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(LOGO)
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
(Institutional Shares)
This mutual fund (the "Fund") is an open-end diversified mutual fund
seeking long-term capital appreciation. The Fund will invest primarily in a
diversified portfolio of small and mid-sized emerging growth companies.
Flag Investors Institutional Shares of the Fund ("Institutional Shares")
are available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
Participating Dealers and may be purchased only by eligible institutions or by
clients of investment advisory affiliates of Alex. Brown. (See "How to Invest
in Institutional Shares.")
This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated February 28, 1995, as amended through
November 1, 1995, has been filed with the Securities and Exchange Commission
(the "SEC") and is hereby incorporated by reference. It is available upon
request and without charge by calling the Fund at (800) 767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is November 1, 1995
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FLAG INVESTORS
EMERGING GROWTH FUND, INC.
(INSTITUTIONAL SHARES)
135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
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Page
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1. Fund Expenses ................................... 2
2. Financial Highlights ............................ 2
3. Investment Program .............................. 6
4. Investment Restrictions ......................... 10
5. How to Invest in Institutional Shares ........... 10
6. How to Redeem Institutional Shares .............. 13
7. Telephone Transactions ........................... 14
8. Dividends and Taxes ............................. 14
9. Management of the Fund .......................... 15
10. Investment Advisor .............................. 16
11. Distributor ..................................... 17
12. Custodian, Transfer Agent, Accounting Services .. 17
13. Performance Information ......................... 18
14. General Information ............................. 19
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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the Fund or
by its distributor in any jurisdiction in which such offering may not
lawfully be made.
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1. FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES: (AS A PERCENTAGE OF OFFERING PRICE)
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Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None
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ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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Management Fees ........................................ .47%
12b-1 Fees ............................................. None
Other Expenses ......................................... .78%
Total Fund Operating Expenses .......................... 1.25%
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EXAMPLE:
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You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period: 1 year 3 years 5 years 10 years
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$13 $40 $71 $161
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THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly or indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor" and "Distributor.") The Expenses
and Example appearing in the table above are based on the Fund's expenses for
the Class A Shares, another class of shares offered by the Fund, for the
fiscal year ended October 31, 1994, less 12b-1 fees of .25%.
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2. FINANCIAL HIGHLIGHTS
The Fund has not offered the Institutional Shares prior to the date of
this Prospectus. However, the Fund has offered another class of shares since
1987. Historical financial information about the Fund is not fully applicable
to the Institutional Shares because the expenses paid by the Fund in the past
differ from those the Institutional Shares will incur. (See "Fund Expenses.")
Nevertheless, historical information about the Fund may be useful to investors
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if they take into account the differences in expenses. Accordingly, the
financial highlights included in this table are a part of the Fund's financial
statements for the Class A Shares for the periods indicated and (except for the
unaudited financial statements for the six-month period ended April 30, 1995)
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
financial statements for the Class A Shares for the fiscal year ended October
31, 1994 and the report thereon of Coopers & Lybrand L.L.P. and the unaudited
financial statements for such shares for the six-month period ended April 30,
1995 are included in the Statement of Additional Information. Additional
performance information for the Class A Shares is contained in the Fund's Annual
Report for the fiscal year ended October 31, 1994, which can be obtained at no
charge by calling the Fund at (800)767-FLAG.
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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Class A
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For the
six months For the Year Ended October 31,
ended April 30, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
(Unaudited)
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Per Share Operating Performance:
Net asset value at beginning of
period $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90 $ 10.87
------------- --------- --------- ---------- --------- ---------- ---------
Income from Investment Operations:
Net investment income/(loss) (0.03) (0.08) (0.08) (0.16) (0.10) (0.11) (0.05)
Net realized and unrealized
gain/(loss) on investments 0.82 0.47 1.20 (1.54) 6.40 (4.00) 4.13
Effect of other capital share
activity -- -- -- -- -- -- --
------------- --------- --------- ---------- --------- ---------- ---------
Total from Investment Operations 0.79 0.39 1.12 (1.70) 6.30 (4.11) 4.08
Less Distributions:
Dividends from net investment income
and short-term gains -- -- -- -- -- (1.86) (0.05)
Distributions from net realized
long-term gains (0.04) (1.51) (0.63) -- -- -- --
------------- --------- --------- ---------- --------- ---------- ---------
Total Distributions (0.04) (1.51) (0.63) -- -- (1.86) (0.05)
------------- --------- --------- ---------- --------- ---------- ---------
Net asset value at end of period $ 13.65 $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90
============= ========= ========= ========== ========= ========== =========
Total Return* 6.16 3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64%
Ratios to Average Net Assets:
Expenses(2) 1.50%(1) 1.50% 1.50% 1.46% 1.50% 1.50% 1.49%
Net investment income (loss)(3) (0.51)%(1) (0.73)% (0.52)% (0.92)% (0.76)% (0.92)% (0.42)%
Supplemental Data:
Net assets at end of period (000) $28,136 $23,302 $28,867 $38,924 $48,656 $31,678 $44,396
Portfolio turnover rate 25% 86% 133% 69% 79% 82% 108%
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For the period
December 30, 1987
(commencement of
operations) through
October 31, 1988
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Per Share Operating Performance:
Net asset value at beginning of
period $ 10.00
------------------
Income from Investment Operations:
Net investment income/(loss) 0.10
Net realized and unrealized
gain/(loss) on investments (0.88)
Effect of other capital share
activity 1.65
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Total from Investment Operations 0.87
Less Distributions:
Dividends from net investment income
and short-term gains --
Distributions from net realized
long-term gains --
------------------
Total Distributions --
------------------
Net asset value at end of period $ 10.87
==================
Total Return* 8.80%
Ratios to Average Net Assets:
Expenses(2) 1.47%(1)
Net investment income (loss)(3) 1.02%(1)
Supplemental Data:
Net assets at end of period (000) $26,159
Portfolio turnover rate 110%
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* Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.79% (annualized), 1.88%, 1.64%, 1.91%, 1.64%,
1.63% and 2.12% for the six months ended April 30, 1995, years ended
October 31, 1994, 1993, 1991, 1990 and 1989 and for the period December
30, 1987 through October 31, 1988, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment
income/loss to average net assets would have been (.79)% (annualized),
(1.10)%, (0.66)%, (1.17)%, (1.07)%, (0.56)% and 1.68% for the six months
ended April 30, 1995, for the fiscal years ended October 31, 1994, 1993,
1991, 1990 and 1989 and for the period December 30, 1987 through October
31, 1988, respectively.
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3. INVESTMENT PROGRAM
.............................................................................
INVESTMENT OBJECTIVES, POLICIES
AND RISK CONSIDERATIONS
The Fund's investment objective is long-term capital appreciation. The
Fund will seek to accomplish its objective through investments in small and
mid-sized emerging growth companies. The Fund's investment objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. There can be no assurance, however, that the Fund will achieve its
investment objective.
At the same time, the Fund will attempt to reduce the volatility inherent
in the price of individual investments in this sector of the market by
investing in a diversified portfolio of securities of companies that the
Fund's advisor believes are well managed and have experienced or have the
potential to experience rapid growth in revenues, earnings, assets and cash
flow. In general, an emerging growth company with approximately $250 million
or less in annual sales would be considered a small company; a mid-sized
emerging growth company would generally have annual sales in an approximate
range of between $250 million and $1 billion. Investments in such emerging
growth companies involve certain risks. (See "Special Risk Considerations.")
The Fund will also attempt to reduce the volatility of price changes by
investing in a broad cross-section of industries. The Fund's investments in
particular industries will change from time to time as investment
opportunities change, but the Fund invests primarily, but not exclusively, in
companies in the businesses of technology, health care, business services,
energy, transportation, financial services, consumer products and services
and capital goods.
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or
the "Advisor"), will seek to identify companies which, in its opinion, have
the ability to sustain a relatively high level of growth and profitability.
In selecting such companies, the Advisor will focus on a number of key
criteria including: industry position, management quality and experience,
accounting and financial policies, marketing and service capabilities and the
productivity of the product development effort.
Up to 25% of the Fund's assets may from time to time be invested in "other
investments" which do not otherwise meet the criteria set forth above, but
which the Advisor believes offer improved opportunities for growth not yet
fully appreciated by investors. Such investments may arise, for example, because
6
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of a new product developed by a mature company or a new opportunity in an
established business line of a mature company that shows growth potential
similar to that of emerging growth companies.
Under normal circumstances Fund assets will be invested as fully as
possible in the common stocks and securities convertible into common stocks
of small and mid-sized emerging growth companies (and at least 65% of the
Fund's assets will be so invested). The Fund will not invest more than 20% of
its assets in convertible securities. A convertible security is a
fixed-income security which may be converted at a stated price within a
specified period of time into a specified number of shares of common stock of
the same or a different issuer. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock but
lower than that afforded by a non-convertible debt security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation of the common stock into
which it is convertible.
However, even under normal circumstances, up to 35% of the Fund's assets
may be invested in U.S. Government securities, corporate bonds and
debentures, preferred stocks or money market instruments when the Advisor
believes doing so is appropriate in light of the Fund's investment objective
and market conditions. Such investments might be appropriate if, for example,
the Advisor believed there were not sufficient quantities of common stocks
available at appropriate prices or if the Advisor believed debt securities
were consistent with the Fund's investment objective because such securities
could enjoy capital appreciation due to an increase in their value caused by
changes in interest rates. In addition, for temporary defensive purposes, the
Fund may, without limitation as to the amount of the Fund's assets which may
be so invested, hold money market instruments. For purposes of the foregoing,
money market instruments will be limited to short-term obligations,
including government obligations, time deposits, bankers acceptances,
certificates of deposit, commercial paper and short-term debt securities,
which are rated in the top two categories published by Moody's Investors
Service, Inc. ("Moody's") or by Standard & Poor's Ratings Group ("Standard &
Poor's") or, if unrated, are of comparable quality as determined by the
Advisor under guidelines established by the Fund's Board of Directors.
Corporate bonds and debentures will be limited to those rated in the top
three categories published by Moody's or by Standard & Poor's (Aaa, Aa or A
by Moody's or AAA, AA or A by Standard & Poor's) or, if unrated, are of
comparable quality as determined by the Advisor under guidelines established
by the Fund's Board of Directors. Should the Fund maintain a temporary
defensive position, investment income would increase and might constitute a
greater percentage of the return of the Fund.
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Although it is the policy of the Fund to purchase and hold securities for
capital appreciation, each security in the portfolio will be evaluated on a
regular basis, and changes in the portfolio will be made whenever the Advisor
believes changes are advisable. Since investment changes usually will be made
without reference to the length of time a security has been held, a
significant number of short-term transactions may result. If the number of
changes in portfolio securities increases, the Fund will necessarily
experience higher transaction costs.
The Fund may engage to a limited extent in the following investment
practices, each of which may involve certain special risks. The Statement of
Additional Information contains more detailed information about these
practices, including limitations designed to reduce these risks.
1) Repurchase Agreements. The Fund may agree to purchase U.S. Government
securities from financial institutions, such as banks and broker- dealers,
subject to the seller's agreement to repurchase the securities at an
established time and price. The Fund will enter into repurchase agreements
only with banks and broker-dealers that have been determined to be
creditworthy by the Fund's Board of Directors under criteria established
with the assistance of the Advisor. The seller under a repurchase
agreement would be required to maintain the value of the securities
subject to the repurchase agreement at not less than the repurchase price.
Default by the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the
disposition of the underlying obligations. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the
Fund may be delayed or limited in its ability to sell the collateral.
2) Loans of Portfolio Securities. The Fund may also lend portfolio securities
to financial institutions in accordance with the investment restrictions
described in this Prospectus and the Statement of Additional Information.
The Fund lends portfolio securities only to those financial institutions
that are approved as creditworthy by the Fund's Board of Directors and
only against collateral consisting of cash or U.S. Government securities
with an aggregate value at all times equal to or greater than the value of
the securities loaned. The borrowers pay the Fund an amount equal to any
dividends or interest received on the securities they borrow. The Fund
retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower.
8
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.............................................................................
SPECIAL RISK CONSIDERATIONS
Although the Advisor will seek to invest in quality emerging growth
companies, there are risks to investors inherent in the characteristics of
emerging growth companies. Securities of small companies often will be
closely held with only a small proportion of their outstanding securities
held by the general public. Securities held by the Fund may have limited
trading markets that may be subject to wide price fluctuations. In view of
such factors, the net asset value of a share may vary significantly.
