<PAGE>
[GRAPHIC OMITTED]
Flag Investors
INTERNATIONAL FUND, INC.
(Class A Shares)
Prospectus & Application -- March 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks long-term growth of capital primarily
through investment in a diversified portfolio of common stocks and other equity
securities of issuers located outside of the United States.
Class A Shares of the Fund ("Class A Shares") are available through your
securities dealer or the Fund's transfer agent. (See "How to Invest in the
Fund.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated March 1, 1998 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.
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 ....................... 7
Telephone Transactions ..................... 8
Dividends and Taxes ........................ 8
Management of the Fund ..................... 9
Investment Advisor and Sub-Advisor ......... 9
Distributor ................................ 10
Custodian, Transfer Agent and
Accounting Services ..................... 10
Performance Information .................... 11
General Information ........................ 11
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
- --------------------------------------------------------------------------------
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.
<PAGE>
FEE TABLE
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Shareholder Transaction Expenses:
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ........................... 0.50%*
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ......................................... 0.00%**
12b-1 Fees ................................................................... 0.25%
Other Expenses (net of fee waivers and reimbursements) ....................... 1.25%
-----
Total Fund Operating Expenses (net of fee waivers and reimbursements) ........ 1.50%**
=====
</TABLE>
- -----------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (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
0.75%, Other Expenses would be 1.40% and Total Fund Operating Expenses
would be 2.40% of the Class A Shares' average daily net assets.
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------------------------------------------------------- -------- --------- --------- ---------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:* ...................... $60 $90 $123 $216
</TABLE>
- -----------
* Absent fee waivers and reimbursements, expenses would be higher.
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the
Fund. If you purchase Class A Shares through a financial institution, you may be
charged separate fees by the financial institution.
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, you may qualify for reduced sales charges or no sales charge at all.
(See "How to Invest in the Fund -- Offering Price.") Due to the continuous
nature of Rule 12b-1 fees, you 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. if you hold your shares for a long
time. The above table has not been audited by Deloitte & Touche LLP, the Fund's
independent auditors.
1
<PAGE>
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, 1997 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, 1997, which can
be obtained at no charge by calling the Fund at (800) 767-FLAG.
(For a Class A Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ............... $ 14.20 $ 12.69 $ 13.97
--------- --------- --------
Income from Investment Operations:
Net investment income .............................. 0.11 0.26 0.09
Net realized and unrealized gain/(loss)
on investments(2) ................................ 2.34 1.28 (1.37)
--------- --------- --------
Total from Investment Operations ................... 2.45 1.54 (1.28)
--------- --------- --------
Less Distributions:
Distributions from net investment income and
short-term gains ................................. (0.18) (0.03) --
Distributions in excess of net investment income and
short-term gains ................................. (0.11) -- --
--------- --------- --------
Total distributions ................................ (0.29) (0.03) --
--------- --------- --------
Net asset value at end of year ..................... $ 16.36 $ 14.20 $ 12.69
========= ========= ========
Total Return(3) ..................................... 17.48% 12.13% (9.16)%
Ratios to Average Daily Net Assets:
Expenses(4) ........................................ 1.50% 1.50% 1.50%
Net investment income(5) ........................... 1.18% 1.91% 0.68%
Supplemental Data:
Net assets at end of year (000) .................... $13,982 $12,930 $12,483
Portfolio turnover rate ............................ 21% 13% 35%
Average commissions per share(6) ................... $0.0405 $0.0201 --
</TABLE>
- -----------
(1) Investment Company Capital Corp. and The Glenmede Trust Company became
the Fund's investment advisor and sub-advisor, respectively, on August
23, 1993.
(2) The years ended October 31, 1997, 1996, 1995 and 1994 include net
realized currency gain/(loss). Realized currency gain/(loss) is included
in net investment income for the years ended October 31, 1993, 1992 and
1991.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 2.24%, 2.30%, 2.17%, 1.97%, 2.13%, 1.92%,
1.90%, 1.75%, 1.82% and 1.79% during the periods ended October 31, 1997,
1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988, respectively.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 0.44%, 1.10%, 0.02%, 0.28%,
1.28%, 0.31%, 0.77%, 1.21%, 0.29% and 0.54% for the years ended October
31, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988,
respectively.
(6) Disclosure of average commissions per share is effective beginning in
fiscal year 1996.
2
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- -------------------------------------------------------------------------------------------
1994 1993(1) 1992 1991 1990 1989 1988
- ------- ------- ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
$13.05 $9.11 $10.63 $11.80 $13.71 $11.78 $10.81
------ ------ ------ ------ ------- ------ ------
0.18 0.49 0.16 0.15 0.60 0.10 0.11
1.58 3.45 (1.62) (0.55) (1.33) 1.92 1.57
------ ------ ------- ------ ------- ------ ------
1.76 3.94 (1.46) (0.40) (0.73) 2.02 1.68
------ ------ ------- ------ ------- ------ ------
(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
====== ====== ======= ====== ====== ====== ======
13.98% 43.25% (13.80)% (3.15)% (6.63)% 17.25% 16.21%
1.50% 1.50% 1.50% 1.50% 1.50% 1.49% 1.46%
0.75% 1.91% 0.73% 1.17% 1.48% 0.62% 0.87%
$15,487 $15,008 $19,780 $38,830 $44,406 $32,325 $35,259
43% 48% 63% 73% 62% 95% 96%
-- -- -- -- -- -- --
</TABLE>
3
<PAGE>
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
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 Depositary 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.
<PAGE>
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 companies are not subject to uniform audit
and financial reporting standards, practices and requirements comparable to
those in the United States.
4
<PAGE>
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
- --------------------------------------------------------------------------------
The investment restrictions recited below are matters of fundamental
policy and may not be changed without shareholder approval. 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; and
3) 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
- --------------------------------------------------------------------------------
You may purchase Class A Shares through your securities dealer or through
any financial institution that is authorized to service shareholder accounts
("Shareholder Servicing Agents"). You may also purchase Class A Shares 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.
<PAGE>
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. Subsequent investments may be
as low as $100 if made monthly, but must be $250 if done quarterly. (See
"Purchases Through Automatic Investing Plan" below.)
o There is no minimum investment requirement for qualified retirement
plans (i.e., 401(k) plans or pension and profit sharing plans.)
You may purchase Class A Shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). Your purchase order will be
executed at a per share purchase price equal to the net asset value next
determined after it is received plus any applicable front-end sales charge (the
"Offering Price"). If your purchase is made by mail, it must be accompanied by
payment of the Offering Price. Purchases made through your securities dealer or
Shareholder Servicing Agent must be in accordance with their payment
procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
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 shares of the Fund. For this purpose, portfolio
securities will be given their market value which is normally based on current
prices but which may be determined according to "fair value" procedures
approved by the Fund's Board of Directors.
