[Flag Investors Logo]
Flag Investors
Emerging Growth
Fund
Annual Report
October 31, 1996
<PAGE>
[Flag Investors Logo]
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
Alex. Brown & Sons
INCORPORATED
<PAGE>
Report Highlights
(bullet) November 1, 1996 marked the current Fund management's three-year
anniversary. For the three years ended October 31, 1996, the Fund
significantly outperformed both the Russell 2000 and Lipper Small
Company Growth indices.
(bullet) Almost two-thirds of the Fund's holdings have remained in the
portfolio for the past two years. This fact, coupled with the Fund's
performance, attests to the successful implementation of our
investment philosophy, which is to seek companies that can grow at
high rates for a long period of time.
(bullet) The Fund had a relatively small spread between after-tax and
pre-tax performance for the past two years. The two-year compound
after-tax performance of 24.4% is an excellent measure of our
high-growth, low-turnover and long-term investment strategy.
<PAGE>
Letter to Shareholders
Dear Shareholders:
Another successful year has passed, and it has now been three years since
this management team assumed responsibility for your Fund. During the year ended
October 31, 1996, your Fund appreciated 18.2% versus 16.6% for the Russell 2000
Index and 17.1% for the Lipper Small Company Growth Index. For the three-year
period, your Fund had an annualized return of 17.7%, again outperforming the
Russell 2000 Index's return of 11.2% and the Lipper Small Company Growth Index's
return of 13.9%. In addition, your Fund ranked in the top 20th percentile in
performance among the 221 funds in Morningstar's Small Company Fund Category for
the three years ended October 31, 1996.*Comparative data for each of the last
three years and the annualized return for those years combined is shown in the
table below.
<TABLE>
<CAPTION>
Performance Comparisons**
Year Ended
-------------------------------------- 3 Years Ended
10/31/96 10/31/95 10/31/94 10/31/96
- --------------------------------------------------------------------------------------------
<S><C>
Flag Investors Emerging Growth Fund 18.2% 32.9% 3.8% 17.7%
NASDAQ (OTC) Industrial Index 15.0 20.5 -0.2 11.4
Russell 2000 Index 16.6 18.3 -0.3 11.2
Lipper Small Company Growth Index 17.1 23.6 2.1 13.9
S&P 500 Index 24.2 26.4 3.9 17.7
</TABLE>
It is important to observe from the above table that your Fund matched the
three-year market performance achieved by the Standard &Poor's 500 despite the
Fund's emerging growth environment, which caused the Russell 2000 and Lipper
Small Company Growth indices to underperform the S&P 500 in each of the three
years. Over very long periods of time, emerging growth stocks have outperformed
large capitalization stocks, and we expect this will be true in the future as
well.
- --------------------
*Funds are grouped according to investment objective and are ranked by total
return performance relative to other funds in their respective categories.
This ranking indicates that the Fund's performance ranked #45 out of 221 funds
in the Small Company Fund category. In addition, the Fund ranked #221 out of
384 funds for the 1-year period and #108 out of 115 funds for the 5-year
period ended October 31, 1996. Performance figures used in these rankings
exclude the impact of any sales charge.
**These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. The unmanaged
indices listed above are widely recognized as indicators of
performance in their respective market sectors. The Russell 2000 Index is
an indicator of small company growth performance; the NASDAQ (OTC)Industrial
Index is comprised of more than 3,000 industrial issues covered by the
NASDAQ Composite Index; and the S&P 500 Index is an indicator of
general market performance. While the Lipper Small Company Growth Index is
unmanaged, it is comprised of the 30 largest funds in the Lipper Small
Company Growth Fund Category, which are managed. Past performance is
not an indicator of future results. Please review the Additional Performance
Information on page 6.
1
<PAGE>
Letter to Shareholders (continued)
We are pleased that these results have been achieved by consistently
applying the philosophy and strategy outlined to you when your new management
assumed responsibility for the portfolio. As the Fund's chairman, Truman Semans,
described our strategy in his letter three years ago:
"Superior investment results have been achieved, regardless of changing
market conditions, by consistently adhering to a clear and simple strategy:
identify emerging growth companies which can sustain high growth rates over
the long term. Furthermore, these should be identified early in their
development stages, so high-quality companies can be purchased by the Fund
before their market valuations reflect their true potential. Finally, a
long-term investment orientation must be sustained in order to fully
realize their value. This is a time proven plan and is the basis for our
strategy."
