<PAGE>
As Filed with the Securities and Exchange Commission on July 31, 2000
Registration Nos. 33-8479 / 811-4827
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 26 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 27 [X]
FLAG INVESTORS SERIES FUNDS, INC.
---------------------------------
(formerly, Flag Investors International Fund, Inc.)
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, MD 21202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 553-8080
Edward J. Veilleux Copy to: Richard W. Grant, Esq.
One South Street Morgan, Lewis & Bockius LLP
Baltimore, MD 21202 1701 Market Street
(Name and address of agent for service) Philadelphia, PA 19103
It is proposed that this filing will become effective (check appropriate box)
_X__ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)
____ 75 days after filing pursuant to paragraph (a)
____ on (date) pursuant to paragraph (a)(2) of Rule 485.
<PAGE>
[FLAG INVESTORS LOGO]
INTERNATIONAL EQUITY FUND
(Institutional Shares)
Prospectus - July 31, 2000
--------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks to achieve long-term capital appreciation
primarily through investment in stocks and other equity securities of companies
in developed countries outside of the United States.
The Fund invests substantially all of its assets in the International Equity
Portfolio (the "Portfolio"), a separate mutual fund managed by Bankers Trust
Company ("Bankers Trust" or the "Advisor").
The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Institutional
Shares (the "Institutional Shares") of the Fund. Institutional Shares may be
purchased only by eligible institutions, by certain qualified retirement plans,
or by investment advisory affiliates of DB Alex. Brown LLC or the Flag Investors
family of funds on behalf of their clients. (See "How to Buy Institutional
Shares.")
TABLE OF CONTENTS
Investment Summary.........................................
Fees and Expenses of the Institutional Shares..............
Investment Program.........................................
Prior Performance of a Similar Fund........................
The Fund's Net Asset Value.................................
How to Buy Institutional Shares............................
How to Redeem Institutional Shares.........................
Telephone Transactions.....................................
Dividends and Taxes........................................
Organizational Structure...................................
Investment Advisor.........................................
Administrator..............................................
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203
--------------------------------------------------------------------------------
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
INVESTMENT SUMMARY
Objective and Strategies
The Fund seeks to achieve long-term capital appreciation. The Fund
invests substantially all of its assets in the Portfolio, a separate mutual fund
with the same investment objective. The Fund, through the Portfolio, seeks to
achieve its objective by investing primarily in stocks and other equity
securities of companies in developed countries located outside of the United
States and may invest a portion of its assets in companies based in emerging
markets.
Risk Profile
The Fund may be suited for you if you are willing to accept the risks
of foreign investing in the hope of achieving long-term capital appreciation.
General Stock Risk. The value of an investment in the Fund will vary
from day to day based on changes in the prices of the securities that the Fund
holds. Those prices, in turn, reflect investor perceptions of the economy, the
markets, and the companies represented in the Fund's portfolio.
Style Risk. As with any investment strategy, the "growth at a
reasonable price" strategy used in managing the Fund will, at times, perform
better than or worse than other investment styles and the overall market. If the
Advisor overestimates the return potential of one or more common stocks, the
Fund may underperform the international equity markets.
Foreign Investing Risk. Foreign investing may entail different risks
than investing in the United States. The prices of foreign securities may be
affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies.
Foreign Currency Risk. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the U.S. dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
If you invest in the Fund, you could lose money. An investment in the
Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
Fund Performance
The following bar chart and table show the performance of the Class A
shares of the Fund, which are not offered in this Prospectus, both year by year
and as an average over different periods of time. The variability of
performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future. Had the Institutional Shares been offered
during the periods shown, the Institutional Shares would have had substantially
similar performance because these shares and the Class A shares would have been
invested in the same portfolio of securities. The performance for each of these
classes would have differed, however, to the extent that each class has
different expenses.
Class A Shares*
For years ended December 31,**
-19.97% 4.17% -10.31% 50.34% -7.40% 5.30% 15.09% 8.63% 13.93% 21.73%
--------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------------------
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown.
** The management of the Fund changed effective February 29, 2000. These
returns reflect the performance of the prior Fund management.
<PAGE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 18.65% (quarter ended 12/31/93) and the lowest return for a quarter
was (20.79)% (quarter ended 9/30/90).
Average Annual Total Return (for periods ended December 31, 1999)(1,2)
<TABLE>
<CAPTION>
Morgan Stanley Capital
International Europe,
Australasia, Far East
Class A Shares(3) (EAFE) Index(R)(4)
------------------------------ -----------------------
<S> <C> <C>
Past One Year ........... 16.25% 26.96%
Past Five Years ......... 11.76% 12.83%
Past Ten Years .......... 6.14% 7.01%
Since Inception ......... 8.61%(11/18/86) 8.52%(5)
</TABLE>
-----------
(1) The management of the Fund changed effective February 29, 2000. These
returns reflect the performance of the prior Fund management.
(2) The returns shown reflect the returns for the Class A shares of the Fund,
which are not offered in this Prospectus. Had the Institutional Shares of
the Fund been offered during the periods shown, the Institutional Shares
would have had substantially similar performance because these shares and
the Class A shares would have been invested in the same portfolio of
securities. The performance for each of these classes would have differed,
however, to the extent that each class has different expenses.
(3) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges, which
increased on January 18, 2000 from the prior rate of 4.50%.
(4) The Morgan Stanley Capital International EAFE Index is an unmanaged index
that is widely recognized as a benchmark of general international equity
performance. The index is a passive measure of international stock
performance. It does not factor in the costs of buying, selling, and
holding securities -- costs which are reflected in the Fund's results.
(5) For the period from 11/30/86 through 12/31/99.
<PAGE>
FEES AND EXPENSES OF THE INSTITUTIONAL SHARES
This table describes the fees and expenses that you may pay if you buy
and hold Institutional Shares.
<TABLE>
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases .................................... None
Maximum Deferred Sales Charge (Load)................................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......................... None
Redemption Fee ...................................................................... None
Exchange Fee......................................................................... None
Annual Fund Operating Expenses (1) (expenses that are deducted from Fund assets):
Management Fees...................................................................... 0.65%
Distribution and/or Service (12b-1) Fees............................................. None
Other Expenses....................................................................... 1.79%
----
Total Annual Fund Operating Expenses................................................. 2.44%
Less Fee Waivers and/or Expense Reimbursements ...................................... (1.19)%(2)
----
Net Expenses ........................................................................ 1.25%
====
</TABLE>
----------
(1) Information on the annual operating expenses reflects the expenses of
both the Fund and the Portfolio, the master fund in which the Fund
invests its assets. (A further discussion of the relationship between
the Fund and the Portfolio appears in the Organizational Structure
section of this Prospectus.)
(2) Bankers Trust Company, the Advisor to the Portfolio, and Investment
Company Capital Corp., the Fund's Administrator, have contractually
agreed to limit their fees and reimburse expenses to the extent
necessary so that the Fund's Total Annual Fund Operating Expenses do
not exceed 1.25% of the Institutional Shares' average daily net assets.
This agreement will continue until at least July 31, 2001 and may be
extended.
Example:*
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in Institutional Shares for
the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 year 3 years
------ -------
Institutional Shares $ 127** $ 647**
------------
* Reflects expenses of both the Fund and the Portfolio, the master fund
in which the Fund invests its assets.
** Based on Total Annual Fund Operating Expenses after fee waivers and
expense reimbursements for year one only.
<PAGE>
INVESTMENT PROGRAM
Investment Objective, Policies and Risk Considerations
The Fund, through its investment in the Portfolio, seeks to achieve
long-term capital appreciation primarily by investing, under normal
circumstances, at least 65% of its total assets in stocks and other securities
with equity characteristics of companies in developed countries outside of the
United States. The Fund invests for capital appreciation, not income. Any
dividend and interest income is incidental to the pursuit of its objective. The
investment objective of the Portfolio, unlike that of the Fund, is not a
fundamental policy and may be changed without shareholder approval. There can be
no guarantee that the Fund will achieve its goals.
The Advisor is responsible for managing the Portfolio's investments.
(Refer to the section on the Investment Advisor.) The Advisor employs a strategy
of growth at a reasonable price. The Advisor seeks to identify companies outside
the United States that combine strong potential for earnings growth with
reasonable investment value. Such companies typically exhibit increasing rates
of profitability and cash flow. Yet their share prices compare favorably to
other stocks in a given market and to their global peers. In evaluating stocks,
the Advisor considers factors such as sales, earnings, cash flow and enterprise
value (a company's market capitalization plus the value of its net debt). The
Advisor further considers the relationship between these and other quantitative
factors. Together, these indicators of growth and value may identify companies
with improving prospects before the market in general has taken notice.
The Fund invests almost all of its assets in companies that are based
in the developed foreign countries that make up the EAFE Index, plus Canada. The
Fund may also invest a portion of its assets in companies based in the emerging
markets of Latin America, the Middle East, Europe, Asia and Africa if the
Advisor believes that the return potential of those markets more than
compensates for the extra risks. While the Fund has invested in emerging markets
in the past, under normal market conditions, the Advisor does not consider this
a central element of the Fund's strategy. Typically, the Fund would not hold
more than 15% of net assets in emerging markets.
The Advisor subjects a stock to intensive review if (i) its rate of
price appreciation begins to trail that of its national stock index; (ii) the
financial analysts who follow the stock cut their estimates of the stock's
future earnings; or (iii) the stock's price approaches the downside target set
when the Advisor first bought the stock (or as modified to reflect changes in
market and economic conditions).
Company research lies at the heart of the investment process, as it
does with many stock mutual funds. The Advisor tracks several thousand companies
to arrive at the approximately 100 stocks the Fund normally holds. The companies
are selected by an extensive tracking system plus the input of experts from
various financial disciplines. The Advisor draws on the insight of experts from
a range of financial disciplines--regional stock-market specialists, global
industry specialists, economists and quantitative analysts. They challenge,
refine and amplify each other's ideas. Their close collaboration is a critical
element of the investment process.
<PAGE>
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign markets may have different risks than investing in
U.S. markets. An investment in a foreign market may be affected by developments,
including political developments, that are unique to that market. These
developments may not affect the U.S. economy or the prices of U.S. securities in
the same manner. Therefore, the prices of foreign common stocks may, at times,
move in a different direction than the prices of U.S. common stocks. Financial
reporting standards for companies based in foreign markets may differ from those
in the United States.
From time to time, foreign capital markets may exhibit more volatility
than those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks. On
the whole, foreign exchanges are smaller and less liquid than the U.S. market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the U.S.
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
To the extent that the Fund invests in emerging markets to enhance
overall returns, it may face higher political, information, and stock market
risks. In addition, profound social changes and business practices that depart
from norms in developed countries' economies have hindered the orderly growth of
emerging economies and their stock markets in the past. High levels of debt tend
to make emerging economies heavily reliant on foreign capital and vulnerable to
capital flight. For all these reasons, the Fund carefully limits and balances
its commitment to these markets.
Although the Fund generally invests in the shares of large,
well-established companies, it may occasionally take advantage of exceptional
opportunities presented by smaller companies. Such opportunities pose unique
risks, which the Advisor takes into account in considering an investment. Small
company stocks tend to experience steeper fluctuations in price than the stocks
of larger companies. A shortage of reliable information, the same information
gap that creates opportunity in small company investing, can also pose added
risk. Industry wide reversals have had a greater impact on small companies,
since they lack a large company's financial resources to deal with setbacks.
Small company managers typically have less experience coping with adversity or
capitalizing on opportunity than their counterparts at larger companies.
Finally, small company stocks are typically less liquid than large company
stocks.
<PAGE>
Although not one of its principal investment strategies, the Fund may
invest in futures contracts, options and options on futures contracts. These
investments, when made, are for hedging purposes. If the Fund invests in futures
contracts and options on futures contracts for non-hedging purposes, the margin
and premiums required to make those investments will not exceed 5% of the Fund's
net asset value after taking into account unrealized profits and losses on the
contracts. Futures contracts and options on futures contracts used for
non-hedging purposes involve greater risks than stock investments.
To reduce the Fund's risk under adverse market conditions, the Advisor
may make temporary defensive investments of up to 100% of the Fund's assets in
U.S. or foreign government money market instruments or other short-term bonds
that would not ordinarily be consistent with the Fund's objective. While engaged
in a temporary defensive strategy, the Fund may not achieve its investment
objective. The Advisor would follow such a strategy only if it believed the risk
of loss in pursuing the Fund's primary investment strategies outweighed the
opportunity for gain.
The Euro Conversion
On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to
the euro on the Fund, the risks may include:
o changes in the relative strength and value of the U.S. dollar or
other major currencies;
o adverse effects on the business or financial condition of European
issuers that the Fund holds in its portfolio; and
o unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by the Fund.
PRIOR PERFORMANCE OF A SIMILAR FUND
The information provided here presents the performance as of December
31, 1999, of the International Equity Fund - Institutional Class II, a Deutsche
Asset Management mutual fund (the "Deutsche Fund"), which has invested its
assets in the International Equity Portfolio since April 1, 1997. In managing
the Fund, the Advisor will employ substantially the same investment objective,
policies and strategies that the Advisor employed in managing the Deutsche Fund.
Management fees and expenses incurred in the operation of the Deutsche
Fund resulted in an overall expense ratio of 1.25%. The Institutional Shares of
the Fund also have an expense ratio of 1.25% after fee waivers.
<PAGE>
<TABLE>
<CAPTION>
Year Deutsche Fund Returns MSCI EAFE Index Returns
---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
1998 22.90% 20.00%
---------------------------------------- -------------------------------------- --------------------------------------
1999 32.58% 26.96%
---------------------------------------- -------------------------------------- --------------------------------------
Year Deutsche Fund Returns MSCI EAFE Index Returns
---------------------------------------- -------------------------------------- --------------------------------------
1 year............................. 32.58% 26.96%
Since inception (4/1/97)........... 25.50% 17.97%
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
The performance data represents the prior performance of the Deutsche
Fund, not the prior performance of the Fund, and should not be considered an
indication of future performance of the Fund.
