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LOGO
FLAG INVESTORS
INTERNATIONAL FUND, INC.
(Class A Shares)
Prospectus & Application -- March 1, 1997
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Flag Investors International Fund, Inc. (the "Fund") is a mutual fund 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 (the "Distributor"), 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, 1997 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.
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 the Distributor.
TABLE OF CONTENTS
Fee Table ........................... 1
Financial Highlights ................ 2
Investment Program .................. 4
Investment Restrictions ............. 5
How to Invest in the Fund ........... 5
How to Redeem Shares ................ 8
Telephone Transactions .............. 9
Dividends and Taxes ................. 9
Management of the Fund .............. 10
Investment Advisor and Sub-Advisor .. 10
Distributor ......................... 11
Custodian, Transfer Agent and
Accounting Services ................ 12
Performance Information ............. 12
General Information ................. 12
Application ......................... A-1
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.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FEE TABLE
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SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............ 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) .. None
Maximum Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ....................................... .50%*
Annual Fund Operating Expenses (net of fee waivers and reimbursements):
(as a percentage of average daily net assets)
Management Fees (net of fee waivers) ..................................................... .00%**
12b-1 Fees ............................................................................... .25%
Other Expenses (net of fee waivers and reimbursements) ................................... 1.25%
-----------
Total Fund Operating Expenses (net of fee waivers and reimbursements) .................... 1.50%**
===========
</TABLE>
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* Purchases of $1 million or more by persons not otherwise eligible for
sales load waivers are not subject to an initial sales charge, however, a
contingent deferred sales charge of .50% may be imposed upon redemption.
(See "How to Invest in the Fund -- Offering Price.")
** The Fund's investment advisor has agreed to voluntarily waive its fees and to
reimburse expenses to the extent required so that Total Fund Operating
Expenses do not exceed 1.50% of the Class A Shares' average daily net assets.
Absent fee waivers and reimbursements, Management Fees would be .75%, Other
Expenses would be 1.30% and Total Fund Operating Expenses would be 2.30% of
the Class A Shares' average daily net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- ---------- ----------- ----------- ------------
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:* ................................... $60 $90 $123 $216
</TABLE>
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* The Example is based on Total Fund Operating Expenses, net of fee waivers and
reimbursements. Absent fee waivers and reimbursements, 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
Fund -- Offering Price", "Investment Advisor and Sub-Advisor" and
"Distributor.") The Expenses appearing in the table above have been restated
to reflect current, rather than historical, fees.
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 Conduct
Rules 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.
1
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FINANCIAL HIGHLIGHTS
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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, 1996 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,
1996, which can be obtained at no charge by calling the Fund at
(800) 767-FLAG.
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)+
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<TABLE>
<CAPTION>
----------------------
1996 1995
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<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............... $12.69 $13.97
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Income from Investment Operations:
Net investment income ................................ 0.26 0.09
Net realized and unrealized gain/(loss) on
investments(1) .................................... 1.28 (1.37)
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Total from Investment Operations ..................... 1.54 1.28
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Less Distributions:
Dividends from net investment income and short-term
gains ............................................. (0.03) --
Distributions from net realized long-term gains ...... -- --
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Total distributions .................................. (0.03) --
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Net asset value at end of period ..................... $14.20 $12.69
========= =========
Total Return*** ........................................ 12.13% (9.16)%
Ratios to Average Daily Net Assets:
Expenses(2) .......................................... 1.50% 1.50%
Net investment income(3) ............................. 1.91% 0.68%
Supplemental Data:
Net assets at end of period (000) .................... $12,930 $12,483
Portfolio turnover rate .............................. 13% 35%
Average commissions per share(4) ..................... $0.0201 --
</TABLE>
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+ Computed based on average shares outstanding.
++ Commencement of operations.
* 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 excludes the effect of sales charge.
(1) The years ended October 31, 1996, 1995 and 1994 include net realized
currency loss. Realized currency gain/(loss) is included in net
investment income for the years ended October 31, 1993, 1992 and 1991.
(2) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 2.30%, 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,
1996, 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 daily net assets would have been 1.10%, 0.02%, 0.28%, 1.28%,
0.31%, 0.77%, 1.21%, 0.29%, 0.54%, and 0.78% for the years ended October
31, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988, and 1987,
respectively.
(4) Disclosure of average commissions per share is effective beginning in
fiscal year 1996.
