<PAGE>
LOGO
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
(Class A and Class B 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.
Shares of the Fund are available through Alex. Brown & Sons Incorporated
("Alex. Brown") as well as Participating Dealers and Shareholder Servicing
Agents. This Prospectus relates to Flag Investors Class A Shares ("Class A
Shares") and Flag Investors Class B Shares ("Class B Shares") of the Fund.
The separate classes provide investors with alternatives as to sales load and
fund expenses. See "How to Invest in the Fund.")
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 March 1, 1996, as
amended through May 24, 1996, 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 May 24, 1996
<PAGE>
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
(CLASS A AND CLASS B SHARES)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Fund Expenses .................................... 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 6
4. Investment Restrictions .......................... 9
5. How to Invest in the Fund ........................ 10
6. How to Redeem Shares ............................. 18
7. Telephone Transactions ........................... 19
8. Dividends and Taxes .............................. 20
9. Management of the Fund ........................... 22
10. Investment Advisor ............................... 22
11. Distributor ...................................... 23
12. Custodian, Transfer Agent, Accounting Services ... 25
13. Performance Information .......................... 25
14. General Information .............................. 26
</TABLE>
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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. Shares may be offered only to residents of those states
in which such shares are eligible for purchase.
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1
<PAGE>
===============================================================================
1. Fund Expenses
...............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................ 4.50%* None
Maximum Sales Charge Imposed on
Reinvested Dividends ............................... None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) .......................................... 0.50%* 4.00%**
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Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
- ----------------------------------------------------------------------------------------------
Management Fees ..................................... .67% .67%
12b-1 Fees .......................................... .25% .75%
Other Expenses (including a .25% shareholder
servicing fee for Class B Shares) ................. .58% .83%***
Total Fund Operating Expenses ....................... 1.50% 2.25%
===== =====
</TABLE>
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* Purchases of $1 million or more of Class A Shares by persons not otherwise
eligible for sales load waivers are not subject to an initial sales charge,
however, a contingent deferred sales charge of .50% may be imposed on such
purchases. (See "How to Invest in the Fund -- Class A Shares.")
** A declining contingent deferred sales charge will be imposed on
redemptions of Class B Shares made within six years of purchase. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Invest in the Fund --Class B Shares.")
*** A portion of the shareholder servicing fee is allocated to member firms
of the National Association of Securities Dealers, Inc. and qualified
banks for continued personal service by such members to investors in
Class B Shares, such as responding to shareholder inquiries, quoting net
asset values, providing current marketing materials and attending to
other shareholder matters.
Example:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------
Class A Shares ......................... $60 $ 91 $126 $230
Class B Shares ......................... $63 $103 $147 $246*
- --------------------------------------------------------------------------------------------------
You would pay the following expenses on
the same investment, assuming no
redemption:* 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------
Class B Shares ......................... $23 $ 72 $127 $246*
- --------------------------------------------------------------------------------------------------
</TABLE>
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* Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of Class
B expenses and four years of Class A expenses.
2
<PAGE>
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 shares of either class 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 the
Fund", "Investment Advisor" and "Distributor.") The Expenses and Example for
the Class A Shares appearing in the table above are based on the Fund's
expenses for the Class A Shares for the fiscal year ended October 31, 1995,
which were 1.50% of the Class A Shares' average net assets. The Expenses and
Example for the Class B Shares, which have not been offered prior to the date
of this Prospectus, are based on those for the Class A Shares plus the
incremental 12b-1 and service fee costs. Due to the continuous nature of Rule
12b-1 fees, long-term shareholders of the Fund may pay more than the
equivalent of the maximum front-end sales charges permitted by the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges. (See "How to Invest in the Fund -- Class A Shares.")
===============================================================================
2. Financial Highlights
The Fund was organized as a corporation under the laws of the State of
Maryland on July 2, 1987. Its registration statement under the Investment
Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 was
declared effective by the SEC on June 15, 1988. 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 have been audited by Coopers &
Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the Class A Shares for the fiscal year ended October
31, 1995 and the report thereon of Coopers & Lybrand L.L.P. 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, 1995, which can be obtained at no charge by
calling the Fund at (800) 767-FLAG. The Fund did not offer the Class B Shares
prior to the date of this Prospectus.
3
<PAGE>
(For a Class A Share outstanding throughout each period)*
<TABLE>
<CAPTION>
For the period
December 30, 1987
For the Year Ended October 31, (commencement of
--------------------------------------------------------------------- operations) through
1995 1994 1993 1992 1991 1990 1989 October 31, 1988
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <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 $10.87 $10.00
--------- --------- --------- ---------- --------- ---------- --------- ----------
Income from Investment Operations:
Net investment income (0.09) (0.08) (0.08) (0.16) (0.10) (0.11) (0.05) 0.10
Net realized and unrealized
gain/(loss) on investments 4.32 0.47 1.20 (1.54) 6.40 (4.00) 4.13 (0.88)
Effect of other capital share
activity -- -- -- -- -- -- -- 1.65
--------- --------- --------- ---------- --------- ---------- --------- ----------
Total from Investment Operations 4.23 0.39 1.12 (1.70) 6.30 (4.11) 4.08 0.87
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 $17.09 $12.90 $14.02 $13.53 $15.23 $8.93 $14.90 $10.87
========= ========= ========= ========== ========= ========== ========= ==========
Total Return** 32.92% 3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64% 8.80%
Ratios to Average Net Assets:
Expenses 1.50% 1.50% 1.50% 1.46% 1.50% 1.50% 1.49% 1.47%(1)
Net investment income (0.64)% (0.73)% (0.52)% (0.92)% (0.76)% (0.92)% (0.42)% 1.02%(1)
Supplemental Data:
Net assets at end of period (000): $38,127 $23,302 $28,867 $38,924 $48,656 $31,678 $44,396 $26,159
Portfolio turnover rate 39% 86% 133% 69% 79% 82% 108% 110%
</TABLE>
- ------
* Computed based upon average shares outstanding.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
4-5
<PAGE>
===============================================================================
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. This investment objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. There can be no assurance that the Fund will achieve its investment
objective.
In general, an emerging growth company with approximately $250 million or
less in annual sales would be considered to be a small company, while an
emerging growth company with approximately $250 million to $1 billion in
annual sales would be considered to be a mid-sized company. While the Fund
intends to invest in emerging growth companies that are small to mid-sized at
the time of investment, it may retain the securities of these companies even
after they reach a larger size if the Fund's investment advisor believes they
continue to have growth potential. Investments in such emerging growth
companies involve certain risks. (See "Special Risk Considerations.")
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 investment
advisor believes are well managed and have experienced or have the potential
to experience rapid growth in revenues, earnings, assets and cash flow. As an
additional attempt to limit volatility, the Fund will invest in a broad
cross-section of industries. While the Fund's investments in particular
industries will change from time to time as investment opportunities change,
it will invest 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.