THE FUND'S NET ASSET VALUE
The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. The net asset value per share
of the Fund is determined at the close of regular trading on the New York Stock
Exchange on each day the Exchange is open for business. While regular trading
ordinarily closes at 4:00 p.m. (Eastern Time), it could be earlier on a day
before a holiday. Contact the Transfer Agent to determine whether the Fund will
close early before a particular holiday. The net asset value per share is
calculated by subtracting the liabilities attributable to the Institutional
Shares from their proportionate share of the Fund's assets and dividing the
result by the number of outstanding Institutional Shares.
In valuing the Fund's assets, its investments are priced at their
market value. When price quotes for a particular security are not readily
available or may be unreliable, the security is priced at its "fair value" using
procedures approved by the Fund's Board of Directors.
You may buy or redeem Institutional Shares on any day the New York
Stock Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that day,
the price you pay or receive will be based on the next Business Day's net asset
value per share.
The following sections describe how to buy and redeem Institutional
Shares.
HOW TO BUY INSTITUTIONAL SHARES
You may buy Institutional Shares if you are any of the following:
o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution or a qualified retirement plan other than a
defined contribution plan).
<PAGE>
o A defined contribution plan with assets of at least $75 million.
o An investment advisory affiliate of DB Alex. Brown LLC or the Flag
Investors family of funds purchasing shares for the accounts of your
investment advisory clients.
You may buy Institutional Shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy Institutional Shares by sending your check (along with a
completed Application Form) directly to the Fund.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $500,000. The following are
exceptions to this minimum:
o There is no minimum initial investment for investment advisory
affiliates of DB Alex. Brown LLC or the Flag Investors family of
funds purchasing shares for the accounts of their investment
advisory clients.
o There is no minimum initial investment for defined contribution
plans with assets of at least $75 million.
o The minimum initial investment for all other qualified retirement
plans is $1 million.
There are no minimums for subsequent investments.
Purchases by Exchange
You may exchange Institutional shares of any other Flag Investors fund
for an equal dollar amount of Institutional Shares of the Fund up to four times
a year. The Fund may modify or terminate this offer of exchange upon 60 days'
notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
HOW TO REDEEM INSTITUTIONAL SHARES
You may redeem Institutional Shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If your shares are in an account with
the Fund, you may also redeem them by contacting the Transfer Agent by mail or
(if you are redeeming less than $500,000) by telephone. You will be paid for
redeemed shares by wire transfer of funds to your securities dealer, servicing
agent or bank upon receipt of a duly authorized redemption request as promptly
as feasible and, under most circumstances, within three Business Days.
<PAGE>
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.
TELEPHONE TRANSACTIONS
If your shares are in an account with the Transfer Agent, you may
redeem them in any amount up to $500,000 or exchange them for Institutional
shares of another Flag Investors fund by calling the Transfer Agent on any
Business Day between the hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You
are automatically entitled to telephone transaction privileges but you may
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that either reasonably believes to be genuine.
Your telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
DIVIDENDS AND TAXES
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of annual dividends and to distribute
taxable net capital gains at least annually.
Dividend Reinvestment
Unless you elect otherwise, all income and capital gains distributions
will be reinvested in additional Fund shares at net asset value. You may elect
to receive your distributions in cash or to have your distributions invested in
Institutional Shares of other Flag Investors funds. To make either of these
elections or to terminate automatic reinvestment, complete the appropriate
section of the Application Form or notify the Transfer Agent, your securities
dealer, or your servicing agent at least five days before the date on which the
next dividend or distribution will be paid.
<PAGE>
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive may be subject to federal, state and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. However, distributions by the Fund to retirement
plans that qualify for tax-exempt treatment under U.S. tax laws will not be
taxable until withdrawn from the plan. Each sale or exchange of the Fund's
shares is generally a taxable event, except for a sale or exchange by a
retirement plan that qualifies for tax-exempt treatment under U.S. tax laws.
Non-U.S. investors in the Fund may be subject to U.S. withholding and
estate tax and are encouraged to consult their tax advisor prior to investing in
the Fund.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
ORGANIZATIONAL STRUCTURE
The Fund is a "feeder fund" that invests substantially all of its
assets in the International Equity Portfolio. The Fund and the Portfolio have
the same investment objective. The Portfolio is advised by Bankers Trust. (See
the section on Investment Advisor.)
The Portfolio may accept investments from other feeder funds. Each
feeder fund bears a share of the Portfolio's expenses in proportion to its
assets. Each feeder fund can set its own transaction minimums, fund-specific
expenses, and other conditions. The Fund's Directors may withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholders' best
interests. If the Directors withdraw the Fund's assets, they would then consider
whether the Fund should hire its own investment advisor, invest in a different
master portfolio, or take other action.
INVESTMENT ADVISOR
Bankers Trust Company serves as investment advisor to the Portfolio.
Subject to the supervision of the Portfolio's Board of Trustees, the Advisor
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. For its services as investment advisor, Bankers Trust is entitled
to a fee of 0.65% of the Fund's average daily net assets.
Bankers Trust is dedicated to servicing the needs of corporations,
governments, financial institutions and private clients and has invested
retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
As of March 31, 2000, Bankers Trust had total assets under management of
approximately $239 billion.
<PAGE>
At a special meeting of shareholders held in 1999, shareholders of the
Portfolio approved a new investment advisory agreement with Deutsche Asset
Management, Inc. ("DeAM Inc.") (formerly Morgan Grenfell Inc.). The new
investment advisory agreement with DeAM Inc. may be implemented within two years
of the date of the special meeting upon approval of a majority of the members of
the Board of Trustees of the Portfolio who are not "interested persons,"
generally referred to as independent trustees. Shareholders of the Portfolio
also approved a new sub-investment advisory agreement among the Portfolio, DeAM
Inc. and Bankers Trust under which Bankers Trust may perform certain of DeAM
Inc.'s responsibilities, at DeAM Inc.'s expense, upon approval of the
independent trustees, within two years of the date of the special meeting. Under
the new investment advisory agreement and new sub-advisory agreement, the
compensation paid and the services provided would be the same as those under the
existing advisory agreement with Bankers Trust.
DeAM Inc. is located at 885 Third Avenue, 32nd Floor, New York, New
York 10022. DeAM Inc. provides a full range of investment advisory services to
institutional clients. DeAM Inc. serves as investment advisor to 11 other
investment companies and as sub-advisor to five other investment companies.
Portfolio Managers
The Portfolio's portfolio managers are Michael Levy, Robert Reiner and
Julie Wang of Bankers Trust.
Mr. Levy, Co-Lead Manager of the Portfolio, has 18 years of investment
experience. He has been with Bankers Trust and the Portfolio since its
inception. Mr. Levy is Bankers Trust's international equity strategist,
overseeing the design and implementation of the firm's proprietary stock
selection process. Mr. Levy received degrees in both mathematics and geophysics
from the University of Michigan.
Mr. Reiner, Co-Lead Manager of the Portfolio, has 18 years of
investment industry experience. He has been with Bankers Trust and the Portfolio
since its inception. Mr. Reiner specializes in Japanese and European stock and
market analysis. Prior to joining Bankers Trust, Mr. Reiner served as a Senior
Financial Analyst at Scudder, Stevens & Clark from 1993 to 1994. Mr. Reiner
received degrees from University of Southern California and Harvard University.
<PAGE>
Ms. Wang, Co-Manager of the Portfolio, has 11 years of investment
management experience. She has been with Bankers Trust and the Portfolio since
its inception. Ms. Wang focuses on the Fund's Asia-Pacific investments and its
emerging-markets exposure. Prior to joining Bankers Trust, Ms. Wang served as
Investment Manager for American International Group's Southeast Asia portfolio
from 1991 to 1994. Ms. Wang received a Bachelors degree in economics from Yale
University and an MBA from The Wharton School, University of Pennsylvania.
ADMINISTRATOR
Investment Company Capital Corp. ("ICCC") provides administration
services to the Fund. ICCC supervises the day-to-day operations of the Fund,
including the preparation of registration statements, proxy materials,
shareholder reports, compliance with all requirements of securities law in the
states in which shares are distributed, and subject to the supervision of the
Fund's Board of Directors, oversight of the relationship between the Fund and
its other service providers. ICCC is also the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. ICCC also may
provide significant compensation to securities dealers and servicing agents for
distribution, administrative and promotional services.
<PAGE>
Investment Advisor of the Portfolio
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Administrator and Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Distributor
ICC DISTRIBUTORS, INC.
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, Maryland 21201
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[FLAG INVESTORS LOGO]
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
(800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual and semi-annual reports containing
detailed financial information and, in the case of the annual
report, a discussion of market conditions and investment strategies
that significantly affected the Fund's performance during its last
fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-4827
--------------------------------------------------------------------------------
INTLIPRS (7/00)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLAG INVESTORS SERIES FUNDS, INC.
Flag Investors International Equity Fund
One South Street
Baltimore, Maryland 21202
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD
BE READ IN CONJUNCTION WITH A PROSPECTUS. THE AUDITED FINANCIAL STATEMENTS
FOR THE FUND ARE INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH HAS BEEN FILED
ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED
BY REFERENCE INTO THIS STATEMENT OF ADDITIONAL INFORMATION. A COPY OF EACH
PROSPECTUS AND THE ANNUAL REPORT MAY BE OBTAINED WITHOUT CHARGE 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 July 31, 2000
Relating to the Prospectus Dated February 29, 2000, as supplemented
through March 16, 2000 for Class A Shares, Class B Shares and Class C Shares
and
Relating to the Prospectus Dated July 31, 2000 for Institutional Shares
<PAGE>
6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................................................3
INVESTMENT OBJECTIVE AND POLICIES.................................................................................3
VALUATION OF SHARES AND REDEMPTION...............................................................................20
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.............................................................21
MANAGEMENT OF THE FUND...........................................................................................25
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................32
DISTRIBUTION OF FUND SHARES......................................................................................33
BROKERAGE........................................................................................................36
CAPITAL STOCK....................................................................................................38
ADMINISTRATOR, CUSTODIAN, ACCOUNTING SERVICES AND TRANSFER AGENT.................................................39
INDEPENDENT ACCOUNTANTS..........................................................................................39
LEGAL MATTERS....................................................................................................40
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..............................................................41
FINANCIAL STATEMENTS.............................................................................................42
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Flag Investors Series Funds, Inc. (the "Company") 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 Company
currently offers four classes of shares of the Flag Investors International
Equity Fund (the "Fund"), a series fund: Flag Investors International Equity
Fund Class A Shares ("Class A Shares"), Flag Investors International Equity Fund
Class B Shares ("Class B Shares"), Flag Investors International Equity Fund
Class C Shares ("Class C Shares") and Flag Investors International Equity Fund
Institutional Shares ("Institutional Shares"), (collectively, the "Shares").
Important information concerning the Company and the Fund is included
in the Fund's Prospectuses, 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 Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Company and its business that is
contained in the Registration Statement relating to the Company 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 Company was organized as a Massachusetts business trust on
September 3, 1986. The Company 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 "1940 Act") and Class
A Shares under the Securities Act of 1933, as amended (the "1933 Act"), and
began operations on November 18, 1986. On August 16, 1993, the Company
reorganized as a Maryland corporation under the name Flag Investors
International Fund, Inc. pursuant to an Agreement and Plan of Reorganization and
Liquidation approved by shareholders on June 16, 1993. Class B and Class C
Shares began operations on February 29, 2000. On February 29, 2000, the Company
reorganized into a series fund, changed its name to Flag Investors Series Funds,
Inc., and its existing series, the Flag Investors International Equity Fund
became a feeder fund of the International Equity Portfolio (the "Portfolio").
The Institutional Shares have not been offered prior to July 31, 2000.
Under a license agreement dated August 16, 1993, between the Company
and Alex. Brown & Sons Incorporated (predecessor to DB Alex. Brown LLC), Alex.
Brown & Sons Incorporated licenses to the Company 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.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation.
The Fund seeks to achieve this objective by investing all of its assets in a
diversified open-end management investment company, the Portfolio, having the
same investment objective as the Fund. The Fund may withdraw its investment from
the Portfolio at any time if the Board of Directors determines that it is in the
best interests of the Fund to do so.
Bankers Trust Company ("Bankers Trust" or the "Advisor") manages the
Portfolio's investments. Since the investment characteristics of the Fund will
correspond directly to those of the Portfolio, the following is a discussion of
the various investments of and techniques employed by the Portfolio.
Under normal circumstances, the Portfolio invests at least 65% of the
value of its total assets in stocks and other securities with equity
characteristics of companies primarily based in developed countries outside the
United States. However, the Portfolio may also invest in emerging market
securities and securities of issuers in underdeveloped countries. Investments in
these countries will be based on what the Advisor believes to be an acceptable
degree of risk in anticipation of superior returns.
The Portfolio's investments will generally be diversified among several
geographic regions and countries. Criteria for determining the appropriate
distribution of investments among various countries and regions include the
prospects for relative growth among foreign countries, expected levels of
inflation, government policies influencing business conditions, the outlook for
currency relationships and the range of alternative opportunities available to
international investors.
In countries and regions with well-developed capital markets where more
information is available, Bankers Trust will seek to select individual
investments for the Portfolio. Criteria for selection of individual securities
include the issuer's competitive position, prospects for growth, managerial
strength, earnings quality, underlying asset value, relative market value and
overall marketability. The Portfolio may invest in securities of companies
having various levels of net worth, including smaller companies whose securities
may be more volatile than securities offered by larger companies with higher
levels of net worth.