2
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FINANCIAL HIGHLIGHTS (continued)
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<TABLE>
<CAPTION>
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November 18,
1986++
For the Year Ended October 31, through
- ------------------------------------------------------------------------------------ October 31,
1994 1993** 1992 1991 1990 1989 1988 1987
--------- --------- ---------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$13.05 $ 9.11 $10.63 $11.80 $13.71 $11.78 $10.81 $10.00
--------- --------- ---------- --------- --------- --------- --------- --------------
0.18 0.49 0.16 0.15 0.60 0.10 0.11 0.03
1.58 3.45 (1.62) (0.55) (1.33) 1.92 1.57 0.78
--------- --------- ---------- --------- --------- --------- --------- --------------
1.76 3.94 (1.46) (0.40) (0.73) 2.02 1.68 0.81
--------- --------- ---------- --------- --------- --------- --------- --------------
(0.84) -- (0.06) -- (0.57) (0.09) (0.16) --
-- -- -- (0.77) (0.61) -- (0.55) --
--------- --------- ---------- --------- --------- --------- --------- --------------
(0.84) -- (0.06) (0.77) (1.18) (0.09) (0.71) --
--------- --------- ---------- --------- --------- --------- --------- --------------
$13.97 $13.05 $ 9.11 $10.63 $11.80 $13.71 $11.78 $10.81
========= ========= ========== ========= ========= ========= ========= ==============
13.98% 43.25% (13.80)% (3.15)% (6.63)% 17.25% 16.21% 8.10%
1.50% 1.50% 1.50% 1.50% 1.50% 1.49% 1.46% 1.48%*
0.75% 1.91% 0.73% 1.17% 1.48% 0.62% 0.87% 1.41%*
$15,487 $15,008 $19,780 $38,830 $44,406 $32,325 $35,259 $38,227
43% 48% 63% 73% 62% 95% 96% 72%
-- -- -- -- -- -- -- --
</TABLE>
3
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INVESTMENT PROGRAM
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INVESTMENT OBJECTIVE, 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.
The Fund's investment advisor (the "Advisor") and sub-advisor (the
"Sub-Advisor") (collectively, the "Advisors") are responsible for managing the
Fund's investments. (See "Investment Advisor and Sub-Advisor.") The Sub-Advisor
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 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.
In addition, the Fund may invest up to 5% of its total assets in restricted
securities, including Rule 144A Securities.
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
4
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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.
INVESTMENT RESTRICTIONS
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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) Invest more than 5% of its total assets in the securities of any single
issuer;
2) 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;
3) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equaling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
4) Invest more than 10% of the 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.
HOW TO INVEST IN THE FUND
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Class A Shares may be purchased from the Distributor, through any securities
dealer which has entered into a dealer agreement with the Distributor,
("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, to the address shown on the Application Form.
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 the Distributor and the Advisor. Orders for purchases of
Class A Shares are accepted on any day on which the New York Stock Exchange is
open for business (a "Business Day"). Purchase orders for Class A Shares will be
executed at a 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
5
<PAGE>
(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 the Distributor, a Participating
Dealer or Shareholder Servicing Agent must be in accordance with such
entity's payment procedures. The Distributor may, in its sole discretion,
refuse to accept any purchase order.
The net asset value per share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share 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 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 the Distributor, 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*
- ------
* 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.
<PAGE>
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
Class A shares of other Flag Investors funds with the same sales charge and
purchases of Class A shares of Flag Investors Short-Intermediate Income Fund,
Inc. (formerly 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 the Distributor, 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.
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. 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.
6
<PAGE>
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 the
Distributor 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 shares on behalf of
their fiduciary and advisory clients, provided such clients have paid an account
management fee for these services (investors may 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 Class A shares
of any other mutual fund in the Flag Investors family of funds with the same
sales charges, or who have redeemed Class A 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 the
Distributor, 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 the
Distributor 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 that have the same sales load
structure 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. In addition, shareholders of Class A shares 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. Shareholders of Flag Investors Cash Reserve Prime Class A Shares may
also 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.
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) or the close of
the New York Stock Exchange, whichever is earlier. Exchange requests received
after 4:00 p.m. (Eastern Time) will be effected on the next Business Day.
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 the Distributor 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 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
7
<PAGE>
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 or who wishes to obtain
additional purchase information may do so by completing the appropriate section
of the Application Form attached to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares.
Unless the shareholder elects otherwise, all income dividends and capital gains
distributions will be reinvested in additional Class A Shares at net asset
value, without a sales charge. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Fund's transfer agent (the
"Transfer Agent") (see "Custodian, Transfer Agent and 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.
Alternately, shareholders may have their distributions invested in Class A
shares of other funds in the Flag Investors family of funds. Shareholders who
are interested in this option should call the Transfer Agent for additional
information.
HOW TO REDEEM SHARES
- -------------------------------------------------------------------------------
Shareholders may redeem all or part of their investment on any Business Day
by transmitting a redemption order through the Distributor, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to 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) or the close of the New York
Stock Exchange, whichever is earlier, will be effected at the net asset value
next determined on the following Business Day. Payment for redeemed 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.
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 participate in the Systematic Withdrawal Plan may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.
8
<PAGE>
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 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 and 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 additional telecopied
instructions of such transaction requests. 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.")
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.
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.
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
9
<PAGE>
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.
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.
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 executive officers, to the Distributor and to
the Advisors. Two Directors and all of the officers of the Fund are officers or
employees of the Distributor or the Advisors. The other Directors of the Fund
have no affiliation with the Distributor or the Advisors.
