<PAGE>
Supplement dated October 11, 1999
to the Prospectus dated March 1, 1999, as supplemented
through March 31, 1999
of Flag Investors International Fund, Inc.
The Prospectus dated March 1, 1999, as supplemented through March 31,
1999 of Flag Investors International Fund, Inc. (the "Fund") is hereby amended
and supplemented by the following:
At a Special Meeting of Shareholders (the "Special Meeting") held on
October 7, 1999, shareholders approved the reorganization of the Fund's
structure into a master-feeder structure under which the Fund would invest all
of its assets in the International Equity Portfolio (the "master fund").
This reorganization is expected to occur on or about January 15, 2000.
When the reorganization occurs, the investment advisory services will be
provided to the Fund at the master fund level. The effect of the reorganization
is that shareholders of the Fund will have their investments managed by Bankers
Trust, the investment advisor of the master fund, rather than Investment Company
Capital Corp. ("ICC") and The Glenmede Trust Company ("Glenmede").
Additionally, the fourth paragraph of the section "Investment Advisor
and Sub-Advisor" in the prospectus is amended and supplemented as follows:
Prior to June 4, 1999, the Advisor was an indirect subsidiary of
Bankers Trust Corporation. On June 4, 1999, Bankers Trust Corporation merged
with a subsidiary of Deutsche Bank A.G. ("Deutsche Bank"). Deutsche Bank is a
major global banking institution that is engaged in a wide range of financial
services, including investment management, mutual funds, retail and commercial
banking, investment banking and insurance.
A Special Meeting was held on October 7, 1999, at which time
shareholders voted to approve a new investment advisory agreement (the "Advisory
Agreement") with ICC and a new investment sub-advisory agreement (the
"Sub-Advisory Agreement") with Glenmede. Approval of the Investment Advisory and
Sub-Advisory Agreements was sought because Deutsche Bank indirectly became ICC's
parent company and, therefore, controls its operations as investment advisor.
The services provided to the Fund under the Advisory Agreement and Sub-Advisory
Agreement are the same as those provided under the previous Advisory Agreement
with ICC and the Sub-Advisory Agreement with Glenmede. These Agreements will
remain in effect until the date of the reorganization discussed previously.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
SUPPINTL (10/99)
<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 SECURITIES
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, 1999,
as supplemented through October 11, 1999
Relating to the Prospectus Dated: March 1, 1999,
as supplemented through October 11, 1999
<PAGE>
TABLE OF CONTENTS
Page
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1. GENERAL INFORMATION AND HISTORY...........................................1
2. INVESTMENT OBJECTIVE AND POLICIES.........................................1
3. VALUATION OF SHARES AND REDEMPTION........................................4
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS......................5
5. MANAGEMENT OF THE FUND....................................................9
6. INVESTMENT ADVISORY AND OTHER SERVICES...................................14
7. DISTRIBUTION OF FUND SHARES..............................................15
8. BROKERAGE................................................................18
9. CAPITAL STOCK............................................................20
10. SEMI-ANNUAL REPORTS......................................................21
11. CUSTODIAN, ACCOUNTING SERVICES AND TRANSFER AGENT........................21
12. INDEPENDENT AUDITORS.....................................................22
13. LEGAL MATTERS............................................................22
14. PERFORMANCE INFORMATION..................................................22
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......................23
16. FINANCIAL STATEMENTS.....................................................24
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors International Fund, Inc. (the "Fund") is an open-end
diversified management investment company. Under the rules and regulations of
the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The 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 & Sons Incorporated (predecessor to BT Alex. Brown Incorporated),
Alex. Brown & Sons 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
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. 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 in equity securities of
companies located outside the United States. Equity securities consist not only
of common stock but of 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
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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.")
Any assets not invested in equity securities may be invested in
securities issued or guaranteed by the United States government or any of its
agencies or instrumentalities; shares of open- or closed-end investment
companies that invest exclusively in such securities; fixed income securities
issued by U.S. or foreign corporations, or by foreign governments, that are
determined by the Advisors to be of high quality; U.S. and foreign short-term
money market instruments (consisting of government obligations; time deposits,
bankers acceptances, and certificates of deposit of creditworthy banks;
commercial paper and short-term corporate debt securities, which are rated in
the top two categories published by Moody's Investors Service, Inc. or by
Standard & Poor's Ratings Group or, if unrated, are of comparable quality as
determined by the Advisors under guidelines established by the Fund's Board of
Directors; and repurchase agreements with respect thereto). Under normal
circumstances, no more than 35% of the Fund's assets may be invested in fixed
income securities and money market instruments. For defensive purposes, however,
up to 100% of such assets may be invested in money market instruments.
The Fund may also enter into forward currency exchange contracts in
order to hedge against uncertainty in the level of future foreign exchange rates
in the purchase and sale of investment securities, but it may not enter into
such contracts for speculative purposes. The Fund will use these instruments 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.
Foreign stock markets are generally not as developed or efficient as
those in the United States. In most 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.