6
<PAGE>
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). However, 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 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.
The Fund may invest up to 20% of its assets in convertible securities
which are fixed-income securities 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.
In addition to the above, 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 believes there are not sufficient quantities of
common stocks available at appropriate prices or if the Advisor believes debt
securities are consistent with the Fund's investment objective because such
securities can 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 ("S&P") or, if unrated, are of comparable
quality as determined by the Advisor under guidelines established by the
Fund's Board of Directors.
7
<PAGE>
Corporate bonds and debentures will be limited to those rated in the top
three categories published by Moody's (Aaa, Aa or A) or by S&P (AAA, AA or A)
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.
The Fund may also invest in securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities") that have been determined to be liquid by the Advisor under
standards approved by the Fund's Board of Directors, and may invest up to 10%
of its net assets in Rule 144A Securities that are illiquid (see "Investment
Restrictions"). Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
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
8
<PAGE>
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.
...............................................................................
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.
===============================================================================
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
9
<PAGE>
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.
===============================================================================
5. How to Invest in the Fund
Class A Shares and Class B Shares may be purchased from Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202 ("Alex.
Brown"), through any securities dealer which has entered into a dealer
agreement with Alex. Brown ("Participating Dealers"), or through any
financial institution which has entered into a shareholder servicing
agreement with the Fund ("Shareholder Servicing Agents"). Shares of either
class may also be purchased by completing the Application Form attached to
this Prospectus and returning it, together with payment of the purchase price
(including any applicable front-end sales charge), to the address shown on
the Application Form. Participating Dealers or Shareholder Servicing Agents
and their investment representatives may receive different levels of
compensation depending on which class of shares they sell.
10
<PAGE>
The Class A and Class B alternatives permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the combination of sales
charge and distribution fee on Class A Shares is more favorable than the
combination of distribution/service fees and contingent deferred sales charge
on Class B Shares. In almost all cases, investors planning to purchase
$100,000 or more of Fund shares will pay lower aggregate charges and expenses
by purchasing Class A Shares. Accordingly, the Fund will not accept purchases
for Class B Shares in excess of $100,000 per account. (See "Fee Table.")
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for
participants in the Fund's Automatic Investing Plan is $250. Each subsequent
investment must be at least $100 per class, except that the minimum
subsequent investment under the Fund's Automatic Investing Plan is $250 for
quarterly investments and $100 for monthly investments. (See "Purchases
Through Automatic Investing Plan" below.) There is no minimum investment
requirement for qualified retirement plans (i.e., 401(k) plans or pension and
profit sharing plans). IRA accounts are, however, subject to the $2,000
minimum initial investment requirement. There is no minimum investment
requirement for spousal IRA accounts.
The Fund reserves the right to suspend the sale of shares at any time at
the discretion of Alex. Brown and the Advisor. Orders for purchases of shares
are accepted on any day on which the New York Stock Exchange is open for
business ("Business Day"). Purchase orders for shares will be executed at a
per share purchase price equal to the net asset value next determined after
receipt of the purchase order plus any applicable front-end sales charge (the
"Offering Price") on the date such net asset value is determined (the
"Purchase Date"). Purchases made by mail must be accompanied by payment of
the Offering Price. Purchases made through Alex. Brown or a Participating
Dealer or Shareholder Servicing Agent must be in accordance with such
entity's payment procedures. Alex. Brown may, in its sole discretion, refuse
to accept any purchase order.
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 are given their market value where feasible. If
11
<PAGE>
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 is generally 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 are valued at amortized cost, which constitutes fair value
as determined by the Fund's Board of Directors.
...............................................................................
OFFERING PRICE
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge which is calculated as a percentage of the Offering
Price and for Class B Shares is net asset value.
.............................................................................
Class A Shares
The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown below:
<TABLE>
<CAPTION>
Dealer
Sales Charge as Retention as
Percentage of Percentage
------------------------- of
Offering Net Amount Offering
Amount of Purchase Price Invested Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 50,000 ..... 4.50% 4.71% 4.00%
$50,000 - $ 99,999 ..... 3.50% 3.63% 3.00%
$100,000 - $249,999 ..... 2.50% 2.56% 2.00%
$250,000 - $499,999 ..... 2.00% 2.04% 1.50%
$500,000 - $999,999 ..... 1.50% 1.52% 1.25%
$1,000,000 and over ..... None* None* None*
</TABLE>
- -----------------------------------------------------------------------------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of accumulation.
In addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Class A Shares and purchases of
shares of other Flag Investors funds with the same sales charge, and purchases
of Class A shares of Flag Investors Intermediate-Term Income Fund, Inc. and Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc. (the "Intermediate
Funds"). The applicable sales charge will be determined based on the total of
(a) the shareholder's current
12
<PAGE>
purchase plus (b) an amount equal to the then current net asset value or cost,
whichever is higher, of all Class A Shares and of all Flag Investors shares
described above and any Flag Investors Class D shares held by the shareholder.
To obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a Participating
Dealer or Shareholder Servicing Agent, as applicable, with sufficient
information to verify that the shareholder has such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
The term "purchase" refers to an individual purchase by a single purchaser,
or to concurrent purchases, which will be aggregated by a purchaser, the
purchaser's spouse and their children under the age of 21 years purchasing Class
A Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the Offering
Price applicable at the time of such purchase to the full amount indicated on
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Letter of Intent is 5% of the full amount. Class A Shares purchased with
the first 5% of the full amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the higher sales
charge applicable to the Class A Shares actually purchased if the full amount
indicated is not invested. Such escrowed shares will be involuntarily redeemed
to pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the escrowed shares will be released. An investor who wishes
to enter into a Letter of Intent in conjunction with an investment in Class A
Shares may do so by completing the appropriate section of the Application Form
attached to this Prospectus.
No sales charge will be payable at the time of purchase on investments of $1
million or more of Class A Shares. However, a contingent deferred sales charge
may be imposed on such investments in the event of a redemption within 24 months
following the purchase, at the rate of .50% on the lesser of the value of the
Class A Shares redeemed or the total cost of such shares. No contingent deferred
sales charge will be imposed on purchases of $3 million or more of Class A
Shares redeemed within 24 months of purchase if the Participating Dealer and
Alex. Brown have entered into an agreement under which the Participating Dealer
agrees to return any payments received on the sale of such shares. In
determining whether a contingent deferred sales
13
<PAGE>
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.
The Fund may sell Class A Shares at net asset value (without sales charge) to
the following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Class A Shares on
behalf of their fiduciary and advisory clients, provided such clients have paid
an account management fee for these services (investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent); (ii)
qualified retirement plans; (iii) participants in a Flag Investors fund payroll
savings plan program; (iv) investors who have redeemed Class A Shares, or shares
of any other mutual fund in the Flag Investors family of funds with the same
sales charges, or who have redeemed Class A shares of the Intermediate Funds
which they had held for at least 24 months prior to redemption, in an amount
that is not more than the total redemption proceeds, provided that the purchase
is within 90 days after the redemption; and (v) current or retired Directors of
the Fund, and directors and employees (and their immediate families) of Alex.