Let us examine certain aspects and implications of this statement. We will
examine the last two years of the Fund's progress, as the year before that was
transitional and did not fully reflect our investment strategy.
"Sustain high growth rates over the long term"
Nearly two-thirds of the holdings in the Fund on October 31, 1996 were in
the portfolio two years ago. This is a highly unusual fact in the emerging
growth arena, where many funds turn over more than 100% each year. With so many
of our holdings in place for several years, the growth of earnings for each
company has had time to affect stock price performance materially. To be
specific, the aggregate weighted average earnings growth of the companies in the
portfolio over the past two years has exceeded 35% per year and has been a key
driver of the Fund's performance.
2
<PAGE>
"Companies can be purchased by the Fund before their market valuations reflect
their true potential"
At any point in time, the Fund is a blend of stocks that are
well-recognized, long-term holdings and stocks that are not as well-known.
Some examples of portfolio holdings that have been conspicuous contributors
to performance will illustrate this strategy. These include Manugistics Group,
up 149%, Pacific Sunwear of California, up 363%, Starbucks Corp., up 66%, and
Papa John's International, up 94%, all for the year ended October 31, 1996.
Starbucks and Papa John's have been consistent performers with no
significant quarterly earnings difficulties and are well-recognized and widely
followed. We continue to hold them because they still have large opportunities
ahead relative to current size. They each have plans to achieve their
opportunities and both are executing successfully.
At the beginning of the year, Manugistics and Pacific Sunwear had not
executed flawlessly. Not only were they narrowly recognized but they were
scorned by many who had followed them. Our analysis of key fundamentals
suggested that earnings were likely to improve. This has happened, and the stock
prices have reflected the improvement.
Currently, the Fund's holdings are split almost evenly between
well-recognized and less well-known stocks. We feel this blend is optimal to
achieve current performance and keep risk at moderate levels.
3
<PAGE>
Letter to Shareholders (concluded)
"Finally, a long-term investment orientation must be sustained in order to fully
recognize their value"
The best measure of success of our high-growth, low-turnover and long-term
investment strategy is after-tax performance. We are happy to report that for
the two years ended October 31, 1996, the Fund's compound after-tax performance
was 24.4%. *During our three years of managing the Fund, portfolio turnover was
high only in the first transitional year. However, turnover dropped to 37% in
the second year and dropped again to 23% last year. The result is a relatively
small spread between pre-tax and after-tax performance (see table, left).
Specifically, for the two-year period, the spread was about 0.9% of performance.
Annual Percentage Return*
Year Ended 2 Years Ended
10/31/96 10/31/96
- --------------------------------------------------------
Pre-Tax Return 18.2% 25.3%
After-Tax Return 16.5 24.4
*After-tax performance was calculated by incorporating a 28% maximum tax bracket
for long-term capital gains distributions and a 36% maximum tax bracket for
ordinary income distributions.
We hope this is helpful to your understanding of your Fund.
Very truly yours,
/s/ Frederick L. Meserve, Jr.
- -----------------------------
Frederick L. Meserve, Jr.
President
November 19, 1996
4
<PAGE>
Five Largest Holdings
Percent of
Company Net Assets
- --------------------------------------------------------------------------------
(bullet) Manugistics Group, Inc. 5.1%
Develops, markets and supports a line of business operations
software and services.
(bullet) QuickResponse Services, Inc. 4.8%
Provides a product information database and related network
services that automate and improve merchandise management.
(bullet) Synopsys, Inc. 4.6%
Develops, markets and supports high-level design automation
software for designers of integrated circuits and electronics
systems. The company has license agreements with over 400
customers, including major international semiconductor,
computer, communications, military and aerospace companies.