Accordingly, the Fund should not be considered suitable for investors who are
unable or unwilling to assume the risk of loss inherent in such a program,
nor should investment in the Fund be considered a balanced or complete
investment program.
The companies in which the Fund may invest may have relatively small
revenues and lack depth of management. Investments in such companies tend to
be volatile and are therefore speculative. They may have a small share of the
market for their products or services and they may provide goods or services
to a regional or limited market. Small companies may be unable to internally
generate funds necessary for growth or potential development or to generate
such funds through external financing on favorable terms. In addition, they
may be developing or marketing new products or services for which markets are
not yet established and may never become established. Such companies may have
or may develop only a regional market for products or services and thus be
affected by local or regional market conditions. Moreover, small companies
may have insignificant market share in their industries and may have
difficulty maintaining or increasing their market share in competition with
larger companies. Due to these and other factors, small companies may suffer
significant losses.
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. For the fiscal years ended October 31, 1994 and October
31, 1993, the Fund's portfolio turnover rate was 83% and 133%, respectively.
A high level of portfolio turnover may generate relatively high transaction
costs and may increase the amount of taxes payable by the Fund's
shareholders. (See "Dividends and Taxes.")
9
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4. INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 through 4 below are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the outstanding shares. The investment restriction
numbered 5 may be changed by a vote of the majority of the Board of
Directors. The Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for these purposes the U.S. Government and its agencies
and instrumentalities are not considered an issuer);
2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for these purposes the U.S.
Government and its agencies and instrumentalities are not considered an
issuer);
3) Invest in the securities of any single issuer if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of such
issuer;
4) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
5) Invest more than 10% of the Fund's net assets in illiquid securities,
including time deposits and repurchase agreements with maturities of
greater than seven days.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. HOW TO INVEST IN INSTITUTIONAL SHARES
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of
Alex. Brown may purchase Institutional Shares through Alex. Brown,
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135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800)
553-8080), through any securities dealer which has entered into a dealer
agreement with Alex. Brown ("Participating Dealers"), or by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price, as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000. There
is no minimum for clients of investment advisory affiliates of Alex. Brown or
for subsequent investments. The Fund reserves the right to reject any order for
the purchase of Institutional Shares.
Orders for purchases of Institutional Shares are accepted on any day on
which the New York Stock Exchange is open for business ("Business Day").
Purchase orders for Institutional Shares will be executed at the net asset
value per share next determined after receipt of the purchase order. Purchases
made through Alex. Brown or a Participating Dealer must be in accordance with
such entity's payment procedures. The Fund reserves the right to suspend the
sale of Institutional Shares at any time at the discretion of Alex. Brown and
the Advisor.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose portfolio securities will be given their market value where feasible.
If a portfolio security is traded on a national exchange or on an automated
dealer quotation system, such as NASDAQ, on the valuation date, the last
quoted sale price will generally be used. Securities or other assets for
which market quotations are not readily available are valued at their fair
value as determined in good faith under procedures established from time to
time and monitored by the Fund's Board of Directors. Debt obligations with
maturities of 60 days or less will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
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Institutional Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
.............................................................................
PURCHASES BY EXCHANGE
Shareholders of other Flag Investors Funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined on
the same day, provided that the exchange request is received prior to 4:00 p.m.
(Eastern Time), or the close of the New York Stock Exchange, whichever is
earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone
Transactions" below) or by regular or express mail at its address listed under
"Custodian, Transfer Agent, Accounting Services." The exchange privilege may be
exercised only in those states where the Institutional shares of such other
funds may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate this offer of exchange at any time on 60 days' prior written notice to
shareholders.
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.............................................................................
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are confirmed
and credited to the shareholder's account on the Fund's books maintained by
ICC or its agents. Shareholders will have the same rights and ownership with
respect to such shares as if certificates had been issued.
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6. HOW TO REDEEM INSTITUTIONAL SHARES
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at its
address listed under "Custodian, Transfer Agent Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up
to $500,000). (See "Telephone Transactions" below.)
A redemption request is effected at the net asset value per share next
determined after receipt of the order in proper form. Redemption orders received
after 4:00 p.m. (Eastern Time) will be effected at the net asset value next
determined on the following Business Day. Payment for redeemed Institutional
Shares will be made by wire transfer of funds to the shareholder's bank, or to a
Participating Dealer, as appropriate, upon receipt of a duly authorized
redemption request as promptly as feasible and, under most circumstances within
two Business Days.
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Dividends payable up to the date of the redemption of Institutional Shares
will be paid on the next dividend payment date. If all of the Institutional
Shares in an account have been redeemed on the dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' notice.
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7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or
express mail at its address listed "Custodian, Transfer Agent, Accounting
Services." Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted for
their accounts. This election may be made on the Application Form or at any time
thereafter by completing and returning appropriate documantation supplied by the
Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. Neither the
Fund nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or market
changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by express mail or
facsimile. (See "How to Invest in Institutional Shares - Purchases by Exchange"
and "How to Redeem Institutional Shares.")
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8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income (consisting of dividend and interest income
and the excess, if any, of net short-term capital gains over net long-term
capital losses) in the form of annual dividends. The Fund anticipates that it
will distribute substantially all of its "net capital gain" income (the
excess of net long-term capital gains over net short-term capital losses) for
each taxable year as a capital gains distribution.
Unless the shareholder elects otherwise, all income dividends and net capital
gains distributions, if any, will be reinvested in additional Institutional
Shares at net asset value per share on the payment date. Shareholders may elect
to terminate automatic reinvestment by giving written notice to the Transfer
Agent (see "Custodian, Transfer Agent, Accounting Services"), either directly or
through Alex. Brown or a Participating Dealer, at least five days before the
next date on which dividends or distributions will be paid.
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.............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will be taxed on the amounts so
distributed, regardless of whether such distributions are paid in cash or
reinvested in additional Institutional Shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time a shareholder has held the Institutional Shares. All other income
distributions are taxed to the shareholders as ordinary income. Corporate
shareholders may be entitled to the dividends received deduction on a portion
of dividends received from the Fund. Shareholders will be advised annually as
to the tax status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The sale, exchange, or redemption of Institutional Shares is a taxable event
for the Shareholder.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income (the excess of short and long-term capital gains
over short and long-term capital losses) prior to the end of each calendar
year to avoid liability for federal excise tax. Shareholders are advised to
consult their tax advisors concerning the application of federal, state and
local income taxes to investments in the Fund.
=============================================================================
9. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with the Advisor and with its custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's executive
officers and to the Advisor. Three Directors and all of the officers of the
Fund are officers or employees of Alex. Brown or the Advisor. The other
Directors of the Fund have no affiliation with Alex. Brown or the Advisor.
15
<PAGE>
The Fund's Directors and officers are as follows:
<TABLE>
<S> <C> <C> <C>
*Truman T. Semans Chairman Frederick L. Meserve, Jr. President
*W. James Price Director Edward J. Veilleux Vice President
*Richard T. Hale Director Gary V. Fearnow Vice President
James J. Cunnane Director Charles A. Reid Vice President
N. Bruce Hannay Director Brian C. Nelson Vice President and Secretary
John F. Kroeger Director Sandra J. Doeller Vice President
Louis E. Levy Director Diana M. Ellis Treasurer
Eugene J. McDonald Director Laurie D. DePrine Assistant Secretary
Harry Woolf Director
</TABLE>
- ------
*Messrs. Semans, Price and Hale are "interested persons" of the Fund within
the meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended.
=============================================================================
10. INVESTMENT ADVISOR
Investment Company Capital Corp., the Fund's investment advisor, is a
wholly-owned subsidiary of Alex. Brown, the Fund's distributor. Since the mid
1970's, Alex. Brown has provided services to and in respect of emerging
growth and later stage private companies in the United States, including
research and analysis, venture capital participation, investment banking and
investment advisory services. Subject to review by the Board of Directors and
to any limitations imposed by applicable law, the Fund may purchase
securities of such emerging growth companies. The Advisor is also the
investment advisor to, and Alex. Brown acts as distributor for, other mutual
funds in the Flag Investors family of funds and Alex. Brown Cash Reserve
Fund, Inc., which funds had approximately $4.1 billion of assets as of
September 30, 1995. The address of the Advisor is 135 East Baltimore Street,
Baltimore, Maryland 21202.
The Advisor is responsible for the general management of the Fund, as well
as for decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates under standards
established and periodically reviewed by the Board of Directors.
The Advisory Agreement provides for maximum annual fee equal to .85% of
Fund's average daily net assets. However, the actual amount of the fee is
contractually limited to an amount that would result in total expenses on
Class A Shares of no more than 1.50%. As compensation for its services for the
fiscal year ended Ocotber 31, 1994, the Advisor received from the Fund a fee
equal to .47% of the Fund's average daily net assets.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
16
<PAGE>
.............................................................................
PORTFOLIO MANAGER
Frederick L. Meserve, Jr., President of the Fund and a principal of Alex.
Brown, has had primary responsibility for managing the Fund's assets since
October of 1993. Mr. Meserve joined Alex. Brown in 1977. He has been a member
of Alex. Brown's Investment Committee since 1979. In addition, Mr. Meserve
has published a number of investment strategy reports on growth stocks. Mr.
Meserve received a B.S.&E. from Princeton University in 1960 and an M.B.A.
from Columbia School of Business in 1962.
=============================================================================
11. DISTRIBUTOR
Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, acts as
distributor of each class of the Fund's shares. Alex. Brown is an investment
banking firm which offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned subsidiary
of Alex. Brown Incorporated, which has engaged directly and through subsidiaries
and affiliates in the investment business since 1800. Alex. Brown is a member of
the New York Stock Exchange and other leading securities exchanges.
Headquartered in Baltimore, Maryland, Alex. Brown has offices throughout the
United States and, through subsidiaries, maintains offices in London, England,
Geneva, Switzerland and Tokyo, Japan. Alex. Brown receives no compensation for
distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
=============================================================================
12. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, acts as
custodian of the Fund's assets. Investment Company Capital Corp., 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553- 8080) is
the Fund's transfer and dividend disbursing agent and provides accounting
services to the Fund. As compensation for providing accounting services for
the period from January 1, 1994 through October 31, 1994, ICC received from
the Fund an annualized fee equal to .09% of the Fund's average daily net
assets. (See the Statement of Additional Information.) Prior to January 1,
1994, Alex. Brown provided accounting services to the Fund and for the period
17
<PAGE>
from November 1, 1993 through December 31, 1993, received an annualized fee
equal to .09% of the Fund's average daily net assets. ICC also serves as the
Fund's investment advisor.
=============================================================================
13. PERFORMANCE INFORMATION
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return over one, five and ten year periods or, if such
periods have not yet elapsed, shorter periods corresponding to the life of
the Fund. Such total return quotations will be computed by finding average
annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value according
to the required standardized calculation. The standardized calculation is
required by the SEC to provide consistency and comparability in investment
company advertising and is not equivalent to a yield calculation. If the Fund
compares its performance to other funds or to relevant indices, the Fund's
performance will be stated in the same terms in which such comparative data
and indices are stated, which is normally total return rather than yield.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500
Stock Index, the Russell 2000 Index, the Dow Jones Industrial Average, and
the NASDAQ OTC Composite and OTC Industrial Indices. The Fund may also use
total return performance data as reported in national financial and industry
publications that monitor the performance of mutual funds such as Money
Magazine, Forbes, Business Week, Barron's, Investor's Daily, IBC/Donoghue's
Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Institutional Shares may be purchased, although not
included in calculations of performance, will reduce performance results.
18
<PAGE>
=============================================================================
14. GENERAL INFORMATION
.............................................................................
DESCRIPTION OF SHARES
The Fund was incorporated under the laws of the State of Maryland on July
2, 1987 and is authorized to issue fifteen million shares of capital stock,
with a par value of $.001 per share. Shares have equal rights with respect to
voting. Voting rights are not cumulative, so the holders of more than 50% of
the outstanding shares voting together for the election of Directors may
elect all the members of the Board of Directors of the Fund. In the event of
liquidation or dissolution of the Fund, each share is entitled to its pro
rata portion of the Fund's assets after all debts and expenses have been
paid.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
Emerging Growth Fund Institutional Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have another class of shares in addition to the shares offered hereby: Flag
Investors Emerging Growth Fund Class A Shares. Shares of that class are
subject to a maximum front-end sales charge of 4.5% and a .25% 12b-1 fee.