Brown, Participating Dealers and their respective affiliates.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
............................................................................
Class B Shares
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class
B Shares redeemed within six years of purchase. The charge is assessed on an
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. Accordingly, the contingent
deferred sales charge will not be applied to dollar amounts representing an
increase in the net asset values above the initial purchase price of the
shares being redeemed. In addition, no charge is assessed on redemptions of
Class B Shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether the contingent deferred sales charge is applicable
to a redemption, the calculation is made in the manner that results in the
lowest possible rate. Therefore, it is assumed that the redemption is first
of any Class B Shares in the shareholder's account that represent reinvested
dividends and distributions and second of Class B Shares held the longest
14
<PAGE>
during the six year period. The amount of the contingent deferred sales
charge, if any, will vary depending on the number of years from the time of
payment for the purchase of Class B Shares until the redemption of such
shares (the "holding period"). For purposes of determining this holding
period, all payments during a month are aggregated and deemed to have been
made on the first day of the month. The following table sets forth the rates
of the contingent deferred sales charge.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
- -----------------------------------------------------------------
<S> <C>
First ................ 4.0%
Second ............... 4.0%
Third ................ 3.0%
Fourth ............... 3.0%
Fifth ................ 2.0%
Sixth ................ 1.0%
Thereafter ........... None*
- ------------------------------------------------------------------
</TABLE>
* As described more fully below, Class B Shares automatically convert
to Class A Shares six years after the beginning of the calendar month
in which the purchase order is accepted.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
death or initial determination of disability (as defined in the Internal
Revenue Code of 1986, as amended) of a shareholder; or (ii) to the extent
that the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a shareholder who
has attained the age of 70 1/2. The waiver with respect to (i) above is only
applicable in cases where the shareholder account is registered (a) in the
name of an individual person, (b) as a joint tenancy with rights of
survivorship, (c) as community property or (d) in the name of a minor child
under the Uniform Gifts or Uniform Transfers to Minors Act. A shareholder, or
his or her representative, must notify the Fund's transfer agent (the
"Transfer Agent") prior to the time of redemption if such circumstances exist
and the shareholder is eligible for this waiver. For information on the
imposition and waiver of the contingent deferred sales charge, contact the
Transfer Agent at (800) 553-8080.
Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month in which the purchase order for Class B Shares is
accepted, such Class B Shares will automatically convert to Class A Shares
and will no longer be subject to the higher distribution and service fees.
Such conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other charge.
The conversion is not a taxable event to the shareholder.
15
<PAGE>
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account
will be considered to be held in a separate sub-account. Each time any Class
B Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
.............................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class that
have the same sales load structure. Shares issued pursuant to this offer will
not be subject to the sales charges described above or any other charge. In
addition, shareholders of Class A shares of the Intermediate Funds may exchange
into Class A Shares upon payment of the difference in sales charges, as
applicable, except that the exchange will be made at net asset value if the
shares of such funds have been held for more than 24 months. Shareholders of
Flag Investors Cash Reserve Prime Class A Shares may exchange into Class A
Shares upon payment of the difference in sales charges, as applicable, or into
Class B Shares at net asset value, subject thereafter to any applicable
contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from another
fund in the Flag Investors family of funds, the Fund will combine the period
for which the original shares were held prior to the exchange with the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such 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.
Holders of partnership interests in EGC Limited Partnership may similarly
exchange their partnership interests for an equal dollar amount of Class A
Shares. Alex. Brown will tender the partnership interests offered for
exchange for redemption by the issuer and will use the proceeds to purchase
16
<PAGE>
Class A Shares on the shareholder's behalf. In addition, shareholders of any
mutual fund not affiliated with the Fund who have paid a sales charge may
also exchange shares of such fund for an equal dollar amount of Class A
Shares by submitting to Alex. Brown or a Participating Dealer the proceeds of
the redemption of such shares, together with evidence of the payment of a
sales charge and the source of such proceeds. Class A Shares issued pursuant
to these offers will not be subject to the sales charges described above or
any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.)
The exchange privilege may be exercised only in those states where the
class of 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.
............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase either Class A Shares or Class B Shares
regularly by means of an Automatic Investing Plan with a pre-authorized check
drawn on their checking accounts. Under this plan, the shareholder may elect
to have a specified amount invested monthly or quarterly in either Class A
Shares or Class B Shares. The amount specified by the shareholder will be
withdrawn from the shareholder's checking account using the pre-authorized
check. This amount will be invested in the class of shares selected by the
shareholder at the applicable Offering Price determined on the date the
amount is available for investment. Participation in the Automatic Investing
Plan may be discontinued either by the Fund or the shareholder upon 30 days'
prior written notice to the other party. A shareholder who wishes to enroll
in the Automatic Investing Plan may do so by completing the appropriate
section of the Application Form attached to this Prospectus.
............................................................................
PURCHASES THROUGH DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. A shareholder who wishes to enroll in the Dividend Reinvestment
Plan should check the appropriate box on the Application Form or call (800)
553-8080 for additional information.
17
<PAGE>
Alternately, shareholders may have their distributions invested in shares
of other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call (800) 553-8080 for additional
information.
Reinvestments of distributions will be effected without a sales charge.
============================================================================
6. How to Redeem Shares
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Fund's transfer agent (the "Transfer Agent"). Shareholders may also redeem
shares of either class by telephone (in any amount up to $50,000). (See
"Telephone Transactions" below.) A redemption order is effected at the net
asset value per share (reduced by any applicable contingent deferred sales
charge) next determined after receipt of the order (or, if stock certificates
have been issued for the shares to be redeemed, after the tender of the stock
certificates for redemption). 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 shares will be made by check and
will be mailed within seven days after receipt of a duly authorized telephone
redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact
names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
18
<PAGE>
Dividends payable up to the date of the redemption of shares will be paid
on the next dividend payable date. If all of the shares in a shareholder's
account have been redeemed on a dividend payable date, the dividend will be
remitted by check to the shareholder. 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' written notice.
.............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed
monthly or quarterly under the Fund's Systematic Withdrawal Plan. Such
payments are drawn from income dividends, and, to the extent necessary, from
share redemptions (which would be a return of principal and, if reflecting a
gain, would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of shares. In addition, Class B Shares may be subject to a
contingent deferred sales charge upon redemption. (See "How to Invest in the
Fund--Class B Shares.") A shareholder who wishes to enroll in the Systematic
Withdrawal Plan may do so by completing the appropriate section of the
Application Form attached to this Prospectus.