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
John W. Church, Jr. President
Andrew B. Williams Executive Vice President
Gary V. Fearnow Vice President
Edward J. Veilleux Vice President
Scott J. Liotta Vice President
Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
Laurie D. Collidge Assistant Secretary
INVESTMENT ADVISOR AND SUB-ADVISOR
- -------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and The Glenmede Trust Company ("Glenmede" or the
"Sub-Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and Alex. Brown Cash
Reserve Fund, Inc., which funds had approximately $5.2 billion of net assets as
of December 31, 1996. Glenmede provides fiduciary and investment services to
endowment funds, foundations, employee benefit plans and other institutions and
individuals. At December 31, 1996, Glenmede had over $10 billion in assets in
the accounts for which it serves in various capacities including as executor,
trustee, or investment advisor.
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.
ICC has voluntarily agreed to waive a portion of the advisory fee to which it
is contractually entitled 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.") For
the fiscal year ended October 31, 1996, ICC waived all advisory fees ($98,672)
and reimbursed expenses of $7,066. In addition, from its own resources, ICC paid
Glenmede a fee (net of fee waivers in effect through September 30, 1996) equal
to .05% of the Fund's average daily net assets.
10
<PAGE>
ICC is an indirect subsidiary of Alex. Brown Incorporated. ICC is also the
Fund's transfer and dividend disbursing agent and provides accounting services
to the Fund. (See "Custodian, Transfer Agent and Accounting Services.")
Glenmede, a limited purpose trust company, is a wholly-owned subsidiary of The
Glenmede Corporation. The address of ICC is One South 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.
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.
DISTRIBUTOR
- -------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor"), One
South Street, Baltimore, Maryland 21202, 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 (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended. As
compensation for providing distribution services to the Class A Shares for the
fiscal year ended October 31, 1996, 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.
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.
11
<PAGE>
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------
Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. As compensation for providing
accounting services for the fiscal year ended October 31, 1996, ICC received a
fee equal to .21% of the Fund's average daily net assets. (See the Statement of
Additional Information.)
Boston Safe Deposit and Trust Company, located at One Boston Place, Boston,
Massachusetts 02108, acts as custodian of the Fund's assets.
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, 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. 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.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
CAPITAL SHARES
The Fund is an open-end diversified management investment company. It 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 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
12
<PAGE>
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 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, the Fund at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
13
<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 419663
Kansas City, MO 64141-6663
Attn: Flag Investors International Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 to request an IRA information
kit.
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. 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)
List the account numbers of other Flag Investors Funds (except Class B shares)
that you or your immediate family already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional shares of the Fund at no
sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800)553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
A-1
<PAGE>
- ------------------------------------------------------------------------------
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
[THE INFORMATION BELOW APPEARS IN A BOX]
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this application, I hereby certify under penalties of perjury
that the information on this application is complete and correct and
that as required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified
me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above,
I have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-553-8080.)
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:_______________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[END OF BOX]
I have received a copy of the Fund's prospectus dated March 1, 1997. 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.
[THE INFORMATION BELOW APPEARS IN A BOX]
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
[END OF BOX]
______________________________________________________________________________
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.: __________________________
A-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------
FLAG INVESTORS INTERNATIONAL FUND, INC.
One South Street
Baltimore, Maryland 21202
-----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, ONE SOUTH STREET, BALTIMORE, MARYLAND
21202, (800) 767-FLAG.
Statement of Additional Information Dated: March 1, 1997
Relating to the Prospectus Dated: March 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History............................... 1
2. Investment Objective and Policies............................. 1
3. Valuation of Shares and Redemption............................ 2
4. Federal Tax Treatment of Dividends and Distributions.......... 3
5. Management of the Fund........................................ 8
6. Investment Advisory and Other Services........................ 13
7. Distribution of Fund Shares................................... 14
8. Brokerage..................................................... 16
9. Capital Shares................................................ 18
10. Semi-Annual Reports........................................... 19
11. Custodian, Accounting Services and Transfer Agent............. 19
12. Independent Auditors.......................................... 19
13. Performance Information....................................... 19
14. Control Persons and Principal Holders of Securities........... 21
15. Financial Statements.......................................... 21
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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 (the "Distributor"), One South 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. 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);
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2. Invest in real estate or mortgages on real estate;
3. Purchase or sell commodities or commodities contracts,
except that the Fund may enter into forward currency exchange
contracts;
4. 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");
5. 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;
6. Issue senior securities;
7. 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;
8. Effect short sales of securities;
9. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions); or
10. Purchase participations or other direct interests in oil,
gas or other mineral exploration or development programs.
The following investment restriction may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other open-end investment company
registered under the Investment Company Act, except as permitted by
federal law.
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 daily as of the
close of the New York Stock Exchange, which is ordinarily 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.
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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 Shares may be significantly affected
on days when shareholders do not have access to the Fund.
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" above and in the Prospectus under "How to Invest in the
Fund," 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 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.
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Qualification as Regulated Investment Company
The Fund has been and expects to continue 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 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
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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.