5
<PAGE>
Offering Price
Your share purchase is made 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 in the following table:
<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------- Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- ------------------------------ ---------- ------------ -----------------
<S> <C> <C> <C>
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*
</TABLE>
- ------------------------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be subject to a contingent
deferred sales charge when you redeem your shares. (See below.) The Fund's
distributor may make payments to your securities dealer or Shareholder
Servicing Agent in an amount up to 0.50% of the Offering Price.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Class A Shares
of this Fund and Class A or Class D shares of any other Flag Investors fund.
The applicable sales charge will be determined based on the total value of your
current purchases plus the value of your existing investments. (For this
purpose, existing investments will be valued at the higher of cost or current
value.) You may combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation,
you must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent, that states your 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 does not require that you 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 your name) to secure payment of the
higher sales charge applicable to the Class A Shares actually purchased if you
do not purchase the full amount. Such escrowed shares will be redeemed to pay
the additional sales charge, if necessary. When the full amount indicated has
been purchased, the escrowed shares will be released. If you wish to enter into
a Letter of Intent in conjunction with an investment in Class A Shares, you may
do so by completing the appropriate section of the Application Form attached to
this Prospectus.
<PAGE>
You will not be charged a sales charge on purchases of $1 million or more
of Class A Shares. You may, however, be required to pay a contingent deferred
sales charge if you redeem the purchased shares within 24 months. The charge
will be made at the rate of 0.50% 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 if your securities
dealer has agreed to return to the Fund's distributor (the "Distributor") 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.
You may purchase Class A Shares at net asset value (without sales charge)
under any of the following circumstances:
1) If you are purchasing shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for this
provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your broker or agent if you purchase shares in this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a full description
of the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Distributor, the Advisors and
any broker-dealer authorized to sell Class A Shares.
6
<PAGE>
You may also purchase Class A Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Purchases by Exchange
You may exchange Class A shares of any other Flag Investors fund with the
same sales charge structure for an equal dollar amount of Class A Shares without
payment of the sales charges described above or any other charge. In addition,
you may exchange Class A shares of any Flag Investors fund with a lower sales
charge (with the exception of Flag Investors Cash Reserve Prime Class A Shares)
for an equal dollar amount of Class A Shares if you have owned the shares you
are redeeming for at least 24 months. If you have owned them for less than 24
months, you may exchange them for Class A Shares if you pay the difference in
sales charges. You may enter both your redemption and purchase orders on the
same Business Day or, if you have already redeemed the shares of the other fund,
you may enter your purchase order within 90 days of the redemption.
When you acquire Class A Shares through an exchange from another fund in
the Flag Investors family of funds, the period for which the original shares
were held prior to the exchange will be combined 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 when those Shares are
redeemed.
The net asset value of shares purchased and redeemed in an exchange
request received on the same Business Day will be determined on that 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.
You may exercise this exchange privilege by telephone. (See "Telephone
Transactions" below.)
The Fund may modify or terminate this offer of exchange at any time upon
60 days' prior written notice to shareholders.
<PAGE>
Purchases Through Automatic Investing Plan
You may elect to have a specified amount invested monthly or quarterly in
Class A Shares. The amount specified will be withdrawn from your checking
account using a pre-authorized check and will be invested in Class A Shares at
the applicable Offering Price determined on the date the amount is available
for investment. Participation in the Automatic Investing Plan may be
discontinued either by you or the Fund upon 30 days' prior written notice to
the other party. If you wish to enroll in the Automatic Investing Plan or if
you wish to obtain additional information, complete the appropriate section of
the Application Form attached to this Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and net capital gains
distributions will be reinvested in additional Class A Shares at net asset
value. You may elect to receive your distributions in cash or to terminate
automatic reinvestment by completing the appropriate section of the attached
Application Form or by giving written notice to the Fund's transfer agent (the
"Transfer Agent") at the address listed on the inside back cover of this
Prospectus, either directly or through your securities dealer or Shareholder
Servicing Agent, at least five days before the next date on which dividends or
distributions will be paid.
You may also have your distributions invested in Class A shares of other
funds in the Flag Investors family of funds. Call the Transfer Agent for
additional information.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day through
your securities dealer, your Shareholder Servicing Agent or the Transfer Agent.
You may also redeem up to $50,000 worth of Class A Shares by telephone. (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 your order (or, if stock certificates
have been issued for the Class A Shares to be redeemed, after you tender 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. You will be paid for redeemed Class A Shares by check
which will be mailed within seven days after your redemption order is received
in proper form.
The Transfer Agent, your Securities dealer or your Shareholder Servicing
Agent may require the following documents in order to redeem your Class A
Shares.
7
<PAGE>
1) A letter of instructions, specifying your account number 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 the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature 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 your
account have been redeemed on a dividend payable date, the dividend will be
remitted to you by check.
The Fund has the power under its Articles of Incorporation to redeem your
account upon 60 days' written notice if its value falls below $500 due to your
redemptions.
Systematic Withdrawal Plan
If you hold Class A Shares having a value of $10,000 or more you may
arrange to have a portion of your 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, your account may eventually be exhausted. Because share
purchases include a sales charge that you will not recover at the time of
redemption, you should not have a withdrawal plan in effect at the same time
you are making recurring purchases. If you wish to participate in the Fund's
Systematic Withdrawal Plan, complete the appropriate section of the Application
Form attached to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem Class A Shares in amounts up to $50,000 or exchange Class A
Shares in any amount, 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).
Telephone transaction privileges are automatic unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. 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) next determined on the following 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 you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by 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.
8
<PAGE>
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are urged to consult with your tax advisor regarding any
specific questions.
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. Unless
you are otherwise exempt, you will be generally subject to federal income or
capital gains taxes on the amounts distributed to you regardless of whether such
distributions are paid in cash or reinvested in additional Class A Shares.
You will be taxed on 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, as gains from the sale or exchange of a capital asset held for more
than one year regardless of the length of time you have held the shares. You
will be taxed on all other income distributions as ordinary income. You will be
advised annually as to the federal income tax status of all distributions.
Ordinarily, you should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be deemed
for tax purposes to have been received by you and paid by the Fund in the year
in which the dividends were declared.
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 you
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.
<PAGE>
If you are a non-resident alien individual, foreign trust or estate,
foreign corporation or foreign partnership, distributions by the Fund to you
may be subject to federal income tax treatment that differs from the treatment
described above. (See the Statement of Additional Information.)