=============================================================================
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, 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 under "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 documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is
19
<PAGE>
effective that day. Telephone orders placed after 4:00 p.m. (Eastern Time)
will be effected at the net asset value (less any applicable contingent
deferred sales charge on redemptions) as determined on the next 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. If these
procedures are employed, neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
During periods of extreme economic or market changes, shareholders may
experience difficulty in effecting telephone transactions. In such event,
requests should be made by regular or express mail. Shares held in certificate
form may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")
=============================================================================
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 Fund shares of the
same class at net asset value. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Transfer Agent
20
<PAGE>
(see "Custodian, Transfer Agent, Accounting Services"), either directly or
through their Participating Dealer or Shareholder Servicing Agent, at least
five days before the next date on which dividends or distributions will be
paid.
.............................................................................
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 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 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 shares is a taxable event for the
shareholder.
21
<PAGE>
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 the rules described above to their particular circumstances
and 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.
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
John F. Kroeger Director Brian C. Nelson Vice President and Secretary
Louis E. Levy Director Sandra J. Doeller Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Harry Woolf Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
*Messrs. Semans, Price and Hale are "interested persons" of the Fund within
the meaning of Section 2(a)(19) under the 1940 Act.
============================================================================
10. Investment Advisor
Investment Company Capital Corp., the Fund's investment advisor, is an
indirect subsidiary of Alex. Brown Incorporated. Since the mid 1970's, Alex.
Brown Incorporated, through subsidiaries and affiliates, 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
22
<PAGE>
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 $4.9 billion of assets as of
February 29, 1996. 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 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, 1995, the Advisor received from the Fund a fee equal to
.67% 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.")
.............................................................................
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
23
<PAGE>
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.
The Fund has adopted two separate Distribution Agreements and related Plans
of Distribution, one with respect to the Class A Shares and one with respect to
the Class B Shares (the "Plans") pursuant to Rule 12b-1 under the 1940 Act. In
addition, 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. Such
financial institutions may impose separate fees in connection with these
services and investors should review this Prospectus in conjunction with any
such institution's fee schedule. In addition, financial institutions may be
required to register as dealers pursuant to state securities laws. Amounts
allocated to Participating Dealers and Shareholder Servicing Agents may not
exceed amounts payable to Alex. Brown under the Plans with respect to shares
held by or on behalf of customers of such entities.
As compensation for providing distribution services to the Class A Shares for
the fiscal year ended October 31, 1995, Alex. Brown received a fee equal to .25%
of the Class A Shares' average daily net assets.
Under the Class B Plan, Alex. Brown will receive an annual distribution fee,
paid monthly, equal to .75% of the Class B Shares' average daily net assets. In
addition, Alex. Brown will receive an annual shareholder servicing fee, paid
monthly, equal to .25% of the Class B Shares' average daily net assets. The
distribution fee will be used to compensate Alex. Brown for its services and
expenses in distributing the Class B Shares. The shareholder servicing fee will
be used to compensate Alex. Brown, Participating Dealers and Shareholder
Servicing Agents for services provided and expenses incurred in maintaining
shareholder accounts, responding to shareholder inquiries and providing
information on their investments.
Payments under the Plans are made as described above, regardless of Alex.
Brown's actual cost of providing distribution services. If the cost of providing
distribution services to the Fund in connection with the sale of the Class A
Shares is less than .25% of the Class A Shares' average daily net assets for any
period or, in connection with the sale of the Class B Shares is less than .75%
of the Class B Shares' average daily net assets for any period, the unexpended
portion of the distribution fee may be retained as profit by Alex. Brown. Alex.
Brown will from time to time and from its own resources pay or allow additional
discounts or promotional incentives in the form of cash or other compensation
(including merchandise or travel), to Participating Dealers.
24
<PAGE>
=============================================================================
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 fiscal year ended October 31, 1995, ICC received from the Fund a fee
equal to .10% of the Fund's average daily net assets. (See the Statement of
Additional Information.) 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, net of the Fund's maximum sales charge imposed
on Class A Shares or including the contingent deferred sales charge imposed
on Class B Shares redeemed at the end of the specific period covered by the
total return figure, over one, five and ten year periods or, if such periods
have not yet elapsed, shorter periods corresponding to the life of the Fund.
Such total return quotations will be computed by finding average annual
compounded rates of return over such periods that would equate an assumed
initial investment of $1,000 to the ending redeemable value, net of the
maximum sales charge and other fees according to the required standardized
calculation. The standardized calculation is required by the SEC to provide
consistency and comparability in investment company advertising and is not
equivalent to a yield calculation. If the Fund compares its performance to
other funds or to relevant indices, its performance will be stated in the
same terms in which such comparative data and indices are stated, which is
normally total return rather than yield. For these purposes, the performance
of the Fund, as well as the performance of such investment companies or
indices, may not reflect sales charges, which, if reflected, would reduce
performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500
25
<PAGE>
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 shares may be purchased, although not included in
calculations of performance, will reduce performance results.
=============================================================================
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 fiscal year
end of the Fund is October 31.
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 Class A Shares" and "Flag Investors Emerging Growth Fund
Class B 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 Institutional Shares." Shares of that class, which are not subject to a
26
<PAGE>
sales charge or 12b-1 fee, are offered only to eligible institutions and clients
of investment advisory affiliates of Alex. Brown. Additional information
concerning the Fund's Institutional Shares may be obtained by calling Alex.
Brown at (800) 767-FLAG. 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 Class A or Class B Shares. All classes of the Fund
share a common investment objective, portfolio of investments and advisory fee,
but the classes may have different sales load structures, distribution/service
fees or other expenses and, accordingly, 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.
.............................................................................
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.
.............................................................................
SHAREHOLDERS INQUIRIES
Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
27
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Emerging Growth
Fund, Inc." and mail with this application to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Emerging Growth Fund, Inc.
For assistance in completing this application please call:
1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 for an IRA
information kit.
I wish to purchase the following class of shares of the Fund, in the amount
indicated below. (Please check the applicable box and indicate the amount of
purchase.)
[ ] Class A Shares (4.5% maximum initial sales charge) in the amount of
$______
[ ] Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $_______
The minimum initial purchase is $2,000, except that the minimum initial
purchase for shareholders of any other Flag Investors Fund or class is $500
and the minimum initial purchase for participants in the Fund's Automatic
Investing Plan is $250 per class. Each subsequent purchase requires a $100
minimum per class, except that the minimum subsequent purchase under the
Fund's Automatic Investing Plan is $250 for quarterly purchases and $100
for monthly purchases. The maximum investment in Class B Shares is $100,000
per account. The Fund reserves the right not to accept checks for more than
$50,000 that are not certified or bank checks.