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 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
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<PAGE>
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 generally 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 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 he
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. 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
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30 days before and ending 30 days after the disposition of the Shares). This
loss disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
Foreign Income Taxes
The dividends and interest payable on certain of the Fund's
foreign portfolio securities received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source, thus
reducing the net amount available for distribution to the Fund's shareholders.
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.
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.
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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 (the "Advisor") and sub-advisor (the "Sub-Advisor")
(collectively, the "Advisors").
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 One South Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Director,
Investment Company Capital Corp. (registered investment advisor);
Formerly, Vice Chairman, Alex. Brown & Sons Incorporated.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); 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)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); Formerly, Consultant, Wendell
& Stockel Associates, Inc. (consulting firm); 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.
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* 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.
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EUGENE J. MCDONALD, Director (7/14/32)
President, Duke Management Company (investments), Erwin Square, Suite
1000, 2200 West Main Street, Durham, North Carolina 27705; Executive
Vice President, Duke University (education, research and healthcare);
Director, Central Carolina Bank & Trust (banking), Key Funds
(registered investment companies) and AMBAC Treasurers Trust
(registered investment companies).
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);
Director, Yellow Corporation (trucking); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).
JOHN W. CHURCH, JR., President (11/25/32)
Executive Vice President and Chief Investment Officer, The Glenmede
Trust Company, One Liberty Place, 1650 Market Street, Philadelphia,
Pennsylvania 19103.
ANDREW B. WILLIAMS, Executive Vice President (4/28/54)
Vice President, The Glenmede Trust Company, One Liberty Place, 1650
Market Street, Philadelphia, Pennsylvania 19103.
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; Vice President, Armata
Financial Corp. (registered broker-dealer); Executive Vice President,
Investment Company Capital Corp. (registered investment advisor).
SCOTT J. LIOTTA, Vice President (3/18/65)
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994-July
1996; and Supervisor, Brown Brothers Harriman & Co. (domestic and
global custody) August 1991-April 1994..
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present; Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company Inc. (investments), 1980-August
1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April
1995-Present; Formerly, Legal Advisor, Federated Investors (registered
investment advisor), 1991-1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present.
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 the Distributor or its affiliates. There are currently
twelve funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund,
Inc. fund
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complex (the "Fund Complex"). Mr. Semans serves as Chairman of five funds and as
a Director of five other funds in the Fund Complex. Mr. Hale serves as Chairman
of three funds, as President and Director of one fund, and as a Director of each
of the other funds in the Fund Complex. Messrs. Cunnane, Kroeger, Levy and
McDonald serve as Directors of each fund in the Fund Complex. Mr. Vogt serves as
a director of nine 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 ten 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. Liotta serves as Vice President, Mr. Finelli
serves as Treasurer, Mr. Stoken serves as Secretary, and Ms. Collidge serves as
Assistant Secretary, respectively, for each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, the Distributor 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 the Distributor or the Advisors 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, 1996, Non-Interested
Directors' fees attributable to the assets of the Fund totalled approximately
$346. The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
October 31, 1996.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------
Pension or Total Compensation From the
Aggregate Compensation Retirement Fund and Fund Complex
From the Fund for the Benefits Accrued Payable to Directors for the
Name of Person, Fiscal Year Ended as Part of Fiscal Year Ended October
Position October 31, 1996 Fund Expenses 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Truman T. Semans $0 $0 $0
Chairman
*Richard T. Hale $0 $0 $0
Director
James J. Cunnane $96(1) + $39,000 for service on 12
Director Boards in the Fund Complex
N. Bruce Hannay** $33(1) + $13,071 for service on 12
Director Boards in the Fund Complex
John F. Kroeger $120(1) + $49,000 for service on 12
Director Boards in the Fund Complex
Louis E. Levy $96(1) + $39,000 for service on 12
Director Boards in the Fund Complex
Eugene J. McDonald $96(1) + $39,000 for service on 12
Director Boards in the Fund Complex
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Carl W. Vogt*** $96(1) + $29,250 for service on 5
Director Boards in the Fund Complex
Harry Woolf**** $96(1) + $39,000 for service on 12
Director Boards in the Fund Complex
</TABLE>
- ---------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired effective January 31, 1996 and is now deceased.
*** Appointed to the Board on January 30, 1996.
**** Retired effective January 31, 1996.
+ The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund
for the period from January 1, 1996 through October 31, 1996 was
approximately $471.
(1) Of the amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy,
McDonald, Woolf and Vogt, nothing was deferred pursuant to the Fund's
deferred compensation plan in the year ended October 31, 1996.
The Fund Complex has adopted a Retirement Plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion of
six years of service, each Participant will be entitled to receive an annual
retirement benefit equal to a percentage of the fee earned 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. Mr. Kroeger has qualified
but has not received benefits. The Fund has two Participants, a Director who
retired effective December 31, 1994 and a Director who retired effective
December 31, 1996, each of whom has qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who will be paid a quarterly fee of $4,875 by the Fund Complex for
the rest of his life. Another participant, who retired on January 31, 1996 and
died on June 2, 1996, was paid fees of $8,090 by the Fund Complex under the
Retirement Plan in the fiscal year ended October 31, 1996. Such fees are
allocated to each fund in the Fund Complex based upon the relative net assets of
such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his last year
of service, as described above. The approximate credited years of service at
December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; and for Mr. Vogt, 1
year.