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<PAGE>
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 actions of the Fund in some
foreign countries
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal limitations.
The investment restrictions recited below are matters of fundamental policy and
may not be changed without the affirmative vote of a majority of the Fund's
outstanding Shares. The vote of a majority of the outstanding Shares of the Fund
means the lesser of: (i) 67% or more of the Shares present at a shareholder
meeting at which the holders of more than 50% of the Shares are present or
represented or (ii) more than 50% of the outstanding Shares of the Fund. The
percentage limitations contained in these restrictions apply at the time of
purchase of securities. The Fund will not:
1. Invest more than 5% of its total assets in the securities of any
single issuer;
2. Invest in the securities of any single issuer if, as a result, the
Fund would hold more than 10% of the outstanding voting securities of such
issuer;
3. Borrow money except as a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 10% of the value of the total
assets of the Fund at the time of such borrowing;
4. 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);
5. Invest in real estate or mortgages on real estate;
6. Purchase or sell commodities or commodities contracts, provided that
the Fund may invest in financial futures and options on such futures;
7. 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;
8. Issue senior securities;
9. Make loans except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies and may
loan portfolio securities and enter into repurchase agreements;
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<PAGE>
The following investment restrictions 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.
2. Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal and state securities laws).
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 (or the days on which they are observed): New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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 third parties 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
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<PAGE>
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. If Shares are redeemed in kind, the redeeming
shareholder, will incur brokerage costs in later converting the assets into
cash. The method of valuing portfolio securities is described under "Valuation
of Shares", and such valuation will be made as of the same time the redemption
price is determined. The Fund 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 is only a summary of certain additional federal income
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.
The following general 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.
Qualification as Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a)derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and
(b)diversify its holdings so that, at the end of each fiscal quarter of the
Fund's taxable year, (i)at least 50% of the market value of the Fund's total
assets is represented by cash and cash items, United States Government
securities, securities of other RICs, and other securities, with such other
securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
that the Fund controls and which are engaged in the same, similar, or related
trades or business. For purposes of the 90% of gross income requirement
described above, foreign currency gains that are not directly related to the
Fund's principal business of investing in stock or securities (or options or
futures with respect to stock or securities) may be excluded from income that
qualifies under the 90% requirement.
In addition to the requirement described above, in order to qualify as
a RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net long-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
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<PAGE>
If the Fund fails to qualify for any taxable year as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax 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. In this event, such distributions generally will be eligible for the
dividends-received deduction.
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.
Some of the forward foreign currency exchange contracts entered into by
the Fund may be treated 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.
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.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount 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
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<PAGE>
securities, only a small portion, if any, of the Fund's distributions will
qualify for the dividends-received deduction.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%, whether
the distribution was paid in cash or reinvested in Shares. Shareholders will be
advised annually as to the U.S. federal income tax status of distributions made
during the year.
Conversely, if any such gains are retained, the Fund will pay federal
income tax thereon, and if the Fund makes an election, the shareholders will
include such gains in their income, will increase their basis in the Fund by the
difference between the amount of such includable gains and the tax deemed paid
by such shareholder and will be able to claim their share of the tax paid by the
Fund as a refundable credit.
Ordinarily, investors 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.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors 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 the Fund fails to qualify as a regulated investment company for any
taxable year, all of its taxable income will be subject to tax at regular
corporate income tax 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 be eligible for the dividends-received
deduction for corporate shareholders.
In certain cases, the Fund will be required to withhold and remit to
the United States Treasury 31% of distributions paid (or deemed to be paid) to
any shareholder who (1) has failed to provide a correct tax identification
number, (2) is subject to backup withholding by the Internal Revenue Service for
failure to report the receipt of interest or dividend income properly, or (3)
has failed to certify to the Fund that he is not subject to backup withholding.
Miscellaneous Considerations
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most,
its net capital gains and pay tax thereon.
Generally, any 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
twelve months, and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a rate of 20% and short-term capital gains
are
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<PAGE>
currently taxed at ordinary income tax rates. However, 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 that 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 because the
amount of the Fund's assets to be invested within various countries is not
known.
If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of the stock or securities of foreign corporations,
the Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign income taxes paid by the Fund (the "Foreign Tax Election"). Pursuant to
the Foreign Tax Election, shareholders would be required to (i) 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 deduct their pro-rata
share of foreign taxes in computing their taxable income, or 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, a foreign corporation,
or a 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 plus the excess, if any, of net short-term capital gains over
net long-term capital losses 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 of the
Fund, distributions of net long-term capital gains, and amounts retained by the
Fund that 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 from the
Fund of any gains realized upon the sale of Shares of the Fund, will be subject
to U.S. federal income tax at the rates applicable to U.S. citizens or domestic
corporations.
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<PAGE>
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.
State and Local Tax Considerations
Rules of U.S. state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other U.S. state
and local tax rules regarding an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The overall business and 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 and
transfer agent.