Different classes of the Fund may be offered to certain investors and holders
of such shares may be entitled to certain exchange privileges not offered to
Institutional Shares. All classes of the Fund share a common investment
objective, portfolio of investments and advisory fee, but the classes may
have different distribution fees or sales load structures and the net asset
value per share of classes may differ at times.
.............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.
19
<PAGE>
.............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
.............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact Alex.
Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080 or a Participating
Dealer, as appropriate.
20
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
==============================================================================
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Emerging Growth Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080
8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
If you are paying by check, make check payable to "Flag Investors Emerging
Growth Fund, Inc." and mail with this Application. If you are paying by wire,
see instructions below.
==============================================================================
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Name on Account
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ------------------------------------------------------------------------------
Tax ID Number
[ ] Corporation [ ] Partnership [ ] Trust
[ ] Non-Profit or Charitable Organization [ ] Other --------------------------
If a Trust, please provide the following:
- -----------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
Mailing Address
- -----------------------------------------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
=============================================================================
INITIAL INVESTMENT
The initial minimum purchase for the Institutional Shares of the Fund is
$500,000. There is no minimum for clients of investment advisory affiliates
of Alex. Brown or for subsequent investments.
Indicate the amount to be invested and the method of payment:
_A. By Mail: Enclosed is a check in the amount of $__________ payable to Flag
Investors Emerging Growth Fund, Inc.
_B. By Wire: A bank wire in the amnount of $__________ has been sent from
_____________________________________________________________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for
initial investment:
o Send completed Application by overnight carrier to Alex. Brown &
Sons Incorporated/Flag Investors Funds at the address listed above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary
Trust Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. #7528183
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Emerging Growth Fund, Inc. - Institutional Shares
o The amount to be invested
o "For further credit to _______________________________."
(Investor's Fund Account Number)
<PAGE>
==============================================================================
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in cash
==============================================================================
TELEPHONE TRANSACTIONS
I understand that the Investor will automatically have telephone redemption
privileges (for amounts up to $500,000) and exchange privileges (with respect
to Institutional Shares of other Flag Investors Funds) unless I mark one or
both of the boxes below:
No, the investor does not want:
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account designated
below.
==============================================================================
BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)
Please attach a blank, voided check to provide account and bank routing
information.
_____________________________________________________________________________
Name of Bank Branch
_____________________________________________________________________________
Bank Address City/State/Zip
_____________________________________________________________________________
Name(s) on Account
_____________________________________________________________________________
Account Number A.B.A. Number
=============================================================================
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE
I have received a copy of the Fund's prospectus dated November 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is the investor's correct taxpayer identification
number and (2) that the investor is not subject to backup withholding as a
result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified the investor that it is no longer subject to
backup withholding. [ ] Check here if the investor is subject to backup
withholding.
If a non-resident alien, please indicate country of residence:_______________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that the investor may bear
the risk of loss in the event of fraudulent use of such privileges. If the
investor does not want telephone redemption or exchange privileges, I have so
indicated on this Application.
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
<PAGE>
==============================================================================
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
________* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
==============================================================================
CERTIFICATE OF AUTHORITY
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board of
Directors or Board of Trustees.)
I ________________________, Secretary of the above-named investor, do hereby
certify that a meeting on ______, at which a quorum was present throughout, the
Board of Directors (Board of Trustees) of the investor duly adopted a resolution
which is in full force and effect and in accordance with the investor's charter
and by-laws, which resolution did the following: (1) empowered the
officers/trustees executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names and titles of
the officers of the investor and to notify ICC when changes in officers occur;
and (4) authorized the Secretary to certify that such a resolution has been duly
adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ___ day of ________, 199_ Secretary ________________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
_____________________________________________________________________________
Signature and title Date
Certificate B: PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of Certificate B and attach it
to the Application).
______________________________________________________________________________
Signature and title Date
______________________________________________________________________________
Signature and title Date
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------
FLAG INVESTORS EMERGING GROWTH FUND, INC.
135 East Baltimore Street
Baltimore, Maryland 21202
-----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
PARTICIPATING DEALER OR BY WRITING OR CALLING ALEX.
BROWN & SONS INCORPORATED, 135 EAST BALTIMORE ST.,
BALTIMORE, MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated:
February 28, 1995, as amended through November 1, 1995
Relating to the Prospectuses Dated:
February 28, 1995, relating to the Class A Shares
and
November 1, 1995, relating to the Institutional Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. General Information and History.............................................................. 1
2. Investment Objectives and Policies........................................................... 1
3. Valuation of Shares and Redemption........................................................... 4
4. Federal Tax Treatment of Dividends and
Distributions.............................................................................. 5
5. Management of the Fund....................................................................... 8
6. Investment Advisory and Other Services....................................................... 12
7. Distribution of Fund Shares.................................................................. 13
8. Brokerage.................................................................................... 16
9. Capital Shares............................................................................... 18
10. Semi-Annual Reports.......................................................................... 18
11. Custodian, Transfer Agent, Accounting Services .............................................. 19
12. Independent Accountants...................................................................... 19
13. Performance Information...................................................................... 20
14. Control Persons and Principal Holders of
Securities................................................................................. 21
15. Financial Statements ........................................................................ 22
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Emerging Growth Fund, Inc. (the "Fund") is an open-end
management investment company. Under the rules and regulations of the Securities
and Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. The Fund currently offers two classes
of shares: Flag Investors Emerging Growth Fund Class A Shares (the "Class A
Shares") and Flag Investors Emerging Growth Fund Institutional Shares (the
"Institutional Shares") (collectively, the "Shares"). As used herein, the "Fund"
refers to Flag Investors Emerging Growth Fund, Inc., and specific references to
either class of the Fund's Shares will be made using the name of such class.
Important information concerning the Fund is included in the Fund's
Prospectuses which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG) or, from Participating Dealers that offer such
Shares to prospective investors. Prospectuses for the Class A Shares 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 Fund and
its business that is contained in the registration statement respecting the Fund
and its Shares filed with the SEC. Copies of the registration statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
July 2, 1987. The Fund filed a registration statement with the SEC registering
itself as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended ("the Investment Company Act") and
its Shares under the Securities Act of 1933, as amended. The Fund's registration
statement was declared effective by the SEC on June 15, 1988 and the Fund
commenced operations as a diversified open-end management investment company.
The Institutional Shares, which were not offered prior to the date of this
Statement of Additional Information, are offered only to certain eligible
institutions and to clients of investment advisory affiliates of Alex Borwn.
Under a license agreement dated December 29, 1987 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to that name and logo,
including the right to permit other investment companies to use them.
Size of the Fund
The allocation of the Fund's assets in emerging growth companies
requires substantial research and analysis in respect of such companies and the
Fund's management believes that the size of the Fund should be limited so that
the investment advisor can perform the appropriate research and analysis of
investment opportunities. Accordingly, at such time as the assets of the Fund
are in excess of $400 million, the Fund will accept Share purchases only from
existing shareholders (including reinvestment of dividends and capital gains
distributions). Further, at such time as the assets of the Fund are in excess of
$500 million, the Fund will discontinue sales of Shares with the exception of
purchases made by pre-existing IRA accounts.
2. INVESTMENT OBJECTIVES AND POLICIES
Investment Objective and Policies of the Fund
The Fund's investment objective and its general investment policies are
described in the Prospectus. As stated in the Prospectus, the Fund's investment
objective is long-term capital appreciation. Realization of income is not a
significant investment consideration and any income realized on the Fund's
-1-
<PAGE>
investments therefore will be incidental to the Fund's objective. There can be
no assurance that the Fund will, in fact, achieve its objective. The Fund's
investment objective may not be changed by the Board of Directors without
shareholder approval.
The Prospectus discusses the types of securities in which the Fund will
invest, the portfolio policies and techniques and the size of the Fund. This
Statement of Additional Information describes other investment practices in
which the Fund may engage, including making loans of the Fund's portfolio
securities, purchasing securities for future delivery, and entering into
repurchase agreements.
Other Investment Practices
Except as described in the section of the Prospectus entitled
"Investment Restrictions" and below under "Investment Restrictions", the
investment policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Board of Directors may
change such policies without the affirmative vote of a majority of the Fund's
outstanding Shares. The Fund's investment objective may not be changed by the
Board of Directors without such a vote.
As described in the Prospectus, the Fund may invest up to 20% of its net
assets in securities convertible into the common stock of high quality growth
companies. In general, the market value of a convertible security is at least
the higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e., the value of the underlying shares of
common stock if the security is converted). As a fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and tends to decrease in value when interest rates rise. However, the
price of a convertible security also is influenced by the market value of the
security's underlying common stock. Thus, the price of a convertible security
tends to increase as the market value of the underlying stock increases, whereas
it tends to decrease as the market value of the underlying stock declines.
Investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
Repurchase Agreements
The Fund may agree to purchase U.S. Government securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. The
collateral for these repurchase agreements will be held by the Fund's custodian
or by a duly appointed sub-custodian. The Fund will enter into repurchase
agreements only with banks and broker-dealers that have been determined to be
creditworthy by the Fund's Board of Directors under criteria established with
the assistance of Investment Company Capital Corp., the Fund's investment
advisor ("ICC"). The list of approved banks and broker-dealers will be monitored
regularly by ICC and reviewed at least quarterly by the Fund's Board of
Directors. The seller under a repurchase agreement would be required to maintain
the value of the securities subject to the repurchase agreement at not less than
the repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the Fund
may be delayed or limited in its ability to sell the collateral.
Loans of Portfolio Securities
The Fund may also lend portfolio securities to financial institutions in
accordance with the investment restrictions described in the Prospectus and this
Statement of Additional Information. The Fund will lend portfolio securities
only to those financial institutions that are approved as creditworthy by the
Fund's Board of Directors and only against collateral consisting of cash or U.S.
Government securities with an aggregate value at all times equal to or greater
than the value of the securities loaned. The borrower would pay to the Fund an
amount equal to any dividends or interest received on the securities lent.
-2-
<PAGE>
The Fund would retain all or a portion of the interest received on investment of
the cash collateral or receive a fee from the borrower. Payments received on
such loans, including amounts received during the loan on account of interest on
the securities loaned, may not (together with all non-qualifying income) exceed
10% of the Fund's gross income (without offset for realized capital gains)
unless, in the opinion of counsel to the Fund, such amounts are qualifying
income under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are in
addition to those described in the Fund's Prospectus, and are matters of
fundamental policy which may not be changed without the affirmative vote of a
majority of the Fund's outstanding Shares. Accordingly, the Fund will not:
1) Invest in real estate or mortgages on real estate except that
the Fund may invest in the securities of companies that invest in real
estate or mortgages;
2) Purchase or sell commodities or commodities contracts;
3) 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;
4) Issue senior securities;
5) Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies,
and may lend portfolio securities and enter into repurchase agreements
as described in the Registration Statement;
6) Effect short sales of securities;
7) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions); or
8) Purchase participations or other direct interests in oil, gas
or other mineral exploration or development programs.