Estimated Annual Benefits Payable By Fund Complex Upon
Retirement
Years of Service Chairman of Audit Committee Other Participants
- ---------------- --------------------------- ------------------
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his annual compensation pursuant to a
Deferred Compensation Plan.
-11-
<PAGE>
Messrs. Cunnane, Kroeger, Levy, McDonald and Vogt have each
executed a Deferred Compensation Agreement. Currently, the deferring Directors
may select various Flag Investors and Alex. Brown Cash Reserve Funds in which
all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors deferral accounts will be paid in
cash, in generally equal quarterly installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Code of
Ethics applies to the personal investing activities of directors and officers of
the Fund, as well as to designated officers, directors and employees of the
Advisors and the Distributor. As described below, the Code of Ethics imposes
significant restrictions on the Advisors' investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that covered employees of the
Advisors, directors or officers of the Distributor, and all Fund Directors who
are "interested persons", preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases which are part
of an automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities in
an initial public offering, a prohibition from profiting on short-term trading
in securities and special preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
Officers, directors and employees of the Advisors and the Distributor may comply
with codes of ethics instituted by those entities so long as they contain
similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
Investment Company Capital Corp. ("ICC" or the "Advisor")
serves as the Fund's investment advisor and The Glenmede Trust Company
("Glenmede" or the "Sub-Advisor") serves as the Fund's sub-advisor pursuant to
agreements approved by shareholders of the Fund on June 16, 1993 and effective
on August 16, 1993.
The Advisors
ICC is a wholly-owned subsidiary of Alex. Brown Financial
Corporation and an indirect subsidiary of Alex. Brown Incorporated. Glenmede, a
limited purpose trust company, provides fiduciary and investment services to
individuals, endowment funds, foundations, employee benefit plans and other
institutions. 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
-12-
<PAGE>
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.
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 October 1, 1996. 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. In the fiscal
year ended October 31, 1996, ICC waived all advisory fees ($98,672) and
reimbursed expenses of $7,066. During the same period and from its own
resources, ICC paid Glenmede sub-advisory fees of $6,149 (net of fee waivers of
$66,211). Glenmede's voluntary fee waiver was in effect through September 30,
1996. 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.
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 & Sons
Incorporated ("Alex. Brown" or the "Distributor") has the exclusive right to
distribute Shares either directly or through other broker-dealers and further
provides that Alex. Brown will: solicit and
-13-
<PAGE>
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 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.
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.
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, 1996, October 31, 1995, and October 31,
1994, Alex. Brown received 12b-1 fees in the amount of $32,891, $32,947, and
$38,112, respectively. In return for such fees, Alex. Brown paid the
distribution-related expenses of the Fund including one or more of the
following: advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sale personnel; and
interest, carrying or other financing charges.
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 October 1, 1996. 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
-14-
<PAGE>
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.
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.
For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, Alex. Brown received sales commissions of $11,908, $21,396
and $41,462 and from such amounts retained $11,878, $12,184 and $27,986 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,
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<PAGE>
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.
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, 1996, Glenmede directed $3,779,330 in
principal value of brokerage transactions to broker dealers and paid $10,872 of
related commissions because of research services provided to Glenmede.
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
-16-
<PAGE>
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 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 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, 1996, October 31, 1995 and
October 31, 1994, 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, 1996, the Fund
held a 5.45% repurchase agreement issued by Goldman Sachs & Co. valued at
$187,000. 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.
-17-
<PAGE>
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
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. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors.
11. CUSTODIAN, 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., One South 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, 1996, such fees totalled $17,048.
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.
Average Net Assets Incremental Annual Accounting Fee
0 - $10,000,000 $25,000 (fixed fee)
$10,000,000 - $25,000,000 0.080%
$25,000,000 - $50,000,000 0.060%
$50,000,000 - $75,000,000 0.040%
$75,000,000 - $100,000,000 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%
In addition, the Fund will reimburse ICC for the following out
of pocket expenses incurred in connection with ICC's performance of its services
under the Master Services Agreement: express delivery service, independent
pricing and storage. For the fiscal year ended October 31, 1996, ICC received
accounting fees of $27,527.
-18-
<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.
Calculated according to the SEC rules, for the one year period
ended September 30, 1996, the ending redeemable value of a hypothetical $1,000
payment for Shares was $1,050, resulting in a
-19-
<PAGE>
total return for such Shares equal to 5.01%. For the five year period ended
September 30, 1996, the ending redeemable value of a hypothetical $1,000 payment
for Shares was $1,351, resulting in an average annual total return for such
Shares equal to 6.20%. 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, 1996, the ending redeemable value of a
hypothetical $1,000 payment for Shares was $1,825, resulting in an average
annual total return for such Shares equal to 6.28%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the one year
period ended October 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Shares was $11,213, resulting in a total return equal to
12.13%. For the five year period ended October 31, 1996, the ending redeemable
value of a hypothetical $10,000 investment in Shares was $14,336, resulting in
an average annual total return equal to 7.47%. 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, 1996, the ending
redeemable value of a hypothetical $10,000 investment in Shares was $19,093,
resulting in an average annual total return equal to 6.71%.