(bullet) Pacific Sunwear of California 4.0%
Operates a nationwide mall-based specialty retail chain of
stores. The company specializes in casual apparel and footwear,
catering to teens and young adults.
(bullet) Buffets, Inc. 3.7%
Operates and franchises scatter bar buffet restaurants featuring
traditional American "home cooking" buffet style food.
The company operates 60 U.S. restaurants.
5
<PAGE>
Flag Investors Emerging Growth Fund
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's initial public
offering on June 15, 1988 through the most recent fiscal year-end and must
reflect the impact of the Fund's total expenses and the currently effective
4.50% maximum sales charge for the Fund's Class A Shares. No graph is given for
the Fund's Class B Shares since the class commenced operations less than six
months ago. Depending on the duration of the investment, Class B Share
performance may be more or less than Class A Share performance due to the
different sales charges and 12b-1/service fees.
Due to the changing nature of the NASDAQ (OTC) Composite, we will begin to
compare the Fund's performance to that of a more appropriate market benchmark,
the NASDAQ (OTC) Industrial Index. The Composite now represents companies with
larger market capitalizations than the companies held in the Fund. For example,
25% of the stocks in the Composite have market caps of over $5 billion compared
to only 6% of the Industrial Index and 1.3% of the Fund.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the indices shown are not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of these indices
would have had to own the securities that they represent. Acquiring these
securities would require a considerable amount of money and would incur expenses
that are not reflected in the index results.
The SEC also requires that we report the Fund's total returns, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective 4.50% maximum sales
charge for the Fund's Class A Shares and the 4.00% maximum contingent deferred
sales charge for the Fund's Class B Shares. These total returns correspond to
those experienced by individual shareholders only if their shares were purchased
on the first day of each time period and the maximum sales charge was paid. Any
performance figures shown are for the full period indicated. Since investment
return and principal value will fluctuate, an investor's shares may be worth
more or less than their original cost when redeemed.
6
<PAGE>
Flag Investors Emerging Growth Fund
Change in Value of a $10,000 Investment in Class A Shares*
June 15, 1988-October 31, 1996
[Graph appears here--see plot points below]
Flag Investors NASDAQ (OTC) NASDAQ (OTC)
Emerging Growth Fund S&P 500 Composite Industrial Composite
6/88 9,550 10,000 10,000 10,000
10/88 9,059 10,323 9,250 9,721
10/89 12,468 13,033 11,030 11,679
10/90 8,525 12,057 8,915 8,541
10/91 14,539 16,091 15,086 14,286
10/92 12,916 17,686 16,216 16,187
10/93 13,992 20,325 20,055 21,106
10/94 14,517 21,099 20,011 21,294
10/95 19,296 26,648 24,121 28,528
10/96 22,805 33,064 27,741 33,634
Average Annual Total Return*
Periods Ended 9/30/96 1 Year 5 Years Since Inception**
- ---------------------------------------------------------------------------
Class A Shares 14.60% 10.56% 11.14%
Class B Shares -- -- 0.68%***
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results. The
NASDAQ (OTC) Composite is an unmanaged index that is an indicator of the
performance of smaller capitalization companies.
**Inception dates: Class A Shares 6/15/88; Class B Shares 6/20/96.
***Aggregate.
7
<PAGE>
Flag Investors Emerging Growth Fund
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Institutional Shares*
November 2, 1995-October 31, 1996
[Graph appears here--see plot points below]
Flag Investors NASDAQ (OTC) NASDAQ (OTC)