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)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust
Company (formerly, Alex. Brown Capital Advisory & Trust Company);
Director, Investment Company Capital Corp. (registered investment
advisor) and Virginia Hot Springs Inc. (property management). Formerly,
Managing Director and Vice Chairman, Alex. Brown Incorporated (now BT
Alex. Brown Incorporated).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company, Hollinger International, Inc., Homestake Mining, HCL
Technologies and Anchor Technologies, Director, Mitchell Hutchins
family of funds; and Member, Textron Corporation International Advisory
Council. Formerly, partner McKinsey & Company, 1991-1994; U.S. Chief
Negotiator in Strategic Arms Reduction Talks (START) with former Soviet
Union and U.S. Ambassador to the Federal Republic of Germany,
1985-1991.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, The Nevis Fund (registered
investment company) and Circon Corp. (medical instruments). Formerly,
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now BT
Alex. Brown Incorporated), 1985-1987; General Partner, Alex. Brown &
Sons Incorporated (now BT Alex. Brown Incorporated), 1976-1985.
-9-
<PAGE>
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 (banking and finance); 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)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director AMBAC
Treasurers Trust (registered investment company) and DP Mann Holdings
(insurance).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, The Wadsworth Group, First Fund Distributors, Inc. and
Guiness Flight Investments Funds, Inc.; Director, The Germany Fund,
Inc., The Central European Equity Fund, Inc.; and Vice President,
Professionally Managed Portfolios and Advisors Series Trust.
CARL W. VOGT, Esq., President (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);
Interim President of Williams College; Director, Yellow Corporation
(trucking) and American Science & Engineering (x-ray detection
equipment). Formerly, Chairman and Member, National Transportation
Safety Board; Director, National Railroad Passenger Corporation
(Amtrak); and Member, Aviation System Capacity Advisory Committee
(Federal Aviation Administration).
CHARLES A. RIZZO, Treasurer (8/5/57)
Vice President and Department Head, Deutsche Asset Management Americas,
since 1999; and Vice President and Department Head, BT Alex. Brown
Incorporated, 1998-1999. Formerly, Senior Manager,
PricewaterhouseCoopers LLP, 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, Deutsche Asset Management Americas, since 1999; and
Vice President, BT Alex. Brown Incorporated, 1997-1999. Formerly,
Senior Manager, PricewaterhouseCoopers LLP, 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas, since 1999. Principal, BT
Alex. Brown Incorporated, 1998-1999. Formerly, Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
- -------------------
* Mr. Semans is a director who is an "interested person," as defined in the
1940 Act.
-10-
<PAGE>
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 eight funds in the Flag Investors Funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of three other funds in the Fund
Complex. Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth serve as Directors
of each of the funds in the Fund Complex. Mr. Vogt serves as President of each
of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms. Olmert
serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, 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.
With the exception of the Fund's President, 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, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (an "Independent Director") and Mr.
Vogt, the Fund's President effective October 7, 1999, 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 each fund
in the Fund Complex for which he serves. In addition, the Chairmen of the Fund
Complex's Audit Committee and Executive Committee receive an aggregate annual
fee from the Fund Complex. Payment of such fees and expenses is allocated among
all such funds described above in proportion to their relative net assets. For
the fiscal year ended October 31, 1998, Independent Directors' fees attributable
to the assets of the Fund totaled approximately $369.
The following table shows aggregate compensation and retirement
benefits 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, 1998.
-11-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Pension or the Fund and Fund
Compensation Retirement Complex Payable to
From the Fund for the Benefits Accrued Directors for the Fiscal
Name of Person, Fiscal Year Ended as Part of Year Ended
Position October 31, 1998 Fund Expenses October 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Truman T. Semans(1) $0 $0 $0
Chairman
Richard T. Hale(1,2) $0 $0 $0
Director
James J. Cunnane(9) $69(3) (4) $39,000 for service on 13(5)
Director Boards in the Fund Complex
Joseph R. Hardiman(6) N/A N/A $9,750 for service on 9(7)
Boards in the Fund Complex
John F. Kroeger(8) $87(3) (4) $49,000 for service on 13(5)
Director Boards in the Fund Complex
Louis E. Levy $73(3) (4) $44,000 for service on 13(5)
Director Boards in the Fund Complex
Eugene J. McDonald $69(3) (4) $39,000 for service on 13(5)
Director Boards in the Fund Complex
Carl W. Vogt, Esq. $71(3) (4) $39,000 for service on 11(5,8)
Director Boards in the Fund Complex
Richard R. Burt(10) N/A N/A N/A
Director
Robert H. Wadsworth(10) N/A N/A N/A
Director
</TABLE>
- ---------------------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Resigned effective November 26, 1998.
(3) Of the amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald and
Vogt nothing was deferred pursuant to the Fund's deferred compensation
plan in the year ended October 31, 1998.
(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, 1998 was approximately $982.
(5) One of these funds ceased operations on July 29, 1998.
(6) Elected to the Fund's Board on January 22, 1999.