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The percentage limitations contained
in these restrictions apply at the time of purchase of securities. The Fund will
not:
1) Purchase any securities of unseasoned issuers which have been
in operation directly or through predecessors for fewer than three
years;
2) Invest in shares of any other investment company registered
under the Investment Company Act, except (a) as a temporary investment
in an investment company that invests only in securities the Fund could
purchase directly for temporary investment or (b) as a means of
purchasing securities of foreign issuers whose securities may be
purchased only through such an investment; provided that, in either
event, the Fund will pay any sales charges in connection with such
purchases without reduction to the sales charges on purchases of Shares,
and provided further, that the Fund shall acquire not more than 3% of
the total outstanding voting stock of such company, or invest more than
5% of the Fund's assets in any one such company or 10% of the Fund's
assets in all such investment companies, and only as otherwise permitted
by law. (If the Board of Directors voted to approve investments in
-3-
<PAGE>
shares of any other investment company, the Fund might incur sales
charges, management fees and other expenses in connection with any such
investment, which charges would be a Fund expense and accordingly might
have some impact on the Fund's net asset value);
3) Purchase or retain the securities of any issuer if, to the
knowledge of the Fund, any officer or Director of the Fund or its
Advisor owns beneficially more than .5% of the outstanding securities of
such issuer and together they own beneficially more than 5% of the
securities of such issuer;
4) Invest in companies for the purpose of exercising management
or control;
5) Invest in puts or calls or any combination thereof;
6) Invest more than 10% of the Fund's net assets in illiquid
securities (as defined under federal and state securities laws),
including time deposits and repurchase agreements with maturities of
greater than seven days;
7) Purchase warrants, if by reason of such purchase more than 5%
of the Fund's net assets (taken at market value) will be invested in
warrants, valued at the lower of cost or market. Included within this
amount, but not to exceed 2% of the value of the Fund's net assets, may
be warrants that are not listed on the New York or American Stock
Exchange. For the purpose of the foregoing calculations, warrants
acquired by the Fund in units or attached to securities will be deemed
to be without value and therefore not included within the preceding
limitations;
8) Invest in real estate limited partnerships;
9) Invest in oil, gas or mineral leases.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined once daily as of the time
the New York Stock Exchange closes, which is ordinarily 4:00 p.m. (Eastern Time)
on each Business Day of the Fund. The New York Stock Exchange is open for
business on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The net asset value per Share of a class is calculated by valuing all
assets held by the Fund, deducting liabilities attributable to all Shares and
any liabilities attributable to the specific class and dividing the resulting
amount by the number of then outstanding Shares of the class. For this purpose,
portfolio securities will be given their market value where feasible. If a
portfolio security is traded on a national exchange or an automatic dealer
quotation system, such as NASDAQ, on the valuation date, the last quoted sale
price will generally be used. Securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith by ICC under procedures established and monitored by
the Board of Directors. Debt obligations with maturities of 60 days or less will
be valued at amortized cost, which constitutes fair value as determined by the
Fund's Board of Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
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<PAGE>
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Class A Shares by check
and Institutional Shares by wire transfer of funds, as described in the
Prospectus relating to each class of Shares. However, if the Board of Directors
determines that it would be in the best interests of the remaining shareholders
of the Fund 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 redeem Shares by distributions in kind. If Shares are redeemed in kind, a
redeeming shareholder will incur brokerage costs when the assets are later
converted into cash. The valuation of portfolio securities, by the method
described under "Valuation of Shares," will be made as of the same time the
redemption price is determined. The Fund's ability to make payment of the
redemption price by distribution in kind is further limited because the Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following discussion of federal income tax consequences is based on
the Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund expects to be taxed as a regulated investment company ("RIC")
under Subchapter M of the Code. However, in order to qualify as a RIC for any
taxable year, the Fund must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from sale or other disposition of stock or securities or foreign currencies, and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"), and (2) derive less
than 30% of its gross income (exclusive of certain gains from the designated
hedging transactions that are offset by realized or unrealized losses on
offsetting positions) from gains on the sale or other disposition of any of the
following investments if such investments are held for less than three months
(the "Short- Short Gain Test"): (a) stock or securities (as defined in Section
2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies); and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities).
The Fund must also diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. government securities, securities of other
RICs, and other securities (so long as such other securities with respect to any
issuer do not constitute more than 5% of the total assets of the Fund or more
than 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
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<PAGE>
than U.S. government securities or the securities of other RICs) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same or similar trades or businesses or related trades or businesses (the
"Asset Diversification Test"). The Fund will not lose its status as a RIC if it
fails to meet the Asset Diversification Test solely as a result of a fluctuation
in value of portfolio assets not attributable to a purchase. The Fund may
curtail its investments in and trading of other securities where the application
thereto of the Asset Diversification Test is uncertain.
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and capital gains which it distributes to shareholders,
provided that it distributes at least 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gains
over net long-term capital losses) for the year (the "Distribution Requirement")
and complies with the other requirements of the Code described above.
Distributions of investment company taxable income made during the taxable year
or, under certain specified circumstances, within twelve months after the close
of the taxable year, will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if a RIC establishes to the satisfaction
of the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below).
Although the Fund intends to distribute substantially all of its net
investment income and capital gains for any taxable (i.e., fiscal) year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
The foregoing requirements of the Code may inhibit the Fund in its
efforts to achieve its investment objectives.
Fund Distributions
The Fund anticipates that it will distribute substantially all of its
investment company taxable income for each taxable year. 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
invested in additional Shares.
The Fund also anticipates that it will distribute substantially all of
its "net capital gains" income (the excess of net long-term capital gains over
net short-term capital losses) for each taxable year as a capital gains
distribution. Such a distribution, whether paid in cash or reinvested in Shares,
is taxable to shareholders as long-term capital gains, regardless of the length
of time a shareholder has held Fund Shares or whether such gains were reflected
in the price paid for the Shares. The aggregate amount of distributions
designated by the Fund as capital gains distributions may not exceed the net
capital gains of the Fund for any taxable year, determined by excluding any net
capital losses or net long-term capital losses attributable to transactions
occurring after October 31 of such year and by treating any such losses as if
they arose on the first day of the following taxable year.
Shareholders who invest either distributions of investment company
taxable income or capital gains in additional Shares will generally be treated
as receiving a distribution in an amount equal to the fair market value,
determined as of the payment date, of the Shares received. Such shareholders
will have a cost basis in each Share received equal to the fair market value of
a Share of the Fund on the payment date.
Ordinary income dividends paid by the Fund to corporate shareholders
will be eligible for the 70% dividends received deduction to the extent of the
gross amount of qualified dividends received by the Fund for the year.
Generally, and subject to certain limitations, a dividend is a qualified
dividend if it is received from a domestic corporation. The Fund will provide a
statement annually to shareholders of the amount of dividends eligible for the
deduction. The dividends received deduction is not available for capital gains
distributions.
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<PAGE>
For purposes of the alternative minimum tax and the environmental tax,
corporate shareholders will generally be required to take the full amount of any
dividend received from the Fund into account in determining their "alternate
minimum taxable income."
Investors should be careful to consider the tax implications of buying
shares just prior to the next record date for any ordinary income dividend or
capital gains distribution. Those purchasing just prior to an ordinary income
dividend or capital gains distribution will be taxable on the entire amount of
the dividend or distribution received even though the net asset value per share
on the date of purchase reflected the amount of such distribution.
If, for any taxable year, the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends received deduction in the case of corporate
shareholders.
The Fund generally will be required in certain cases to withhold tax at
the rate of 31% with respect to distributions payable to any shareholder (1) who
has provided either an incorrect tax identification number or no number at all,
(2) who is subject to backup withholding by the Internal Revenue Service for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Fund that the shareholder is not subject to
backup withholding or that he is an "exempt recipient."
Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation
The Code imposes a nondeductible 4% federal excise tax on RICs that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gain net income for the
one-year period ending on October 31 of such calendar year. The excise tax is
imposed on the undistributed part of this required distribution. In addition,
the balance of such income must be distributed during the next calendar year to
avoid liability for the excise tax in that year. For the foregoing purposes, a
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year. For this purpose,
in determining its capital gain net income for the one-year period ending on
October 31 of such calendar year the Fund must reduce its capital gain net
income by the amount of any net ordinary loss for the calendar year (but not
below the net capital gains for the one-year period ending on October 31).
Because the Fund intends to distribute all of its income currently (or to
retain, at most, its "net capital gains" and pay tax thereon), the Fund does not
anticipate incurring any liability for this excise tax. However, investors
should note that the Fund may in certain circumstances be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability and, in addition, that the liquidation of such investments in such
circumstances may affect the ability of the Fund to satisfy the Short-Short Gain
Test.
Generally, gain or loss on the sale, exchange or redemption of a Share
will be capital gain or loss, which will be long-term capital gain or loss if
the Share is held for more than one year and otherwise will be short-term
capital gain or loss. However, if a shareholder realizes a loss on the sale,
exchange or redemption of a Share held for six months or less, such loss will be
treated as a long-term capital loss to the extent that any capital gains
distributions have been paid with respect to such Share (or any undistributed
net capital gains of the Fund with respect to such Share have been included in
determining the 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). Investors should
particularly note that this loss disallowance rule will apply to Shares received
through the reinvestment of dividends or distributions during the 61-day
period.
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<PAGE>
Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from the rules for federal income taxation
described above. Shareholders are urged to consult their tax advisers as to the
consequences of federal, state and local tax rules affecting an investment in
the Fund.
5. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are the responsibility of the
Board of Directors. The Board approves all significant agreements between the
Fund and persons or companies furnishing services to the Fund, including the
Fund's agreements with its investment advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers and the Fund's Advisor. Three Directors and all of the
officers of the Fund, are officers or employees of Alex. Brown or ICC. The other
Directors of the Fund have no affiliation with Alex. Brown or ICC.
Directors and Officers
The Directors and executive officers of the Fund, their respective ages
and their principal occupations for the last five years are set forth below.
Unless otherwise indicated, the address of each Director and executive officer
is 135 East Baltimore Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (68)
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.
*RICHARD T. HALE, Director (50)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst.
*W. JAMES PRICE, Director (71)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3343. Director, Boca Research, Inc. (computer peripherals);
Formerly, Managing Director, Alex. Brown & Sons Incorporated; Director,
CSX Corporation (transportation and natural resources company), and
PHH Corporation (business services).
JAMES J. CUNNANE, Director (57)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice-President and Chief Financial Officer, General Dynamics Corporation
(defense)(1989-1993) and Director, The Arch Fund (mutual fund).
N. BRUCE HANNAY, Director (74)
201 Condon Lane, Port Ludlow, Washington 98365. Director, Plenum
Publishing Corp.; Formerly Director, Rohm & Haas Company (diversified
chemicals) and General Signal Corp. (control equipment and systems) and
Consultant, SRI International (nonprofit consulting organization).
JOHN F. KROEGER, Director (71)
P. O. Box 464, 24875 Swan Road-Martingham, St. Michaels, Maryland 21663.
Director/Trustee, AIM Funds; Formerly Consultant, Wendell & Stockel
Associates, Inc. (consulting firm) and
General Manager, Shell Oil Company.
- --------
* A Director who is an "interested person" as defined in the Investment
Company Act of 1940.
-8-
<PAGE>
LOUIS E. LEVY, Director (62)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (63)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and healthcare).
HARRY WOOLF, Director (72)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, Merrill Lynch Cluster C Funds (registered investment
companies), ATL and Spacelabs Medical Corp. (medical equipment) and
Family Health International (nonprofit research and education); Trustee,
Reed College (education); Formerly, Trustee, Rockefeller Foundation.
FREDERICK L. MESERVE, JR., President (56)
Principal, Alex. Brown & Sons Incorporated 1977-Present.
EDWARD J. VEILLEUX, Vice President (52)
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); Vice President,
Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (50)
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
CHARLES A. REID, Vice President (52)
Principal, Alex. Brown & Sons Incorporated, 1980-Present; General
Partner, Baltimore Street Capital III (growth companies investor).
BRIAN C. NELSON, Vice President and Secretary (36)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
SANDRA J. DOELLER, Vice President (34)
Vice President, Alex. Brown & Sons Incorporated; Equity Trader, Asset
Management Department, Alex. Brown & Sons Incorporated, 1983-Present.
DIANA M. ELLIS, Treasurer (44)
Manager, Portfolio Accounting Department, Investment Company Capital
Corp. (registered investment advisor); Mutual Fund Accounting
Department, Alex. Brown & Sons Incorporated, 1991-Present; Formerly
Accounting Manager, Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary (29)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Prior thereto, Student, 1989-1991.
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<PAGE>
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates. There are currently 12 funds in
the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund
complex (the "Fund Complex"). Mr. Price serves as a director of seven funds in
the Fund Complex. Mr. Semans serves as a Director of eight funds in the Fund
Complex. Mr. Hale serves as President and Director of one fund, Vice President
of one fund and as a Director of 10 other funds in the Fund Complex. Messrs.
Cunnane, Hannay, Kroeger, Levy, McDonald and Woolf serve as Directors of each
fund in the Fund Complex. Messrs. Meserve and Reid serve as President and Vice
President, respectively, of the Fund. Mr. Fearnow serves as Vice President of 10
funds in the Fund Complex. Mr. Veilleux serves as Executive Vice President of
one fund and as Vice President of each of the other funds in the Fund Complex.