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.
The sale, exchange, or redemption of Class A Shares is a taxable event
for you.
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. A majority of the Directors of the Fund have no affiliation with
the Distributor or the Advisors.
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 BT Alex. Brown Cash
Reserve Fund, Inc., which funds, together with the Fund, had approximately $7.3
billion of net assets as of December 31, 1997. Glenmede provides fiduciary and
investment services to endowment funds, foundations, employee benefit plans and
other institutions and individuals. At December 31, 1997, Glenmede had over
$12.8 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
9
<PAGE>
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, 1997, ICC received a fee (net of
fee waivers) equal to 0.01% of the Fund's average daily net assets. In
addition, from its own resources, ICC paid Glenmede a fee equal to 0.55% of the
Fund's average daily net assets.
ICC is an indirect subsidiary of Bankers Trust New York Corporation. ICC
also serves as 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.
Portfolio Manager
Mr. Andrew B. Williams, CFA, the Fund's Executive Vice President, has
primary responsibility for managing the Fund's assets. From April, 1993 through
December, 1997 Mr. Williams shared primary responsibility with Mr. John W.
Church, Jr., the Fund's President.
Mr. Williams is executive 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.
<PAGE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of the Class A Shares since August 31, 1997. ICC
Distributors is a registered broker-dealer that offers distribution services to
a variety of registered investment companies including other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC
Distributors is not affiliated with the Advisor.
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.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, including certain banks and BT Alex. Brown
Incorporated, to provide shareholder services, pursuant to which the Distributor
may allocate on a proportional basis up to all of its distribution fee as
compensation for such financial institutions' ongoing shareholder services. Such
financial institutions may charge you separately for these services.
As compensation for providing distribution services for the period from
August 31, 1997 through October 31, 1997, the Distributor received a fee equal
to 0.25% (annualized) of the Class A Shares' average daily net assets.
Payments under the Plan are made as described above, regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services is less than the payments received, the Distributor may retain the
unexpended portion of the distribution fee. The Distributor or the Advisors, and
their respective affiliates, may make payments from their own resources to
securities dealers or Shareholder Servicing Agents. Payments by the Distributor
will include additional discounts or promotional incentives in the form of cash
or other compensation (including merchandise or travel).
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. 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
10
<PAGE>
October 31, 1997, ICC received a fee equal to 0.20% of the Fund's average daily
net assets. (See the Statement of Additional Information.)
Boston Safe Deposit and Trust Company 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.
<PAGE>
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 your bank
with respect to the account through which Class A Shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Capital Shares
The Fund is an open-end, diversified management investment company. It
was 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
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 by 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.
11
<PAGE>
Reports
You will be furnished 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.
Shareholder Inquiries
If you have questions concerning your shares, you should contact the
Transfer Agent at (800) 553-8080, the Fund at (800) 767-FLAG, or your
securities dealer or Shareholder Servicing Agent.
12
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Make check payable to For assistance
Investors International Fund, Inc." in completing this Application please call:
and mail with this Application to: 1-800-553-8080, Monday through Friday,
Flag Investors Funds 8:30 a.m. to 5:30 p.m. (Eastern Time).
P.O. Box 419663
Kansas City, MO 64141-6663 To open an IRA account, please call
Attn: Flag Investors International 1-800-767-3524 to request an IRA Information
Fund, Inc. kit.
</TABLE>
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 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.)
<TABLE>
<CAPTION>
<S> <C> <C>
Minimum Initial Investment: $250
Subsequent Investments (check one): [ ] Monthly ($100 minimum) [ ] Quarterly ($250 minimum)
</TABLE>
<TABLE>
<CAPTION>
Please attach a voided check.
<S> <C>
- ------------------------------------------------ -----------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------------------ -----------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature Date
(if joint acct., both must sign)
</TABLE>
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)
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.
<TABLE>
<CAPTION>
<S> <C> <C>
No, I/We do not want: [ ] Telephone redemption privileges [ ] Telephone exchange privileges
</TABLE>
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 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
your 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.
<PAGE>
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- ------------------------------------------------------------------------------
Signature Date
- ------------------------------------------------------------------------------
Signature (if joint account, both must sign) Date
- ----------------------
For Dealer Use Only
- ----------------------
<TABLE>
<CAPTION>
<S> <C>
Dealer's Name: ---------------------------------- Dealer Code: -------------------------------
Dealer's Address: -------------------------------- Branch Code: -------------------------------
--------------------------------
Representative: --------------------------------- Rep. No. -------------------------------
</TABLE>
A-2
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND, INC.
(Class A Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
THE GLENMEDE TRUST COMPANY ICC DISTRIBUTORS, INC.
One Liberty Place P.O. Box 7558
1650 Market Street Portland, Maine 04101
Philadelphia, Pennsylvania 19103
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
1-800-553-8080
Custodian Fund Counsel
BOSTON SAFE DEPOSIT AND TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
One Boston Place 2000 One Logan Square
Boston, Massachusetts 02108 Philadelphia, Pennsylvania 19103
<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 THE FUND, ONE SOUTH
STREET, BALTIMORE, MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated: March 1, 1998
Relating to the Prospectus Dated: March 1, 1998
<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.......................... 12
7. Distribution of Fund Shares..................................... 13
8. Brokerage....................................................... 16
9. Capital Shares.................................................. 18
10. Semi-Annual Reports............................................. 18
11. Custodian, Accounting Services and Transfer Agent............... 18
12. Independent Auditors............................................ 19
13. Performance Information......................................... 19
14. Control Persons and Principal Holders of Securities............. 21
15. Financial Statements............................................ 21
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors International Fund, Inc. (the "Fund") is an open-end
management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required
to furnish prospective investors with certain information concerning the
activities of the company being considered for investment. The Fund currently
offers one class of shares: Flag Investors International Fund Class A Shares
(the "Shares").
Important information concerning the Fund is included in the Fund's
Prospectus which may be obtained without charge from the Fund's distributor
(the "Distributor") or from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current 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 (now BT Alex. Brown Incorporated), BT 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
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. 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
-1-
<PAGE>
the Fund equaling 5% or more of the Fund's total assets are outstanding, the
Fund will not purchase securities;
2. 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);
3. Invest in real estate or mortgages on real estate;
4. Purchase or sell commodities or commodities contracts, except that
the Fund may enter into forward currency exchange contracts;
5. 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");
6. 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;
7. Issue senior securities;
8. 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;
9. Effect short sales of securities;
10. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions); or
11. 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, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
-2-
<PAGE>
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.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third
party receives an order prior to the Fund's close of business, the order is
deemed to have been received by the Fund and, accordingly, may receive the net
asset value computed at the close of business that day. These "late day"
agreements are intended to permit shareholders placing orders with a third
party to place orders up to the same time as other shareholders.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check 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.