(7) Mr. Hardiman receives and Mr. Vogt received proportionately higher
compensation from each fund for which they served.
(8) Deceased November 26, 1998.
(9) Retired effective October 7, 1999.
(10) Elected to the Fund's board effective October 7, 1999.
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 the Participant 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 the Participant 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. The Fund has
two Participants, a Director who retired effective December 31, 1994 and another
Director, who retired effective December 31, 1996, each of whom has qualified
for the Retirement Plan by serving thirteen years and fourteen years,
respectively, as Directors in the Fund Complex and who will be paid a quarterly
fee of $4,875 by the Fund Complex for the rest of his life. 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, 1998 are as follows: for Mr. Levy, 4 years; for Mr. McDonald, 6
years; for Mr. Vogt, 3 years; and for Mr. Hardiman, 0 years.
-12-
<PAGE>
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- --------------------------------------------------------------------
<S> <C> <C>
Chairmen of Audit and Other Participants
Executive Committees ------------------
---------------------
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 50%
to 100% of his annual compensation pursuant to a Deferred Compensation Plan.
Messrs. Levy, McDonald and Vogt have each executed a Deferred Compensation
Agreement. Currently, the deferring Directors may select from among various Flag
Investors funds, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. and BT
International Equity Fund 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 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 all of the 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 that are part
of an automatic dividend reinvestment plan). The foregoing would apply 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 or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity 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 instituted by those entities so long as they contain similar
requirements and restrictions.
-13-
<PAGE>
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 October 7, 1999. ICC is an indirect subsidiary of
Deutsche Bank AG. ICC is also investment advisor to other Funds in the Flag
Investors family of funds and Deutsche Banc 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 materials, 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.
Under the Investment Advisory Agreement, ICC is responsible for
obtaining and evaluating economic, statistical and financial information to
formulate and implement investment policies for the Fund. ICC has delegated this
responsibility to Glenmede, provided that ICC continues to supervise the
performance of Glenmede and report thereon to the Fund's Board of Directors. Any
investment program undertaken by ICC or Glenmede will at all times be subject to
policies and control of the Fund's Board of Directors. ICC will provide the Fund
with office space for managing its affairs, with the services of required
executive personnel and with certain clerical and bookkeeping services and
facilities. These services are provided by ICC without reimbursement by the Fund
for any costs. The services of ICC and Glenmede to the Fund are not exclusive
and ICC and Glenmede are free to render similar services to others.
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.
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
-14-
<PAGE>
under "Capital Stock") and (b) by the affirmative vote of a majority of the
Independent Directors who have no direct or indirect financial interest in each
of such agreements by votes cast in person at a meeting called for such purpose.
Each of the Investment Advisory Agreement and Sub-Advisory Agreement was most
recently approved in the foregoing manner by the Fund's Board of Directors on
September 29, 1998. 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 Stock"). 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: 1998 1997 1996
- --------------------------------------------------------------------------------
ICC $0(1) $ 1,461(2) $0(3)
- --------------------------------------------------------------------------------
Glenmede $73,399 $77,150 $6,149(4)
- --------------------------------------------------------------------------------
- ----------------
(1) Net of fee waivers of $98,993. During this period, ICC also reimbursed
expenses of $73,256.
(2) Net of fee waivers of $103,734.
(3) Net of fee waivers of $98,672. During this period, ICC also reimbursed
expenses of $7,066.
(4) Net of fee waivers of $66,211.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
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 the exclusive distributor of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997.
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
-15-
<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 most recently approved by the Board
of Directors, including a majority of the Independent Directors, on September
27, 1999.
ICC Distributors and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which broker-dealers have
agreed to process investor purchase and redemption orders and 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, in the same manner as the Distribution Agreement and shall automatically
terminate in the event of an assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, including 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. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review the
Prospectus and this Statement of Additional Information in conjunction with such
institution's fee schedule. In addition, state securities laws on this issue may
differ from interpretations of federal law expressed herein, and banks and
financial institutions may be required to register as dealers pursuant to state
law.
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 sales 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:
-16-
<PAGE>
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
-----------------------------------------------
Fee
1998 1997 1996
- --------------------------------------------------------------------------------
Class A 12b-1 Fee $32,998(1) $ 35,065(2) $ 32,891(3)
- --------------------------------------------------------------------------------
- ------------
(1) Fees received by ICC Distributors, the Fund's distributor.
(2) 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.
(3) Fees received by Alex. Brown, the Fund's distributor.
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 29, 1998. 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 Stock").
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 broker-dealers pursuant to any 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.
-17-
<PAGE>
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 1998 1997 1996
--------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Class A $2,056(1) $0 $10,338(2) $9,938(3) $11,908(4) $11,878(5)
Commissions
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) By ICC Distributors, the Fund's distributor.
(2) 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.
(3) Of commissions received, Alex. Brown retained $9,938 and ICC Distributors
retained $0, respectively.
(4) By Alex. Brown, the Fund's distributor.
The Fund will pay all costs associated with its organization and
registration under the Securities Act and the Investment Company Act. 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
-18-
<PAGE>
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.