Emerging Growth Fund S&P 500 Composite Industrial Composite
11/95 10,000 10,000 10,000 10,000
1/96 9,806 10,546 9,996 10,014
4/96 11,931 10,906 11,554 11,261
7/96 10,547 10,727 10,202 10,233
10/96 11,621 11,892 11,133 11,564
Average Annual Total Return*
Periods Ended 9/30/96 1 Year 5 Years Since Inception**
- ------------------------------------------------------------------------
Institutional Shares -- -- 24.63%***
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
**Inception date: 11/2/95.
***Annualized.
8
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
COMMON STOCK -- 94.2%
Business Services--15.4%
<S><C>
100,350 Cidco, Inc.* $ 1,894,106 2.9%
29,150 Corporate Express, Inc.* 951,019 1.4
70,150 Energy Biosystems Corp.* 473,512 0.7
78,150 Manugistics Group, Inc.* 3,360,450 5.1
84,450 QuickResponse Services, Inc.* 3,135,206 4.8
15,750 Wilmar Industries, Inc.* 338,625 0.5
----------- ----
10,152,918 15.4
----------- ----
Capital Goods--2.1%
67,425 Itron, Inc.* 1,120,941 1.7
25,400 Xeikon N.V. ADR* 238,125 0.4
----------- ----
1,359,066 2.1
----------- ----
Consumer Services--21.1%
35,925 Apollo Group, Inc.* 987,937 1.5
128,550 Apple South, Inc. 1,510,462 2.3
220,643 Buffets, Inc.* 2,454,653 3.7
120,575 O'Charleys, Inc.* 1,356,469 2.1
117,062 Pacific Sunwear of California* 2,604,629 4.0
26,150 Papa John's International, Inc.* 1,300,963 2.0
54,800 PETsMART, Inc.* 1,479,600 2.2
40,750 Starbucks Corp.* 1,324,375 2.0
20,550 Sylvan Learning Systems, Inc.* 868,238 1.3
----------- ----
13,887,326 21.1
----------- ----
Financial Services--2.4%
33,900 First Investors Corp.* 347,475 0.5
49,325 PXRE Corp. 1,220,794 1.9
----------- ----
1,568,269 2.4
----------- ----
Health Care Services--12.1%
32,300 Access Health, Inc.* 1,065,900 1.6
86,675 Genesis Health Ventures, Inc.* 1,982,691 3.0
43,275 PhyCor, Inc.* 1,341,525 2.0
78,950 Physician Sales and Service, Inc.* 1,677,688 2.5
61,475 Vivra, Inc.* 1,959,516 3.0
----------- ----
8,027,320 12.1
----------- ----
</TABLE>
9
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
COMMON STOCK -- concluded
Health Equipment and Services--2.1%
<S><C>
40,400 Perclose, Inc.* $ 666,600 1.0%
18,950 Target Therapeutics, Inc.* 701,150 1.1
----------- ----
1,367,750 2.1
----------- ----
Media/Communications--1.1%
9,732 Clear Channel Communications, Inc.* 710,436 1.1
----------- ----
Technology--Software/Services--17.4%
28,150 EPIC Design Technology, Inc.* 689,675 1.0
81,925 Integrated Systems, Inc.* 2,211,975 3.4
112,500 Marcam Corp.* 1,378,125 2.1
17,400 Parametric Technology Co.* 850,425 1.3
98,500 Progress Software Corp.* 1,539,063 2.3
67,275 Synopsys, Inc.* 3,027,375 4.6
108,325 XcelleNet, Inc.* 1,760,281 2.7
----------- ----
11,456,919 17.4
----------- ----
Technology--Systems/Semiconductor--15.7%
49,385 Atmel Corp.* 1,253,144 1.9
83,250 Level One Communications, Inc.* 2,351,812 3.6
26,600 Maxim Integrated Products, Inc.* 931,000 1.4
30,350 QUALCOMM, Inc.* 1,206,413 1.8
13,650 Security Dynamics Technologies, Inc.* 1,109,063 1.7
80,975 Sipex Corp.* 2,135,716 3.3
40,650 Xilinx, Inc.* 1,331,288 2.0
----------- ----
10,318,436 15.7
----------- ----
Transportation--4.8%
64,075 Atlantic Coast Airlines, Inc.* 672,787 1.0
91,200 Fritz Companies, Inc.* 1,459,200 2.2
122,500 Great Lakes Aviation Ltd.* 352,187 0.5
80,875 Landair Services, Inc.* 707,656 1.1
----------- ----
3,191,830 4.8
----------- ----
Total Common Stock
(Cost $45,954,052) 62,040,270 94.2
----------- ----
</TABLE>
10
<PAGE>
Flag Investors Emerging Growth Fund
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--6.1%
<S><C>
$4,029 Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased
on 11/1/96, collateralized by U.S.