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.
-3-
<PAGE>
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 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").
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 Internal Revenue Service that income from such currency transactions
may be considered "qualifying income" for purposes of the Income Requirement.
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%
-4-
<PAGE>
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 gain from the sale or exchange of a capital asset held for
more than twelve months, 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.
-5-
<PAGE>
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.
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
eighteen months, mid-term if such Shares have been held for more than twelve,
but not more than eighteen months, 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 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.
-6-
<PAGE>
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.
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.
-7-
<PAGE>
5. MANAGEMENT OF THE FUND
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 (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly,
Vice Chairman, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated); Vice Chairman, Alex. Brown Capital Advisory & Trust
Company and Director, Investment Company Capital Corp. (registered
investment advisor).
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor) and 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); and General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32) 26 Farmstead Road, Short Hills, New
Jersey 07078. Director, Kimberly-Clark Corporation (personal consumer
products) and Household International (finance and banking); Chairman
of the Quality Control Inquiry Committee, American Institute of
Certified Public Accountants; Formerly, Trustee, Merrill Lynch Funds
for Institutions, 1991-1993; Adjunct Professor, Columbia
University-Graduate School of Business, 1991-1992; and Partner, KPMG
Peat Marwick, retired 1990.
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 DP Mann Holdings (insurance);
Formerly, Director, AMBAC Treasures Trust (registered investment
company).
CARL W. VOGT, Esq., 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) and American Science & Engineering (x-ray
detection equipment); Formerly, Chairman and Member,
- --------
* 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.
-8-
<PAGE>
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) Formerly, 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) Senior, Vice
President, The Glenmede Trust Company, One Liberty Place, 1650 Market
Street, Philadelphia, Pennsylvania 19103.
JOSEPH A. FINELLI, Treasurer (1/24/57) Vice President, BT Alex. Brown
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.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown 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.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of six other funds in the Fund
Complex. Mr. Hale serves as Chairman of four funds and as a Director of eight
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 11 funds in the Fund Complex. Ms. Olmert serves as Secretary,
Mr. Finelli serves as Treasurer and Mr. Liotta 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, BT Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated
persons. Additional transactions may be expected to take place in the future.
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 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) (an "Independent 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 BT 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
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<PAGE>
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,
1997, Independent Directors' fees attributable to the assets of the Fund
totaled approximately $518. 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, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Pension or Total Compensation From
From the Fund for the Retirement the Fund and Fund Complex
Fiscal Year Ended Benefits Accrued Payable to Directors for the
Name of Person, October 31, 1997 as Part of Fiscal Year Ended October
Position Fund Expenses 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans(1) $ 0 $0 $0
Chairman
Richard T. Hale(1) $ 0 $0 $0
Director
James J. Cunnane $ 88(3) (4) $39,000 for service on 13
Director Boards in the Fund Complex
John F. Kroeger $111(3) (4) $49,000 for service on 13
Director Boards in the Fund Complex
Louis E. Levy $ 88(3) (4) $39,000 for service on 13
Director Boards in the Fund Complex
Eugene J. McDonald $ 88(3) (4) $39,000 for service on 13
Director Boards in the Fund Complex
Carl W. Vogt, Esq. $ 95(3) (4) $39,000 for service on 11(5)
Director Boards in the Fund Complex
Harry Woolf(2) $ 46(3) (4) $9,750 for service on 12
Director Boards in the Fund Complex
</TABLE>
- ----------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired effective December 31, 1996. Mr. Woolf was appointed
President of certain funds in the Fund Complex. For serving as
President, Mr. Woolf receives compensation from such Funds in
addition to his retirement benefits.
(3) Of the amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald,
Vogt and Woolf, nothing was deferred pursuant to the Fund's deferred
compensation plan in the year ended October 31, 1996.
(4) The Fund Complex has adopted a Retirement Plan for eligible
Directors, as described below. The actuarially computed pension
expense for the Fund for the year ended October 31, 1997 was
approximately $705.
(5) Mr. Vogt receives proportionately higher compensation from each fund
for which he serves.
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
-10-
<PAGE>
Complex for the rest of his life. 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, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger,
15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; and for Mr. Vogt,
2 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his annual compensation pursuant to a Deferred
Compensation Plan. Messrs. Cunnane, Levy, McDonald and Vogt have each executed a
Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors funds and BT Alex. Brown Cash Reserve Fund,
Inc. in which all or part of their deferral account shall be deemed to be
invested. Distributions from the deferring Directors deferral accounts will be
paid in cash, in generally equal quarterly installments over a period of ten
years.
Code of Ethics
The Board of Directors of the 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
additional restrictions on the Advisors' investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that any officer, director, or employee of
the Fund, or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases which are part
of an automatic dividend reinvestment plan). The foregoing applies to any
officer, director, or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor would be exempt from this "blackout period" provided that (1) the
market
-11-
<PAGE>
capitalization of a particular security exceeds $2 billion; and (2) orders of
the Advisor do not exceed ten percent of the daily average trading volume of
the security for the prior 15 days. Officers, directors and employees of the
Advisors and the Distributor may comply with codes of ethics instituted by
those entities so long as they contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
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. ICC is an indirect subsidiary of Bankers Trust New York Corporation.
ICC is also investment advisor to other Funds in the Flag Investors family of
funds and BT Alex. Brown Cash Reserve Fund Inc. 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 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 0.75%
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 0.55% 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
Independent Directors who
-12-
<PAGE>
have no direct or indirect financial interest in each of such agreements by
votes cast in person at a meeting called for such purpose. Each of the
Investment Advisory Agreement and Sub-Advisory Agreement was most recently
approved in the foregoing manner by the Fund's Board of Directors on September
16, 1997. 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.
Advisory fees paid by the Fund to ICC and sub-advisory fees paid by
ICC to Glenmede for the last three fiscal years were as follows:
- ------------------------------------------------------------------------------
Year Ended October 31,
- ------------------------------------------------------------------------------
Fees Paid to: 1997 1996 1995
- ------------------------------------------------------------------------------
ICC $ 1,461(1) $ 0(2) $29,894(4)
- ------------------------------------------------------------------------------
Glenmede $77,150 $6,149(3) $26,600(5)
- ------------------------------------------------------------------------------
- ----------------
(1) Net of fee waivers of $103,734.