Mr. Nelson serves as Vice President and Secretary, Ms. Ellis serves as Treasurer
and Ms. DePrine serves as Assistant Secretary, respectively, of each of the
funds in the Fund Complex. Ms. Doeller serves as a Vice President of the Fund.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business. All
such transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons. Additional
transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of Alex. Brown or ICC may be considered to have received remuneration
indirectly. As compensation for his services as director, each Director who is
not an "interested person" of the Fund (as defined in the Investment Company
Act) (a "Non-Interested Director") receives an aggregate annual fee (plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
his attendance at board and committee meetings) from all Flag Investors/ISI
Funds and Alex. Brown Cash Reserve Fund, Inc. for which he serves. Payment of
such fees and expenses is allocated among all such funds described above in
direct proportion to their relative net assets. For the fiscal year ended
October 31, 1994, Non-Interested Directors' fees attributable to the assets of
the Fund totalled $1,997. The following table shows aggregate compensation paid
to each of the Fund's Directors by the Fund and the Fund Complex, respectively,
in the fiscal year ended October 31, 1994.
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation From the Fund Total Compensation from the Fund and
Name of Person, for the Fiscal Year Ended October 31, 1994 Fund Complex Paid to Directors for
Position the Fiscal Year Ended October 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Truman T. Semans, Chairman $0 $0
*W. James Price, Director $0 $0
Richard T. Hale, Director $0 $0
James J. Cunnane, Director $0 ** $0 **
N. Bruce Hannay, Director $180.37 $39,000 for
service on 11 Boards(1)
John F. Kroeger, Director $158.43 $42,900 for
service on 11 Boards(1)
Louis E. Levy, Director $57.52 $9,750 for
service on 11 Boards ***(1)
Eugene J. McDonald, Director $180.37 $39,000 for
service on 11 Boards(1)
Harry Woolf, Director $180.37 $39,000 for
service on 11 Boards(1)
</TABLE>
- ---------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
(1) Two other funds in the Fund Complex commenced operations after October
31, 1994. In addition, one fund ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of five years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned by him in his last year of
service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Messrs. Hannay, Kroeger
and Woolf have qualified but have not received benefits, and no such benefits
are being accrued for them since they have not yet retired. The Fund has one
Participant, a Director who retired effective December 31, 1994, who has
qualified for the Retirement Plan and who will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
Beginning in December, 1994, any Director who receives fees from the
Fund is permitted to defer a minimum of 50%, or up to all, of his annual
compensation pursuant to a Deferred Compensation Plan.
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<PAGE>
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act. The Code of Ethics
significantly restricts the personal investing activities of all employees of
ICC and the directors and officers of Alex. Brown. As described below, the Code
of Ethics imposes additional, more onerous, restrictions on the Fund's
investment personnel, including the portfolio managers and employees who execute
or help execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of ICC, any director or
officer of Alex. Brown, and all Non-Interested Directors, preclear any personal
securities investments (with limited exceptions, such as non-volitional
purchases or purchases which are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and preclearance
of the acquisition of securities in private placements. Furthermore, the Code of
Ethics provides for trading "blackout periods" that prohibit trading by
investment personnel and certain other employees within periods of trading by
the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On December 29, 1987, the sole shareholder of the Fund approved and on
June 20, 1989 a majority of the outstanding Shares of the Fund approved, an
Investment Advisory Agreement (the "Advisory Agreement") between the Fund and
ICC, which contract is described in greater detail below.
The Advisor
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's Distributor.
ICC is also the investment advisor to Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Telephone Income Fund, Inc., Flag Investors International Fund, Inc.,
Flag Investors Value Builder Fund, Inc., Flag Investors Intermediate-Term Income
Fund, Inc., Flag Investors Maryland Intermediate Tax Free Income Fund, Inc.,
Flag Investors Real Estate Securities Fund, Inc. and Flag Investors Equity
Partners Fund, Inc., which are also distributed by Alex. Brown.
ICC (a) formulates and implements continuing programs for the purchases
and sales of securities, (b) determines what issuers and securities (and in what
proportion) shall be represented in the Fund's portfolio, (c) provides the
Fund's Board of Directors regular financial reports and analyses respecting the
Fund's portfolio investments and operations, and the operations of comparable
investment companies, (d) obtains and evaluates pertinent information about
economic, statistical and financial information pertinent to the Fund, (e)
takes, on behalf of the Fund, all actions which appear necessary to the Fund to
carry into effect its purchase and sale programs, (f) supervises all aspects of
the Fund's management, (g) arranges, but does not pay for, the printing and
mailing of prospectuses, proxy materials and shareholder reports, (h) prepares
and files federal and state tax returns, (i) prepares and files registration
statements and reports regarding the sale of shares and (j) maintains books and
records respecting its activities. Any investment program undertaken by ICC will
at all times be subject to policies and control of the Fund's Board of
Directors. ICC shall not be liable to the Fund or its shareholders for any act
or omission by ICC or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty. These services of ICC to the Fund are not exclusive
and ICC is free to render similar services to others.
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<PAGE>
The Investment Advisory Agreement provides for a maximum annual fee,
payable monthly, representing .85% of the Class A Shares' average daily net
assets. However, the actual amount of the fee is contractually limited to an
amount that would result in total expenses on Class A Shares of no more than
1.5% of the Class A Shares' average daily net assets.
In addition, ICC has agreed to reduce its aggregate fees attributable to
the Fund or make payments to the Fund, if necessary, to the extent required to
satisfy any expense limitations imposed by any securities laws or regulations
thereunder of any state in which the Shares of the Fund are qualified for sale.
Currently, the most restrictive of such expense limitations requires the
Investment Advisor to reduce its fees, or to make payments to the Fund, to the
extent required so that ordinary expenses of the Fund (excluding brokerage
commissions, interest, taxes and extraordinary expenses, such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not exceed
2.5% of the first $30 million of the Fund's average daily net assets, 2.0% of
the next $70 million of the Fund's average daily net assets and 1.5% of the
Fund's average daily net assets in excess of $100 million.
The Advisory Agreement will continue in effect for an initial term of
two years and from year to year thereafter as specifically approved (a) at least
annually by the Fund's Board of Directors or by a vote of a majority of the
outstanding Shares of the Fund and (b) by the affirmative vote of a majority of
the Non-Interested Directors who have no direct or indirect financial interest
in the Advisory Agreement by votes cast in person at a meeting called for such
purpose. The Advisory Agreement was most recently approved by the Fund's Board
of Directors, including a majority of the Non-Interested Directors, on September
25, 1995. The Fund or ICC may terminate the Advisory Agreement on 60 days'
written notice without penalty. The Advisory Agreement will terminate
automatically in the event of assignment. For the fiscal years ended October 31,
1994, October 31, 1993 and October 31, 1992, ICC received fees from the Fund of
$206,444, $255,608 and $398,690, respectively.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. See "Custodian, Transfer Agent and
Accounting Services."
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the distributor of the Fund's Shares pursuant to
two separate Distribution Agreements, one for the Class A Shares (the "Class A
Distribution Agreement") and one for the Institutional Shares (the
"Institutional Distribution Agreement") (collectively, the "Distribution
Agreements").
The Class A Shares
The Class A Distribution Agreement provides that Alex. Brown has the
exclusive right to distribute Class A Shares either directly or through other
broker-dealers and further provides that Alex. Brown will solicit and receive
orders for the purchase of Class A Shares, accept or reject such orders on
behalf of the Fund in accordance with the Fund's currently effective Prospectus
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible, receive requests for redemption and transmit such
redemption requests to the Fund's transfer agent as promptly as possible,
respond to inquiries from the Fund's shareholders concerning the status of their
accounts with the Fund, provide the Fund's Board of Directors for their review
with quarterly reports required by Rule 12b-1, maintain such accounts, books and
records as may be required by law or be deemed appropriate by the Fund's Board
of Directors, and take all actions deemed necessary to carry into effect the
distribution of the Class A Shares. Alex. Brown has not undertaken to sell any
specific number of Class A Shares. The Class A Distribution Agreement further
provides that, in connection with the distribution of Class A Shares, Alex.
Brown will be responsible for all of the promotional expenses. The services
provided by Alex. Brown to the Fund are not exclusive, and Alex. Brown shall
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<PAGE>
not be liable to the Fund or its shareholders for any act or omission by Alex.
Brown or any losses sustained by the Fund or its shareholders except in the case
of willful misfeasance, bad faith, gross negligence or reckless disregard of
duty.
Alex. Brown and certain broker-dealers ("Participating Dealers") may
enter into sub-distribution agreements ("Sub-Distribution Agreements"), pursuant
to which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning the
status of their accounts and the operations of the Fund.
As compensation for providing distribution and related administrative
services for the Class A Shares as described above, Alex. Brown receives an
annual fee, calculated and paid monthly, equal to .25% the average daily net
assets of the Class A Shares. Alex. Brown expects to allocate a substantial
portion of its annual fee to its investment representatives and to
broker-dealers who enter into Sub-Distribution Agreements with Alex. Brown
under which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning the
status of their accounts and the operations of the Fund. For the fiscal years
ended October 31, 1994, October 31, 1993 and October 31, 1992, Alex. Brown
received from the Fund $60,719, $89,403 and $118,683, respectively, in fees for
distribution and related administrative services. For the same periods, Alex.
Brown paid approximately $54,254, $45,834 and $64,159, respectively, as
compensation to its investment representatives and $939, $183 and $716,
respectively, as compensation to Participating Dealers and financial
institutions. Alex. Brown received no brokerage commissions from the Fund during
these periods.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Fund's Class A Shares (the "Class A Plan"). Under the Class A Plan, the
Fund pays a fee to Alex. Brown for distribution and other shareholder servicing
assistance as set forth in the Class A Distribution Agreement, and Alex. Brown
is authorized to make payments out of its fee to its investment representatives,
to Participating Dealers and to Shareholder Servicing Agents. Payments to
Participating Dealers and Shareholder Servicing Agents may not exceed fees
payable to Alex. Brown under the Class A Plan.
The Class A Distribution Agreement, including the Class A Plan and a
form of Sub-Distribution Agreement was approved by the Fund's Board of
Directors, including a majority of the Non-Interested Directors (and those
Directors who have no direct or indirect financial interest in the Class A Plan
or the Class A Distribution Agreement) initially on July 2, 1987 and most
recently on September 25, 1995. The Plan was approved by a majority of the
outstanding Class A Shares on June 20, 1989. The Class A Distribution Agreement
and the Plan encompassed therein will remain in effect from year to year as
specifically approved at least annually by the Fund's Board of Directors and by
the affirmative vote of a majority of the Non-Interested Directors, by votes
cast in person at a meeting called for such purpose.
In approving the Class A Plan, the Directors concluded, in the exercise
of reasonable business judgment, that there was a reasonable likelihood that the
Class A Plan would benefit the Fund and its shareholders. The Class A Plan will
be renewed only if the Directors make a similar determination in each subsequent
year. The Class A Plan may not be amended to increase materially the fee to be
paid pursuant to the Distribution Agreement without the approval of the
shareholders of the Fund. The Plan may be terminated at any time and the
Distribution Agreement may be terminated at any time upon sixty days' notice, in
either case without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the outstanding Class A
Shares (as defined under "Capital Shares"). Any Sub-Distribution Agreement
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<PAGE>
may be terminated in the same manner at any time. Any Shareholder Servicing
Agreement may be terminated at any time, without penalty, upon 10 days' notice.
The Distribution Agreement, any Sub-Distribution Agreement and any Shareholder
Servicing Agreement shall automatically terminate in the event of assignment.
During the continuance of the Class A Plan, the Fund's Board of
Directors will be provided for their review, at least quarterly, with a written
report concerning the payments made under the Plan to Alex. Brown pursuant to
the Class A Distribution Agreement, to broker-dealers pursuant to Sub-
Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements described below. Such reports shall be made by
the persons authorized to make such payments. In addition, during the
continuance of the Class A Plan, the selection and nomination of the Fund's
Non-Interested Directors shall be committed to the discretion of the
Non-Interested Directors then in office.