Glenmede's primary consideration in effecting securities transactions is
to obtain best price and execution of orders on an overall basis. As described
below, however, Glenmede may, in its discretion, effect agency transactions with
broker-dealers that furnish statistical, research or other information or
services that 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. In over-the-counter
transactions, Glenmede will not pay any commission or other remuneration for
research services. Therefore, it 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. The foregoing policy under which the Fund may pay
higher commissions to certain broker-dealers in the case of agency transactions,
does not apply to transactions effected on a principal basis. In addition,
consistent with NASD Rules, and subject to seeking the most favorable price and
execution available and such other policies as the Board may determine, Glenmede
may consider services in connection with the sale of shares as a factor in the
selection of broker-dealers to execute portfolio transactions for the Fund.
ICC directed transactions to broker-dealers and paid related commissions
because of research services in the following amounts:
------------------------------------------------
Fiscal Year Ended October 31,
------------------------------------------------
1998 1997
------------------------------------------------
Transactions Directed $9,557,179 $6,272,458
- --------------------------------------------------------------------------------
Commissions Paid $ 22,749 $ 16,973
- --------------------------------------------------------------------------------
-19-
<PAGE>
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through the Advisors or
their affiliates. At the time of such authorization, the Board adopted certain
policies and procedures incorporating the standards of Rule 17e-1 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 fiscal
year ended October 31, 1998 and the period from September 1, 1997 through
October 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 year ended October 31, 1996, the Fund paid no brokerage
commissions to Alex. Brown.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of October 31, 1998,
the Fund held a 5.25% repurchase agreement issued by Goldman Sachs & Co. valued
at $455,000. Goldman & Sachs & Co. is one of the Fund's "regular brokers or
dealers."
The Advisors manage other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by the Advisors. The Advisors may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution. Such simultaneous transactions, however,
could adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security that it seeks to purchase or sell.
9. CAPITAL STOCK
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. In the event separate series or classes are
established, all 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. 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, each series would be treated as
separate entities. Generally, each class of Shares issued by a particular series
would be identical to every other class 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.
-20-
<PAGE>
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
Bankers Trust Company ("Bankers Trust") 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's assets.
Bankers Trust 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. Bankers Trust receives
such compensation from the Fund for its services as Custodian as may be agreed
to from time to time by Bankers Trust and the Fund. For the period from June 16,
1998 through October 31, 1998, Bankers Trust was paid $8,008 as compensation for
providing custody services to the Fund. Investment Company Capital Corp., One
South Street, Baltimore, Maryland 21202, has been retained to act as transfer
and dividend disbursing agent. As compensation for providing these services, the
Fund pays ICC up to $15.12 per account per year, plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended October 31, 1998, such fees totaled $19,096.
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, 1998, ICC received
accounting fees of $27,558.
-21-
<PAGE>
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP whose report thereon appears elsewhere herein, and have been included
herein in reliance upon the report of such firm of accountants given on their
authority as experts in accounting and auditing. Deloitte & Touche LLP has
offices at University Square, 117 Campus Drive, Princeton, New Jersey 08540.
13. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
14. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain 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:
P(1+T)(n)= 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.
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, 1998 were as follows:
-22-
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended
October 31, 1998 October 31, 1998 October 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Average
Ending Ending Annual Ending Annual
Class Redeemable Total Redeemable Total Redeemable Total
Value Return Value Return Value Return
- -----------------------------------------------------------------------------------------------------------------------------
Class A
*November 18, 1986 $1,054 0.51% $1,370 6.51% $1,794 6.02%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
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 aggregate and average 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 does 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 1998
was 27% and in fiscal year 1997 was 21%.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons owned of record or
beneficially 5% or more of the Fund's outstanding Shares, as of December 1,
1998.
-23-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Name and Address Owned of Record Beneficially Owned Percentage Owned
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Timothy E. Toohig TR X X 5.17%
U/A 06/24/96
Fairfield Jesuit
Community Corp
c/o Fairfield University
St. Ignatius Hall
Fairfield, CT 06430
- ---------------------------------------------------------------------------------------------
BT Alex. Brown X X 5.87%
Incorporated
FBO 201-70188-19
P.O. Box 1346
Baltimore, MD 21203-
1346
- ---------------------------------------------------------------------------------------------
</TABLE>
The Directors and executive officers as a group (nine persons)
beneficially owned 1.17% of the Fund's total outstanding Shares, as of
November 30, 1998.
16. FINANCIAL STATEMENTS
See next page.
-24-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- 95.6%?