==============================================================================
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: __________
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the__________________Uniform Gifts to Minors Act
State of Residence
<PAGE>
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- -----------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- -----------------------------------------------------------------------------
Tax ID Number Date of Trust
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- -----------------------------------------------------------------------------
For the Benefit of
MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
=============================================================================
LETTER OF INTENT -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying Prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares of Flag Investors Emerging
Growth Fund, Inc. in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
=============================================================================
RIGHT OF ACCUMULATION -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
DISTRIBUTION OPTIONS
Please check the appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the same class of
the Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
==============================================================================
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ in Class A Shares or $_______ in Class B Shares
for me, on a monthly or quarterly basis, on or about the 20th of each month
or if quarterly, the 20th of January, April, July and October, and to draw a
bank draft in payment of the investment against my checking account. (Bank
drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250 per class
Subsequent Investments (check one):
[ ] Monthly ($100 minimum per class) Please attach a voided check.
[ ] Quarterly ($250 minimum per class)
- -----------------------------------------------------------------------------
Bank Name
- -----------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any
- -----------------------------------------------------------------------------
Depositor's Signature Date
- -----------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
=============================================================================
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of _______ , 19_______ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $______, from Class A Shares and/or $_______ from Class B Shares
that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)
=============================================================================
<PAGE>
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:_______________________ Bank Account No:_____________________
Address:_______________________ Bank Account Name:______________________
_______________________
==============================================================================
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated May 24, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are 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 I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
___________________________________________________________________________
Signature Date
___________________________________________________________________________
Signature (if joint acct., both must sign) Date
===========================================================================
For Dealer Use Only
Dealer's Name ________________________________ Dealer Code:______________
Dealer's Address:________________________________ Branch Code:______________
________________________________
Representative: ________________________________ Rep. No. ______________
<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: March 1, 1996,
as amended through May 24, 1996
Relating to Prospectuses of
Flag Investors Emerging Growth Fund Class A and Class B Shares
Dated: May 24, 1996
and
Flag Investors Emerging Growth Fund Institutional Shares Dated March 1, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <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.................................................................................... 17
9. Capital Shares............................................................................... 18
10. Reports...................................................................................... 19
11. Custodian, Transfer Agent, Accounting Services .............................................. 19
12. Independent Accountants...................................................................... 20
13. Performance Information...................................................................... 20
14. Control Persons and Principal Holders of
Securities................................................................................. 22
15. Financial Statements ........................................................................ 23
</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 three classes
of shares: Flag Investors Emerging Growth Fund Class A Shares (the "Class A
Shares"), Flag Investors Emerging Growth Fund Class B Shares (the "Class B
Shares") and Flag Investors Emerging Growth Fund Institutional Shares (the
"Institutional Shares") (collectively, the "Shares").
There are two separate prospectuses for the Fund's shares: one for the
Class A and Class B Shares and one for the Institutional Shares. Each prospectus
contains important information concerning the classes of shares offered thereby
and the Fund and 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 and Class B Shares
may also be obtained from Shareholder Servicing Agents. As used herein, the term
"Prospectus" describes information common to the prospectuses of the three
classes of the Fund's Shares, unless the term "Prospectus" is modified by the
appropriate class designation. As used herein, the "Fund" refers to Flag
Investors Emerging Growth Fund, Inc., and specific references to any class of
the Fund's Shares will be made using the name of such class. 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 Fund has offered the Institutional Shares since November 1, 1995. Such
shares are offered only to certain eligible institutions and to clients of
investment advisory affiliates of Alex. Brown. The Fund has not offered the
Class B Shares prior to the date of this Statement of Additional Information.
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
-1-
<PAGE>
objective is long-term capital appreciation. Realization of income is not a
significant investment consideration and any income realized on the Fund's
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. The
-2-
<PAGE>
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
-3-
<PAGE>
permitted by law. (If the Board of Directors voted to approve
investments in 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.
-4-
<PAGE>
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Class A and Class B
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).
-5-
<PAGE>
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
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.
-6-
<PAGE>
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.
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 "alternative
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
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<PAGE>
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.
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 dates
of birth 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 (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst.
*W. JAMES PRICE, Director (10/6/24)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3342. Director, Boca Research, Inc. (computer peripherals);
Managing Director Emeritus, Alex. Brown & Sons Incorporated; Formerly,
Director, CSX Corporation (transportation), and PHH Corporation
(business services).
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice President and Chief Financial Officer, General Dynamics Corporation
(defense), 1989-1993 and Director, The Arch Fund (registered investment
company).
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JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds; Formerly Consultant, Wendell & Stockel Associates, Inc.
(consulting firm) and General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and healthcare).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, ATL and Spacelabs Medical Corp. (medical equipment) and Family
Health International (non-profit research and education); Trustee, Reed
College (education); Director, Research America (non-profit medical
research); Formerly, Trustee, Rockefeller Foundation; and Director,
Merrill Lynch Cluster C Funds (registered investment companies).
FREDERICK L. MESERVE, JR., President (12/11/38)
Principal, Alex. Brown & Sons Incorporated 1977-Present.
EDWARD J. VEILLEUX, Vice President (8/26/43)
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 (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
CHARLES A. REID, Vice President (7/28/43)
Principal, Alex. Brown & Sons Incorporated, 1980-Present; General
Partner, Baltimore Street Capital III (growth companies investor).
BRIAN C. NELSON, Vice President and Secretary (7/31/59)
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 (8/29/61)
Vice President, Alex. Brown & Sons Incorporated, 1994-Present; Equity
Trader, Asset Management Department, Alex. Brown & Sons Incorporated,
1983-Present.
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<PAGE>
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company Inc., 1980-August 1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student, 1989-1991.
- ------------
* A Director who is an "interested person" as defined in the Investment
Company Act of 1940.
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 and as a Director
of each of the other funds in the Fund Complex. Messrs. Cunnane, 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
11 funds in the Fund Complex. Mr. Nelson serves as Vice President and Secretary,
Mr. Finelli 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. In addition,
the Chairman of the Fund Complex's Audit Committee receives an aggregate annual
fee from the Fund Complex. 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, 1995, Non-Interested Directors'
fees attributable to the assets of the Fund totalled $2,004. 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, 1995.
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<TABLE>
<CAPTION>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From the Fund Total Compensation from the Fund and
Position for the Fiscal Year Ended October 31, 1995 Fund Complex Paid to Directors for
the Fiscal Year Ended October 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<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 $213(1) $29,250 for service on 13
Boards in the Fund Complex(2)
N. Bruce Hannay, Director** $271(1) $39,000 for service on 13
Boards in the Fund Complex(2)
John F. Kroeger, Director $298(1) $42,900 for service on 13
Boards in the Fund Complex(2)
Louis E. Levy, Director $271(1) $39,000 for service on 13
Boards in the Fund Complex(2)
Eugene J. McDonald, Director $271(1) $39,000 for service on 13
Boards in the Fund Complex(2)
Harry Woolf, Director $271(1) $39,000 for service on 13
Boards in the Fund Complex(2)
</TABLE>
- ------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired, effective January 31, 1996.