In other countries and regions where capital markets are underdeveloped
or not easily accessed and information is difficult to obtain, the Portfolio may
choose to invest only at the market level. Here, the Portfolio may seek to
achieve country exposure through use of options or futures based on an
established local index. Similarly, country exposure may also be achieved
through investments in other registered investment companies.
The remainder of the Portfolio's assets will be invested in dollar and
non-dollar denominated short-term instruments. These investments are subject to
the conditions described in "Short-Term Instruments" below.
Equity Investments. The Portfolio invests primarily in common stocks
and other securities with equity characteristics. For purposes of the
Portfolio's policy of investing at least 65% of the value of its total assets in
the equity securities of foreign issuers, "equity securities" are defined as
common stock, preferred stock, trust or limited partnership interests, rights
and warrants, and convertible securities (consisting of debt securities or
preferred stock that may be converted into common stock or that carry the right
to purchase common stock). The Portfolio invests in securities listed on foreign
or domestic securities exchanges and securities traded in foreign or domestic
over-the-counter markets, in addition to investment in restricted or unlisted
securities.
ADRs, GDRs and EDRs. American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs") are
certificates evidencing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution. Designed for use in U.S.,
international and European securities markets, respectively, ADRs, GDRs and EDRs
are alternatives to the purchase of the underlying securities in their national
markets and currencies. ADRs, GDRs and EDRs are subject to the same risks as the
foreign securities to which they relate.
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
7
<PAGE>
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts. For a description of commercial paper
ratings, see the Appendix.
Short-Term Instruments. The Portfolio intends to stay invested in
equity securities to the extent practical in light of its objective and
long-term investment perspective. However, up to 35% of the Portfolio's assets
may be invested in short-term instruments with remaining maturities of 397 days
or less or in money market mutual funds: to meet anticipated redemptions and
expenses; for day-to-day operating purposes; and when the Portfolio experiences
large cash inflows through the sale of securities and desirable equity
securities that are consistent with the Portfolio's investment objective are
unavailable in sufficient quantities or at attractive prices. In addition, when
in Bankers Trust's opinion, it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the equity markets,
up to 100% of the Portfolio's assets may be invested in such short-term
instruments. Short-term instruments consist of U.S. and non U.S.: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by Standard & Poor's Ratings Group ("S&P") or Aa or higher by
Moody's Investors Service, Inc. ("Moody's") or, if unrated, are of comparable
quality in the opinion of Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits and
bankers' acceptances; and (v) repurchase agreements. At the time the Portfolio
invests in commercial paper, bank obligations or repurchase agreements, the
issuer or the issuer's parent must have outstanding debt rated AA or higher by
S&P or Aa or higher by Moody's or outstanding commercial paper or bank
obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of
Bankers Trust. These instruments may be denominated in U.S. dollars or in
foreign currencies.
Derivatives. The Portfolio may invest in various instruments that are
commonly known as "derivatives." Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a traditional
security, asset or market index. Some derivatives such as mortgage-related and
other asset-backed securities are in many respects like any other investment,
although they may be more volatile or less liquid than more traditional debt
securities. There are, in fact, many different types of derivatives and many
different ways to use them. There is also a range of risks associated with those
uses. Futures and options are commonly used for traditional hedging purposes to
attempt to protect a fund from exposure to changing interest rates, securities
prices or currency exchange rates and for cash management purposes as a low cost
method of gaining exposure to a particular securities market without investing
directly in those securities. However, some derivatives are used for leverage,
which tends to magnify the effects of an instrument's price changes as market
conditions change. Leverage involves the use of a small amount of money to
control a large amount of financial assets and can, in some circumstances, lead
to significant losses. Bankers Trust, as the Portfolio's Advisor will use
derivatives only in circumstances where it believes they offer the most economic
means of improving the risk/reward profile of the Portfolio. Derivatives will
not be used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to changes
8
<PAGE>
in the value of assets or indices that by themselves would not be purchased for
the Portfolio. The use of derivatives for non-hedging purposes may be considered
speculative.
Illiquid Securities. Illiquid securities include securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a remaining maturity of longer than
seven days. Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on their resale
to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the 1933 Act of resales of certain securities to
qualified institutional buyers. The Advisor anticipates that the market for
certain restricted securities such as institutional commercial paper will expand
further as a result of this regulation and the development of automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A. Provided that a dealer or institutional
trading market in such securities exists, these restricted securities are
treated as exempt from the Portfolio's 15% limit on illiquid securities.
Bankers Trust will monitor the liquidity of Rule 144A securities in the
Portfolio's holdings under the supervision of the Portfolio's Board of Trustees.
In reaching liquidity decisions, the Advisor will consider, among other things,
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers and other potential purchasers or sellers of the
security; (iii) dealer undertakings to make a market in the security and (iv)
the nature of the security and of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). If institutional trading in restricted securities were to
decline, the liquidity of the Portfolio could be adversely affected.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
9
<PAGE>
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio identifies, as part of a segregated
account, cash or liquid securities in an amount at least equal to these
commitments. When entering into a when-issued or delayed delivery transaction,
the Portfolio will rely on the other party to consummate the transaction; if the
other party fails to do so, the Portfolio may be disadvantaged.
Repurchase Agreements. In a repurchase agreement the Portfolio buys a
security and simultaneously agrees to sell it back at a higher price at a future
date. In the event of the bankruptcy of the other party to either a repurchase
agreement or a securities loan, the Portfolio could experience delays in
recovering either its cash or the securities it lent. To the extent that, in the
meantime, the value of the securities repurchased or lent had changed, the
Portfolio could experience a loss. In all cases, Bankers Trust must find the
creditworthiness of the other party to the transaction satisfactory. A
repurchase agreement is considered a collateralized loan under the 1940 Act.
Investment Companies. With respect to certain countries in which
capital markets are either less developed or not easily accessed, investments by
the Portfolio may be made through investment in other investment companies that
in turn are authorized to invest in the securities of such countries. Investment
in other investment companies may also be made for other purposes, such as noted
herein under "Short-Term Instruments", and are limited in amount by the 1940
Act, unless permitted to exceed these limitations by an exemptive order of the
SEC. Such investments will involve the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies and may
result in a duplication of fees and expenses.
Options on Securities. The Portfolio may write (sell) covered call and
put options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, in so doing, the Portfolio may forgo
10
<PAGE>
the benefits of appreciation on securities sold pursuant to the call options or
may pay more than the market price on securities acquired pursuant to put
options.
When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the security at the price specified in the option
(the "exercise price") by exercising the option at any time during the option
period. If the option expires unexercised, the Portfolio will realize income in
an amount equal to the premium received for writing the option. If the option is
exercised, the Portfolio must sell the security to the option holder at the
exercise price. By writing a covered call option, the Portfolio forgoes, in
exchange for the premium less the commission ("net premium"), the opportunity to
profit during the option period from an increase in the market value of the
underlying security above the exercise price. In addition the Portfolio may
continue to hold a stock which might otherwise have been sold to protect against
depreciation in the market price of the stock.
A put option sold by the Portfolio is covered when, among other things,
cash or securities acceptable to the broker are placed in a segregated account
to fulfill the Portfolio's obligations. When the Portfolio writes a covered put
option, it gives the purchaser of the option the right to sell the underlying
security to the Portfolio at the specified exercise price at any time during the
option period. If the option expires unexercised, the Portfolio will realize
income in the amount of the premium received for writing the option. If the put
option is exercised, the Portfolio must purchase the underlying security from
the option holder at the exercise price. By writing a covered put option, the
Portfolio, in exchange for the net premium received, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and expiration
date as the option previously written. This transaction is called a "closing
purchase transaction." The Portfolio will realize a profit or loss from a
closing purchase transaction if the amount paid to purchase an option is less or
more, respectively, than the amount received from the sale thereof. To close out
a position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked prices. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the Portfolio's custodian.
11
<PAGE>
The Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Portfolio does not own. The Portfolio would ordinarily recognize a
gain if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value of the
securities remained at or above the exercise price. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options ("OTC Options")
transactions with broker-dealers who make markets in these options. The ability
to terminate OTC Options positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Advisor will monitor
the creditworthiness of dealers with which the Portfolio enters into such
options transactions under the general supervision of the Portfolio's Trustees.
The Portfolio intends to treat OTC Options purchased and the assets used to
"cover" OTC Options written as not readily marketable and therefore subject to
the limitations described in "Investment Restrictions." Unless the Trustees
conclude otherwise, the Portfolio intends to treat OTC Options as not readily
marketable and therefore subject to the Portfolio's 15% limitation on investment
in illiquid securities.
Options on Securities Indices. In addition to options on securities,
the Portfolio may also purchase and write (sell) call and put options on
securities indices. Such options will be used for the purposes described above
under "Options on Securities."
Options on stock indices are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise settlement amount"
12
<PAGE>
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars or a foreign currency, as the case may be, times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase or writing of options on
an index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indices will be subject to
the Advisor's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
The Portfolio may, to the extent allowed by federal and state
securities laws, invest in securities indices instead of investing directly in
individual foreign securities. A stock index fluctuates with changes in the
market values of the stocks included in the index.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolio generally will only purchase or write such an option if the Advisor
believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolio will not purchase such options unless
the Advisor believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Portfolio's holdings may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Advisor may be forced to liquidate portfolio
securities to meet settlement obligations.
Options on Foreign Securities Indices. The Portfolio may purchase and
write put and call options on foreign stock indices listed on domestic and
foreign stock exchanges. The Portfolio may also purchase and write OTC Options
on foreign stock indices. These OTC Options would be subject to the same
liquidity and credit risks noted above with respect to OTC Options.
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To the extent permitted by U.S. federal or state securities laws, the
Portfolio may invest in options on foreign stock indices in lieu of direct
investment in foreign securities. The Portfolio may also use foreign stock index
options for hedging purposes.
Currency Exchange Transactions. Because the Portfolio buys and sells
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.
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Forward Currency Exchange Contracts. A forward currency exchange
contract is an obligation by the Portfolio to purchase or sell a specific
currency at a future date. Forward foreign currency exchange contracts establish
an exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks and brokerages) and their customers. A forward currency
exchange contract may not have a deposit requirement and may be traded at a net
price without commission. The Portfolio maintains with its custodian a
segregated account of cash or liquid securities in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolio may enter into currency hedging transactions in an
attempt to protect against changes in currency exchange rates between the trade
and settlement dates of specific securities transactions or changes in currency
exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, the Portfolio will not routinely enter into currency hedging
transactions with respect to security transactions; however, the Advisor
believes that it is important to have the flexibility to enter into currency
hedging transactions when it determines that the transactions would be in the
Portfolio's best interest. Although these transactions 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 that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC,") the CFTC may in the future assert authority
to regulate forward contracts. In such event the Portfolio's ability to utilize
forward contracts may be restricted. Forward contracts may reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the Portfolio than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on the Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Portfolio to certain
risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit the Portfolio's
ability to use such contracts to hedge or cross-hedge its assets. Also, with
regard to the Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue.
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Thus, at any time a poor correlation may exist between movements in the exchange
rates of the foreign currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are denominated.
Options on Foreign Currencies. The Portfolio may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, the Portfolio will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The purchase of an option on foreign currency may be used to hedge
against fluctuations in exchange rates although, in the event of exchange rate
movements adverse to the Portfolio's position, it may forfeit the entire amount
of the premium plus related transaction costs. In addition, the Portfolio may
purchase call options on a foreign currency when the Advisor anticipates that
the currency will appreciate in value.
The Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, where the Advisor anticipates a decline
in the dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates the Portfolio could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the options will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
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The Portfolio may write covered call options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with its custodian.
The Portfolio also may write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign currency
is for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If the Portfolio is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Portfolio will not be able to sell the underlying currency or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Portfolio is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying currency. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. In
some circumstances, the Portfolio's ability to terminate OTC Options may be more
limited than with exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. The Portfolio intends to treat OTC Options as not readily
marketable and therefore subject to the Portfolio's 15% limit on illiquid
securities.
Futures Contracts and Options on Futures Contracts.
General. The successful use of futures contracts and options thereon
draws upon the Advisor's skill and experience with respect to such instruments
and usually depends on the Advisor's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, the Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or may realize
losses and thus will be in a worse position than if such strategies had not been
used. In addition, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
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Futures Contracts. Futures contracts are contracts to purchase or sell
a fixed amount of an underlying instrument, commodity or index at a fixed time
and place in the future. U.S. futures contracts have been designed by exchanges
which have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on a number of exchanges,
and clear through their clearing corporations. The Portfolio may enter into
contracts for the purchase or sale for future delivery of fixed-income
securities, foreign currencies, or financial indices including any index of U.S.
government securities, foreign government securities or corporate debt
securities. The Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
government, such as long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association modified pass-through mortgage-backed securities
and three-month U.S. Treasury Bills. The Portfolio may also enter into futures
contracts which are based on bonds issued by governments other than the U.S.
government. Futures contracts on foreign currencies may be used to hedge against
securities that are denominated in foreign currencies.
At the same time a futures contract is entered into, the Portfolio must
allocate cash or securities as a deposit payment ("initial margin"). The initial
margin deposits are set by exchanges and may range between 1% and 10% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
Although futures contracts (other than those that settle in cash such
as index futures) by their terms call for the actual delivery or acquisition of
the instrument underlying the contract, in most cases the contractual obligation
is fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Portfolio
will incur brokerage fees when it enters into futures contracts.
The assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash or securities acceptable to the broker from its portfolio in an amount
equal to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial and variation margin payments
made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on most
participants entering into offsetting transactions rather than making or taking
delivery. To the extent that many participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements in
the futures market are less onerous than margin lending requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate or currency exchange
rate trends by the Advisor may still not result in a successful transaction.