UNITED KINGDOM -- 21.4%
12,500 Allied Zurich PLC* $ 147,913 1.2%
9,300 BOC Group PLC 136,042 1.1
12,500 British American Tobacco* 111,615 0.9
15,000 British Petroleum Co 221,305 1.8
60,000 British Steel PLC 102,430 0.9
36,562 BTR PLC 63,795 0.5
25,000 Caradon PLC 51,885 0.4
14,000 De La Rue PLC 40,888 0.4
38,750 Iceland Group PLC 127,442 1.1
20,000 Johnson Matthey PLC 112,640 0.9
84,000 Mirror Group Newspapers PLC 204,560 1.7
10,000 Rio Tinto PLC 121,762 1.0
35,100 Scottish Power PLC 344,257 2.8
25,000 Tate & Lyle PLC 143,624 1.2
75,000 Tomkins PLC 345,828 2.8
36,000 WH Smith Class A 330,790 2.7
----------- -----
2,606,776 21.4
JAPAN -- 19.2%
6,600 Acom Co., Ltd 370,556 3.0
6,000 Aoyama Trading Co., Ltd. 148,771 1.2
5,000 Canon Inc. 95,084 0.8
10,000 Chugai Pharmaceutical Co. 91,419 0.8
50 East Japan Railway Co. 297,973 2.5
20,000 Fuji Heavy Industry 100,043 0.8
4,000 Fuji Photo Film - Ord 147,305 1.2
4,000 Honda Motor Co. 120,742 1.0
12,000 Kao Corp. 244,243 2.0
2,000 Nintendo Corp. Ltd. 170,073 1.4
2,000 Rohm Company 177,663 1.5
1,600 Sony Corp. 102,113 0.8
5,000 Takefuji Corp. 267,788 2.2
----------- -----
2,333,773 19.2
-25-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- continued=20
GERMANY -- 10.0%
5,500 Bayer AG $ 222,016 1.8%
3,000 Deutsche Bank AG 194,213 1.6
3,600 Deutsche Telekom AG 197,533 0.8
4,000 Hoechst AG 167,150 1.4
3,400 Siemens AG 206,846 1.7
6,000 Veba AG 329,826 2.7
----------- -----
1,217,584 10.0
FRANCE -- 9.1%
2,258 Elf Aquitaine 261,697 2.1
2,356 Lafarge SA 241,205 2.0
3,872 Lagardere Groupe 156,052 1.3
2,000 Pernod-Ricard 133,381 1.1
5,600 SCOR SA 321,586 2.6
----------- -----
1,113,921 9.1
SPAIN -- 6.8%
10,000 Dragados & Construcciones SA 298,258 2.4
6,000 Repsol SA 301,600 2.5
1,700 Telefonica de Espana ADR 232,794 1.9
----------- -----
832,652 6.8
ITALY -- 6.3%
9,631 Assicurazioni Generali 345,774 2.8
121,520 Bennetton Group SpA 204,020 1.7
30,665 Telecom Italia SpA 222,251 1.8
----------- -----
772,045 6.3
AUSTRALIA -- 5.0%
100,000 Fosters Brewing Group* 245,232 2.0
16,634 Lend Lease Corp., Ltd. 366,369 3.0
----------- -----
611,601 5.0
-26-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- concluded
FINLAND -- 3.1%
4,000 Nokia AB - Series A ADR $ 372,250 3.1%
----------- -----
NETHERLANDS -- 3.0%
4,900 Akzo Nobel 190,623 1.6
9,456 Algemene Bank Nederland 177,344 1.4
----------- -----
367,967 3.0
SWEDEN -- 3.0%
11,000 Astra AB 173,256 1.4
5,000 SKF AB - B Shares 57,538 0.5
6,000 Volvo AB - B 129,990 1.1
----------- -----
360,784 3.0
NORWAY -- 2.3%
4,300 Kvaerner AS 93,549 0.8
4,300 Norsk Hydro 188,274 1.5
----------- -----
281,823 2.3
BELGIUM -- 2.1%
700 Electrabel, SA* 257,970 2.1
----------- -----
DENMARK -- 1.6
2,500 Uni-Danmark A/S 190,779 1.6
----------- -----
NEW ZEALAND -- 1.2%
28,000 Telecom Corp New Zealand 114,793 1.0
5,000 Tranz Rail Holdings 126,562 0.2
----------- -----
141,355 1.2
PORTUGAL -- 1.0%
5,000 Electricidade 125,855 1.0
----------- -----
SINGAPORE -- 0.5%
10,000 Singapore Airlines Ltd. F 61,633 0.5
----------- -----
Total Common Stock
(Cost $9,497,855) 11,648,768 95.6
----------- -----
-27-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.7
$455 Goldman Sachs & Co., 5.25%
Dated 10/30/98 to be repurchased
on 11/02/98, collateralized by U.S.
Treasury Notes with a market value
of $464,102.76.
(Cost $455,000) $ 455,000 3.7%
----------- -----
Total Investments in Securities
(Cost $9,952,855)** 12,103,768 99.3
Other Assets in Excess of Liabilities 83,188 0.7
----------- -----
Net Assets $12,186,956 100.0%
=========== =====
Net Asset Value and Redemption Price Per Share
($12,186,956 / 719,333 shares outstanding) $16.94
======
Maximum Offering Price Per Share
($16.94 / 0.955) $17.74
======
- ----------
* Non-income producing security.