(2) Net of fee waivers of $98,672. During this period, ICC also
reimbursed expenses of $7,066.
(3) Net of fee waivers of $66,211.
(4) Net of fee waivers of $68,946.
(5) Net of fee waivers of $19,020
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
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor")
serves as Distributor of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997. Prior to
August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown") served as the
distributor of the Fund's Shares for the same rate of compensation and on
substantially the same terms as ICC Distributors.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained
in the Distribution Agreement and the Fund's then current Prospectus; (ii) use
its best efforts to conform with the requirements of all federal and state
laws relating to the sale of the Shares; (iii) adopt and follow procedures as
may be necessary to comply with the requirements of the National Association
of Securities Dealers, Inc. and any other applicable self-regulatory
organization; (iv) perform its duties under the supervision of and in
accordance with the directives of the Fund's Board of Directors and the Fund's
Articles of Incorporation and By-Laws; and (v) provide the Fund's Board of
Directors with a written report of the amounts expended in connection with the
Distribution Agreement. ICC Distributors shall devote reasonable time and
effort to effect sales of Shares but shall not be obligated to sell any
specific number of Shares. The services of ICC Distributors are not exclusive
and ICC Distributors shall not be liable to the Fund or its shareholders for
any error of judgment or mistake of law, for any losses arising out of any
investment, or for any action or inaction of ICC Distributors in the absence
of bad faith, willful misfeasance, or gross negligence in the performance of
ICC Distributors' duties or obligations under the Distribution Agreement or by
reason of ICC Distributors' reckless disregard of its duties and obligations
under the Distribution Agreement. The Distribution
-13-
<PAGE>
Agreement further provides that the Fund and ICC Distributors will mutually
indemnify each other for losses relating to disclosures in the Fund's
registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the Fund (as defined under "Capital Stock") or upon 60
days' written notice by the Distributor and shall automatically terminate in
the event of an assignment. The Distribution Agreement has an initial term of
one year from the date of effectiveness. It shall continue in effect
thereafter with respect to the Fund provided that it is approved at least
annually by (i) a vote of a majority of the outstanding voting securities of
the Fund or (ii) a vote of a majority of the Fund's Board of Directors
including a majority of the Independent Directors and so long as the Fund's
Plan of Distribution is approved at least annually by the Independent
Directors in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement, including the form of Sub-Distribution
Agreement, was initially approved by the Board of Directors, including a
majority of the Independent Directors, on August 4, 1997.
ICC Distributors 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. Any Sub-Distribution Agreement may be terminated at any
time, without penalty in the same manner as the Distribution Agreement and will
automatically terminate in the event of an assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such BT Alex. Brown and certain banks, to
act as Shareholder Servicing Agents, pursuant to which ICC Distributors will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. The Fund may also enter into
Shareholder Servicing Agreements pursuant to which the Advisor or its affiliates
will provide compensation out of its own resources for ongoing shareholder
services. Although banking laws and regulations prohibit banks from distributing
shares of open-end investment companies such as the Fund, according to
interpretations by various bank regulatory authorities, financial institutions
are not prohibited from acting in other capacities for investment companies,
such as the shareholder servicing capacities described above. Should future
legislative, judicial or administrative action prohibit or restrict the
activities of the Shareholder Servicing Agents in connection with the
Shareholder Servicing Agreements, the Fund may be required to alter materially
or discontinue its arrangements with the Shareholder Servicing Agents. Any
Shareholder Servicing Agreement may be terminated at any time, without penalty,
upon ten days' notice and will terminate automatically in the event of an
assignment.
As compensation for providing distribution services for the Shares as
described above, ICC Distributors receives an annual fee, paid monthly, equal
to 0.25% of the average daily net assets of the Class A Shares. ICC
Distributors expects to allocate up to all of its fee to Participating Dealers
and Shareholder Servicing Agents. In return for such fees, ICC Distributors
pays 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.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
-14-
<PAGE>
- ------------------------------------------------------------------------------
Fiscal Year Ended October 31,
---------------------------------------------------
Class 1997 1996 1995
- ------------------------------------------------------------------------------
Class A 12b-1 Fee $ 36,065(1) $ 32,891(2) $ 32,947(2)
- ------------------------------------------------------------------------------
- ------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $29,898 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $6,167.
(2) Fees received by Alex. Brown, the Fund's distributor for the fiscal
years ended October 31, 1996 and October 31, 1995.
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 ICC
Distributors for distribution and other shareholder servicing assistance is an
amount calculated on an average net asset basis and paid monthly, equal to
0.25% of the Shares' average daily net assets, unless and until a change in
payment is authorized and approved by the Board of Directors. ICC Distributors
is authorized to make payments out of its fee to Participating Dealers and
Shareholder Servicing Agents. Payments to Participating Dealers and
Shareholder Servicing Agents may not exceed fees payable to ICC Distributors
under the Plan. The Plan was most recently approved by the Fund's Board of
Directors, including a majority of the Independent Directors, on September 16,
1997. 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 Independent Directors, by votes cast in person at a meeting
called for such purpose.
In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed
only if the Directors make a similar determination in each subsequent year.
The Plan may not be amended to increase materially the fee to be paid pursuant
to the Distribution Agreement without the approval of the shareholders of the
Fund. The Plan may be terminated at any time upon 60 days' notice, without
penalty, by a vote of a majority of the Fund's Independent Directors or by a
vote of a majority of the Fund's outstanding Shares (as defined under "Capital
Shares").
During the continuance of the Plan, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plan to ICC Distributors pursuant to the
Distribution Agreement, 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 Independent Directors shall
be committed to the discretion of the Independent Directors then in office.
The Fund's distributor received commissions on the sale of Class A
Shares (of which only a portion was retained) in the following amounts:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $10,338(1) $9,938(2) $11,908(3) $11,878(3) $41,462(3) $27,986(3)
Commissions
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- 15 -
<PAGE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August
31, 1997, received $10,234 and ICC Distributors, the Fund's
distributor effective August 31, 1997 received $104.
(2) Of commissions received, Alex. Brown retained $9,938 and ICC
Distributors retained $0, respectively.
(3) By Alex. Brown, the Fund's distributor for the fiscal years ended
October 31, 1996 and October 31, 1995.
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 Independent Directors and independent members of
any advisory board or committee; all expenses incident to the payment of any
dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Independent Directors, and independent accountants, in connection with any
matter relating to the Fund; membership dues of industry associations;
interest payable on Fund borrowings; postage; insurance premiums on property
or personnel (including officers and Directors) of the Fund which inure to its
benefit; extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification related thereto);
and all other charges and costs of the Fund's operations unless otherwise
explicitly assumed by ICC or ICC Distributors.