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In addition, futures contracts entail risks. Although the Advisor
believes that use of such contracts will benefit the Portfolio, if the Advisor's
investment judgment about the general direction of interest rates is incorrect,
the Portfolio's overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of bonds may
be, but will not necessarily be, at increased prices which reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Futures Contracts. The Portfolio may purchase and write
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. For example, when the Portfolio is not fully
invested it may purchase a call option on an interest rate sensitive futures
contract to hedge against a potential price increase on debt securities due to
declining interest rates. The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put options on portfolio
securities. For example, the Portfolio may purchase a put option on an interest
rate sensitive futures contract to hedge its portfolio against the risk of a
decline in the prices of debt securities due to rising interest rates.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of portfolio securities which are the
same as or correlate with the security or currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Portfolio will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Portfolio's portfolio holdings. The writing of a put option
on a futures contract may constitute a partial hedge against increasing prices
of the security or foreign currency which is deliverable upon exercise of the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Portfolio intends to purchase. If a put or call option the
Portfolio has written is exercised, the Portfolio will incur a loss which will
be reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Portfolio's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The amount of risk the Portfolio assumes when it purchases an option on
a futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Futures Contracts on Domestic and Foreign Securities Indices. The
Portfolio may enter into futures contracts providing for cash settlement based
upon changes in the value of an index of domestic or foreign securities. This
investment technique may be used as a low-cost method of gaining exposure to a
particular securities market without investing directly in those securities or
to hedge against anticipated future change in general market prices which
otherwise might either adversely affect the value of securities held by the
Portfolio or adversely affect the prices of securities which are intended to be
purchased at a later date for the Portfolio.
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When used for hedging purposes, each transaction in futures contracts
on a securities index involves the establishment of a position which the Advisor
believes will move in a direction opposite to that of the investment being
hedged. If these hedging transactions are successful, the futures positions
taken for the Portfolio will rise in value by an amount which approximately
offsets the decline in value of the portion of the Portfolio's investments that
are being hedged. Should general market prices move in an unexpected manner, the
full anticipated benefits of futures contracts may not be achieved or a loss may
be realized.
Although futures contracts on securities indices would be entered into
for hedging purposes only, such transactions do involve certain risks. These
risks include a lack of correlation between the futures contract and the foreign
equity market being hedged, and incorrect assessments of market trends which may
result in poorer overall performance than if a futures contract had not been
entered into.
Asset Coverage. To assure that the Portfolio's use of futures and
related options, as well as when-issued and delayed-delivery securities and
foreign currency exchange transactions, are not used to achieve investment
leverage, the Portfolio will cover such transactions, as required under
applicable interpretations of the SEC, either by owning the underlying
securities or by segregating with the Portfolio's custodian or futures
commission merchant liquid securities in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts.
Investment Restrictions on Futures Transactions. The Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures contracts owned by
the Portfolio (other than those entered into for bona fide hedging purposes)
would exceed 5% of the Portfolio's net asset value, after taking into account
unrealized profits and unrealized losses on any such contracts.
Lending of Portfolio Securities. The Portfolio has the authority to
lend up to 30% of the total value of its portfolio securities to brokers,
dealers and other financial organizations. These loans must be secured
continuously by cash or securities issued or guaranteed by the United States
government, its agencies or instrumentalities or by a letter of credit at least
equal to the market value of the securities loaned plus accrued income. The
Portfolio will not lend securities to Bankers Trust, the Distributor or their
affiliates. By lending its securities, the Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. government obligations are used
as collateral. During the term of the loan, the Portfolio continues to bear the
risk of fluctuations in the price of the loaned securities. There may be risks
of delay in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. The Portfolio will adhere to the following
conditions whenever its securities are loaned: (i) the Portfolio must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the
securities including accrued interest rises above the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities. Cash collateral may be
invested in a money market fund managed by Bankers Trust (or its affiliates) and
Bankers Trust may serve as the Portfolio's lending agent and may share in
revenue received from securities lending transactions as compensation for this
service.
Additional Risk Factors
In addition to the risks discussed above, the Portfolio's investments
may be subject to the following risk factors:
Foreign Securities. The Portfolio will, under normal market conditions,
invest a significant portion of its assets in foreign securities. Although the
Portfolio intends to invest primarily in securities of established companies
based in developed countries, the value of the Portfolio's investments may be
adversely affected by changes in political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, nationalization, limitation on
the removal of funds or assets, or imposition of (or change in) exchange control
or tax regulations in those foreign countries. In addition, changes in
government administrations or economic or monetary policies in the United States
or abroad could result in appreciation or depreciation of portfolio securities
and could favorably or unfavorably affect the Portfolio's operations.
Furthermore, the economies of individual foreign nations may differ from the
U.S. economy, whether favorably or unfavorably, in areas such as growth of gross
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national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position; it may also be more difficult
to obtain and enforce a judgment against a foreign issuer. In general, less
information is publicly available with respect to foreign issuers than is
available with respect to U.S. companies. Most foreign companies are also not
subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. Any foreign investments made by the
Portfolio must be made in compliance with U.S. and foreign currency restrictions
and tax laws restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. Generally, the Portfolio's currency exchange transactions will
be conducted on a spot (i.e., cash) basis at the spot rate prevailing in the
currency exchange market. The cost of the Portfolio's currency exchange
transactions will generally be the difference between the bid and offer spot
rate of the currency being purchased or sold. In order to protect against
uncertainty in the level of future foreign currency exchange, the Portfolio is
authorized to enter into certain foreign currency exchange transactions.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange, Inc. Accordingly, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, the Portfolio normally pays fixed
commissions that are generally higher than the negotiated commissions charged in
the United States. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
Emerging Markets. The world's industrialized markets generally include
but are not limited to the following: Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom, and the United States; the world's emerging
markets generally include but are not limited to the following: Argentina,
Botswana, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, the
Czech Republic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, the
Ivory Coast, Jordan, Korea, Malaysia, Mexico, Morocco, Nicaragua, Nigeria,
Pakistan, Peru, Philippines, Poland, Romania, Russia, Slovakia, Slovenia, South
Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and Zimbabwe.
Investment in securities of issuers based in underdeveloped emerging
markets entails all of the risks of investing in securities of foreign issuers
outlined in the above section to a heightened degree. These heightened risks
include: (i) greater risks of expropriation, confiscatory taxation,
nationalization, and less social, political and economic stability; (ii) the
smaller size of the market for such securities and a low or nonexistent volume
of trading, resulting in lack of liquidity and in price volatility; and (iii)
certain national policies which may restrict the Portfolio's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests.
In addition to brokerage commissions, custodial services and other
costs relating to investment in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Portfolio to make intended securities
purchases due to settlement problems could cause the Portfolio to miss
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attractive investment opportunities. Inability to dispose of a security due to
settlement problems could result either in losses to the Portfolio due to
subsequent declines in the value of the security or, if the Portfolio has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as principals, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting
the Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
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Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
Special Information Concerning Master-Feeder Fund Structure. Unlike
other open-end management investment companies (mutual funds) which directly
acquire and manage their own portfolio securities, the Fund seeks to achieve its
investment objective by investing all of its assets in the Portfolio, a separate
registered investment company with the same investment objective as the Fund.
Therefore, an investor's interest in the Portfolio's securities is indirect. In
addition to selling a beneficial interest to the Fund, the Portfolio may sell
beneficial interests to other mutual funds, investment vehicles or institutional
investors. Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio are not required to sell
their shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. These differences may result in
differences in returns experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are also present in other
mutual fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust at 1-800-730-1313.
Smaller funds investing in the Portfolio may be materially affected by
the actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience higher pro
rata operating expenses, thereby producing lower returns (however, this
possibility exists as well for traditionally structured funds which have large
institutional investors). Additionally, the Portfolio may become less diverse,
resulting in increased portfolio risk. Also, funds with a greater pro rata
ownership in the Portfolio could have effective voting control of the operations
of the Portfolio. Except as permitted by the SEC, whenever the Fund is requested
to vote on matters pertaining to the Portfolio, the Fund will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Fund's votes at the Portfolio meeting. The percentage of the
Fund's votes representing the Fund's shareholders not voting will be voted by
the Directors or Officers of the Fund in the same proportion as the Fund
shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if
the Company's Board of Directors determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Company's
Board of Directors would consider what action might be taken, including the
investment of all the assets of the Fund in another pooled investment entity
having the same investment objective as the Fund or the retaining of an
investment advisor to manage the Fund's assets in accordance with the investment
policies described herein with respect to the Portfolio.
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The Fund's investment objective is a fundamental policy and may not be
changed without the approval of the Fund's shareholders. Because the investment
objective of the Portfolio is not a fundamental policy and may be changed
without the approval of its shareholders, if there is a change in the
Portfolio's investment objective, the Company's Board of Directors would submit
the matter to the Fund's shareholders for a vote. Shareholders of the Portfolio
will receive 30 days prior written notice with respect to any change in the
investment objective of the Portfolio.
Rating Services
The ratings of rating services represent their opinions as to the
quality of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards
of quality. Although these ratings are an initial criterion for selection of
portfolio investments, Bankers Trust also makes its own evaluation of these
securities, subject to review by the Portfolio's Board of Trustees. After
purchase by the Portfolio, an obligation may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Portfolio. Neither
event would require the Portfolio to eliminate the obligation from its
portfolio, but Bankers Trust will consider such an event in its determination of
whether the Portfolio should continue to hold the obligation. A description of
the ratings used herein and in the Fund's Prospectus is set forth in the
Appendix to this SAI.
Investment Restrictions
The following investment restrictions are "fundamental policies" of the
Fund and may not be changed with respect to the Fund without the approval of a
"majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the 1940 Act, and as used in this SAI and
the Shares' Prospectus, means, with respect to the Fund, the lesser of (i) 67%
or more of the outstanding voting securities of the Fund present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund. Whenever the Fund is requested to vote on a
fundamental policy of the Portfolio, the Fund will hold a meeting of the Fund's
shareholders and will cast its votes as instructed by the Fund's shareholders.
Fund shareholders who do not vote will not affect the Fund's votes at the
Portfolio meeting. The percentage of the Fund's votes representing Fund
shareholders not voting will be voted by the Directors or Officers of the Fund
in the same proportion as the Fund shareholders who do, in fact, vote.
Except that no investment restriction of the Fund shall prevent the
Fund from investing all of its assets in an open-end investment company with
substantially the same investment objective, as a matter of fundamental policy,
the Fund:
1. Will not, with respect to 75% of its assets, invest more than 5% of the
Portfolio's (Fund's) total assets in the securities of any one issuer (excluding
cash, cash equivalents, U.S. government securities and the securities of other
investment companies) or own more than 10% of the voting securities of any one
issuer (excluding securities of other investment companies);
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2. May borrow money to the extent permitted by the Investment Company Act of
1940, the rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended from time to time;
3. 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);
4. May not purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein) in the
ordinary course of business (except that the Portfolio (Fund) may hold and sell,
for the Portfolio's (Fund's) portfolio, real estate acquired as a result of the
Portfolio's (Fund's) ownership of securities);
5. Will not purchase or sell commodities or commodity contracts provided that
the Fund may invest in financial futures and options on such futures;
6. Act as an underwriter of securities within the meaning of the federal
securities laws except insofar as it might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities;
7. Issue senior securities;
8. Will not make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies, and may
loan portfolio securities and enter into repurchase agreements;
As a matter of fundamental policy, the Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the Portfolio, except that
in an amount not to exceed 1/3 of the current value of the Portfolio's assets,
it may borrow money as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete the portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional Restrictions" below
(as an operating policy, the Portfolio may not engage in dollar-roll
transactions);
2. Underwrite securities issued by other persons except insofar as the Portfolio
may technically be deemed an underwriter under the 1933 Act in selling a
portfolio security;
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3. Make loans to other persons except: (a) through the lending of the
Portfolio's securities and provided that any such loans not exceed 30% of the
Portfolio's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
4. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the
Portfolio may hold and sell, real estate acquired as a result of the Portfolio's
ownership of securities);
5. Concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the achievement of
the Portfolio's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
6. Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction; and
7. With respect to 75% of the Portfolio's total assets, invest more than 5% of
its total assets in the securities of any one issuer (excluding cash and cash
equivalents, U.S. government securities and the securities of other investments
companies) or own more than 10% of the voting securities of any issuer.
Additional Restrictions of the Fund.
In order to comply with certain statutes and policies, the Fund will
not as a matter of operating policy (except that no operating policy shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective):
(i) Invest in shares of any other open-end investment company registered under
the Investment Company Act, except as permitted by federal law.
(ii) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not currently marketable
(excluding Rule 144A securities deemed by the Board of Directors of the Fund to
be liquid).
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Other Considerations
The Fund's investments in convertible securities rated below investment
grade will not exceed 5% of the value of its total assets.
Additional Investment Restrictions of the Portfolio
In order to comply with certain statutes and policies, the Portfolio
will not as a matter of operating policy:
(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 5% of the Portfolio's total assets
(taken at cost), except that the Portfolio (Fund) may borrow for temporary or
emergency purposes up to 1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Portfolio's total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of purchases
and sales of securities may be obtained and except that deposits of initial
deposit and variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) invest for the purpose of exercising control or management of another
company;
(v) purchase securities issued by any investment company except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission, or except when
such purchase, though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any investment company
will not be purchased for the Portfolio if such purchase at the time thereof
would cause: (a) more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer to be held
for the Portfolio, unless permitted to exceed these limitations by an exemptive
order of the SEC; provided further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any securities of any open-end
investment company unless (1) the Portfolio's investment advisor waives the
investment advisory fee with respect to assets invested in other open-end
investment companies and (2) the Portfolio incurs no sales charge in connection
with the investment;
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(vi) invest more than 15% of the Portfolio's net assets (taken at the greater of
cost or market value) in securities that are illiquid or not currently
marketable (excluding Rule 144A securities deemed by the Board of Trustees of
the Portfolio (Trust) to be liquid);
(vii) write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the investment
policies of the Portfolio and the option is issued by the OCC, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations underlying the
puts determined as of the date the options are sold shall not exceed 5% of the
Portfolio's net assets; (c) the securities subject to the exercise of the call
written by the Portfolio must be owned by the Portfolio at the time the call is
sold and must continue to be owned by the Portfolio until the call has been
exercised, has lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's obligation to
deliver securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio establishes a segregated account with its custodian
consisting of cash or liquid securities equal in value to the amount the
Portfolio will be obligated to pay upon exercise of the put (this account must
be maintained until the put is exercised, has expired, or the Portfolio has
purchased a closing put, which is a put of the same series as the one previously
written); and
(viii) buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial futures
unless such options are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities association or are
listed on a national securities or commodities exchange, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net assets; and
(c) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Portfolio's total assets.