Treasury Bonds with a market value
of $4,109,879.
(Cost 4,029,000) $ 4,029,000 6.1%
----------- -----
Total Investment in Securities
(Cost $49,983,052)** 66,069,270 100.3
Liabilities in Excess of Other Assets, Net (221,212) (0.3)
----------- -----
Net Assets $65,848,058 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($45,324,973 / 2,367,961 shares outstanding) $19.14
======
Class B Share
($772,495 / 40,442 shares outstanding) $19.10
======
Institutional Share
($19,750,590 / 1,031,427 shares outstanding) $19.15
======
Maximum Offering Price Per:
Class A Share
($19.14 / .955) $20.04
======
Class B Share $19.10
======
Institutional Share $19.15
======
</TABLE>
- -----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $50,119,496.
See Notes to Financial Statements.
11
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
October 31,
- -------------------------------------------------------------------------------------------
1996
<S><C>
Investment Income (Note 1):
Interest $ 292,171
Dividends 32,827
Other income 12,622
----------
Total income 337,620
----------
Expenses:
Investment advisory fee (Note 2) 381,086
Distribution fee (Note 2) 101,211
Accounting fee (Note 2) 41,911
Audit 41,623
Printing and postage 40,249
Legal 39,913
Transfer agent fee (Note 2) 36,629
Registration fees 35,952
Custodian fee 14,067
Miscellaneous 6,060
Directors' fees 1,136
----------
Total expenses 739,837
----------
Expenses in excess of income (402,217)
----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 3,148,580
Change in unrealized appreciation or depreciation of investments 4,422,457
----------
Net gain on investments 7,571,037
----------
Net increase in net assets resulting from operations $7,168,820
==========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------
1996 1995
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of income $ (402,217) $ (190,378)
Net realized gain from security transactions 3,148,580 2,180,561
Change in unrealized appreciation or
depreciation of investments 4,422,457 6,850,511
----------- -----------
Net increase in net assets resulting
from operations 7,168,820 8,840,694
----------- -----------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares (614,007) --
Institutional Shares (60,009) --
Net realized long-term gains:
Class A Shares (1,228,016) (73,772)
Institutional Shares (120,017) --
----------- -----------
Total distributions (2,022,049) (73,772)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 34,395,004 10,561,629
Value of shares issued in
reinvestment of dividends 1,913,272 68,962
Cost of shares repurchased (13,733,625) (4,572,632)
----------- -----------
Increase in net assets derived from capital
share transactions 22,574,651 6,057,959
----------- -----------
Total increase in net assets 27,721,422 14,824,881
Net Assets:
Beginning of year 38,126,636 23,301,755
----------- -----------
End of year $65,848,058 $38,126,636
=========== ===========
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)(1)
<TABLE>
<CAPTION>
For the Year Ended
October 31, For the Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S><C>
Per Share Operating Performance:
Net asset value at beginning of year $ 17.09 $ 12.90 $ 14.02 $ 13.53 $ 15.23
------- ------- ------- ------- -------
Income from Investment Operations:
Expenses in excess of income (0.15) (0.09) (0.08) (0.08) (0.16)
Net realized and unrealized gain/(loss) on investments 3.10 4.32 0.47 1.20 (1.54)
------- ------- ------- ------- -------
Total from Investment Operations 2.95 4.23 0.39 1.12 (1.70)
Less Distributions:
Distributions from net realized short-term gains (0.30) -- -- -- --
Distributions from net realized long-term gains (0.60) (0.04) (1.51) (0.63) --
------- ------- ------- ------- -------
Total distributions (0.90) (0.04) (1.51) (0.63) --
------- ------- ------- ------- -------
Net asset value at end of year $ 19.14 $ 17.09 $ 12.90 $ 14.02 $ 13.53
======= ======= ======= ======= =======
Total Return(2) 18.19% 32.92% 3.75% 8.33% (11.16)%
Ratios to Average Daily Net Assets:
Expenses 1.50% 1.50% 1.50% 1.50% 1.46%
Expenses in excess of income (0.83)% (0.64)% (0.73)% (0.52)% (0.92)%
Supplemental Data:
Net assets at end of year (000) $45,325 $38,127 $23,302 $28,867 $38,924
Portfolio turnover rate 24% 39% 86% 133% 69%
Average commissions per share $ 0.07(3) -- -- -- --
</TABLE>
- ------------------
(1) Computed based on average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Disclosure is required for fiscal years beginning on or after September
1, 1995. Represents average commission rate per share charged to the
Fund on purchases and sales of investments during the period.