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, the Advisors or their affiliates or ICC
Distributors.
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 the
Advisors or their affiliates in any transaction in which the Advisors or their
affiliates act as a principal.
If the Advisors or their affiliates are participating in an
underwriting or selling group, the Fund may not buy portfolio securities from
the group except in accordance with rules of the SEC. The Fund believes that
the limitation will not affect its ability to carry out its present investment
objective.
- 16 -
<PAGE>
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 the Advisors or their affiliates
higher commissions than another broker might have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation
of orders among broker-dealers and the commission rates paid by the Fund will
be reviewed periodically by the Board.
ICC directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
---------------------------------------
Fiscal Year Ended October 31,
---------------------------------------
1997 1996
- ------------------------------------------------------------------------------
Transactions Directed $6,272,458 $ 3,779,330
- ------------------------------------------------------------------------------
Commissions Paid $ 16,973 $ 10,872
- ------------------------------------------------------------------------------
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through the Advisors or their affiliates pursuant to certain policies and
procedures incorporating the standards of Rule 17e-1 of the SEC under the
Investment Company Act which requires that the commissions paid the Advisor or
its affiliates 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. For
the period from September 1 through December 31, 1997 the Fund did not pay any
brokerage commissions to BT Alex. Brown or its affiliates. For the period from
January 1, 1997 through August 31, 1997 and for the fiscal years ended October
31, 1996 and October 31, 1995, the Fund paid no brokerage commissions to Alex.
Brown.
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
- 17 -
<PAGE>
laws and regulations, in order to obtain the best net price and most favorable
execution. Such simultaneous transactions, however, could adversely affect the
ability of the Fund to obtain or dispose of the full amount of a security
which it seeks to purchase or sell and may favorably or unfavorably affect the
price received on the purchase or sale of portfolio securities.
9. CAPITAL SHARES
Under the Fund's Articles of Incorporation, the Fund has 10 million
authorized Shares of common stock, par value of $.001 per share. The Board of
Directors may increase or decrease the number of authorized Shares without
shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series or separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated two classes of shares: Flag Investors International Fund Class
A Shares (formerly known as the Flag Investors International Fund Shares) and
Flag Investors International Fund Class B Shares. The Class B Shares are not
currently being offered. Shares of the Fund, regardless of series or class,
would have equal rights with respect to voting, except that with respect to
any matter affecting the rights of the holders of a particular series or
class, the holders of each series or class, would vote separately. In general,
each such series would be managed separately and shareholders of each series
would have an undivided interest in the net assets of that series. For tax
purposes, the series would be treated as separate entities. Generally, each
class of Shares would be identical to every other class in a particular series
and expenses of the Fund (other than 12b-1 and any applicable service fees)
are prorated between all classes of a series based upon the relative net
assets of each class. Any matters affecting any class exclusively would be
voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The Fund's issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the 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") 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.
- 18 -
<PAGE>
Investment Company Capital Corp. 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, 1997, such fees totaled $18,380.
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 Daily 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, 1997, ICC received
accounting fees of $28,220.
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP. Deloitte & Touche LLP has offices at University Square, 117 Campus
Drive, Princeton, New Jersey 08540.
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
- 19 -
<PAGE>
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.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 investment for the
periods ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended
October 31, 1997 October 31, 1997 October 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Ending Annual Ending Annual Ending Annual
Class Redeemable Total Redeemable Total Redeemable Total
Value Return Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
*November 18, 1986 $1,121.95 12.19% $1,865.93 13.29% $1,981.81 7.08%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
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.
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 year 1997 was 21% and in fiscal year 1996 was 13%.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- 20 -
<PAGE>
To Fund management's knowledge, the following persons owned of record
or beneficially 5% or more of the Fund's outstanding Shares, as of February 2,
1998.
Name and Address Percentage of Ownership
- ---------------- -----------------------
Mercantile Safe Deposit & Trust Company 6.55%
Riggs Councilman Michaels & Downes
Thrift & PLS PL
Attn: David Santelle
2 Hopkins Plaza
Baltimore, MD 21201
BT Alex. Brown Incorporated 5.03%
FBO 201-70188-19
P.O. Box 1346
Baltimore, MD 21203
The Directors and executive officers as a group owned less than 1% of
the Fund's total outstanding Shares, as of February 2, 1998.
15. FINANCIAL STATEMENTS
See next page.
- 21 -
<PAGE>
Alex. Brown Flag Investors International Fund
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS OCTOBER 31, 1997
No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- 97.1%
AUSTRALIA -- 5.3%
100,000 Foster's Brewing Group $ 189,081 1.4%
26,634 Lend Lease Corp., Ltd. 543,140 3.9
--------- ----
732,221 5.3
CANADA -- 1.4%