In addition, with respect to the Class A Shares, the Fund may enter into
Shareholder Servicing Agreements with certain financial institutions, such as
banks, to act as Shareholder Servicing Agents, pursuant to which Alex. Brown
will allocate a portion of its distribution fee as compensation for such
financial institutions' ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review the
Prospectus and this Statement of Additional Information in conjunction with any
such institution's fee schedule. In addition, state securities laws on this
issue may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers pursuant
to state law.
The Institutional Shares
The Institutional Distribution Agreement provides that Alex. Brown
either directly or through other broker-dealers has the exclusive right to
distribute the Institutional Shares and further provides that Alex. Brown will
solicit and receive orders for the purchase of Institutional Shares, accept or
reject such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus for the Institutional Shares and transmit such orders as
are accepted to the Fund's transfer agent as promptly as possible, receive
requests for redemption and transmit such redemption requests to the Fund's
transfer agent as promptly as possible, respond to inquiries from the Fund's
shareholders concerning the status of their accounts with the Fund, maintain
such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors, and take all actions deemed
necessary to carry into effect the distribution of the Institutional Shares.
Alex. Brown has not undertaken to sell any specific number of Institutional
Shares. The Institutional Distribution Agreement further provides that, in
connection with the distribution of Institutional Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services provided by Alex.
Brown to the Fund are not exclusive, and Alex. Brown is free to provide similar
services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown receives no compensation for distributing the Institutional
Shares.
Alex. Brown and Participating Dealers have entered into Sub-Distribution
Agreements under which such Participating 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.
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<PAGE>
The Institutional Distribution Agreement was approved by the Fund's
Board of Directors on September 25, 1995 and by the sole shareholder of the
class on October 31, 1995. It has an initial term of two years and will remain
in effect from year to year thereafter, if specifically approved at least
annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast at a meeting called for
such purpose. It may be terminated at any time upon sixty days' written notice,
without penalty, by the vote of a majority of ther Fund's Non-Interested
Directors or by a vote of a majority of the outstanding Institutional Shares (as
defined under Capital Shares). The Institutional Distribution Agreement and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
General Information
Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depositary appointed by the Fund for the safekeeping of 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 of
certificates representing Shares; all costs and expenses in connection with the
maintenance of registration of the Fund and its Shares with the SEC and various
states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of printing, including
typesetting and distributing prospectuses and statements of additional
information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing proxy statements and reports to shareholders; fees and travel expenses
of Non-Interested Directors and Non-Interested Director members of any advisory
board or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Non-Interested Directors,
and independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and indemnification related thereto); and all other charges and cost of
the Fund's operation unless otherwise explicitly assumed by Alex. Brown or ICC.
8. BROKERAGE
Purchases and sales of securities on a securities exchange are effected
through brokers who charge a commission for their services. These brokerage
commissions are subject to negotiation between ICC and the broker-dealer. ICC
may direct purchase and sale orders to any broker-dealer, including, to the
extent and in the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown serves as a principal; that is, an
order will not be placed with Alex. Brown if execution of the trade involves
Alex. Brown serving as a principal with respect to any part of the Fund's order,
nor will the Fund buy or sell over-the-counter securities with Alex. Brown
acting as market maker.
If Alex. Brown is participating in an underwriting or selling group, the
Fund may not buy portfolio securities from the group except in accordance with
rules of the SEC. While the Fund believes that the limitation will not
significantly affect its ability to carry out its present investment objective,
the Fund may be at a disadvantage in the future in comparison to other funds
which have similar investment objectives, but which are not subject to such
limitations.
ICC's primary consideration in effecting securities transactions is to
obtain, on an overall basis, the best price and execution of orders. As
described below, however, to the extent that the price and execution offered by
more than one broker-dealer are comparable, ICC may, in its discretion, effect
transactions with broker-dealers that furnish statistical, research or other
information or services which are deemed by ICC to be beneficial to the Fund's
investment program. ICC is also authorized to pay higher commissions on
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brokerage transactions for the Fund to non-affiliated brokers in order to secure
research and investment services described below, subject to periodic review by
the Fund's Board of Directors. Research services may include the following:
statistical and background information on the U.S. economy, industry groups and
individual small and mid-sized companies; forecasts and interpretations with
respect to specific industry groups and individual small and mid-sized
companies; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indices and investment accounts; information concerning prices of
securities; provision of equipment used to communicate research information;
arrangement of meetings with management of companies; and provision of access to
consultants who supply research information. Certain research services furnished
by broker-dealers may be useful to ICC with clients other than the Fund.
Similarly, any research services received by ICC through placement of portfolio
transactions of other clients may be of value to ICC in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to ICC by a broker-dealer. ICC is of
the opinion that because the material must be analyzed and reviewed by its
staff, its receipt does not tend to reduce expenses, but may be beneficial in
supplementing ICC's research and analysis. Therefore, it may tend to benefit the
Fund by improving ICC's investment advice. ICC's policy is to pay a
broker-dealer higher commissions for particular transactions than might be
charged if a different broker-dealer had been chosen when, in ICC's opinion,
this policy furthers the overall objective of obtaining the best price and
execution. The allocation of orders among broker-dealers and the commission
rates paid by the Fund will be reviewed periodically by the Board.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown pursuant to certain policies and procedures incorporating
the standards of Rule 17e-1 under the Investment Company Act which requires that
the commissions paid Alex. Brown must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC to
furnish reports and to maintain records in connection with such reviews. The
Distribution Agreements between Alex. Brown and the Fund do not provide for any
reduction in the distribution fee to be received by Alex. Brown from the Fund as
a result of profits from brokerage commissions on transactions of the Fund
effected through Alex. Brown.
For the fiscal years ended October 31, 1994, October 31, 1993 and
October 31, 1992, ICC directed $11,425,223, $31,080,534 and $71,010,027,
respectively of transactions to broker-dealers and paid $35,863, $125,743 and
$128,337, respectively to broker-dealers in related commissions because of
research services provided to the Fund. During such periods, the Fund did not
pay brokerage commissions to Alex. Brown. The Fund is required to identify any
securities of its "regular brokers or dealers" (as such term is defined in the
Investment Company Act) which the Fund has acquired during its most recent
fiscal year. As of October 31, 1994, the Fund held a 4.72% repurchase agreement
issued by Goldman Sachs & Co. valued at $588,000. Goldman Sachs & Co. is a
"regular broker or dealer" of the Fund.
ICC manages other investment accounts and it is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ICC. ICC may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
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9. CAPITAL SHARES
The Fund is authorized to issue 15 million Shares of capital stock,
par value of $.001 per Share, all of which Shares are designated common stock.
The Board of Directors may increase or decrease the number of authorized Shares
without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated three classes of shares: Flag Investors Emerging Growth Fund
Class A Shares, Flag Investors Emerging Growth Fund Class B Shares, and Flag
Investors Emerging Growth Fund Institutional Shares. The Institutional Shares
are offered only to certain eligible institutions and to clients of investment
advisory affiliates of Alex. Brown. The Class B Shares are not currently being
offered. Shares of the Fund, regardless of series or class would have equal
rights with respect to voting, except that with respect to any matter affecting
the rights of the holders of a particular series or class, the holders of each
series or class would vote separately. In general, each series would be managed
separately and shareholders of each series would have an undivided interest in
the net assets of that series. For tax purposes, the series would be treated as
separate entities. Generally, each class of Shares would be identical to every
other class in a particular series and expenses of the Fund (other than 12b-1
and any applicable service fees) would be prorated between all classes of a
series based upon the relative net assets of each class. Any matters affecting
any class exclusively will be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and,
therefore, the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining shareholders cannot elect
any members of the Board of Directors of the Fund.
The Fund's issued and outstanding Shares are fully paid and
non-assessable. Each Share has one vote and shall be entitled to dividends and
distributions when and if declared by the Fund. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its pro rata
portion of the Fund's assets (or the assets allocated to a separate series of
shares if there is more than one series) after all debts and expenses have been
paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
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11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport Business Park, 200
Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of PNC Bank Corp., has
been retained to act as custodian of the Fund's investments. PNC Bank receives
such compensation from the Fund for its services as custodian as may be agreed
to from time to time by PNC Bank and the Fund. Investment Company Capital Corp.,
135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800)
553-8080), has been retained to act as the Fund's transfer and dividend
disbursing agent, effective March 1, 1994. As compensation for providing these
services, the Fund pays ICC up to $15.00 per account per year, plus
reimbursement for out-of-pocket expenses. For the period from March 1, 1994
through October 31, 1994, such fees totaled $11,060.
ICC also provides certain accounting services to the Fund under a Master
Services Agreement effective January 1, 1994 between the Fund and ICC. These
services were previously provided by Alex. Brown. As compensation for these
services, ICC is entitled to receive an annual fee, calculated daily and paid
monthly as shown below. These fees are the same as those paid to Alex. Brown
under the prior accounting services agreement.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services under the Master Services Agreement: express delivery service,
independent pricing and storage. ICC also serves as the Fund's investment
advisor.
As compensation for providing accounting services for the period from
November 1, 1993 through December 31, 1993, Alex. Brown received fees of $4,687.
As compensation for providing accounting services for the period from January 1,
1994 through October 31, 1994, ICC received fees of $21,743.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. whose report thereon appears elsewhere herein, and has been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, PA 19103.
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13. 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.
Under the foregoing formula the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's registration statement (or the later commencement of operations of
the series or class). During its first year of operations the Fund may, in lieu
of annualizing its total return, use an aggregate total return calculated in
the same manner. In calculating the ending redeemable value, the maximum sales
load is deducted from the initial $1,000 payment and all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the Prospectus on the reinvestment dates during the period. "T"
in the formula above is calculated by finding the average annual compounded rate
of return over the period that would equate an assumed initial payment of $1,000
to the ending redeemable value. Any sales loads that might in the future be made
applicable at the time to reinvestments would be included as would any recurring
account charges that might be imposed by the Fund. The Institutional Shares are
sold without a sales load.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., 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
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
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<PAGE>
Calculated according to the SEC rules, for the one year period ended
September 30, 1994, the ending redeemable value of a hypothetical $1,000 payment
for Class A Shares was $948, resulting in a total return for such Shares equal
to (5.19%). For the five year period ended September 30, 1994, the ending
redeemable value of a hypothetical $1,000 payment for Class A Shares was $1,018,
resulting in an average annual total return for such Shares equal to 0.35%.
For the period from June 15, 1988 (effectiveness of the Fund's registration
statement) through the end of the Fund's most recent calendar quarter on
September 30, 1994, the ending redeemable value of a hypothetical $1,000 payment
for Class A Shares was $1,392, resulting in an average annual total return for
such Shares equal to 5.39%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the one year period
ended October 31, 1994, the ending redeemable value of a hypothetical $10,000
investment in Class A Shares was $10,375, resulting in a total return equal to
3.8%. For the five year period ended October 31, 1994, the ending redeemable
value of a hypothetical $10,000 investment in Class A Shares was $11,643,
resulting in an average annual total return equal to 3.1%. For the period from
June 15, 1988 (effectiveness of the Fund's registration statement) through the
end of the Fund's most recent fiscal year on October 31, 1994, the ending
redeemable value of a hypothetical $10,000 investment in the Class A Shares was
$15,201, resulting in an average annual total return equal to 6.8%
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 10, 1995, to Fund management's knowledge, the following
persons owned of record or beneficially 5% or more of the Fund's outstanding
Class A Shares:
Name & Address % Ownership
-------------- -----------
Alex. Brown Incorporated 65.81*
P.O. Box 1776 =====
Baltimore, MD 21203
* As of such date to the Fund's knowledge, Alex. Brown
Incorporated owned beneficially less than 1% of such Shares.
T. Rowe Price 18.73%
Trustee for Alex. Brown & Sons Incorporated =====
Plan 100460
P.O. Box 17215
Baltimore, MD 21203
Alex. Brown & Sons Incorporated 5.88%
FBO 201-95002-10 =====
P.O. Box 1345
Baltimore, MD 21203
As of August 10, 1995, the Directors and executive officers as a
group owned less than 1% of the total outstanding Class A Shares.
-21-
<PAGE>
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
15. FINANCIAL STATEMENTS
See next page.