14 See Notes to Financial Statements. 15
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights--Class B Shares
(For a share outstanding throughout the period)(1)
For the Period
June 20, 1996(2) through
October 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $19.22
------
Income from Investment
Operations:
Expenses in excess of income (0.12)
Net realized and unrealized gain/(loss) on investments --
------
Total from Investment Operations (0.12)
Less Distributions:
Distributions from net realized short-term gains --
Distributions from net realized long-term gains --
------
Total distributions --
------
Net asset value at end of period $19.10
======
Total Return(3) (0.62)%
Ratios to Average Daily Net Assets:
Expenses(4) 2.25%
Expenses in excess of income(4) (1.67)%
Supplemental Data:
Net assets at end of period (000) $ 772
Portfolio turnover rate(4) 24%
Average commissions per share $ 0.07(5)
- ----------------
(1) Computed based on average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
16
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights --Institutional Shares
(For a share outstanding throughout the period)(1)
For the Period
November 2, 1995(2)
through October 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $ 17.45
-------
Income from Investment Operations:
Expenses in excess of income (0.12)
Net realized and unrealized gain/(loss) on investments 2.72
-------
Total from Investment Operations 2.60
Less Distributions:
Distributions from net realized short-term gains (0.30)
Distributions from net realized long-term gains (0.60)
-------
Total distributions (0.90)
-------
Net asset value at end of period $ 19.15
=======
Total Return(3) 16.48%
Ratios to Average Daily Net Assets:
Expenses(4) 1.25%
Expenses in excess of income(4) (0.61)%
Supplemental Data:
Net assets at end of period (000) $19,751
Portfolio turnover rate(4) 24%
Average commissions per share $ 0.07(5)
- ------------
(1) Computed based on average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
17
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements
NOTE 1--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, consisting of Class A Shares, which are subject to a maximum front-end
sales charge of 4.50% and a 0.25% distribution fee. On November 2, 1995, the
Fund began offering Institutional Shares, which are not subject to a front-end
sales charge or distribution fee. On June 20, 1996, the Fund began offering
Class B Shares, which are subject to a maximum contingent deferred sales charge
of 4.00%, a 0.75% distribution fee and a 0.25% shareholder servicing fee. The
Fund is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
A. Security Valuation--Portfolio securities that 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.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The
agreement ensures that the market value of the collateral,
including accrued interest thereon, is sufficient in the event of
default. If the counterparty defaults and the value of the collateral
declines or if the counterparty enters into an insolvency proceeding,
realization of the collateral by the Fund may be delayed or limited.
C. 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
18
<PAGE>
Flag Investors Emerging Growth Fund
NOTE 1--concluded
company and to make requisite distributions to shareholders that 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.
Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles.
Accordingly, periodic reclassifications are made within the Fund's
capital accounts to reflect income and gains available for distribution
under income tax regulations.
D. 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.
NOTE 2--Investment Advisory Fee, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor. The Advisory Agreement
provides for a maximum annual fee equal to .85% of the 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 October 31,
1996, the Advisor received $381,086 in fees, which was equivalent to .75% of the
Fund's average daily net assets.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $36,629 for
transfer agent services for the year ended October 31, 1996.
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 $41,911 for accounting services for the year ended October
31, 1996.
19
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements (continued)
NOTE 2--concluded
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated receives from the Fund an annual fee, calculated daily and paid
monthly, at an annual rate equal to .25% of the Class A Shares' average daily
net assets, .75% of the Class B Shares' average daily net assets plus an
additional .25% shareholder servicing fee for the Class B Shares. For the year
ended October 31, 1996, distribution fees were $101,211, of which $100,191 were
allocated to Class A Shares and $1,020 were allocated to Class B Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $1,837, and the accrued liability was approximately $4,689.