3,000 Magna International Inc. - Class A 197,625 1.4
--------- ----
FINLAND -- 3.8%
6,000 Oy Nokia AB - Series A ADR 529,500 3.8
--------- ----
FRANCE -- 6.6%
2,258 Elf Aquitaine SA* 278,785 2.0
4,356 Lafarge SA* 271,469 1.9
3,872 Lagardere Groupe 111,078 0.8
5,600 SCOR SA 264,361 1.9
--------- ----
925,693 6.6
GERMANY -- 6.4%
5,000 Deutsche Bank AG 329,591 2.4
3,600 Deutsche Telecom AG 67,296 0.5
4,000 Hoechst AG 153,365 1.1
6,000 Veba AG 336,825 2.4
--------- ----
887,077 6.4
ITALY -- 7.8%
9,631 Assicurazioni Generali* 215,001 1.6
22,152 Benetton Group SpA 322,057 2.3
18,800 Instituto Bancario SpA 142,428 1.0
66,665 Telecom Italia SpA 417,172 2.9
--------- ----
1,096,658 7.8
JAPAN -- 25.1%
6,600 Acom Co., Ltd. 362,306 2.6
5,000 Amway Japan Ltd. 131,415 0.9
2,000 Aoyama Trading Co., Ltd. 53,730 0.4
10,000 Canon, Inc. 242,868 1.7
50 East Japan Railway Co. 243,284 1.7
25,000 Hitachi Ltd. 192,340 1.4
12,000 Honda Motor Co. 404,225 2.9
- 22 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- continued
JAPAN -- CONCLUDED
20,000 Kao Corp. $ 279,464 2.0%
1,500 Kyocera Corp. ADR 174,938 1.3
2,000 Nintendo Corp. Ltd. 173,002 1.2
26,000 Nishimatsu Construction Co. 127,589 0.9
4,000 Rohm Company 395,908 2.8
25,000 Sekisui Chemicals Corp. 196,914 1.4
7,000 Sharp Corp. 54,437 0.4
20,000 Toda Construction Co. 100,973 0.7
28,000 Toshiba Corp. 126,923 0.9
10,000 Yamanouchi Pharmaceutical 246,195 1.9
---------- ----
3,506,511 25.1
MALAYSIA -- 1.1%
94,666 Malaysian International
Shipping Corp. Berhad `F' 158,295 1.1
---------- ----
MEXICO -- 2.2%
33,750 Cemex. S.A. de C.V. - Series `B'* 147,757 1.1
8,000 TV Azteca S.A. 153,000 1.1
---------- ----
300,757 2.2
NETHERLANDS -- 1.4%
9,456 ABN-AMRO Holding N.V. 189,917 1.4
---------- ----
NEW ZEALAND -- 0.5%
5,000 Tranz Rail Holdings ADR 67,500 0.5
---------- ----
NORWAY -- 3.3%
4,300 Kvaerner AS 220,536 1.6
4,300 Norsk Hydro 235,830 1.7
---------- ----
456,366 3.3
PORTUGAL -- 0.6%
5,000 Electricidade de Portugal 86,075 0.6
---------- ----
SINGAPORE -- 0.4%
10,000 Singapore Airlines Ltd. F 74,968 0.4
---------- ----
- 23 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED) OCTOBER 31, 1997
No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- concluded
SPAIN -- 5.4%
25,000 Dragados & Construcciones SA $ 506,003 3.6%
6,000 Repsol SA 251,115 1.8
---------- ----
757,118 5.4
SWEDEN -- 3.1%
11,000 Astra AB 170,054 1.2
5,000 SKF AB-- B Shares 115,946 0.8
6,000 Volvo AB-- B Shares 156,727 1.1
---------- ----
442,727 3.1
UNITED KINGDOM -- 22.7%
25,000 B.A.T. Industries PLC 219,137 1.6
16,149 The Boots Co. PLC 235,923 1.7
45,000 BTR PLC 153,145 1.1
25,000 Dalgety PLC 102,766 0.7
14,000 De La Rue PLC 99,861 0.7
43,750 Iceland Group PLC 87,906 0.6
84,000 Mirror Group Newspapers PLC 277,783 2.0
25,000 National Power PLC 207,416 1.5
25,000 Reed International PLC 245,718 1.8
10,000 RTZ Corp. PLC 129,599 0.9
22,967 Safeway PLC 149,786 1.1
55,100 Scottish Power PLC 410,093 2.9
40,000 Smith (WH) Group PLC - Class A 253,169 1.8
25,000 Tate & Lyle PLC 190,254 1.4
80,000 Tomkins PLC 408,218 2.9
---------- ----
3,170,774 22.7
Total Common Stock
(Cost $11,326,242) 13,579,782 97.1
---------- ----
- 24 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Value Percent of
Par (000) Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
PREFERRED STOCK -- 0.1%
HONG KONG -- 0.1%
$16 Dairy Farm International
Holdings Ltd., Cvt.
(Cost $16,000) $ 13,039 0.1%
----------- -----
TOTAL INVESTMENT IN SECURITIES
(Cost $11,342,242)** 13,592,821 97.2
OTHER ASSETS IN EXCESS OF LIABILITIES, NET 388,818 2.8
----------- -----
NET ASSETS $13,981,639 100.0%
=========== =====
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($13,981,639 / 854,564 shares outstanding) $16.36
======
MAXIMUM OFFERING PRICE PER SHARE
($16.36 / 0.955) $17.13
======
- ----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $11,550,031.
See Notes to Financial Statements.
- 25 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Dividends $ 398,934
Interest 22,372
Less:Foreign taxes withheld (45,153)
----------
Total income 376,153
----------
Expenses:
Investment advisory fee (Note 2) 105,195
Legal 43,115
Distribution fee (Note 2) 35,065
Audit 28,499
Accounting fee (Note 2) 28,220
Custodian fee 24,853
Transfer agent fee (Note 2) 18,380
Printing and postage 12,544
Registration fees 11,651
Miscellaneous 5,950
Directors' fees 657
----------
Total expenses 314,129
Less: Fees waived (Note 2) (103,734)
----------
Net expenses 210,395
----------
Net investment income 165,758
----------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 1,797,921
Net realized foreign exchange loss (67,080)
Change in unrealized appreciation or depreciation
of investments 348,203
Change in unrealized appreciation or depreciation on translation
of assets and liabilities, excluding investments, denominated in
foreign currencies (438)
----------
Net gain on investments 2,078,606
----------
Net increase in net assets resulting from operations $2,244,364
==========
See Notes to Financial Statements.
- 26 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 165,758 $ 250,800
Net realized gain from security transactions and
foreign exchange transactions 1,730,841 571,223
Change in unrealized appreciation or depreciation
of investments 348,203 656,848
Change in unrealized appreciation or depreciation
on translation of other assets and liabilities
denominated in foreign currencies (438) (3,773)
---------- ----------
Net increase in net assets resulting
from operations 2,244,364 1,475,098
---------- ----------
Dividends to Shareholders from:
Net investment income and short-term gains (165,758) (28,072)
Distributions in excess of net investment
income and short-term gains (94,471) --
---------- ----------
Total distributions (260,229) (28,072)
Capital Share Transactions (Note 3):
Proceeds from sale of 83,957 and
107,997 shares, respectively 1,258,732 1,494,406
Value of 15,155 and 1,596 shares issued in
reinvestment of dividends, respectively 223,079 22,601
Cost of 155,119 and 182,530 shares
repurchased, respectively (2,414,563) (2,516,921)
---------- ----------
Total decrease in net assets derived
from capital share transactions (932,752) (999,914)
---------- ----------
Total increase in net assets 1,051,383 447,112
Net Assets:
Beginning of year 12,930,256 12,483,144
----------- -----------
End of year $13,981,639 $12,930,256
=========== ===========
Undistributed net investment income $ 437 $ 625,259
=========== ===========
See Notes to Financial Statements.