There will be no violation of any investment restriction (except with
respect to fundamental investment restriction (1) above) if that restriction is
complied with at the time the relevant action is taken, notwithstanding a later
change in the market value of an investment, in net or total assets or in the
change of securities rating of the investment, or any other later change.
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. Securities held
by the Portfolio which are listed on foreign exchanges may be traded on days
that the Portfolio 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.
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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. 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 and the Portfolio will redeem
Shares in cash as described in the Prospectus. However, if the Board of
Directors of the Fund determines that it would be in the best interests of the
remaining shareholders to make payment of the redemption price in whole or in
part by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash, in conformity with applicable rules of
the SEC, the Fund will make such distributions in kind. 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 1940 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.
The Portfolio has agreed to make a redemption in kind to the Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the Portfolio and in no case will they receive a security issued by the
Portfolio. The Portfolio has advised the Fund that the Portfolio will not redeem
in kind except in circumstances in which the Fund is permitted to redeem in kind
or unless requested by the Fund.
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 Prospectuses. 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 Prospectuses is not intended as a
substitute for careful tax planning. For example, under certain specified
circumstances, state income tax laws may exempt from taxation distributions of a
regulated investment company to the extent that such distributions are derived
from interest on federal obligations. Investors are urged to consult with their
tax advisor regarding whether such exemption is available.
The following general discussion of certain 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.
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Qualification as a 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 generally 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% 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 requirements described previously, in order to
qualify as a RIC, the Fund must distribute at least 90% of its investment
company taxable income (which generally includes dividends, taxable interest,
and the excess of net short-term capital gains over net long-term capital losses
less operating expenses, but determined without regard to the deduction for
dividends paid) 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 net 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.
If the Fund fails to qualify for any taxable year as a RIC, 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
generally 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
for corporate shareholders. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
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%,
regardless of the length of time the shareholder has held Shares. 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 undistributed gains
in their income, will increase their basis in Fund shares 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.
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold.
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Because the Fund's income is derived primarily from investments in
foreign rather than domestic U.S. Securities, no portion of its distributions
will generally be eligible for the dividends-received deduction.
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 the shareholder 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 dividend or distribution received, even though some or all
of the amount distributed may have been realized by the Fund prior to the
investor's purchase.
The Fund will provide an annual statement to shareholders describing
the federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
The Fund may invest in complex securities. These investments may be
subject to numerous special and complex tax rules. These rules could affect
whether gains and losses recognized by the Fund are treated as ordinary income
or capital gain, accelerate the recognition of income to the Fund and/or defer
the Fund's ability to recognize losses. In turn, those rules may affect the
amount, timing or character of the income distributed to you by the Fund.
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Sale or Exchange of Fund Shares
The sale or exchange of a Share generally is a taxable event for the
shareholder. Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution
with respect to the Share (or any undistributed net capital gains of the Fund
with respect to such Share are included in determining the shareholder's
long-term capital gains), the shareholder must treat the loss as a long-term
capital loss to the extent of the amount of the prior capital gains distribution
(or any undistributed net capital gains of the Fund that have been included in
determining such shareholder'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.
In certain cases, the Fund will be required to withhold and remit to
the United States Treasury 31% of distributions payable 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 properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax
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.
Non U.S. investors in the Fund may be subject to U.S. withholding and
estate tax and are encouraged to consult their tax advisor prior to investing in
the Fund.
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State and Local Taxes
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 advisors as to the consequences of these and other U.S. state
and local tax rules regarding an investment in the Portfolio.
Foreign Securities
Income from investments in foreign stocks or securities may be subject
to foreign taxes. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the Portfolio's
assets to be invested in various countries will vary.
If the Portfolio is liable for foreign taxes, and if more than 50% of
the value of the Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, the Fund may make an
election pursuant to which certain foreign taxes paid by the Portfolio would be
treated as having been paid directly by shareholders of the Fund. Pursuant to
such election, the amount of foreign taxes paid will be included in the income
of the Fund's shareholders, and such Fund shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each shareholder of the Fund will be notified after the
close of the Fund's taxable year whether the foreign taxes paid will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid to each such country and (b) the
amount which represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit
in any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Portfolio
on the sale of foreign securities will be treated as U.S. source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.
Taxation of the Portfolio
The Portfolio is not subject to Federal income taxation. Instead, the
Fund and other investors investing in the Portfolio must take into account, in
computing their federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
Distributions received by the Fund from the Portfolio generally will
not result in the Fund recognizing any gain or loss for federal income tax
purposes, except that: (i) gain will be recognized to the extent that any cash
distributed exceeds the Fund's basis in its interest in the Portfolio prior to
the distribution; (ii) income or gain may be realized if the distribution is
made in liquidation of the Fund's entire interest in the Portfolio and includes
a disproportionate share of any unrealized receivables held by the Portfolio;
and (iii) loss may be recognized if the distribution is made in liquidation of
the Fund's entire interest in the Portfolio and consists solely of cash and/or
unrealized receivables. The Fund's basis in its interest in the Portfolio
generally will equal the amount of cash and the basis of any property which the
Fund invests in the Portfolio, increased by the Fund's share of income from the
Portfolio, and decreased by the amount of any cash distributions and the basis
of any property distributed from the Portfolio.
33
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The overall business and affairs of the Company are managed by its
Board of Directors. The Board approves all significant agreements between the
Company and persons or companies furnishing services to the Company, including
the Company's agreements with the Fund's administrator, distributor, custodian
and transfer agent. The Directors and executive officers of the Company, their
respective dates of birth and their principal occupations during the last five
years are set forth below. A Director who is an "interested person" of the
Company as that term is defined in Section 2(a)(19) of the 1940 Act is denoted
by an "*". Unless otherwise indicated, the address of each Director and
executive officer is One South Street, Baltimore, Maryland 21202.
Directors Of The Fund
*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) and Director and President of Virginia
Hot Springs Inc. (property management). Formerly, Managing Director and Vice
Chairman, Alex. Brown Incorporated (now DB Alex. Brown LLC); Director,
Investment Company Capital Corp. (registered investment advisor) and Director,
ISI Family of Funds (registered investment companies).
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 (agribusiness
operations), Hollinger International, Inc. (publishing), Homestake Mining
(mining and exploration), HCL Technologies (information technology) and Anchor
Technologies (gaming software and equipment); Director, Mitchell Hutchins family
of funds (registered investment companies); and Member, Textron Corporation
International Advisory Council. Formerly, Partner, McKinsey & Company
(consulting), 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.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management; Managing Director, DB Alex. Brown
LLC (formerly BT Alex. Brown Incorporated); Director and President, Investment
Company Capital Corp. (registered investment advisor). Director or President,
Deutsche Asset Management Mutual Funds (registered investment companies).
Chartered Financial Analyst. Formerly, Director, ISI Family of Funds (registered
investment companies).
34
<PAGE>
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor and
Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI Family
of Funds (registered investment companies). Formerly, Director, Circon Corp.
(medical instruments), November 1998-January 1999; President and Chief Executive
Officer, The National Association of Securities Dealers, Inc. and The NASDAQ
Stock Market, Inc., 1987-1997; Chief Operating Officer of Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC), 1985-1987; General Partner, Alex. Brown &
Sons Incorporated (now DB Alex. Brown LLC), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-Clark
Corporation (personal consumer products), Household International (banking and
finance) and ISI Family of Funds (registered investment companies). Formerly,
Chairman of the Quality Control Inquiry Committee, American Institute of
Certified Public Accountants, 1992-1998, 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.
35
<PAGE>
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), DP Mann
Holdings (insurance) and ISI Family of Funds (registered investment companies).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite 1700,
Philadelphia, Pennsylvania 19103-7017. President and Chief Executive Officer,
The Pew Charitable Trusts (charitable foundation); Director and Executive Vice
President, The Glenmede Trust Company (investment trust and wealth management).
Formerly, Executive Director, The Pew Charitable Trusts and Director, ISI Family
of Funds (registered investment companies).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018. President,
Investment Company Administration LLC, President, Trustee, Trust for Investment
Managers (registered investment company) and President, Director, First Fund
Distributors, Inc. (registered broker-dealer); Director, The Germany Fund, Inc.,
The New Germany Fund Inc., The Central European Equity Fund, Inc., and Vice
President, Professionally Managed Portfolios and Advisors Series Trust
(registered investment companies). Formerly, President, Guinness Flight
Investment Funds, Inc. (registered investment companies); and President, The
Wadsworth Group (registered investment advisor).
36
<PAGE>
Officers Of The Fund
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); Director, Yellow
Corporation (trucking), American Science & Engineering (x-ray detection
equipment), and ISI Family of Funds (registered investment companies). Formerly,
Chairman and Member, National Transportation Safety Board; Director, National
Railroad Passenger Corporation (Amtrak); Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration); Interim President of
Williams College and Director, Flag Investors Family of Funds (registered
investment companies).
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management; Formerly Vice President and Department
Head, BT Alex. Brown Incorporated (now DB Alex. Brown LLC), 1998-1999; and
Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP),
1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management; Formerly, Vice President, BT Alex. Brown
Incorporated (now DB Alex. Brown LLC), 1997-1999 and Senior Manager, Coopers &
Lybrand L.L.P. (now PricewaterhouseCoopers LLP), 1992-1997.
DANIEL O. HIRSCH, ASSISTANT SECRETARY (3/27/54)
Director, Deutsche Asset Management; Formerly Principal, BT Alex. Brown
Incorporated (now DB Alex. Brown LLC), 1998-1999 and Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
Trustees of the Portfolio
CHARLES P. BIGGAR, Trustee (10/13/30)
12 Hitching Post Lane, Chappaqua, New York 10514. Trustee, each of the
investment companies in the BT Fund Complex *(registered investment companies);
Retired; former Vice President, International Business Machines ("IBM") and
President, National Services and the Field Engineering Divisions of IBM.
S. LELAND DILL, Trustee (3/28/30)
5070 North Ocean Drive, Singer Island, Florida 33404. Trustee, each of the
investment companies in the BT Fund Complex *(registered investment companies);
Retired; Director, Coutts (U.S.A.) International; Trustee, Phoenix-Zweig Trust
and Phoenix-Euclid Market Neutral Fund (registered investment companies); former
Partner, KPMG Peat Marwick; Director, Vintners International Company Inc.;
Director, Coutts Trust Holdings Ltd., Director, Coutts Group; and General
Partner, Pemco (registered investment company).
MARTIN J. GRUBER, Trustee (7/15/37)
229 South Irving Street, Ridgewood, New Jersey 07450. Trustee, each of the
investment companies in the BT Fund Complex *(registered investment companies);
Nomura Professor of Finance, Leonard N. Stern School of Business, New York
University (since 1964); Trustee, TIAA (registered investment company); Trustee,
SG Cowen Mutual Funds (registered investment company); and Trustee, Japan Equity
Fund and Taiwan Equity Fund (registered investment companies).
RICHARD T. HALE, Trustee (7/17/45)
(See above.)
37
<PAGE>
RICHARD J. HERRING, Trustee (2/18/46)
325 South Roberts Road, Bryn Mawr, Pennsylvania 19010. Trustee, each of the
investment companies in the BT Fund Complex *(registered investment companies);
Jacob Safra Professor of International Banking, Professor of Finance and Vice
Dean, The Wharton School, University of Pennsylvania (since 1972).
BRUCE E. LANGTON, Trustee (5/10/31)
99 Jordan Lane, Stamford, Connecticut 06903. Trustee, each of the investment
companies in the BT Fund Complex *(registered investment companies); Retired;
Trustee, Allmerica Financial Mutual Funds (1992-present); Member, Pension and
Thrift Plans and Investment Committee, Unilever U.S. Corporation (1989 to
present) (publicly held company registered under the Securities Exchange Act of
1934); and Director, TWA Pilots Directed Account Plan and 401(k) Plan (1988 to
present) (registered investment company).
PHILIP SAUNDERS, JR., Trustee (10/11/35)
445 Glen Road, Weston, Massachusetts 02193. Trustee, each of the investment
companies in the BT Fund Complex* (registered investment companies); Principal,
Philip Saunders Associates (Economic and Financial Analysis); Formerly,
Director, Financial Industry Consulting, Wolf & Company; President, John Hancock
Home Mortgage Corporation; and Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc.
HARRY VAN BENSCHOTEN, Trustee (2/18/28)
6581 Ridgewood Drive, Naples, Florida 34108. Trustee, each of the investment
companies in the BT Fund Complex1 (registered investment companies); Retired;
Director, Canada Life Insurance Corporation of New York.
Officers Of The Portfolio
JOHN A. KEFFER, President and Chief Executive Officer (7/14/42)
President, Forum Financial Group L.L.C. and its affiliates.
DANIEL O. HIRSCH, Secretary (3/27/54)
(See Above)
CHARLES A. RIZZO, Treasurer (8/5/57)
(See Above)
----------
* The "BT Fund Complex" consists of BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management Portfolio,
Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio and
BT Investment Portfolios.
38
<PAGE>
Directors and officers of the Company are also directors and officers
of some or all of the other investment companies managed, administered or
advised by Investment Company Capital Corporation ("ICCC") or its affiliates.