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, 1996 and October 31, 1995 was 13% and 35%,
respectively.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons owned of
record or beneficially 5% or more of the Fund's outstanding Shares, as of
January 31, 1997.
Name and Address Percentage of Ownership
- ---------------- -----------------------
Mercantile Safe Deposit & Trust Co., Custodian - 5.37%
2 Hopkins Plaza
Baltimore, MD 21202-2930
The Directors and executive officers as a group owned less
than 1% of the Fund's total outstanding Shares, as of January 31, 1997.
15. FINANCIAL STATEMENTS
See next page.
-20-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
No. of Value Percent of
Shares Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
=========================================================================================
<S> <C>
COMMON STOCK -- 98.8%
AUSTRALIA -- 4.0%
41,163 Burns, Philp & Co. Ltd. $ 65,145 0.5%
26,634 Lend Lease Corp., Ltd. 450,805 3.5
-------- ----
515,950 4.0
CANADA -- 1.9%
70 Bank of Nova Scotia 2,220 --
5,000 Magna International, Inc. - Class A 250,625 1.9
-------- ----
252,845 1.9
FINLAND -- 2.2%
6,000 Nokia AB - Series A ADR 278,250 2.2
-------- ----
FRANCE -- 8.4%
2,549 Compagnie Generale des Eaux 303,991 2.3
4,258 Elf Aquitaine SA 339,756 2.6
4,356 Lafarge SA 260,851 2.0
Lagardere Groupe,
9,680 Warrants Expiring 6/30/97* 13,037 0.1
4,000 Technip ADR 174,973 1.4
-------- ----
1,092,608 8.4
GERMANY -- 6.1%
10,000 Deutsche Bank AG 463,500 3.6
6,000 Veba AG 319,528 2.5
-------- ----
783,028 6.1
HONG KONG -- 2.2%
125,000 Hong Kong Land Holdings, Ltd. 278,750 2.2
-------- ----
ITALY -- 5.4%
9,631 Assicurazioni Generali 185,846 1.4
21,300 Benetton Group SpA 251,661 1.9
120,000 Telecom Italia SpA 267,123 2.1
- -----------------------------------------------------------------------------------------
704,630 5.4
</TABLE>
-21-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value Percent of
Shares Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
=========================================================================================
<S> <C>
COMMON STOCK -- continued
JAPAN -- 25.4%
6,600 Acom Co., Ltd. $ 253,111 2.0%
5,000 Amway Japan Ltd. 199,210 1.5
2,000 Aoyama Trading Co., Ltd. 51,075 0.4
10,000 Canon, Inc. 191,312 1.5
10,000 Daiwa House Industry Co., Ltd. 138,657 1.1
50 East Japan Railway Co. 229,487 1.8
25,000 Hitachi Ltd. 221,588 1.7
12,000 Honda Motor Co. 286,441 2.2
20,000 Kao Corp. 235,191 1.8
1,500 Kyocera Corp. ADR 197,063 1.5
2,000 Nintendo Corp. Ltd. 127,775 1.0
20,000 Nishimatsu Construction Co. 184,291 1.4
4,000 Rohm Co. 236,946 1.8
11,000 Sankyo Co., Ltd. 272,225 2.1
7,000 Sharp Corp. 106,275 0.8
20,000 Toda Construction Co. 158,140 1.2
10,000 Yamanouchi Pharmaceutical Co. 202,720 1.6
--------- ----
3,291,507 25.4
MALAYSIA -- 2.2%
94,666 Malaysian International
Shipping Corp. Berhad 282,949 2.2
--------- ----
MEXICO -- 1.0%
33,750 Cemex. S.A. de C.V. - Series "B" 123,228 1.0
--------- ----
NETHERLANDS -- 7.0%
6,114 ABN-AMRO Holding N.V. 344,678 2.7
10,000 IHC Caland NV Holdings 556,699 4.3
--------- ----
901,377 7.0
NEW ZEALAND -- 0.6%
5,000 Tranz Rail Holdings ADR* 81,875 0.6
.........................................................................................