1 Of amounts received by Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and
Woolf, $0, $0, $0, $0, $0 and $0, respectively, was deferred pursuant to a
deferred compensation plan.
2 One of these funds 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 six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned by him in his last year of
service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Messrs. Kroeger and Woolf
have qualified but have not yet received benefits. The Fund has two
Participants, a Director who retired effective December 31, 1994 and a Director
who retired effective January 31, 1996, each of whom has qualified for the
Retirement Plan and 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. Messrs. Cunnane, Kroeger,
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<PAGE>
Levy, McDonald and Woolf have each execute a Deferred Compensation Agreement.
Currently, the deferring Directors may select various Flag and Alex. Brown Funds
in which all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors' deferral accounts will be paid in
cash, in generally equal quarterly installments over a period of five years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act. The Code of Ethics 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 Directors, preclear any personal securities
investments (with certain exceptions, such as non-volitional purchases or
purchases which are part of an automatic dividend reinvestment plan). The
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 Financial Corporation
and an indirect subsidiary of Alex. Brown Incorporated. 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 distributed by Alex. Brown, the Fund's
distributor.
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 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% 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,
1995, October 31, 1994 and October 31, 1993, ICC received fees from the Fund of
$201,199, $206,444 and $255,608, 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
three separate Distribution Agreements, one for the Class A Shares (the "Class A
Distribution Agreement"), one for the Class B Shares (the "Class B Distribution
Agreement") and one for the Institutional Shares (the "Institutional
Distribution Agreement") (collectively, the "Distribution Agreements").
The Class A Shares and the Class B Shares
The Class A and the Class B Distribution Agreements provide that Alex.
Brown has the exclusive right to distribute the related class of 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 or Class B Shares,
accept or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective Prospectus for such 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, 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 or Class B
Shares. Alex. Brown has not undertaken to sell any specific number of Class A or
Class B Shares. The Class A and the Class B Distribution Agreements further
provide that, in connection with the distribution of the related class of
shares, Alex. Brown will be responsible for all of the promotional expenses. The
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<PAGE>
services provided by Alex. Brown to the Fund are not exclusive, and 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 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 Participating
Dealers.
For the fiscal years ended October 31, 1995, October 31, 1994 and
October 31, 1993, Alex. Brown received from the Fund $74,639, $60,719 and
$89,403, respectively, in fees for distribution and related administrative
services for the Class A Shares. For the same periods, Alex. Brown paid
approximately $67,928, $54,254 and $45,834, respectively, as compensation to its
investment representatives and $2,554, $939 and $183, respectively, as
compensation to Participating Dealers and financial institutions. Alex. Brown
received no brokerage commissions from the Fund during these periods. In
addition, in the fiscal year ended October 31, 1995, Alex. Brown incurred
expenses of $0 for advertising and $14,968 for printing and mailing
prospectuses to prospective investors in Class A Shares.
As compensation for providing distribution services for the Class B
Shares as described above, Alex. Brown will receive an annual fee, calculated
and paid monthly, equal to .75% of the average daily net assets of the Class B
Shares. Alex. Brown expects to retain the entire distribution fee as
reimbursement for front-end payments to its investment representatives and to
Participating Dealers.
In addition, with respect to the Class B Shares, the Fund will pay Alex.
Brown a shareholder servicing fee at an annual rate equal to .25% of the Class B
Shares' average daily net assets. (See the Prospectus.) Alex. Brown expects to
allocate most of its shareholder servicing fee to its investment representatives
or to Participating Dealers.
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 two separate Plans of
Distribution, one for the Class A Shares (the "Class A Plan") and one for the
Class B Shares (the "Class B Plan") (collectively, the "Plans"). Under the
Plans, the Fund pays a fee to Alex. Brown for distribution and other shareholder
servicing assistance as set forth in the related Distribution Agreement, and
Alex. Brown is authorized to make payments out of its fee to its investment
representatives and to Participating Dealers. Each of the Class A and Class B
Distribution Agreements has an initial term of two years. The Class A and Class
B Distribution Agreements and the Plans encompassed therein 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 in person at a meeting called for
such purpose.
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<PAGE>
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 B Distribution Agreement
including the Class B Plan and a form of Sub-Distribution Agreement was approved
by the Fund's Board of Directors and by the affirmative vote of a majority of
the Non-Interested Directors (and those Directors who have no direct or indirect
financial interest in the Class B Plan or the Class B Distribution Agreement)
initially on September 22, 1994 and most recently on September 25, 1995.
The Class B Plan was approved by the sole shareholder of the Class on
May 24, 1996.
In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreement without the approval of the shareholders of the
related class. The Plans may be terminated at any time and the Class A and Class
B Distribution Agreements 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 shares
(as defined under "Capital Shares") of the related class. Any Sub-Distribution
Agreement may beterminated in the same manner at any time. Any Shareholder
Servicing Agreement may be terminated at any time, without penalty, upon 10
days' notice. The Class A and Class B Distribution Agreements, any
Sub-Distribution Agreement and any Shareholder Servicing Agreement shall
automatically terminate in the event of assignment.
During the continuance of the Plans, 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 Plans to Alex. Brown pursuant to
the related Distribution Agreements, 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 Plans, 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.
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<PAGE>
In addition, with respect to the Class A or Class B 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.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown under
the Plans with respect to shares held by or on behalf of customers of such
entities. Payments under the Plans are made as described above regardless of
Alex. Brown's actual cost of providing distribution services and may be used to
pay Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is less
than .25% of the Class A Shares' average daily net assets for any period or in
connection with the sale of the Class B Shares is less than .75% of the Class B
Shares' average daily net assets for any period, the unexpended portion of the
distribution fee may be retained by Alex. Brown. The Plans do not provide for
any charges to the Fund for excess amounts expended by Alex. Brown and, if
either Plan is terminated in accordance with its terms, the obligation of the
Fund to make payments to Alex. Brown pursuant to such Plan will cease and the
Fund will not be required to make any payments past the date the related
Distribution Agreement terminates.
In the fiscal years ended October 31, 1995, October 31, 1994 and October
31, 1993, Alex. Brown received sales commissions on the Class A Shares of
$153,431, $44,802 and $48,745 and from such amounts retained $106,239, $37,546
and $46,314 for each such year, respectively.
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
-16-
<PAGE>
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.
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 the 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.
-17-
<PAGE>
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.
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
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
-18-
<PAGE>
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, 1995, October 31, 1994 and
October 31, 1993, ICC directed $25,120,072, $11,425,223 and $31,080,534,
respectively of transactions to broker-dealers and paid $12,495, $35,863 and
$125,743, 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, 1995, the Fund held a 5.75% repurchase agreement
issued by Goldman Sachs & Co. valued at $4,424,000. 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.