There are currently 23 funds in the Flag Investors Funds and Deutsche Banc Alex.
Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans
serves as Chairman of five funds and as a Director of 18 other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of 20 funds
in the Fund Complex. Ms. Rimel and Messrs. Burt, Hardiman, Levy, McDonald and
Wadsworth serve as Directors of each of the funds in the Fund Complex. Mr. Vogt
serves as President of 22 funds in the Fund Complex. Mr. Rizzo serves as
Treasurer, Ms. Olmert serves as Secretary or Assistant Secretary, and Mr. Hirsch
serves as Assistant Secretary, of, 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, DB 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 Company's President, officers of the Company
receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Company who are officers or directors of the Advisor or its
affiliates may be considered to have received remuneration indirectly. As
compensation for his/her services, each Director who is not an "interested
person" of the Company (as defined in the 1940 Act) (an "Independent Director")
and Mr. Vogt, the Company's President effective October 7, 1999, receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his/her attendance at board and committee meetings)
from each fund in the Fund Complex for which he/she 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, 1999, Independent
Directors' fees attributable to the assets of the Company totaled approximately
$1,603.
39
<PAGE>
The following table shows aggregate compensation and retirement
benefits payable to each of the Company'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, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the
From the Fund for the Pension or Retirement Fund and Fund Complex payable to
Name of Person, Position Fiscal Year Ended Benefits Accrued as Directors for the Fiscal Year
October 31, 1999 Part of Fund Expenses Ended October 31, 1999 (10)
<S> <C> <C> <C> <C>
Truman T. Semans (1) $0 $0 $0
Chairman
Richard R. Burt (2) $0 $0 $0
Director
Richard T. Hale (1,3) $0 $0 $0
Director
James J. Cunanne (4) $49.90 (5) (6) $39,000 for service on 12 Boards
Director in the Fund Complex
Joseph R. Hadiman (7,8) $23.19 (5) (6) $39,000 for service on 12 Boards
Director in the Fund Complex
Louis E. Levy $62.69 (5) (6) $49,000 for service on 12 Boards
Director in the Fund Complex
Eugene J. McDonald $62.69 (5) (6) $49,000 for service on 12 Boards
Director in the Fund Complex
Rebecca W. Rimel (11) $0 $0 $39,000 for service on 11 Boards
Director in the Fund Complex
Carl W. Vogt, Esq. (9) $50.43 (5) (6) $39,000 for service on 12 Boards
Director in the Fund Complex
Robert H. Wadsworth (2) $0 $0 $0
Director
</TABLE>
----------
(1) A director who is an "interested person" as defined in the Investment
Company Act.
(2) Elected to the Company's Board effective October 7, 1999.
(3) Resigned effective November 26, 1998. Re-elected to the Company's Board
effective February 16, 2000.
(4) Retired effective October 7, 1999.
(5) Of the amounts payable to Messrs. Cunanne, Hardiman, Levy, McDonald and
Vogt, nothing was deferred pursuant to the Fund's deferred compensation
plan in the year ended October 31, 1999.
(6) 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, 1999 was approximately $559.
(7) Elected to the Company's Board on January 22, 1999.
(8) Prior to his appointment to the Company's Board, Mr. Hardiman received
proportionately higher compensation from each Fund for which he served.
(9) Retired as Company Director effective October 7, 1999; elected Company
President effective October 7, 1999.
(10) Prior to September 28, 1999, the Fund Complex consisted of 12 funds and
included the four funds in the ISI Family of Funds.
(11) Elected to the Company's Board effective February 16, 2000.
40
<PAGE>
The following table shows aggregate compensation and retirement
benefits payable to each of the Portfolio's Trustees by the International Equity
Portfolio and the BT Fund Complex, respectively, for the twelve months ended
September 30, 1999:
<TABLE>
<CAPTION>
Aggregate Compensation From Aggregate Compensation From
International Equity Portfolio for the BT Fund Complex (1) for
the Twelve Months Ended the Twelve Months Ended
Name of Person,Position September 30, 1999 December 31, 1999
<S> <C> <C>
Charles P. Biggar, Trustee $1,288 $43,750
S. Leland Dill, Trustee $1,086 $43,750
Martin J. Gruber, Trustee(3) $0 $45,000
Richard T. Hale, Trustee(2) $0 $0
Richard J. Herring, Trustee(3) $0 $43,750
Bruce E. Langton, Trustee(3) $0 $43,750
Philip Saunders, Jr., Trustee $1,120 $45,000
Harry Van Benschoten, Trustee(3) $0 $45,000
Kelvin Lancaster, Trustee $0 $18,750
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds,
BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio for the year ended
December 31, 1999.
(2) A Trustee who is an "interested person" as defined in the 1940 Act.
(3) Elected to the Board of Trustees on October 8, 1999.
The Fund Complex has adopted a Retirement Plan for Directors who are
not employees of the Company, the Company's administrator or its respective
affiliates (the "Directors' Retirement Plan") and a Retirement Plan for a former
Director serving as the Company's President (collectively, the "Retirement
Plans"). After
41
<PAGE>
completion of six years of service, each participant in the Retirement Plans
will be entitled to receive an annual retirement benefit equal to a percentage
of the fee earned by the participant in his or her last year of service. Upon
retirement, each participant will receive annually 10% of such fee for each year
that he or she served after completion of the first five years, up to a maximum
annual benefit of 50%. The fee will be paid quarterly, for life, by each fund
for which he or she serves. The Retirement Plans are unfunded and unvested. The
Company currently has two participants in the Directors' Retirement Plan, a
Director who retired effective December 31, 1994 and another Director who
retired effective December 31, 1996, each of whom 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. Mr. McDonald has qualified for, but has not received, benefits.
Set forth in the table below are the estimated annual benefits payable
to a participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1999 are as follows: for Mr. Levy, 5 years; for Mr. McDonald, 7
years; for Ms. Rimel and Mr. Vogt, 4 years; for Mr. Hardiman, 1 year; and for
Mr. Burt and Mr. Wadsworth, 0 years.
42
<PAGE>
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
Chairmen of Audit and Other Participants
Executive Committees
<S> <C> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Company is permitted to defer
50% to 100% of his or her annual compensation pursuant to a Deferred
Compensation Plan. Ms. Rimel and Messrs. Burt, Levy, McDonald and Wadsworth have
each executed a Deferred Compensation Agreement. Mr. Vogt participates in a
separate deferred compensation plan as president of the Company. Currently, the
deferring Directors and Mr. Vogt may select from among various Flag Investors
funds and the Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. in which all or
part of their deferral account shall be deemed to be invested. Distributions
from the deferring Directors/President's deferral accounts will be paid in cash,
in generally quarterly installments over a period of ten years.
Codes of Ethics
The Board of Directors of the Company has adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. The Code of Ethics permits access
persons to invest in securities for their own accounts, but requires compliance
with the Code's preclearance requirements. In addition, the Code provides for
trading "blackout periods" that prohibit trading by personnel within periods of
trading by the Company in the same security, subject to certain exceptions. The
Code also prohibits short-term trading profits and personal investment in
initial public offerings. The Code requires prior approval with respect to
purchases of securities in private placements.
The Board of Trustees of the Portfolio has adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. The Portfolio's Code of Ethics
permits access persons to invest in securities for their own accounts, provided
that the access persons comply with the provisions of the advisor's code of
ethics and requires that the Code be approved by the Board of Trustees. In
addition, the Fund's code contains reporting requirements applicable to
disinterested directors of the Fund.
The Portfolio's advisor, Bankers Trust, has also adopted a Code of
Ethics pursuant to Rule 17j-1 under the 1940 Act. The Bankers Trust Code of
43
<PAGE>
Ethics allows personnel to invest in securities for their own accounts, but
requires compliance with that Code's preclearance requirements and other
restrictions including "blackout periods" and minimum holding periods, subject
to certain exceptions. The Bankers Trust Code prohibits purchases of securities
in U.S. initial public offerings and requires prior approval for purchases of
securities in private placements.
These Codes of Ethics are on public file with, and are available from,
the SEC.
The Company's principal underwriter, ICC Distributors, Inc. is not
required to adopt a Code of Ethics as it meets the exception provided by Rule
17j-1(c)(3) under the 1940 Act.
INVESTMENT ADVISORY AND OTHER SERVICES
Bankers Trust is the Portfolio's investment advisor. Bankers Trust is
the principal banking subsidiary of Bankers Trust Corporation. Bankers Trust
Corporation is a wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG
is a banking company with limited liability organized under the laws of the
Federal Republic of Germany. Deutsche Bank AG is the parent company of a group
consisting of banks, capital markets companies, fund management companies,
mortgage banks, a property finance company, installment financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies.
At a Special Meeting held on October 8, 1999, shareholders of the
Portfolio approved a new investment advisory agreement with Morgan Grenfell,
Inc. On October 5, 1999, Morgan Grenfell, Inc. was renamed Deutsche Asset
Management Inc. ("DeAM Inc."). The new investment advisory agreement with DeAM
Inc. may be implemented within two years of the date of the Special Meeting upon
approval of a majority of the members of the Board of Trustees of the Portfolio
who are not "interested persons" ("Independent Trustees"). Shareholders of the
Portfolio also approved a new sub-advisory agreement among each portfolio, DeAM
Inc. and Bankers Trust under which Bankers Trust may perform certain of DeAM
Inc.'s responsibilities, at DeAM Inc.'s expense, upon approval of the
Independent Trustees, within two years of the date of the Special Meeting. DeAM
Inc. is a subsidiary of Deutsche Asset Management Ltd., a wholly owned
subsidiary of Deutsche Morgan Grenfell Group PLC, an investment holding company
which is, in turn, a wholly owned subsidiary of Deutsche Bank.
Prior to February 29, 2000, ICCC served as the Fund's advisor and
Glenmede Trust Company served as the Fund's sub-advisor. Advisory fees paid by
the Fund to ICCC and sub-advisory fees paid by ICCC to Glenmede for the last
three fiscal years were as follows:
44
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31,
Fees Paid to: 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
ICCC $0(1) $0(2) $ 1,461(3)
Glenmede $64,173 $3,399 $77,150
</TABLE>
----------
(1) Net of fee waivers of $94,386. During this period, ICCC also reimbursed
expenses of $106,660.
(2) Net of fee waivers of $98,993. During this period, ICCC also reimbursed
expenses of $73,256.
(3) Net of fee waivers of $103,734.
ICCC serves as the Fund's administrator, transfer and dividend
disbursing agent and provides accounting services to the Fund. Bankers Trust
provides custody services to the Fund. (See "Administrator, Custodian,
Accounting Services, Transfer Agent.")
DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the exclusive distributor of each class of the Fund's Shares pursuant to a
Distribution Agreement (the "Distribution Agreement").
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 Prospectuses; (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 Company's Board of Directors and the Company's Articles of
Incorporation and By-Laws; and (v) provide the Company'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 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
Company's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares (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 Company provided that it is approved at least annually by (i) a vote of a
majority of the outstanding voting securities of the Company or (ii) a vote of a
majority of the Company's Board of Directors including a majority of the
Independent Directors and so long as the Fund's Plans of Distribution are
approved at least annually by the Independent Directors in person at a meeting
called for the purpose of voting on such approval.
45
<PAGE>
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 Company may enter into Shareholder Servicing
Agreements with certain financial institutions, including DB 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 Company may also
enter into Shareholder Servicing Agreements pursuant to which the Administrator
or its affiliates will provide compensation out of its own resources. State
securities laws may require banks and financial institutions to register as
dealers.
As compensation for providing distribution services as described above
for the Class A Shares, ICC Distributors receives an annual fee, paid monthly
equal to 0.25% of the average daily net assets of the Class A Shares. With
respect to Class A Shares, ICC Distributors expects to allocate up to all of its
fee to Participating Dealers and Shareholder Servicing Agents. As compensation
for providing distribution services as described above for the Class B Shares
and Class C Shares respectively. ICC Distributors receives an annual fee, paid
monthly, equal to 0.75% of the average daily net assets of the Class B Shares
and Class C Shares, respectively. In addition, with respect to the Class B and
Class C Shares, ICC Distributors receives a shareholder servicing fee at an
annual rate of 0.25% of the respective average daily net assets of the Class B
and the Class C Shares. (See the applicable Prospectus.) ICC Distributors
receives no distribution or shareholder service fees for distributing the
Institutional Shares.
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:
<TABLE>
<CAPTION>
Year Ended October 31,
Fee 1999 1998 1997
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fee(1) $31,462(2) $32,998(2) $35,065(3)
Class B Service Fee(4) N/A N/A N/A
Class C Service Fee(4) N/A N/A N/A
</TABLE>
----------
(1) 12b-1 fees received from Class A Shares only.
46
<PAGE>
(2) Fees received by ICC Distributors.
(3) Of this amount, Alex. Brown & Sons Incorporated, 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.
(4) Class B Shares and Class C Shares were not offered prior to February
29, 2000.
Pursuant to Rule 12b-1 under the 1940 Act, 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 for each of its classes of Shares
(the "Plans"). Under each Plan, the Company, on behalf of each class, except the
Institutional class pays a fee to ICC Distributors for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreement, and
ICC Distributors is authorized to make payments out of its fee to Participating
Dealers and Shareholder Servicing Agents. The Plans will remain in effect from
year to year thereafter, as specifically approved (a) at least annually by the
Company's Board of Directors 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 Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans 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
applicable class. The Plans may be terminated at any time upon 60 days' notice,
without penalty, by a vote of a majority of the Company's Independent Directors
or by a vote of a majority of the applicable class' outstanding Shares (as
defined under "Capital Stock").