NORWAY -- 1.3%
4,300 Kvaerner AS 162,099 1.3
--------- ----
</TABLE>
-22-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
No. of Value Percent of
Shares Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
=========================================================================================
<S> <C>
COMMON STOCK -- concluded
SPAIN -- 7.4%
10,000 Banco Central Hispano Americano SA $ 233,086 1.8%
25,000 Dragados & Construcciones SA 334,376 2.6
6,000 Repsol SA 195,463 1.5
10,000 Vallehermoso SA 197,106 1.5
--------- ----
960,031 7.4
SWITZERLAND -- 1.9%
1,260 Schweizerischer Bankverein
(Swiss Bank Corp.), Registered Shares 241,964 1.9
--------- ----
THAILAND -- 0.7%
10,000 Siam Commercial Bank Ltd. `F' 90,952 0.7
- -----------------------------------------------------------------------------------------
UNITED KINGDOM -- 21.1%
25,000 B.A.T. Industries PLC 173,982 1.3
16,149 The Boots Co. PLC 163,852 1.3
45,000 BTR PLC 188,413 1.4
25,000 Dalgety PLC 126,625 1.0
10,000 De La Rue PLC* 95,853 0.7
20,000 Grand Metropolitan PLC 150,730 1.2
70,000 Iceland Group PLC 97,885 0.8
84,000 Mirror Group Newspapers PLC 317,558 2.5
25,000 National Power PLC 165,445 1.3
22,967 Safeway PLC 136,120 1.0
55,100 Scottish Power PLC 281,769 2.2
40,000 Smith (WH) Group PLC 298,859 2.3
25,000 Tate & Lyle PLC 193,900 1.5
80,000 Tomkins PLC 335,606 2.6
--------- ----
2,726,597 21.1
--------- ----
Total Common Stock
(Cost $10,861,064) 12,768,640 98.8
---------- ----
</TABLE>
-23-
<PAGE>
Flag Investors International Fund
<TABLE>
<CAPTION>
No. of
Shares/ Value Percent of
Par (000) Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
=========================================================================================
<S> <C>
PREFERRED STOCK -- 0.1%
HONG KONG -- 0.1%
16 Dairy Farm International
Holdings Ltd., Cvt.
(Cost $16,000) $ 10,800 0.1%
---------- ----
=========================================================================================
REPURCHASE AGREEMENT -- 1.4%
$187 Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased
on 11/1/96, collateralized by U.S.
Treasury Notes with a market value
of $190,920.
(Cost $187,000) 187,000 1.4
----------- -----
Total Investment in Securities
(Cost $11,064,064) ** 12,966,440 100.3
Liabilities in Excess of Other Assets, Net (36,184) (0.3)
----------- -----
Net Assets $12,930,256 100.0%
=========== =====
Net Asset Value and Redemption Price Per Share
($12,930,256 / 910,571 shares outstanding) $14.20
======
Maximum Offering Price Per Share
($14.20 / .955) $14.87
======
</TABLE>
- ------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
-24-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
October 31,
1996
Investment Income (Note 1):
Dividends $ 496,529
Interest 26,100
Other income 7,770
Less:Foreign taxes withheld (82,170)
----------
Total income 448,229
----------
Expenses:
Investment advisory fee (Note 2) 98,672
Legal 35,086
Distribution fee (Note 2) 32,891
Printing and postage 29,036
Accounting fee (Note 2) 27,527
Registration fees 27,453
Audit 20,877
Transfer agent fees (Note 2) 17,048
Custodian fee 9,796
Miscellaneous 4,435
Directors' fees 346
----------
Total expenses 303,167
Less:Fees waived and expenses reimbursed (Note 2) (105,738)
----------
Net expenses 197,429
----------
Net investment income 250,800
----------
Netrealized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 601,748
Net realized foreign exchange loss (30,525)
Change in unrealized appreciation or depreciation
of investments 656,848
Change in unrealized appreciation or depreciation
on translation of assets and liabilities,
excluding investments, denominated in
foreign currencies (3,773)
----------
Net gain on investments 1,224,298
----------
Net increase in net assets resulting from operations $1,475,098
==========
See Notes to Financial Statements.
-25-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31,
1996 1995
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 250,800 $ 90,267
Net realized gain from security transactions
and foreign exchange transactions 571,223 666,979
Change in unrealized appreciation or
depreciation of investments 656,848 (2,231,677)
Change in unrealized appreciation or
depreciation on translation of
assets and liabilities denominated in
foreign currencies (3,773) 41,662
------------ -----------
Net increase/(decrease) in net assets
resulting from operations 1,475,098 (1,432,769)
------------ -----------
Dividends to Shareholders from:
Net investment income (28,072) --
------------ -----------
Capital Share Transactions (Note 3):
Proceeds from sale of 107,997 and
99,262 shares, respectively 1,494,406 1,243,444
Value of 1,596 shares issued in
reinvestment of dividends 22,601 --
Cost of 182,530 and 224,000 shares
repurchased, respectively (2,516,921) (2,814,795)
------------ -----------
Total decrease in net assets derived
from capital share transactions (999,914) (1,571,351)
------------ -----------
Total increase/(decrease) in net assets 447,112 (3,004,120)
Net Assets:
Beginning of year 12,483,144 15,487,264
------------ -----------
End of year $12,930,256 $12,483,144
============ ===========
Undistributed net investment income $ 625,259 $ 103,321
============ ===========
See Notes to Financial Statements.