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 (formerly known as the Flag Investors Emerging Growth Fund
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. In the event separate series are established, all
Shares of the Fund, regardless of series or class would have equal rights with
respect to voting, except that with respect to any matter affecting the rights
of the holders of a particular series or class, the holders of each series or
class would vote separately. 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
-19-
<PAGE>
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. 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.
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. As compensation for providing these services, the Fund pays
ICC up to $10.12 per account per year, plus reimbursement for out-of-pocket
expenses. For the fiscal year ended October 31, 1995, such fees totaled $21,635.
ICC also provides certain accounting services to the Fund under a Master
Services Agreement effective January 1, 1994 between the Fund and ICC. As
compensation for these services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly as shown below.
-20-
<PAGE>
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 fiscal year
ended October 31, 1995, ICC received fees of $30,407.
ICC also serves as the Fund's investment advisor.
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.
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
-21-
<PAGE>
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
(for the Flag Investors Emerging Growth Fund Class A Shares 4.5% and for the
Flag Investors Emerging Growth Fund Class B Shares, 4.0% for the one-year
period, 2.0% for the five-year period and no sales charge thereafter) 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.
Calculated according to the SEC rules, for the one year period ended
September 30, 1995, the ending redeemable value of a hypothetical $1,000 payment
for Class A Shares was $1,373, resulting in a total return for such Shares equal
to 37.26%. For the five year period ended September 30, 1995, the ending
redeemable value of a hypothetical $1,000 payment for Class A Shares was $2,094,
resulting in an average annual total return for such Shares equal to 15.93%. 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, 1995, the ending redeemable value of a hypothetical $1,000 payment
for Class A Shares was $2,001, resulting in an average annual total return for
such Shares equal to 9.98%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the one year period
ended October 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in Class A Shares was $13,292, resulting in a total return equal to
32.9%. For the five year period ended October 31, 1995, the ending redeemable
value of a hypothetical $10,000 investment in Class A Shares was $22,635,
resulting in an average annual total return equal to 17.8%. 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, 1995, the ending
redeemable value of a hypothetical $10,000 investment in the Class A Shares was
$20,175, resulting in an average annual total return equal to 10.0%.
The Institutional Shares were not offered in any period ended October
31, 1995. The Class B Shares were not offered prior to the date of this
Statement of Additional Information.
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
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<PAGE>
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, 1995 and October 31,
1994, the Fund's portfolio turnover rate was 39% and 86%, 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".)
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 19, 1996, to Fund management's knowledge, the following
persons owned of record or beneficially 5% or more of the Fund's outstanding
Shares:
Name & Address % Ownership
-------------- -----------
Class A Shares
Alex. Brown Incorporated 66.49%*
135 East Baltimore Street
Baltimore, MD 21202
T. Rowe Price 20.10%
Trustee for Alex. Brown & Sons Incorporated
Plan 100460
Flag Investors Emerging Growth
ATTN: ASSET RECON
P.O. Box 17215
Baltimore, MD 21203-7215
Institutional Shares
Alex. Brown Incorporated 52.03%*
135 East Baltimore Street
Baltimore, MD 21202
Lauer & Co Cust 7.12%
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market Street, Suite 1200
Philadelphia, PA 19103-7301
Lauer & Co Cust 21.74%
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market Street, Suite 1200
Philadelphia, PA 19103-7301
Light & Co 8.71%
c/o First National Bank of Maryland
ATTN: Trust Operations #101-610
P.O. Box 1696
Baltimore, MD 21203-1596
* As of such date, to Fund management's knowledge, Alex. Brown
Incorporated owned beneficially less than 1% of such shares.
As of March 19, 1996, the Directors and executive officers as a group
owned less than 1% of the Fund's total outstanding Shares.
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<PAGE>
15. FINANCIAL STATEMENTS
See next page.
-24-
<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1995
<TABLE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -------------------------------------------------------------------
COMMON STOCKS--88.5%
BUSINESS SERVICES--8.8%
2,100 Apollo Group* $ 55,125 0.1%
18,750 Corporate Express, Inc.* 489,844 1.3
21,000 Energy Biosystems Corp.* 189,000 0.5
75,000 Manugistics Group, Inc.* 1,293,750 3.4
50,500 QuickResponse Services,
Inc.* 1,262,500 3.3
7,600 Strategic Distribution Inc.* 55,575 0.2
------------ -----
3,345,794 8.8
CONSUMER SERVICES--14.4%
51,000 DF&R Restaurants, Inc.* 1,555,500 4.1
104,650 HomeTown Buffet, Inc.* 1,373,531 3.6
58,000 O'Charley's, Inc.* 667,000 1.7
51,500 Pacific Sunwear of
California* 373,375 1.0
12,500 Papa John's International,
Inc.* 481,250 1.3
17,250 PETsMART, Inc.* 577,875 1.5
11,500 Starbucks Corp.* 451,375 1.2
------------ -----
5,479,906 14.4
FINANCIAL SERVICES--5.0%
57,500 Life Partners Group Inc. 1,042,188 2.7
34,500 Pxre Corporation 879,750 2.3
------------ -----
1,921,938 5.0
HEALTH CARE SERVICES--11.9%
17,500 Access Health Marketing
Inc.* 544,688 1.4
37,500 Genesis Health Ventures
Inc.* 1,082,813 2.9
47,250 PhyCor, Inc.* 1,736,437 4.6
35,050 Vivra Inc.* 1,156,650 3.0
------------ -----
4,520,588 11.9
-25-
<PAGE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- -------------------------------------------------------------------
MEDIA/COMMUNICATIONS--1.9%
6,066 Clear Channel Communications
Inc.* $ 497,412 1.3%
17,500 Lancit Media Productions* 224,219 0.6
------------ -----
721,631 1.9
TECHNOLOGY--
SOFTWARE/SERVICES--22.3%
26,000 Cidco Inc.* 770,250 2.0
49,500 Integrated Systems Inc.* 1,732,500 4.5
68,500 Marcam Corp.* 1,027,500 2.7
11,000 Parametric Technology Corp.* 735,625 1.9
27,500 Progress Software Corp.* 1,801,250 4.7
13,000 Security Dynamics
Technologies, Inc.* 409,500 1.1
34,000 Synopsys Inc.* 1,275,000 3.3
8,000 System Softwares Associates* 247,000 0.7
30,000 XcelleNet Inc.* 517,500 1.4
------------ -----
8,516,125 22.3
TECHNOLOGY--
SYSTEMS/SEMICONDUCTOR--13.7%
44,000 Applied Digital Access Inc.* 528,000 1.4
21,000 Atmel Corp.* 656,250 1.7
8,500 Itron, Inc.* 246,500 0.6
69,000 Level One Communications
Inc.* 1,552,500 4.1
9,000 Maxim Integrated Products
Inc.* 672,750 1.8
22,900 QUALCOMM, Inc.* 881,650 2.3
15,000 Xilinx, Inc.* 690,000 1.8
------------ -----
5,227,650 13.7
</TABLE>
[LOGO]
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<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONCLUDED) October 31, 1995
<TABLE>
<CAPTION>
NO. OF
SHARES/ PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<C> <S> <C> <C>
- ------------------------------------------------------------------
COMMON STOCKS (CONCLUDED)
TRANSPORTATION--10.5%
47,200 Fritz Companies Inc.* $ 1,652,000 4.3%
114,500 Great Lakes Aviation Ltd.* 543,875 1.4
47,500 Landair Services Inc.* 552,188 1.5
24,500 Landstar System Inc.* 643,125 1.7
24,700 Wabash National Corp. 626,761 1.6
------------- -----
4,017,949 10.5
TOTAL COMMON STOCKS
(Cost $22,087,820) 33,751,581 88.5
------------- -----
REPURCHASE AGREEMENT--11.6%
$4,424 GOLDMAN SACHS & CO., 5.75%
Dated 10/31/95, to be
repurchased on 11/1/95,
collateralized by U.S.