During the continuance of the Plans, the Company's Board of Directors
will be provided for their review, at least quarterly, a written report
concerning the payments made under the Plans 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 Plans, the
selection and nomination of the Company's Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
The Company's distributor received commissions on the sale of the
Fund's Class A Shares (of which only a portion was retained) in the following
amounts:
47
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1999 1998 1997
---- ---- ----
Class Received Retained Received Retained Received Retained
----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
Commissions $6,608(1) $2,056(1) $ 0 $ 0 $10,338(2) $9,938(3)
Class B Shares
Contingent Deferred
Sales Charge(4) N/A N/A N/A N/A N/A N/A
Class C Shares
Contingent Deferred
Sales Charge(4) N/A N/A N/A N/A N/A N/A
</TABLE>
----------
(1) By ICC Distributors.
(2) Of this amount, Alex. Brown & Sons Incorporated, the Company's
distributor prior to August 31, 1997, received $10,234 and ICC
Distributors, the Company's distributor effective August 31, 1997
received $104.
(3) Of commissions received, Alex. Brown & Sons Incorporated, retained
$9,938 and ICC Distributors retained $0, respectively.
(4) Class B Shares and Class C Shares were not offered prior to February
29, 2000.
The Company will pay all costs associated with its organization and
registration under the 1933 Act and the 1940 Act. Except as described elsewhere,
the Fund or the Portfolio pays or causes to be paid all continuing expenses of
the Fund and the Portfolio, 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 Bankers Trust, ICCC or ICC
Distributors.
The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.
48
<PAGE>
BROKERAGE
The Advisor is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Portfolio,
the selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of a Portfolio are frequently placed by the Advisor with the issuer or
a primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Portfolio. Trading does, however,
involve transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may also
include fees paid to third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.
The Advisor seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and skill
required of the executing broker-dealer through familiarity with commissions
charged on comparable transactions, as well as by comparing commissions paid by
the Portfolio to reported commissions paid by others. The Advisor reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Advisor is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for the Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Portfolio may determine, the Advisor may consider sales of
shares of the Fund and of other investment company clients of Bankers Trust as a
factor in the selection of broker-dealers to execute portfolio transactions.
Bankers Trust will make such allocations if commissions are comparable to those
charged by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research information
in managing the Portfolio's assets, as well as the assets of other clients.
49
<PAGE>
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Portfolio and to the Advisor, it is the
opinion of the management of the Portfolio that such information is only
supplementary to the Advisor's own research effort, since the information must
still be analyzed, weighed and reviewed by the Advisor's staff. Such information
may be useful to the Advisor in providing services to clients other than the
Portfolio, and not all such information is used by the Advisor in connection
with the Portfolio. Conversely, such information provided to the Advisor by
brokers and dealers through whom other clients of the Advisor effect securities
transactions may be useful to the Advisor in providing services to the
Portfolio.
In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of the Advisor's other clients. Investment
decisions for the Portfolio and for the Advisor's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment advisor,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Portfolio is concerned. However, it is believed that
the ability of the Portfolio to participate in volume transactions will produce
better executions for the Portfolio.
Prior to February 29, 2000, ICCC served as the Fund's advisor and
Glenmede Trust Company served as the Fund's sub-advisor. Glenmede directed
transactions to broker-dealers and paid related commissions because of research
services in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Transactions Directed $ 1,633,295 $ 9,557,179 $ 6,272,458
Commissions Paid $ 2,674 $ 22,749 $ 16,973
</TABLE>
Prior to February 29, 1999, subject to the above considerations, the
Board of Directors had authorized the Fund to effect portfolio transactions
through the Advisor or its affiliates. At the time of such authorization, the
Board adopted certain policies and procedures incorporating the standards of
Rule 17e-1 under the 1940 Act, which requires that the commissions paid the
50
<PAGE>
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 required ICCC and
Glenmede to furnish reports and to maintain records in connection with such
reviews. For the fiscal years ended October 31, 1999 and October 31, 1998 and
for the period from September 1, 1997 through October 31, 1997 the Fund did not
pay any brokerage commissions to DB Alex. Brown or its affiliates. For the
period from November 18, 1996 through August 31, 1997, the Fund paid no
brokerage commissions to DB Alex. Brown.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the 1940 Act) which the Fund has
acquired during its most recent fiscal year. As of October 31, 1999, the Fund
held a 5.10% repurchase agreement issued by Goldman Sachs & Co. valued at
$1,336,000. Goldman Sachs & Co. is one of the Fund's "regular brokers or
dealers."
CAPITAL STOCK
Under the Company's Articles of Incorporation, the Company is
authorized to issue 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 Company'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 Company currently has one Series and the Board
has designated four classes of shares: Flag Investors International Equity Fund
Class A Shares (formerly known as the Flag Investors International Fund Class A
Shares), Flag Investors International Equity Fund Class B Shares, Flag Investors
International Equity Fund Class C Shares and Flag Investors International Equity
Fund Institutional Shares. The Flag Investors International Equity Fund
Institutional Shares have not been offered prior to the date of this Statement
of Additional Information. In the event separate series or classes are
established, all Shares of the Company, 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 Company (other than
12b-1 and any applicable service fees) are prorated between all classes of a
series based upon the relative net assets of each class. Any matters affecting
any class exclusively would be voted on by the holders of such class.
Shareholders of the Company 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 Company. In such event, the remaining holders cannot elect any members of
the Board of Directors of the Company.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The Company's issued and outstanding Shares are fully paid
and non-assessable. In the event of liquidation or dissolution of the Company,
each Share is entitled to its portion of the Company'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.
51
<PAGE>
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.
ADMINISTRATOR, CUSTODIAN, ACCOUNTING SERVICES AND TRANSFER AGENT
Under a Master Services Agreement, ICCC is obligated on a continuous
basis to provide such administrative service as the Board of Directors of the
Company reasonably deems necessary for the proper administration of the Company.
ICCC will generally assist in all aspects of the Fund's operations; supply and
maintain office facilities (which may be in ICCC's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents of the Company), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities, if applicable; supply supporting
documentation for meetings of the Board of Directors; provide monitoring reports
and assistance regarding compliance with the Company's Articles of
Incorporation, By-Laws, investment objective and policies and with applicable
federal and state securities laws; arrange for appropriate insurance coverage;
calculate the NAV, net income and realized capital gains or losses of the Fund;
and negotiate arrangements with, and supervise and coordinate the activities of,
agents and others retained to supply services.
Bankers Trust Company 130 Liberty Street, New York, New York 10006, has
been retained to act as custodian of the Company's and the Portfolio's assets.
Bankers Trust has presented information to the Portfolio's Board of Directors
regarding any non-branch correspondent institutions with which it may enter into
agreements to hold the Portfolio'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 1940 Act and to be consistent with the best
interests of the Portfolio and its shareholders. Bankers Trust receives such
compensation from the Company for its services as Custodian as may be agreed to
from time to time by Bankers Trust and the Company. For the fiscal year ended
October 31, 1999, the Company paid Bankers Trust $16,013 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
Company pays ICCC up to $16.07 per account per year, plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended October 31, 1999, such fees totaled $18,644.
52
<PAGE>
ICCC also provides certain accounting services to the Company. As
compensation for these services, ICCC receives an annual fee, calculated daily
and paid monthly as shown below.
<TABLE>
<CAPTION>
Average Daily Net Assets Incremental Annual Accounting Fee
<S> <C> <C>
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%
</TABLE>
In addition, the Company will reimburse ICCC for the following out of
pocket expenses incurred in connection with ICCC's performance of its services
under the Master Services Agreement: express delivery service, independent
pricing and storage. For the fiscal year ended October 31, 1999, ICCC received
accounting fees of $27,067.
INDEPENDENT ACCOUNTANTS
The independent accountant for the Company is PricewaterhouseCoopers
LLP located at 250 West Pratt Street, Suite 2100, Baltimore, Maryland 21201. For
the fiscal years ended October 31, 1994 through October 31, 1999, the annual
financial statements of the Company were audited by Deloitte & Touche LLP whose
report thereon appears in the Company's Annual Report, and have been included
therein 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 Princeton-Forrestal Village, 116-300 Village Boulevard, Princeton,
New Jersey 08540.
53
<PAGE>
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Company.
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:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-,
5-, or 10-year periods (or fractional portion
thereof) of a hypothetical $1,000 payment made
at the beginning of the 1-, 5- or 10-year
periods.
54
<PAGE>
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 1-, 5-, and 10-year periods or a shorter period dating from the
effectiveness of the Company'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, 1999** were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended October Five-Year Period Ended Ten-Year Period Ended October 31,
31, 1999 October 31, 1999 1999
Ending Ending Ending
Redeemable Total Return Redeemable Total Return Redeemable Value Total
Class Value Value Return
<S> <C> <C> <C> <C> <C> <C>
Class A
*November 18, 1996 $1,179 7.94% $1,483 8.21% $1,891 6.58%
Class B
*January 18, 2000 N/A N/A N/A N/A N/A N/A
Class C
*January 18, 2000 N/A N/A N/A N/A N/A N/A
Institutional Class
*July 31, 2000 N/A N/A N/A N/A N/A N/A
</TABLE>
----------
* Inception Date
** The management of the Fund changed effective February 29, 2000. These returns
reflect the performance of the prior Fund management.
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, 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.
55
<PAGE>
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 1999
was 18%, in fiscal year 1998 was 27% and in fiscal year 1997 was 21%.
56
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Company management's knowledge, the following persons owned of
record or beneficially 5% or more of the Fund's outstanding Shares, as of July
5, 2000.
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage of Ownership
---------------- ------ ------------ -----------------------
<S> <C> <C> <C>
DB Alex. Brown LLC
FBO 201-16290-17 |X| 5.85% of International Equity A Shares
P O Box 1346
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 201-16294-13 |X| 5.52% of International Equity A Shares
P O Box 1346
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 201-68006-13 |X| 5.04% of International Equity A Shares
P O Box 1346
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 201-16298-19 |X| 6.70% of International Equity A Shares
P O Box 1346
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 222-08209-10 |X| 7.43% of International Equity B
P O Box 1346 Shares
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 222-80525-16 |X| 5.61% of International Equity B
P O Box 1346 Shares
Baltimore, MD 21203
NFSC PRBO #A7D-025895
Family Trust U/W Samuel A. SPE |X| |X| 6.43% of International Equity B
Libby S Berman Shares
U/A 03/25/93
409 Washington Avenue, Ste. 900
Towson, MD 21204-4905
Mark C. Walker
PAS A/C |X| |X| 7.36% of International Equity B
418 N Monroe Street Shares
Hinsdale IL 60521-3151
DB Alex. Brown LLC
FBO 210-24203-18 |X| 12.75% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
Salomon Smith Barney Inc
0014146A046 |X| 5.39% of International Equity B
333 W 34th Street #3 Shares
New York, NY 10001-2483
DB Alex. Brown LLC
FBO 204-19875-18 |X| 18.55% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 204-19817-19 |X| 14.80% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DB Alex. Brown LLC
FBO 204-19806-12 |X| 7.52% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 254-05702-11 |X| 7.28% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
DB Alex. Brown LLC
FBO 204-19888-13 |X| 6.38% of International Equity C
P O Box 1346 Shares
Baltimore, MD 21203
</TABLE>
The Directors and executive officers as a group (12 persons)
beneficially owned 1.49% of the Fund's total outstanding Shares, as of July 5,
2000.
57
<PAGE>
FINANCIAL STATEMENTS
The Company furnishes shareholders with semi-annual and annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Company's independent accountants.
The financial statements for the Fund for the period ended April 30,
2000 and the fiscal year ended October 31, 1999 are incorporated herein by
reference to the Company's Semi-Annual Report dated April 30, 2000 and the
Company's Annual Report dated October 31, 1999, respectively.
58
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
(a)(1) Articles of Incorporation incorporated by reference to Exhibit (1)(a) to
Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-96-000106) on February 28, 1996.
(a)(2) Articles Supplementary incorporated by reference to Exhibit (1)(b) to
Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-96-000106) on February 28, 1996.
(a)(3) Articles Supplementary incorporated by reference to Exhibit (1)(c) to
Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-96-000106) on February 28, 1996.
(a)(4) Articles Supplementary dated July 26, 1999, incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR on February 29, 2000.
(a)(5) Articles Supplementary dated September 28, 1999, incorporated by
reference to Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-8479), filed with the Securities and
Exchange Commission via EDGAR on February 29, 2000.
(a)(6) Articles of Amendment to change Fund's name, incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR on February 29, 2000.
(a)(7) Articles Supplementary dated March 28, 2000, incorporated by reference to
Exhibit (a)(7) to Post-Effective Amendment No. 25 to Registrant's Registration
Statement on Form N-1A (File No. 33-8479), filed with the Securities and
Exchange Commission via EDGAR on June 2, 2000.
(b)(1) By-Laws as amended through July 28, 1999, incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR on February 29, 2000.
(c) Specimen Security with respect to Flag Investors Shares incorporated by
reference to Exhibit 1 (Articles of Incorporation), as amended to date, to
Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479) filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-96-000106) on February 28, 1996 and
Exhibit 2 (By-Laws) as amended to date, to Post-Effective Amendment No. 17 to
such Registration Statement, filed with the Securities and Exchange commission
via EDGAR (Accession No. 950116-97-000357) on February 25, 1997.
<PAGE>
(d) Not Applicable.
(e)(1) Distribution Agreement dated August 31, 1997 between Registrant and ICC
Distributors, Inc. incorporated by reference to Exhibit (6)(a) to Post-Effective
Amendment No. 18 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-8479), filed with the Securities and Exchange Commission
via EDGAR (Accession No. 950116-98-000474) on February 25, 1998.
(e)(2) Form of Sub-Distribution Agreement between ICC Distributors, Inc. and
Participating Dealers incorporated by reference to Exhibit (6)(b) to
Post-Effective Amendment No. 18 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000474) on February 25, 1998.