- 27 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 14.20
-------
Income from Investment Operations:
Net investment income 0.11
Net realized and unrealized gain/(loss) on investments(1) 2.34
-------
Total from Investment Operations 2.45
Less Distributions:
Distributions from net investment income and short-term gains (0.18)
Distributions in excess of net investment income
and short-term gains (0.11)
-------
Total distributions (0.29)
-------
Net asset value at end of year $ 16.36
=======
Total Return(2) 17.48%
Ratios to Average Daily Net Assets:
Expenses(3) 1.50%
Net investment income(4) 1.18%
Supplemental Data:
Net assets at end of year (000) $13,982
Portfolio turnover rate 21%
Average commissions per share(5) $0.0405
- ----------
(1) The years ended October 31, 1997, 1996, 1995 and 1994 include net realized
currency gain/(loss). Realized currency gain/(loss) is included in net
investment income for the year ended October 31, 1993.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.24%, 2.30%, 2.17%, 1.97% and
2.13% for the years ended October 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.44%, 1.10%, 0.02%,
0.28% and 1.28% for the years ended October 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Disclosure of average commissions per share is effective beginning in fiscal
year 1996.
- 28 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 12.69 $ 13.97 $ 13.05 $ 9.11
------- ------- ------- ------
Income from Investment Operations:
Net investment income 0.26 0.09 0.18 0.49
Net realized and unrealized gain/(loss) on investments(1) 1.28 (1.37) 1.58 3.45
------- ------- ------- ------
Total from Investment Operations 1.54 (1.28) 1.76 3.94
Less Distributions:
Distributions from net investment income and short-term gains (0.03) -- (0.84) --
Distributions in excess of net investment income
and short-term gains -- -- -- --
------- ------- ------- -------
Total distributions (0.03) -- (0.84) --
------- ------- ------- -------
Net asset value at end of year $ 14.20 $ 12.69 $ 13.97 $ 13.05
======= ======= ======= =======
Total Return(2) 12.13% (9.16)% 13.98% 43.25%
Ratios to Average Daily Net Assets:
Expenses(3) 1.50% 1.50% 1.50% 1.50%
Net investment income(4) 1.91% 0.68% 0.75% 1.91%
Supplemental Data:
Net assets at end of year (000) $12,930 $12,483 $15,487 $15,008
Portfolio turnover rate 13% 35% 43% 48%
Average commissions per share(5) $0.0201 -- -- --
</TABLE>
See Notes to Financial Statements.
- 29 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Significant Accounting Policies
Flag Investors International Fund, Inc. (the "Fund"), which was organized
as a Massachusetts business trust September 3, 1986 and reorganized as a
Maryland Corporation on August 16, 1993, commenced operations November 18, 1986.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end investment management company. Its objective is to seek
long-term growth of capital primarily through investment in a diversified
portfolio of marketable equity securities of issuers located outside of the
United States.
The Fund consists of one share class, Class A Shares, which is subject to a
4.50% maximum front-end sales charge and a 0.25% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price
reported for the day. When the security is listed on more than one
exchange, the Fund uses the last price on the exchange where the
security is primarily traded. If there are no sales or the security is
not traded on a listed exchange, the Fund values the security at the
last bid price in the over-the-counter market. When a market quotation
is unavailable, the Investment Advisor determines a fair value using
procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less
at amortized cost.
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
- 30 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 1--concluded
C. FOREIGN CURRENCY TRANSLATION--The Fund's books and records are
maintained in U.S. dollars. Transactions denominated in foreign
currencies are recorded in the Fund's records at the effective
exchange rate 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 that are a result
of changes in the exchange rate during the reporting period or upon
settlement of the foreign currency transactions are reported in
realized and unrealized gain/(loss) on investments for the current
period.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. These contracts are not reflected in the Fund's financial
statements. However, the net income or loss from these contracts is
recorded from the contract's inception date. Premiums or discounts are
amortized over the life of the contracts.
D. FEDERAL INCOME TAXES--The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long
as it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net
realized capital gains, it will be exempt from most, if not all,
federal income and excise taxes. As a result, the Fund has made no
provisions for federal income taxes.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
- 31 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, is the Fund's investment advisor and The Glenmede
Trust Company ("Glenmede") is the Fund's subadvisor. As compensation for
advisory services, the Fund pays ICC an annual fee based on the Fund's average
daily net assets. This fee is calculated daily and paid monthly at the annual
rate of 0.75%. As compensation for subadvisory services, ICC pays Glenmede an
annual fee based on the Fund's average daily net assets. This fee is calculated
monthly and paid quarterly at the annual rate of 0.55%.
ICC has agreed to waive up to all of its fees if necessary so that the
Fund's total operating expenses are no more than 1.50% of the Fund's average
daily net assets. For the year ended October 31, 1997, ICC waived fees of
$103,734. ICC paid Glenmede $77,150 for subadvisory services for the year ended
October 31, 1997.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or subadvisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $28,220 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $18,380 for
transfer agent services for the year ended October 31, 1997.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), a member of the Forum Financial Group
of companies, an annual fee that is calculated daily and paid monthly at an
annual rate equal to 0.25% of the Fund's average daily net assets. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated served as the Fund's
distributor for the same compensation and on substantially the same terms as ICC
Distributors. The Fund paid $35,065 for distribution services for the year ended
October 31, 1997.
- 32 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 2--concluded
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1997 was $705, and the accrued liability was $2,011.
NOTE 3--CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to 10 million shares of $.001 par value
capital stock.
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $2,820,683 and sales of investment securities
aggregated $4,153,426 for the year ended October 31, 1997.
On October 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $3,044,446 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $1,001,656.
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, permanent book/tax differences related
to foreign exchange losses of $530,352 have been reclassified from the
accumulated net realized loss from security and foreign exchange transactions to
undistributed net investment income. These reclassifications have no effect on
net assets or net asset values per share.
On October 31, 1997, there was a tax capital loss carryforward of
approximately $2,588,000, of which $1,999,000 expires in 2000 and $589,000 in
2001. This carryforward will be used to offset future net capital gains.
- 33 -
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 6--Net Assets
On October 31, 1997, net assets consisted of:
Paid-in capital $14,321,020
Undistributed net investment income 437
Accumulated net realized loss from security and
foreign exchange transactions (2,591,157)
Unrealized appreciation of investments 2,250,579
Unrealized translation gain 760
-----------
$13,981,639
===========
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, 1997.
Total Foreign
Record Payable Ordinary Taxes Paid Long-Term
Date Date Income or Withheld Capital Gains
---- ---- ------ ----------- -------------
12/20/96 12/30/96 $0.29 $0.05 None
All of the foreign taxes paid or withheld represent taxes incurred by the
Fund on dividends received by the Fund from foreign sources.
- 34 -
<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, 1997, 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, 1997 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, 1997, 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
Princeton, New Jersey
November 21, 1997
- 35 -