NOTE 3--Capital Share Transactions
At October 31, 1996, the Fund was authorized to issue up to 15 million
shares of $.001 par value common stock (8 million Class A, 1 million Class B, 5
million Institutional and 1 million undesignated). Transactions in shares of the
Fund were as follows:
Class A Shares
---------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
Shares sold 706,114 735,343
Shares issued to shareholders on
reinvestment of dividends 106,529 5,714
Shares redeemed (675,793) (316,169)
------------ -----------
Net increase in shares outstanding 136,850 424,888
============ ===========
Proceeds from sale of shares $ 13,138,521 $10,561,629
Value of reinvested dividends 1,733,222 68,962
Cost of shares redeemed (11,827,481) (4,572,632)
------------ -----------
Net increase from capital share
transactions $ 3,044,262 $ 6,057,959
============ ===========
20
<PAGE>
Flag Investors Emerging Growth Fund
NOTE 3--concluded
Class B Shares
-----------------
For the Period
June 20, 1996* to
October 31, 1996
-----------------
Shares sold 40,579
Shares issued to shareholders on
reinvestment of dividends --
Shares redeemed (137)
--------
Net increase in shares outstanding 40,442
========
Proceeds from sale of shares $779,667
Value of reinvested dividends --
Cost of shares redeemed (2,766)
--------
Net increase from capital share
transactions $776,901
========
Institutional Shares
--------------------
For the Period
November 2, 1995* to
October 31, 1996
--------------------
Shares sold 1,127,123
Shares issued to shareholders on
reinvestment of dividends 11,073
Shares redeemed (106,769)
-----------
Net increase in shares outstanding 1,031,427
===========
Proceeds from sale of shares $20,476,816
Value of reinvested dividends 180,050
Cost of shares redeemed (1,903,378)
-----------
Net increase from capital share
transactions $18,753,488
===========
- -----------
*Commencement of operations.
21
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term
obligations, aggregated $31,474,614 and $10,747,940, respectively, for the year
ended October 31, 1996.
At October 31, 1996, net unrealized appreciation for all securities in
which there is an excess of value over tax cost was $15,949,774, of which
$19,803,268 related to appreciated securities and $3,853,494 related to
depreciated securities.
NOTE 5--Net Assets
At October 31, 1996, net assets consisted of:
Paid-in capital $47,163,090
Accumulated net realized gain from security transactions 2,598,751
Unrealized appreciation of investments 16,086,217
-----------
$65,848,058
===========
NOTE 6--Tax Information (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1996.
Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
- -------- -------- -------- -------------
11/21/96 11/29/96 $0.30 $0.60
22
<PAGE>
Flag Investors Emerging Growth Fund
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, 1996, and the related statement 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 respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, 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, 1996, 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 respective periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
December 2, 1996
23
<PAGE>
Flag Investors Emerging Growth Fund
Directors and Officers
Truman T. Semans
Chairman
James J. Cunnane Sandra J. Doeller
Director Vice President
Richard T. Hale Gary V. Fearnow
Director Vice President
John F. Kroeger Charles A. Reid
Director Vice President
Louis E. Levy Edward J. Veilleux
Director Vice President
Eugene J. McDonald Scott J. Liotta
Director Vice President
W. James Price Joseph A. Finelli
Director Treasurer
Harry Woolf Edward J. Stoken
Director Secretary
Frederick L. Meserve, Jr. Laurie D. Collidge
President Assistant Secretary
Investment Objective
An open-end mutual fund seeking long-term growth of capital through investment
in a diversified portfolio of small and mid-sized emerging growth companies.
24
<PAGE>
This report is prepared for the general
information of shareholders. It is authorized for
distribution to prospective investors only when
preceded or accompanied by an effective
prospectus.
For more complete information regarding
any of the Flag Investors Funds, including
charges and expenses, obtain a prospectus from
your investment representative or directly from
the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