** Cost for federal tax purposes is $10,192,648.
See Notes to Financial Statements
-28-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998
Investment Income:
Dividends ........................................................ $ 294,725
Interest ......................................................... 20,698
Less: Foreign taxes withheld .................................. (33,349)
---------
Total income ............................................ 282,074
---------
Expenses:
Investment advisory fee .......................................... 98,993
Professional fee ................................................. 110,377
Distribution fee ................................................. 32,998
Accounting fee ................................................... 27,558
Printing and postage ............................................. 25,206
Registration fees ................................................ 24,658
Transfer agent fee ............................................... 19,096
Custodian fee .................................................... 19,091
Miscellaneous .................................................... 13,467
---------
TOTAL EXPENSES .......................................... 371,444
Less: Fees waived ................................................ (172,249)
---------
Net expenses ............................................ 199,195
---------
Net investment income ............................................ 82,879
---------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions ..................... 813,915
Net realized foreign exchange loss ............................... (61,533)
Change in unrealized appreciation/depreciation
of investments ................................................ (99,666)
Change in unrealized appreciation/depreciation on translation
of assets and liabilities, excluding investments denominated in
foreign currencies ............................................ 2,524
---------
Net gain on investments ................................. 655,240
---------
Net increase in net assets resulting from operations ................ $ 738,119
=========
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS INTERNATIONAL FUND
- ----------------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Years Ended October 31,
- ----------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ........................... $ 82,879 $ 165,758
Net realized gain from security transactions and
foreign exchange transactions ................ 752,382 1,730,841
Change in unrealized appreciation/depreciation
of investments ............................... (99,666) 348,203
Change in unrealized appreciation/depreciation
on translation of other assets and liabilities
denominated in foreign currencies ............ 2,524 (438)
------------ ------------
Net increase in net assets resulting
from operations .............................. 738,119 2,244,364
------------ ------------
Dividends to Shareholders from:
Net investment income and short-term gains ...... (82,879) (165,758)
Distributions in excess of net investment
income and short-term gains .................. (127,834) (94,471)
------------ ------------
Total distributions ............................. (210,713) (260,229)
Capital Share Transactions:
Proceeds from sale of 61,500 and
83,957 shares, respectively .................. 1,076,733 1,258,732
Value of 11,538 and 15,155 shares issued in
reinvestment of dividends, respectively ...... 182,302 223,079
Cost of 208,269 and 155,119 shares
repurchased, respectively .................... (3,581,124) (2,414,563)
------------ ------------
Total decrease in net assets derived
from capital share transactions .............. (2,322,089) (932,752)
------------ ------------
Total increase/(decrease) in net assets ......... (1,794,683) 1,051,383
Net Assets:
Beginning of year ............................... 13,981,639 12,930,256
------------ ------------
End of year ..................................... $ 12,186,956 $ 13,981,639
============ ============
Distributions in excess of net investment income ... $ (192,053) $ 437
============ ============
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the Year Ended
October 31,
- --------------------------------------------------------------------------------
<S> <C>
1998
Per Share Operating Performance:
Net asset value at beginning of year .................... $ 16.36
-------
Income from Investment Operations:
Net investment income ................................... 0.08
Net realized and unrealized gain/(loss) on investments(1) 0.76
-------
Total from Investment Operations ........................ 0.84
Less Distributions:
Distributions from net investment income
and short-term gains .................................... (0.10)
Distributions in excess of net investment income
and short-term gains .................................... (0.16)
-------
Total distributions ..................................... (0.26)
-------
Net asset value at end of year .......................... $ 16.94
=======
Total Return(2) ............................................ 5.25%
Ratios to Average Daily Net Assets:
Expenses(3) ............................................. 1.50%
Net investment income(4) ................................ 0.62%
Supplemental data:
Net assets at end of year (000) ......................... $12,187
Portfolio turnover rate ................................. 27%
</TABLE>
- ----------
(1) The years ended October 31, 1998, 1997, 1996, 1995 and 1994 include net
realized currency gain/(loss).
(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 2.78%, 2.24%, 2.30%, 2.17% and
1.97% for the years ended October 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been (0.67)%, 0.44%, 1.10%,
0.02% and 0.28% for the years ended October 31, 1998, 1997, 1996, 1995 and
1994, respectively.