-22-
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Statement of Net Assets October 31, 1994
<TABLE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
COMMON STOCKS-87.7%
BUSINESS SERVICES-5.7%
16,500 Brock Control
Systems Inc.* $ 160,875 0.7%
65,000 Manugistics Group,Inc.* 568,750 2.5
36,500 QuickResponse
Services,Inc.* 593,125 2.5
1,322,750 5.7
CONSUMER PRODUCTS-3.7%
25,000 Electronic Arts,Inc. 562,500 2.4
12,500 Sierra On-Line,Inc.* 300,000 1.3
862,500 3.7
CONSUMER SERVICES-6.6%
39,150 Hometown Buffet,Inc.* 450,225 1.9
12,500 Papa John's
International,Inc.* 400,000 1.7
10,500 PETsMART,Inc.* 387,187 1.7
11,500 Starbucks Corp.* 311,938 1.3
1,549,350 6.6
FINANCIAL SERVICES-5.8%
14,000 John Alden
Financial Corp. 420,000 1.8
42,500 Life Partners Group Inc. 924,375 4.0
1,344,375 5.8
HEALTH CARE SERVICES-9.9%
7,500 Access Health
Marketing Inc.* 141,562 0.6
20,500 Genesis Health
Venture Inc. 604,750 2.6
21,000 Phycor Inc.* 719,250 3.1
29,550 Vivra Inc.* 834,788 3.6
2,300,350 9.9
HEALTH CARE-
TECHNOLOGY/SUPPLIES-1.9%
21,700 Haemonetics Corp.* $ 434,000 1.9%
MEDIA/COMMUNICATIONS-8.8%
36,000 Broadcasting Partners Inc. 571,500 2.5
14,566 Clear Channel
Communications Inc. 733,762 3.1
9,500 Lancit Media Productions* 150,812 0.7
42,500 Westcott
Communications Inc.* 589,688 2.5
2,045,762 8.8
TECHNOLOGY-
SOFTWARE/SERVICES-16.3%
75,500 Integrated Systems Inc.* 1,113,625 4.8
64,500 Marcam Corp.* 636,938 2.7
18,500 Parametric
Technology Corp.* 666,000 2.8
16,000 Progress Software Corp.* 502,000 2.2
19,000 Synopsys Inc.* 876,375 3.8
3,794,938 16.3
TECHNOLOGY-
SYSTEMS/SEMICONDUCTOR-18.0%
9,500 Applied Digital
Access Inc.* 235,125 1.0
30,500 Atmel Corp. 1,124,687 4.8
25,500 Level One
Communications Inc. 459,000 2.0
7,500 Maxim Integrated
Products Inc.* 502,500 2.2
34,300 QUALCOMM, Inc.* 1,011,850 4.3
15,000 Xilinx,Inc.* 871,875 3.7
4,205,037 18.0
</TABLE>
<PAGE>
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Statement of Net Assets October 31, 1994
(CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES/ PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<S> <C> <C> <C>
TRANSPORTATION-11.0%
24,600 Fritz Companies Inc.* $ 959,400 4.1%
70,500 Great Lakes Aviation Ltd.* 334,875 1.4
26,000 Landair Services Inc.* 552,500 2.4
10,000 Landstar System Inc.* 332,500 1.4
11,500 Wabash National Corp. 399,625 1.7
2,578,900 11.0
TOTAL COMMON STOCKS
(Cost $15,624,712) 20,437,962 87.7
COMMERCIAL PAPER-10.7%
$2,500 Ford Motor Corp.
4.724%,11/2/94
(Cost $2,500,000) 2,500,000 10.7
REPURCHASE AGREEMENT-2.5%
588 GOLDMAN SACHS & CO. 4.72%
Dated 10/31/94,to be
repurchased on 11/1/94,
collateralized by U.S.
Treasury Strips with
a market value
of $599,849
(Cost $588,000) 588,000 2.5
</TABLE>
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
(NOTE A) ASSETS
<S> <C> <C>
TOTAL INVESTMENT IN
SECURITIES
(Cost $18,712,712)** $23,525,962 100.9%
LIABILITIES IN EXCESS OF
OTHER ASSETS, NET (224,207) (0.9)
NET ASSETS $23,301,755 100.0%
NET ASSET VALUE AND
REDEMPTION PRICE
PER SHARE
($23,301,755 / 1,806,223
shares outstanding) $12.90
MAXIMUM OFFERING
PRICE PER SHARE
($12.90 / .955) $13.51
</TABLE>
*NON-INCOME PRODUCING SECURITY.
**AGGREGATE COST FOR FEDERAL TAX PURPOSES WAS $18,822,500.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND,INC.
Statement of Operations For the Year Ended October 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest........................................... $ 144,914
Dividends.......................................... 43,222
Total income...................................... 188,136
EXPENSES:
Investment advisory fee (Note B)................... 206,444
Distribution fee (Note B).......................... 60,719
Legal.............................................. 33,871
Printing and postage............................... 26,810
Accounting fee (Note B)............................ 26,430
Transfer agent fees (Note B)....................... 22,978
Custodian fees..................................... 22,049
Audit.............................................. 20,712
Registration fees.................................. 18,532
Miscellaneous...................................... 13,605
Directors'fees..................................... 1,997
Insurance.......................................... 1,734
Total expenses.................................... 455,881
Less: Fees waived (Note B)......................... (91,569)
Net expenses...................................... 364,312
Net investment loss................................ (176,176)
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions....... (13,816)
Net unrealized appreciation of investments......... 328,533
Net gain on investments............................ 314,717
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $ 138,541
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
1994 1993
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS:
OPERATIONS:
Net investment loss.................................... $ (176,176) $ (186,089)
Net realized gain/(loss) from security
transactions......................................... (13,816) 3,037,146
Net unrealized appreciation/(depreciation) of
investments........................................... 328,533 (154,510)
Net increase in net assets resulting from
operations........................................... 138,541 2,696,547
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized long-term gains........................... (2,944,147) (1,772,357)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 502,395 and 334,871 shares,
respectively.......................................... 6,358,306 4,602,863
Value of 230,642 and 113,876 shares issued in
reinvestment of dividends,respectively................ 2,746,944 1,540,740
Cost of 985,114 and 1,266,845 shares repurchased,
respectively.......................................... (11,865,168) (17,124,314)
Decrease in net assets derived from capital share
transactions.......................................... (2,759,918) (10,980,711)
Total decrease in net assets........................... (5,565,524) (10,056,521)
NET ASSETS:
Beginning of year...................................... 28,867,279 38,923,800
End of year............................................ $ 23,301,755 $ 28,867,279
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year... $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.................... (0.08) (0.08) (0.16) (0.10) (0.11)
Net realized and unrealized gain/(loss)
on investments....................... 0.47 1.20 (1.54) 6.40 (4.00)
Total from Investment Operations....... 0.39 1.12 (1.70) 6.30 (4.11)
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains................. - - - - (1.86)
Distributions from net realized
long-term gains...................... (1.51) (0.63) - - -
Total distributions.................... (1.51) (0.63) - - (1.86)
Net asset value at end of year......... $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93
TOTAL RETURN............................. 3.75% 8.33% (11.16)% 70.55% (31.63)%
RATIOS TO AVERAGE NET ASSETS:
Expenses(1)............................ 1.50% 1.50% 1.46% 1.50% 1.50%
Net investment loss(2)................. (0.73)% (0.52)% (0.92)% (0.76)% (0.92)%
SUPPLEMENTAL DATA:
Net assets at end of year (000)........ $23,302 $28,867 $ 38,924 $48,656 $ 31,678
Portfolio turnover rate................ 86% 133% 69% 79% 82%
</TABLE>
1 WITHOUT THE WAIVER OF ADVISORY FEES (NOTE B), THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WOULD HAVE BEEN 1.88%, 1.64%, 1.91% AND 1.64% FOR THE YEARS
ENDED OCTOBER 31, 1994, 1993, 1991 AND 1990, RESPECTIVELY.
2 WITHOUT THE WAIVER OF ADVISORY FEES (NOTE B), THE RATIO OF NET INVESTMENT
LOSS TO AVERAGE NET ASSETS WOULD HAVE BEEN (1.10)%, (0.66)%, (1.17)% AND (1.07)%
FOR THE YEARS ENDED OCTOBER 31, 1994, 1993, 1991 AND 1990, RESPECTIVELY.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Emerging Growth
Fund,Inc.(the "Fund") was organized as a Maryland Corporation on July 2,1987 and
commenced operations on December 30,1987.The Fund is registered under the
Investment Company Act of 1940 as a diversified,open-end management investment
company.Significant accounting policies are as follows:
SECURITY VALUATION - Portfolio securities which are primarily traded on a
recognized U.S.securities exchange are valued on the basis of their last sale
price.In the event that there are no sales or the security is not listed,it is
valued at the average between the last reported bid and asked prices or at the
fair value as determined by the Investment Advisor under procedures established
and monitored by the Board of Directors.Short-term obligations with maturities
of 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price.The seller,under a repurchase agreement,will be required on
a daily basis to maintain the value of the securities subject to the agreement
at not less than the repurchase price.The agreement is conditioned upon the
collateral being deposited under the Federal Reserve book-entry system.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to shareholders,which will be sufficient to
relieve it from all or substantially all federal income and excise taxes.The
Fund's policy is to annually distribute to shareholders substantially all of its
taxable net investment income and net realized long-term capital gains, if any.
Effective November 1,1993,the Fund adopted Statement of Position 93-
2;Determination, Disclosure and Financial Statement Presentation of
Income,Capital Gain and Return of Capital Distributions by Investment Companies.
Adoption of this standard results in the reclassification to paid-in-capital of
permanent differences between tax and financial reporting of net investment
income and realized gain/(loss). As of November 1,1993,the cumulative effect of
such differences has been accounted for by decreasing accumulated investment
loss,undistributed net realized gain and paid-in-capital by $1,512,683.The
change had no effect on net asset value or distributions to shareholders.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed in kind is determined by use of the
specific identification method for both financial reporting and income tax
purposes. Interest income is recorded on an accrual basis.Dividend income is
recorded on the ex-dividend date.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp.("ICC"),formerly Flag Investors Management
Corp.,a subsidiary of Alex.Brown & Sons Incorporated ("Alex. Brown"),serves as
the Fund's investment advisor. As compensation for its advisory services, ICC
receives from the Fund an annual fee,calculated daily and paid monthly,at the
annual rate of .85% of the Fund's average daily net assets.ICC has agreed to
reduce its aggregate fees so that ordinary expenses of the Fund for any fiscal
year do not exceed 1.5% of average net assets.For the year ended October 31,
1994,ICC waived $91,569 in fees.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Notes to Financial Statements (concluded)
Effective March 1,1994,ICC provides transfer agent services to the
Fund.As compensation for its transfer agent services,ICC receives from the Fund
a per account fee,calculated and paid monthly.ICC received $11,060 for transfer
agent services for the period ended October 31,1994.Prior to March 1,1994,PFPC,
Inc.provided these services.
As compensation for its accounting services, ICC receives from the Fund an
annual fee,calculated daily and paid monthly,from the Fund's average daily net
assets.Prior to December 31, 1993, Alex.Brown provided these services.ICC and
Alex.Brown received $26,430 for accounting services for the year ended October
31, 1994.
As compensation for providing distribution services, Alex.Brown receives
from the Fund an annual fee calculated daily and paid monthly,at an annual rate
equal to .25% of the Fund's average daily net assets.For the year ended October
31,1994,distribution fees were $60,719.
CAPITAL SHARE TRANSACTIONS - At October 31, 1994,the Fund was authorized to
issue up to 10 million shares of $.001 par value common stock.
INVESTMENT TRANSACTIONS - Purchases and sales of investment
securities,other than short-term obligations,aggregated $20,087,428 and
$22,529,380,respectively,for the year ended October 31,1994.
At October 31,1994,aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $5,506,739 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $803,277.
E. NET ASSETS - At October 31,1994,net assets consisted of:
<TABLE>
<CAPTION>
<S> <C>
Paid-in-capital . . . . . . . . . . . . $18,530,480
Accumulated net realized
loss from security
transactions . . . . . . . . . . . . (41,975)
Unrealized appreciation
on investments . . . . . . . . . 4,813,250
$23,301,755
</TABLE>
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund,Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Emerging Growth Fund,Inc.as of October 31,1994,and the related statements of
operations for the year then ended,the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended.These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards.Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement.An audit includes examining,on a
test basis,evidence supporting the amounts and disclosures in the financial
statements.Our procedures included confirmation of investments owned as of
October 31,1994,by correspondence with the custodian.An audit also includes
assessing the accounting principles used and significant estimates made by
management,as well as evaluating the overall financial statement presentation.We
believe that our audits provide a reasonable basis for our opinion.