-26-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
October 31, For the Year Ended October 31,
1996 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 12.69 $ 13.97 $ 13.05 $ 9.11 $ 10.63
------- ------- ------- ------- --------
Income from Investment Operations:
Net investment income 0.26 0.09 0.18 0.49 0.16
Net realized and unrealized gain/(loss) on investments(2) 1.28 (1.37) 1.58 3.45 (1.62)
------- ------- ------- ------- --------
Total from Investment Operations $ 1.54 $ (1.28) $ 1.76 $ 3.94 $ (1.46)
------- ------- ------- ------- --------
Less Distributions:
Dividends from net investment income
and short-term gains (0.03) -- (0.84) -- (0.06)
------- ------- ------- ------- --------
Net asset value at end of year $ 14.20 $ 12.69 $ 13.97 $ 13.05 $ 9.11
======= ======= ======= ======= ========
Total Return(3) 12.13% (9.16)% 13.98% 43.25% (13.80)%
Ratios to Average Daily Net Assets:
Expenses(4) 1.50% 1.50% 1.50% 1.50% 1.50%
Net investment income(5) 1.91% 0.68% 0.75% 1.91% 0.73%
Supplemental Data:
Net assets at end of the year (000) $12,930 $12,483 $15,487 $15,008 $19,780
Portfolio turnover rate 13% 35% 43% 48% 63%
Average commissions per share(6) $0.0201 -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
(1) Computed based upon average shares outstanding.
(2) The years ended October 31, 1996, 1995 and 1994 include net realized
currency loss. Realized currency gain/(loss) is included in net investment
income for the years ended October 31, 1993 and 1992.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.30%, 2.17%, 1.97%, 2.13% and
1.92% for the years ended October 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 1.10%, 0.02%, 0.28%,
1.28% and 0.31% for the years ended October 31, 1996, 1995, 1994, 1993 and
1992, respectively.
(6) Disclosure of average commissions per share is effective fiscal year
beginning in 1996.
See Notes to Financial Statements.
-27-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors International Fund, Inc. ("the Fund") was organized as a
Massachusetts business trust on September 3, 1986 and commenced operations on
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
A. Security Valuation--Securities that are listed on a securities exchange
are valued on the basis of their last quoted sale price as provided by
an independent pricing service (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 procedures established and monitored by the
Board of Directors. Short-term obligations with maturities of 60 days or
less are valued at amortized cost.
B. 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.
-28-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 1--concluded
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.
C. Federal Income Taxes -- 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 distribute annually to shareholders substantially all of its taxable
net investment income and net realized capital gains.
D. 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.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor and The Glenmede Trust
Company ("Glenmede") is the 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.
ICC has voluntarily agreed to waive a portion of its fees and reimburse the
Fund for expenses 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,
1996, ICC waived $98,672 and reimbursed expenses of $7,066, respectively.
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. Glenmede voluntarily agreed to waive all of its fees from the
beginning of the fiscal year through September 30, 1996, which amounted to
$66,211.
-29-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 2--concluded
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 $27,527 for accounting services for the year ended October
31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC earned $17,048 for transfer
agent services for the year ended October 31, 1996.
As compensation for providing distribution services, Alex. Brown &Sons
Incorporated ("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, 1996, distribution fees were $32,891.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $471, and the accrued liability was approximately $1,808.
NOTE 3--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.
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term
obligations, aggregated $1,660,869 and $2,217,979, respectively, for the year
ended October 31, 1996.
At October 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $2,518,521 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $616,145.
-30-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 5--Federal Income Tax Information
Generally accepted accounting principles require that certain components of
net assets be reclassified to reflect permanent differences between financial
reporting and tax purposes. Accordingly, current year's permanent book/tax
differences of $299,300 have been reclassified to undistributed net investment
income from paid-in capital. These reclassifications have no effect on net
assets or net asset values per share.
At October 31, 1996, there was a tax capital loss carryforward of
approximately $4,386,000, of which $1,447,000 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.
NOTE 6--Net Assets
At October 31, 1996, net assets consisted of:
Paid-in capital $15,253,772
Undistributed net investment income 625,259
Accumulated net realized loss from security and
foreign exchange transactions (4,852,349)
Unrealized appreciation of investments 1,902,376
Unrealized translation gain 1,198
-----------
$12,930,256
===========
NOTE 7--Personal Income Tax Information for the Shareholder (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1996.
Foreign Total Foreign
Record Payable Source Ordinary Taxes Paid Long-Term
Date Date Income Income or Withheld Capital Gains
------ ------- ------- -------- ----------- -------------
10/1/96 10/2/96 $0.0308 $0.0308 $0.116499 None
All of the foreign taxes paid or withheld represent taxes incurred by the
Fund on dividends received by the Fund from foreign sources. Foreign taxes paid
or withheld should be included in taxable income with an offsetting deduction
from gross income or as a credit for taxes paid to foreign governments. You
should consult your tax advisor regarding the appropriate treatment of foreign
taxes paid.
-31-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Flag Investors International Fund, Inc.:
We have audited the statement of net assets of the Flag Investors
International Fund, Inc. as of October 31, 1996, and the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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, 1996 by correspondence with the custodian and brokers. 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
InternationalFund, Inc. as of October 31, 1996, 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
November 22, 1996
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