(e)(3) Form of Shareholder Servicing Agreement between Registrant and
Shareholder Servicing Agents incorporated by reference to Exhibit (6)(c) to
Post-Effective Amendment No. 18 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000474) on February 25, 1998.
(e)(4) Form of Distribution Agreement between Registrant and ICC Distributors,
incorporated by reference to Exhibit (e)(4) to Post-Effective Amendment No. 25
to Registrant's Registration Statement on Form N-1A (File No. 33-8479), filed
with the Securities and Exchange Commission via EDGAR on June 2, 2000.
(e)(5) Form of Sub-Distribution Agreement between ICC Distributors, Inc. and
Participating Dealers, incorporated by reference to Exhibit (e)(5) to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(e)(6) Form of Shareholder Servicing Agreement between Registrant and
Shareholder Servicing Agents, incorporated by reference to Exhibit (3)(6) to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(f) None.
(g) Custodian Agreement dated June 5, 1998 between Registrant and Bankers Trust
Company, incorporated by reference to Exhibit (g) to Post-Effective Amendment
No. 19 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479) filed with the Securities and Exchange Commission via EDGAR on December
30, 1998.
(h)(1) Master Services Agreement between Registrant and Investment Company
Capital Corp., with Appendices for the provision of Administration, Transfer
Agency and Accounting Services, incorporated by reference to Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-8479), filed with the Securities and Exchange Commission
via EDGAR on February 29, 2000.
<PAGE>
(h)(5) Expense Limitation Agreement among Flag Investors Series Funds, Inc.,
International Equity Portfolio, Bankers Trust Company and Investment Company
Capital Corp., filed herewith.
(i) Opinion of Counsel, incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(j)(1) Consent of Accountant, filed herewith.
(j)(2) Consent of Independent Auditors, filed herewith.
(k) None.
(l) Form of Subscription Agreement between Registrant and Investors incorporated
by reference to Exhibit (13) to Post-Effective Amendment No. 16 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-8479), filed with the
Securities and Exchange Commission via EDGAR (Accession No. 950116-96-000106) on
February 28, 1996.
(m)(1) Distribution Plan with respect to Flag Investors International Fund Class
A Shares incorporated by reference to Exhibit (15)(a) to Post-Effective
Amendment No. 16 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-8479), filed with the Securities and Exchange Commission
via EDGAR (Accession No. 950116-96-000106) on February 28, 1996.
(m)(2) Amended Distribution Plan with respect to Flag Investors International
Fund Class A Shares incorporated by reference to Exhibit (15)(b) to
Post-Effective Amendment No. 18 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000474) on February 25, 1998.
(m)(3) Distribution Plan with respect to Flag Investors International Equity
Fund Class B Shares, incorporated by reference to Post-Effective Amendment No.
24 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479), filed with the Securities and Exchange Commission via EDGAR on
February 29, 2000.
(m)(4) Distribution Plan with respect to Flag Investors International Equity
Fund Class C Shares, incorporated by reference to Post-Effective Amendment No.
24 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479), filed with the Securities and Exchange Commission via EDGAR on
February 29, 2000.
(n) Not Applicable
(o)(4) Amended Rule 18f-3 Plan, incorporated by reference to Exhibit (o)(4) to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(p)(1) Flag Investors Funds Code of Ethics, incorporated by reference to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(p)(2) Deutsche Asset Management Code of Ethics, incorporated by reference to
Post-Effective Amendment No. 25 to Registrant's Registration Statement on Form
N-1A (File No. 33-8479), filed with the Securities and Exchange Commission via
EDGAR on June 2, 2000.
(p)(3) International Equity Portfolio Code of Ethics, filed herewith.
<PAGE>
(q)(1) Powers of Attorney, Messrs. Semans, Burt, Hardiman, Levy, McDonald,
Wadsworth, Vogt and Rizzo, incorporated by reference to Post-Effective Amendment
No. 20 to Registrants Registration Statement on Form N-1A (Registration No.
33-8479) filed with the Securities and Exchange Commission on November 17, 1999.
(q)(2) Powers of Attorney, Ms. Rimel and Mr. Hale, incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-8479), filed with the Securities and Exchange
Commission via EDGAR on February 29, 2000.
(q)(3) Powers of Attorney, Messrs. Biggar, Dill, Gruber, Hale, Herring, Langton,
Saunders, Van Benschoten, Keffer and Rizzo incorporated by reference to
Post-Effective amendment No. 20 to Registrants Registration Statement on Form
N-1A (Registration No. 33-8479) filed with the Securities and Exchange
Commission on November 17, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification.
Sections 1, 2, 3 and 4 of Article VIII of Registrant's Articles of
Incorporation, included as Exhibit a(1) to this Registration Statement and
incorporated herein by reference, provide as follows:
Section 1. To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
Section 2. The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify and advance expenses to its officers to the
same extent as its directors and to such further extent as is consistent with
law. The Board of Directors of the Corporation may make further provision for
indemnification of directors, officers, employees and agents in the By-Laws of
the Corporation or by resolution or agreement to the fullest extent permitted by
the Maryland General Corporation law.
Section 3. No provision of this Article VIII shall be effective to
protect or purport to protect any director or officer of the Corporation against
any liability to the Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
<PAGE>
Section 4. References to the Maryland General Corporation Law in this
Article VIII are to such law as from time to time amended. No further amendment
to the Charter of the Corporation shall decrease, but may expand, any right of
any person under this Article VIII based on any event, omission or proceeding
prior to such amendment.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event of a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered) the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue. In the absence of a determination by a court
of competent jurisdiction, the determinations that indemnification against such
liabilities is proper, and advances can be made, are made by a majority of a
quorum of the disinterested, non-party directors of the Fund, or an independent
legal counsel in a written opinion, based on review of readily available facts.
Item 26. Business and Other Connections of Investment Advisor.
(a) Investment Advisor
During the last two fiscal years, no director or officer of Investment
Company Capital Corp., the Fund's investment advisor, has engaged in any other
business, profession, vocation or employment of a substantial nature other than
that of the business of investment management and, through affiliates,
investment banking. Effective February 29, 2000, the Fund converted to a feeder
fund and has no investment advisor. Bankers Trust Company serves as the
investment advisor to the master portfolio in which the Fund invests.
Item 27. Principal Underwriters.
(a) ICC Distributors, Inc., the Distributor for shares of the Registrant, acts
as principal underwriter for the following open-end investment companies:
BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity
500 Index Portfolio, Capital Appreciation Portfolio, Asset Management
Portfolio, BT Investment Portfolios, Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Communications Fund, Inc., Flag Investors
Emerging Growth Fund, Inc., the Flag Investors Total Return U.S. Treasury
Fund Shares of Total Return U.S. Treasury Fund, Inc., the Flag Investors
Managed Municipal Fund Shares of Managed Municipal Fund, Inc., Flag
Investors Short-Intermediate Income Fund, Inc., Flag Investors Value
Builder Fund, Inc., Flag Investors Real Estate Securities Fund, Inc., Flag
Investors Equity Partners Fund, Inc., Flag Investors Series Funds,
Inc.(formerly known as Flag Investors International Fund, Inc.), Flag
Investors Funds, Inc. (formerly known as Deutsche Funds, Inc.), Flag
Investors Portfolios Trust (formerly known as Deutsche Portfolios), Morgan
Grenfell Investment Trust, Glenmede Fund, Inc. and Glenmede Portfolios.
<PAGE>
(b)
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Position and Offices
Business Address* Principal Underwriters with Registrant
<S> <C> <C>
John Y. Keffer President None
Ronald H. Hirsch Treasurer None
Nanette K. Chern Chief Compliance Officer None
David I. Goldstein Secretary None
Benjamin L. Niles Vice President None
Frederick Skillin Assistant Treasurer None
Marc D. Keffer Assistant Secretary None
</TABLE>
--------------
* Two Portland Square
Portland, Maine 04101
(c) Not Applicable.
Item 28. Location of Accounts and Records.
Investment Company Capital Corp. ("ICCC"), One South Street, Baltimore,
Maryland 21202, the Registrant's administrator, transfer agent, dividend
disbursing agent and accounting services provider, will maintain physical
possession of each such account, book or other document of Registrant except for
the records maintained by Bankers Trust Company, 130 Liberty Street, New York,
New York 10006 relating to its functions as the Registrant's custodian and the
investment advisor to the Master Portfolio, the records maintained by ICC
Distributors, Inc., Two Portland Square, Portland, Maine 04101 relating to its
functions as the Registrant's distributor. Prior to February 29, 2000, ICCC
served as investment advisor and The Glenmede Trust Company at One Liberty
Place, 1650 Market Street, Philadelphia, PA 19103, served as sub-advisor to the
Registrant and maintain physical possession of relevant records relating to that
time period.
In particular, with respect to the records required by Rule
31a-1(b)(1), ICCC and Bankers Trust Company each maintains physical possession
of all journals containing itemized daily records of all purchases and sales of
securities, including sales and redemptions of Fund securities and Bankers Trust
Company also maintains physical possession of all receipts and deliveries of
securities (including certificate numbers if such detail is not recorded by the
custodian or transfer agent), all receipts and disbursements of cash, and all
other debts and credits.
Item 29. Management Services.
None.
Item 30. Undertakings.
Not Applicable.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund certifies that it meets all of the
requirements for effectiveness of this registration statement under Rule 485(b)
under the Securities Act and has duly caused this Post-Effective Amendment No.
26 to Registration Statement No. 33-8479 to be signed on its behalf by the
undersigned, duly authorized in the city of Baltimore, in the state of Maryland,
on the 31st day of July, 2000.
FLAG INVESTORS SERIES FUNDS, INC.
By: /s/ Carl Vogt, Esq.*
--------------------------
Carl Vogt, Esq., President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities on the date(s) indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
*/s/ Truman T. Semans Chairman and Director July 31, 2000
------------------------
Truman T. Semans
*/s/ Richard R. Burt Director July 31, 2000
------------------------
Richard R. Burt
** /s/ Richard T. Hale Director July 31, 2000
------------------------
Richard T. Hale
*/s/ Joseph R. Hardiman Director July 31, 2000
------------------------
Joseph R. Hardiman
*/s/ Louis E. Levy Director July 31, 2000
------------------------
Louis E. Levy
*/s/ Eugene J. McDonald Director July 31, 2000
------------------------
Eugene J. McDonald
**/s/ Rebecca W. Rimel Director July 31, 2000
------------------------
Rebecca W. Rimel
*/s/ Robert H. Wadsworth Director July 31, 2000
-------------------------
Robert H. Wadsworth
*/s/ Carl W. Vogt, Esq. President July 31, 2000
-------------------------
Carl W. Vogt, Esq.
*/s/ Charles A. Rizzo Chief Financial and July 31, 2000
---------------------- Accounting Officer
Charles A. Rizzo
By: /s/ Daniel O. Hirsch
---------------------
*Daniel O. Hirsch, Attorney-In-Fact July 31, 2000
</TABLE>
* By Power of Attorney - incorporated by reference to Post-Effective Amendment
No. 20 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479) filed with the Securities and Exchange Commission on November 17, 1999.
**By Power of Attorney - incorporated by reference to Post-Effective Amendment
No. 24 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479), filed with the Securities and Exchange Commission via EDGAR on
February 29, 2000.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund certifies that it meets all of the
requirements for effectiveness of this registration statement under Rule 485(b)
under the Securities Act and has duly caused this Post-Effective Amendment No.
26 to Registration Statement No. 33-8479 to be signed on its behalf by the
undersigned, duly authorized in the city of Baltimore, in the state of Maryland,
on the 31st day of July, 2000.
INTERNATIONAL EQUITY PORTFOLIO
By: /s/ John Y Keffer*
-------------------------------
John Y. Keffer, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities on the date(s) indicated with respect to INTERNATIONAL EQUITY
PORTFOLIO.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Daniel O. Hirsch Secretary July 31, 2000
---------------------- (Attorney in Fact for the
Daniel O. Hirsch Persons Listed Below)
/s/ CHARLES A. RIZZO* Treasurer (Principal
--------------------- Financial and Accounting Officer)
Charles A. Rizzo
/s/ CHARLES P. BIGGAR* Trustee
----------------------
Charles P. Biggar
/s/ S. LELAND DILL* Trustee
---------------------
S. Leland Dill
/s/ MARTIN J. GRUBER* Trustee
---------------------
Martin J. Gruber
/s/ RICHARD T. HALE* Trustee
---------------------
Richard T. Hale
/s/ RICHARD J. HERRING* Trustee
------------------------
Richard J. Herring
/s/ BRUCE E. LANGTON* Trustee
------------------------
Bruce E. Langton
/s/ PHILIP SAUNDERS, JR.* Trustee
-------------------------
Philip Saunders, Jr.
/s/ HARRY VAN BENSCHOTEN* Trustee
-------------------------
Harry Van Benschoten
</TABLE>
* By Power of Attorney - incorporated by reference to Post-Effective Amendment
No. 20 to Registrant's Registration Statement on Form N-1A (Registration No.
33-8479) filed with the Securities and Exchange Commission on November 17, 1999.
<PAGE>
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch
are authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Communications Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Total
Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc., Flag Investors Value Builder Fund, Inc.,
North American Government Bond Fund, Inc., Flag Investors Real Estate Securities
Fund, Inc., Flag Investors Equity Partners Fund, Inc. and ISI Strategy Fund,
Inc. on behalf of each Fund's President pursuant to a properly executed power of
attorney.
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch
are authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Communications Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Total
Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc., Flag Investors Value Builder Fund, Inc.,
North American Government Bond Fund, Inc., Flag Investors Real Estate Securities
Fund, Inc., Flag Investors Equity Partners Fund, Inc. and ISI Strategy Fund,
Inc. on behalf of each Fund's Chief Financial Officer pursuant to a properly
executed power of attorney.
NOTE: Flag Investors Series Funds, Inc. was formerly known as Flag Investors
International Fund, Inc.