Treasury Notes with a
market value of
$4,513,376.
(Cost $4,424,000) 4,424,000 11.6
------------- -----
</TABLE>
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
(NOTE A) ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
TOTAL INVESTMENT IN
SECURITIES (Cost
$26,511,820)** $ 38,175,581 100.1%
------------- ----------
LIABILITIES IN EXCESS OF
OTHER ASSETS, NET (48,945) (0.1)
------------- ----------
NET ASSETS $ 38,126,636 100.0%
------------- ----------
------------- ----------
NET ASSET VALUE AND REDEMPTION
PRICE
PER SHARE
($38,126,636 DIVIDED BY
2,231,111 shares outstanding) $17.09
MAXIMUM OFFERING
PRICE PER SHARE
($17.09 DIVIDED BY .955) $17.90
</TABLE>
- --------------------------------------------------------------------------------
*Non-income producing security.
**Aggregate cost for federal tax purposes was $26,680,701.
See accompanying Notes to Financial Statements.
[LOGO]
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<PAGE>
[LOGO]
FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest................................................................. $ 222,779
Dividends................................................................ 20,158
Other income............................................................. 14,607
---------
Total income........................................................... 257,544
---------
EXPENSES:
Investment advisory fee (Note B)......................................... 201,199
Distribution fee (Note B)................................................ 74,639
Legal.................................................................... 35,158
Printing and postage..................................................... 30,979
Accounting fee (Note B).................................................. 30,407
Transfer agent fees (Note B)............................................. 21,635
Audit.................................................................... 21,444
Miscellaneous............................................................ 10,792
Custodian fees........................................................... 10,160
Registration fees........................................................ 8,592
Directors' fees.......................................................... 2,004
Insurance................................................................ 913
---------
Total expenses......................................................... 447,922
---------
Net investment loss...................................................... (190,378)
---------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions............................. 2,180,561
Change in unrealized appreciation of investments......................... 6,850,511
---------
Net gain on investments.................................................. 9,031,072
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................... $8,840,694
---------
---------
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
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FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER
31,
----------------------------
1995 1994
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss.................................................................. $ (190,378) $ (176,176)
Net realized gain/(loss) from security transactions.................................. 2,180,561 (13,816)
Change in unrealized appreciation of investments..................................... 6,850,511 328,533
------------- -------------
Net increase in net assets resulting from operations................................. 8,840,694 138,541
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized long-term gains......................................................... (73,772) (2,944,147)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 735,343 and 502,395 shares, respectively....................... 10,561,629 6,358,306
Value of 5,714 and 230,642 shares issued in reinvestment
of dividends, respectively......................................................... 68,962 2,746,944
Cost of 316,169 and 985,114 shares repurchased, respectively......................... (4,572,632) (11,865,168)
------------- -------------
Increase/(decrease) in net assets derived from capital share transactions............ 6,057,959 (2,759,918)
------------- -------------
Total increase/(decrease) in net assets.............................................. 14,824,881 (5,565,524)
NET ASSETS:
Beginning of year.................................................................... 23,301,755 28,867,279
------------- -------------
End of year.......................................................................... $ 38,126,636 $ 23,301,755
------------- -------------
------------- -------------
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</TABLE>
See accompanying Notes to Financial Statements.
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FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)*
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year................ $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................... (0.09) (0.08) (0.08) (0.16) (0.10)
Net realized and unrealized gain/(loss)
on investments.................................... 4.32 0.47 1.20 (1.54) 6.40
---------- ---------- ---------- ---------- ----------
Total from Investment Operations.................... 4.23 0.39 1.12 (1.70) 6.30
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
Distributions from net realized
long-term gains................................... (0.04) (1.51) (0.63) -- --
---------- ---------- ---------- ---------- ----------
Total distributions................................. (0.04) (1.51) (0.63) -- --
---------- ---------- ---------- ---------- ----------
Net asset value at end of year...................... $ 17.09 $ 12.90 $ 14.02 $ 13.53 $ 15.23
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN.......................................... 32.92% 3.75% 8.33% (11.16)% 70.55%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 1.50% 1.50% 1.50% 1.46% 1.50%
Net investment income............................... (0.64)% (0.73)% (0.52)% (0.92)% (0.76)%
SUPPLEMENTAL DATA:
Net assets at end of the year (000)................. $38,127 $23,302 $28,867 $38,924 $48,656
Portfolio turnover rate............................. 39% 86% 133% 69% 79%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Computed based upon average shares outstanding.
See accompanying Notes to Financial Statements.
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FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
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 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 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.
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.
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.
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. 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, 1995, the
Advisor received $201,199 in fees.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $21,635 for
transfer agent services for the year ended October 31, 1995.
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 $30,407 for accounting services for the year ended
October 31, 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 year ended
October 31, 1995, distribution fees were $74,639.
C. CAPITAL SHARE TRANSACTIONS -- At October 31,
1995, the Fund was authorized to issue up to 10 million shares of $.001 par
value common stock.
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FLAG INVESTORS
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONCLUDED)
D. INVESTMENT TRANSACTIONS -- Purchases and sales
of investment securities, other than short-term obligations, aggregated
$14,826,109 and $10,543,560, respectively, for the year ended October 31,
1995.
At October 31, 1995, net unrealized appreciation for all securities in which
there is an excess of value over tax cost was $11,494,880 of which
$12,575,034 related to appreciated securities and $1,080,154 related to
depreciated securities.
E. NET ASSETS -- At October 31, 1995, net assets
consisted of:
<TABLE>
<S> <C>
Paid-in capital.................... $ 24,588,439
Accumulated net realized gain from
security transactions............ 1,874,437
Unrealized appreciation of
investments...................... 11,663,760
------------
$ 38,126,636
------------
------------
</TABLE>
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, 1995, 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 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, 1995, 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, 1995, 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 its 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 1, 1995
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