In our opinion,the financial statements and financial highlights referred to
above present fairly,in all material respects,the financial position of Flag
Investors Emerging Growth Fund, Inc.as of October 31,1994,the results of its
operations for the year then ended,the changes in its net assets for each of the
two years in the period then ended and the financial highlights for each of the
five years in the period then ended,in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore,Maryland
December 2,1994
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Statement of Net Assets April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -----------------------------------------------------------------
COMMON STOCKS--84.7%
BUSINESS SERVICES--6.9%
11,500 Corporate Express, Inc. $ 324,875 1.2%
66,000 Manugistics Group, Inc.* 709,500 2.5
48,000 QuickResponse Services,
Inc.* 894,000 3.2
------------- ----------
1,928,375 6.9
CONSUMER SERVICES--14.0%
52,500 DF&R Restaurants, Inc. 748,125 2.6
92,150 HomeTown Buffet, Inc.* 1,094,281 3.9
46,500 O'Charley's, Inc. 581,250 2.1
63,000 Pacific Sunwear of Calif. 472,500 1.7
12,500 Papa John's International,
Inc.* 432,813 1.5
10,500 PETsMART, Inc.* 350,437 1.2
11,500 Starbucks Corp.* 270,250 1.0
------------- ----------
3,949,656 14.0
FINANCIAL SERVICES--5.3%
47,500 Life Partners Group Inc. 926,250 3.3
23,500 Pxre Corporation 569,875 2.0
------------- ----------
1,496,125 5.3
HEALTH CARE SERVICES--8.8%
13,000 Access Health Marketing
Inc.* 219,375 0.8
20,500 Genesis Health Venture Inc. 558,625 2.0
27,500 Phycor Inc.* 873,125 3.1
25,550 Vivra Inc.* 820,793 2.9
------------- ----------
2,471,918 8.8
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -----------------------------------------------------------------
MEDIA/COMMUNICATIONS--6.1%
10,066 Clear Channel
Communications Inc. $ 566,212 2.0%
15,500 Lancit Media Productions* 189,875 0.7
68,500 Westcott Communications
Inc.* 959,000 3.4
------------- ----------
1,715,087 6.1
TECHNOLOGY--
SOFTWARE/SERVICES--18.3%
51,500 Integrated Systems Inc.* 1,081,500 3.9
75,500 Marcam Corp.* 1,123,063 4.0
13,500 Parametric Technology
Corp.* 641,250 2.3
24,500 Progress Software Corp.* 992,250 3.5
6,500 Security Dynamics
Technologies, Inc. 229,125 0.8
16,500 Synopsys Inc.* 895,125 3.2
7,500 XcelleNet, Inc. 177,188 0.6
------------- ----------
5,139,501 18.3
TECHNOLOGY--
SYSTEMS/SEMICONDUCTOR--13.5%
15,000 Applied Digital Access
Inc.* 213,750 0.8
19,500 Atmel Corp. 858,000 3.1
60,500 Level One Communications
Inc. 930,187 3.3
15,000 Maxim Integrated Products
Inc.* 543,750 1.9
22,800 Qualcom Inc.* 598,500 2.1
8,500 Xilinx Inc.* 652,375 2.3
------------- ----------
3,796,562 13.5
</TABLE>
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Statement of Net Assets (CONCLUDED) April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NO. OF
SHARES/ PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -----------------------------------------------------------------
COMMON STOCKS (CONCLUDED)
TRANSPORTATION--11.8%
21,100 Fritz Companies Inc.* $ 1,271,275 4.5%
105,500 Great Lakes Aviation Ltd.* 395,625 1.4
33,500 Landair Services Inc.* 510,875 1.8
19,000 Landstar System Inc.* 551,000 2.0
19,000 Wabash National Corp. 591,376 2.1
------------- ----------
3,320,151 11.8
TOTAL COMMON STOCKS
(Cost $18,369,619) 23,817,375 84.7
------------- ----------
COMMERCIAL PAPER--11.0%
$3,100 Ford Motor Credit Corp.
5.96%, 5/3/95 (Cost
$3,100,000) 3,100,000 11.0
------------- ----------
REPURCHASE AGREEMENT--2.1%
604 Goldman Sachs & Co., 5.80%
Dated 4/28/95, to be
repurchased on 5/1/95,
collateralized by U.S.
Treasury Strips with a
market value of $616,422 604,000 2.1
------------- ----------
</TABLE>
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
(NOTE A) ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES
(Cost $22,073,619)** $ 27,521,375 97.8%
------------- ----------
OTHER ASSETS IN EXCESS OF
LIABILITIES, NET 614,722 2.2
------------- ----------
NET ASSETS $ 28,136,097 100.0%
============= ==========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE
($28,136,097 DIVIDED BY 2,061,292
shares outstanding) $13.65
======
MAXIMUM OFFERING PRICE PER SHARE
($13.65 DIVIDED BY .955) $14.29
======
</TABLE>
- --------------------------------------------------------------------------------
*Non-income producing security.
**Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Satements
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Statement of Operations For the Six Months Ended April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest................................................................. $ 116,900
Dividends................................................................ 6,893
---------
Total Income........................................................... 123,793
---------
EXPENSES:
Investment advisory fee (Note B)......................................... 105,686
Distribution fee (Note B)................................................ 31,084
Legal.................................................................... 17,514
Accounting fee (Note B).................................................. 13,419
Transfer agent fees (Note B)............................................. 11,414
Custodian fees........................................................... 10,899
Audit.................................................................... 10,407
Printing and postage..................................................... 10,391
Miscellaneous............................................................ 5,373
Registration fees........................................................ 4,261
Directors' fees.......................................................... 996
Insurance................................................................ 520
---------
Total expenses......................................................... 221,964
Less: Fees waived (Note B)............................................... (35,374)
---------
Net expenses........................................................... 186,590
---------
Net investment loss...................................................... (62,797)
---------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions............................. 865,608
Change in unrealized appreciation of investments......................... 634,506
---------
Net gain on investments.................................................. 1,500,114
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................... $1,437,317
==========
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, 1995 ENDED
(UNAUDITED) OCTOBER 31, 1994
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss............................................... $ (62,797) $ (176,176)
Net realized gain/(loss) from security transactions............... 865,608 (13,816)
Change in unrealized appreciation of investments.................. 634,506 328,533
--------------- ------------------
Net increase in net assets resulting from operations.............. 1,437,317 138,541
--------------- ------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized long-term gains...................................... (73,772) (2,944,147)
--------------- ------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 405,855 and 502,395 shares, respectively.... 5,467,880 6,358,306
Value of 5,714 and 230,642 shares issued in reinvestment of
dividends, respectively......................................... 68,961 2,746,944
Cost of 156,500 and 985,114 shares repurchased, respectively...... (2,066,044) (11,865,168)
--------------- ------------------
Increase/(decrease) in net assets derived from capital share
transactions.................................................... 3,470,797 (2,759,918)
--------------- ------------------
Total increase/(decrease) in net assets........................... 4,834,342 (5,565,524)
NET ASSETS:
Beginning of period............................................... 23,301,755 28,867,279
--------------- ------------------
End of period..................................................... $ 28,136,097 $ 23,301,755
============== ==================
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 1995 ----------------------------------------------------------
(UNAUDITED) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period............. $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90
------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss................................ (0.03) (0.08) (0.08) (0.16) (0.10) (0.11)
Net realized and unrealized gain/(loss)
on investments................................... 0.82 0.47 1.20 (1.54) 6.40 (4.00)
------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations................... 0.79 0.39 1.12 (1.70) 6.30 (4.11)
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains............................. -- -- -- -- -- (1.86)
Distributions from net realized
long-term gains.................................. (0.04) (1.51) (0.63) -- -- --
------- ---------- ---------- ---------- ---------- ----------
Total distributions................................ (0.04) (1.51) (0.63) -- -- (1.86)
------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period................... $ 13.65 $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93
======= ========== ========== ========== ========== ==========
TOTAL RETURN......................................... 6.16% 3.75% 8.33% (11.16)% 70.55% (31.63)%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)........................................ 1.50%(1) 1.50% 1.50% 1.46% 1.50% 1.50%
Net investment loss(3)............................. (0.51)%(1) (0.73)% (0.52)% (0.92)% (0.76)% (0.92)%
SUPPLEMENTAL DATA:
Net assets at end of period (000).................. $28,136 $23,302 $28,867 $38,924 $48,656 $31,678
Portfolio turnover rate............................ 25% 68% 133% 69% 79% 82%
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</TABLE>
1 Annualized.
2 Without the waiver of advisory fees (Note B), the ratio of expenses to average
net assets would have been 1.79% (annualized), 1.88%, 1.64%, 1.91%, 1.64% and
1.63% for the six months ended April 30, 1995 and for the years ended October
31, 1994, 1993, 1992, 1991 and 1990, respectively.
3 Without the waiver of advisory fees (Note B), the ratio of net investment loss
to average net assets would have been (.79)% (annualized), (1.10)%, (.66)%,
(1.17)%, (1.07)% and (0.56)% for the six months ended April 30, 1995 and for
the years ended October 31, 1994, 1993, 1992, 1991 and 1990, respectively.
See accompanying Notes to Financial Statements.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
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Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES
Flag Investors Emerging Growth Fund, Inc. (the "Fund") was organized as a
Maryland Corporation on July 2, 1987 and commenced operations on December 30,
1987. The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. Significant accounting
policies are as follows:
SECURITY VALUATION -- Portfolio securities which are primarily traded on a
recognized U.S. securities exchange are valued on the basis of their last
sale price. In the event that there are not sales or the security is not
listed, it is valued at the average between the last reported bid and asked
prices or at the fair value as determined by the Investment Advisor under
procedures established and monitored by the Board of Directors. Short-term
obligations with maturities of 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS -- The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at not less than the repurchase price. The agreement is
conditioned upon the collateral being deposited under the Federal Reserve
book-entry system.
FEDERAL INCOME TAX -- No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to shareholders, which will be sufficient
to relieve it from all or substantially all federal income and excise taxes.
The Fund's policy is to annually distribute to shareholders substantially all
of its taxable net investment income and net realized long-term capital
gains, if any.
Effective November 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure and Financial Statement of Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Adoption of this standard results in the reclassification to paid-in-capital
of permanent differences between tax and financial reporting of net
investment income and realized gain/loss). As of November 1, 1993, the
cumulative effect of such differences has been accounted for by decreasing
accumulated investment loss, undistributed net realized gain and
paid-in-capital by $1,512,683. The change had no effect on net asset value or
distributions to shareholders.
OTHER -- Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed in kind is determined by use of the
specific identification method for both financial reporting and income tax
purposes. Interest income is recorded on an accrual basis. Dividend income is
recorded on the ex-dividend date.
B. INVESTMENT ADVISORY FEE, TRANSACTIONS WITH AFFILIATES AND OTHER FEES
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at the annual rate of .85% of the Fund's
average daily net assets. ICC has agreed to reduce its aggregate fees so that
ordinary expenses of the Fund for any fiscal year do not exceed 1.5% of average
net assets. For the six months ended April 30, 1995, ICC waived $35,374 in fees.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $11,414 for
transfer agent services for the six months ended April 30, 1995.
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONCLUDED)
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $13,419 for accounting services for the six months
ended April 30, 1995.
As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee calculated daily and paid monthly, at an annual
rate equal to .25% of the Fund's average daily net assets. For the six months
ended April 30, 1995, distribution fees were $31,084.
C. CAPITAL SHARE TRANSACTIONS
At April 30, 1995, the Fund was authorized to issue up to 10 million shares
of $.001 par value common stock.
D. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term
obligations, aggregated $7,701,570, and $5,822,270, respectively, for the six
months ended April 30, 1995.
At April 30, 1995, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $6,460,646 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,012,890.
E. NET ASSETS
At April 30, 1995, net assets consisted of:
<TABLE>
<S> <C>
Paid-in-capital.................... $ 22,001,277
Accumulated net realized gain from
security transactions............ 687,064
Unrealized appreciation of
investments...................... 5,447,756
------------
$ 28,136,097
============
</TABLE>