-31-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996 1995 1994
Per Share Operating Performance:
Net asset value at beginning of year .................... $14.20 $ 12.69 $ 13.97 $ 13.05
------- ------- ------- -------
Income from Investment Operations:
Net investment income ................................... 0.11 0.26 0.09 0.18
Net realized and unrealized gain/(loss) on investments(1) 2.34 1.28 (1.37) 1.58
------- ------- ------- -------
Total from Investment Operations ........................ 2.45 1.54 (1.28) 1.76
Less Distributions:
Distributions from net investment income
and short-term gains .................................... (0.18) (0.03) -- (0.84)
Distributions in excess of net investment income
and short-term gains .................................... (0.11) -- -- --
------- ------- ------- -------
Total distributions ..................................... (0.29) (0.03) -- (0.84)
------- ------- ------- -------
Net asset value at end of year .......................... $16.36 $ 14.20 $ 12.69 $ 13.97
======= ======= ======= =======
Total Return(2) ............................................ 17.48% 12.13% (9.16)% 13.98%
Ratios to Average Daily Net Assets:
Expenses(3) ............................................. 1.50% 1.50% 1.50% 1.50%
Net investment income(4) ................................ 1.18% 1.91% 0.68% 0.75%
Supplemental data:
Net assets at end of year (000) ......................... $13,982 $12,930 $12,483 $15,487
Portfolio turnover rate ................................. 21% 13% 35% 43%
</TABLE>
Notes to Financial Statements
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<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors International Fund, Inc. (the "Fund"), which commenced
operations on November 18, 1986 is a Maryland Corporation. The Fund is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment 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 not readily available, 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.
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<PAGE>
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 gain or loss on 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.
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<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statemnents (continued)
Note 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust 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 and reimburse expenses 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, 1998, ICC
waived fees of $98,993 and reimbursed expenses of $73,256. At October 31, 1998,
the Fund was owed $34,417 from the advisor for waived advisory fees of $7,400
and reimbursed expenses of $27,017. ICC paid Glenmede $73,399 for subadvisory
services for the year ended October 31, 1998.
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 $27,558 for accounting services for the year ended
October 31, 1998. At October 31, 1998, accrued accounting services fees amounted
to $2,233.
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 $19,096 for
transfer agent services for the year ended October 31, 1998. At October 31,
1998, the Fund owed $3,865 in transfer agent fees.
Effective June 16, 1998, Bankers Trust Company became the Fund's custodian.
Prior to June 16, 1998, Mellon Trust served as the Fund's custodian. From June
16, 1998 to October 31, 1998, the Fund paid $8,008 in custody fees.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), 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. The Fund paid $32,998 for distribution services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $2,467 in distribution
fees.
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, 1998 was $982, and the accrued liability was $489.
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<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 9 million shares of $.001 par value
capital stock (8 million Flag Investors Class A and 1 million undesignated).
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $3,461,505 and sales of investment securities
aggregated $6,119,807 for the year ended October 31, 1998.
On October 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $3,134,217 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $983,304.
NOTE 5--Foreign Investment Risk
Foreign investments involve substantial and different risks than
investments in companies in the United States. In general, less information is
publicly available about foreign companies than is available about companies in
the United States. Most foreign companies are not subject to uniform audit and
financial reporting standards, practices and requirements comparable to those in
the United States.
Foreign stock markets are generally not as developed or efficient as those
in the United States. In most foreign markets volume and liquidity are less than
in the United States and, at times, volatility of price can be greater than in
the United States. Fixed commissions on foreign stock exchanges are generally
higher than the negotiated commissions on U.S. exchanges. There is generally
less government supervision and regulation of foreign stock exchanges, brokers
and companies than in the United States. The settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity.
Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries.
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<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 6--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 $64,656 have been reclassified from the
accumulated net realized loss from security and foreign exchange transactions to
distributions in excess of net investment income. These reclassifications have
no effect on net assets or net asset values per share.
On October 31, 1998, there was a tax capital loss carryforward of
approximately $1,774,000, of which $1,185,000 expires in 2000 and $589,000 in
2001. This carryforward will be used to offset future net capital gains.
NOTE 7--Net Assets
On October 31, 1998, net assets consisted of:
Paid-in capital ............................................ $11,998,931
Distribution in excess of net investment income ............ (192,053)
Accumulated net realized loss from security and
foreign exchange transactions ........................... (1,774,119)
Unrealized appreciation of investments ..................... 2,150,913
Unrealized translation gain ................................ 3,284
------------
$12,186,956
============
NOTE 8--Personal Income Tax Information for the Shareholder (Unaudited)
The following information summarizes all distributions paid by the
Fund
during the taxable period ended October 31, 1998.
Domestic Ordinary Income ................................... $ 28,367
Foreign Source Income ...................................... 182,346
--------
Total Ordinary Income ................................... 210,713
========
Long-Term Capital Gains .................................... --
Total Distributions ..................................... 210,713
========
Foreign Tax Paid or Withheld ............................... $ 45,153
========
The foreign taxes paid or withheld represent taxes incurred by the Fund on
interest and dividends received by the Fund from foreign sources. Foreign taxes
paid or withheld should be included in taxable income with an offsetting
deduction from gross income or as a credit for taxes paid to foreign
governments. You should consult your tax advisor regarding the appropriate
treatment of foreign taxes paid.
-37-
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Flag Investors International Fund, Inc.:
We have audited the accompanying statements of net assets of Flag Investors
International Fund, Inc. as of October 31, 1998, 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
the 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 as of
October 31, 1998 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
International Fund, Inc. as of October 31, 1998, 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 30, 1998
-38-
