, at the last available bid price). If a security is listed on
more than one exchange, the last quoted sale price on the exchange where the
security is primarily traded is used. Securities or other assets for which
market quotations are not readily available are valued at their fair value so
determined in good faith by the Investment Advisor under procedures
established and monitored by the Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized cost.
FOREIGN CURRENCY TRANSACTIONS - The books and records of the Fund are
maintained in U.S. dollars. Transactions denominated in foreign currencies
are recorded in the Fund's records at the rate prevailing when earned or
incurred. Asset and liability accounts that are denominated in foreign
currencies are adjusted to reflect the current exchange rate. Transaction
gains or losses resulting from changes in the exchange rate during the
reporting period or upon settlement of the foreign currency transactions are
reported in realized and unrealized gain/(loss) on investments for the
current period.
The Fund is authorized to enter into forward foreign exchange contracts as a
hedge against either specific transactions or portfolio positions. Such
contracts are not reflected in the Fund's financial statements. However, the
net income or loss from such contracts is recorded from the date the contract
is entered into. Premiums or discounts are amortized over the life of the
contracts.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to annually distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when
applicable, the pro rata amortization of premiums and accretion of discounts.
Dividend income is recorded on the ex-dividend date.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH
AFFILIATES AND OTHER FEES - Investment Company Capital Corp. ("ICC"), a
subsidiary of Alex. Brown & Sons Incorporated ("Alex. Brown"), serves as the
Fund's investment advisor and The Glenmede Trust Company ("Glenmede") is the
[LOGO]
<PAGE>
[LOGO]
FLAG INVESTORS
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONCLUDED)
Fund's subadvisor. As compensation for its services, ICC receives from the
Fund a fee, calculated daily and paid monthly, equal to .75% of the Fund's
average daily net assets.
As compensation for its subadvisory services, Glenmede receives a fee from
ICC, calculated daily and paid monthly, equal to .55% of the Fund's average
daily net assets.
ICC and Glenmede have voluntarily agreed to waive a portion of their fees so
that the total operating expenses of the Fund do not exceed 1.50% of the
Fund's average daily net assets. For the year ended October 31, 1995, ICC and
Glenmede waived $68,946 and $19,020, respectively.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly from the Fund's average daily
net assets. ICC earned $15,370 for accounting services for the period April
10, 1995 through October 31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC earned $17,002 for transfer
agent services for the year ended October 31, 1995.
As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee, payable monthly, at the annual rate of .25% of
the Fund's average daily net assets. For the year ended October 31, 1995,
distribution fees were $32,947.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 10
million shares of capital stock, par value $0.001 per share, all of which
shares are designated as common stock.
D. INVESTMENT TRANSACTIONS - Purchases and sales
of investment securities, other than short-term obligations, aggregated
$4,441,914 and $6,263,964, respectively, for the year ended October 31, 1995.
At October 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,617,567
and aggregated gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $372,039.
E. CAPITAL LOSS CARRYFORWARD - At October 31,
1995, there was a tax capital loss carryforward of approximately $4,988,000,
of which $2,049,000 expires in 1999, $2,350,000 in 2000 and $589,000 in 2001.
This carryforward will be used to offset future net capital gains, if any.
F. NET ASSETS - At October 31, 1995, net assets
consisted of:
<TABLE>
<S> <C>
Paid-in capital.................... $ 16,552,986
Undistributed net investment
income........................... 103,231
Accumulated net realized loss from
security and foreign exchange
transactions..................... (5,423,572)
Unrealized appreciation of
investments...................... 1,245,528
Unrealized translation gain........ 4,971
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$ 12,483,144
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FLAG INVESTORS
INTERNATIONAL FUND
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Independent Auditors' Report
The Board of Directors and Shareholders,
Flag Investors International Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
International Fund, Inc. as of October 31, 1995, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1995 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
International Fund, Inc. as of October 31, 1995, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
December 6, 1995
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