[FLAG INVESTORS LOGO]
FLAG INVESTORS
FLAG
INVESTORS
EMERGING
GROWTH
FUND
ANNUAL REPORT
OCTOBER 31, 1997
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
o Your Fund significantly outperformed several small company benchmark indexes
for the year ended October 31, 1997.
o The Fund's after-tax return has been a very small reduction from the pre-tax
figure for the three-year period. Since the Fund has historically had very low
turnover, the new tax law reducing the gains on assets held more than 18
months should enhance that return going forward.
o Your management team has an average of over 23 years' investment experience.
We seek to invest in companies that we believe are able to deliver high
earnings growth, a strategy we have seen prove itself over different market
cycles.
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
What a difference six months makes. For the fiscal year ending October 31,
1997, your Fund's Class A Shares had a total return of 25.9%, significantly
outperforming the NASDAQ (OTC) Industrial Index, Russell 2000 Growth Index and
Lipper Small Capitalization Fund Index, which were up 18.3%, 21.2% and 18.6%,
respectively (see table below). As you can also see, your Fund's Class A Shares
had a total return of 35.8% during the second half of the year, following the
difficult market environment the previous six months. Most importantly, over the
past three years, your Fund's Class A Shares compounded at 25.5% annually.
Performance Comparisons*
<TABLE>
<CAPTION>
6 Months Ended 1 Year Ended 3 Years Ended
10/31/97 10/31/97 10/31/97**
- ------------------------------------------------------------------------------------------------
<S><C>
Flag Investors Emerging Growth Fund-Class A 35.8% 25.9% 25.5%
................................................................................................
NASDAQ(OTC) Industrial Index 27.6% 18.3% 17.9%
................................................................................................
Russell 2000 Index 26.3% 29.3% 21.3%
................................................................................................
Russell 2000 Growth Index 30.7% 21.2% 18.3%
................................................................................................
Lipper Small Capitalization Fund Index 29.2% 18.6% 19.7%
................................................................................................
S&P500 Index 15.2% 32.3% 27.6%
................................................................................................
</TABLE>
- --------
* These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. The Russell 2000
Index, Russell 2000 Growth Index, NASDAQ (OTC) Industrial Index and
Standard &Poor's (S&P) 500 Index are unmanaged. The Russell 2000 Index is an
indicator of small company growth performance; the Russell 2000 Growth Index
is comprised of the Russell 2000 Index securities with greater-than-average
growth orientations; the NASDAQ (OTC) Industrial Index is comprised of more
than 3,000 industrial issues covered by the NASDAQ Composite Index; and the
S&P 500 Index is an indicator of general market performance. While the Lipper
Small Capitalization Fund Index is unmanaged, it is comprised of the total
return performance of the 30 largest funds in the Lipper Small Capitalization
Fund Average, which are managed. Past performance is not an indicator of
future results. Please review the Additional Performance Information on
page 5.
**Annualized.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
Fund's Strategy Benefited by New Tax Law
Your Fund has achieved a competitive after-tax return. Moreover, the new
tax law that reduces the tax rate on gains of assets held more than 18 months
should enhance that return. The Fund's turnover has been low historically--an
average of 35% over the last three years. As a result, we have owned a majority
of the Fund's holdings for more than 18 months. The result is an after-tax
return of 24.5% for the Class A Shares for the three-year period, a very small
reduction from the 25.5% pre-tax figure.* Going forward, the tax on your gains
should shrink accordingly.
Long-Term Investors
We, of course, have not changed our strategy. We have always been long-term
investors and only add companies to your portfolio that have characteristics
indicating the potential for rapid earnings growth for many years so that
shareholders will benefit from any share price appreciation that should follow
those earnings. This is very different from the trading-oriented "short-term
momentum" style that is pursued so broadly today and results in short holding
periods and turnover rates exceeding 100% per year.
Growth Investors
We think it bears repeating that we are growth investors. We seek out
companies that we believe are able to deliver high earnings growth relentlessly,
and we hold them as long as they deliver these earnings. Currently the expected
weighted average future earnings growth per share is over 35%, as it has been
for the past three years. Your management team, which averages over 23 years'
investment experience, has seen this strategy prove itself over many market
cycles. This same strategy has seen investment fads come and go and has
delivered increasing wealth to those who select holdings carefully and invest
for the long term.
- --------
*After-tax performance was calculated by incorporating a 28% maximum tax bracket
for long-term capital gains distributions and a 36% maximum tax bracket for
ordinary income distributions.
2
<PAGE>
- --------------------------------------------------------------------------------
An excellent illustration of our strategy at work has occurred since the
volatility that severely impacted the emerging growth sector last spring. Many
stocks declined dramatically in a single day as short-term momentum-driven
holders reacted to short-term earnings glitches and sold, not staying long
enough to try to understand the fundamentals. In contrast, we knew our companies
well, recognized that our investment theses for them were intact and took
advantage of the opportunities in several cases to add to our holdings of
excellent companies at advantageous prices. These purchases enhanced your Fund's
performance as the year progressed. These same stocks quickly became the leaders
when the overall market improved. In the second quarter, including the market's
low in April, stocks that were perceived to be the highest quality and most
consistent performers handily outperformed all others. During this time period,
your portfolio bounced back quickly. Again, when the market rewards quality and
consistency, your portfolio has stood out. Thus, for long-term investors,
volatility in the emerging growth sector, while painful at times, also creates
opportunity.
Thank you for your continued support. We look forward to reporting to you
again next year.
Very truly yours,
/s/ Frederick L. Meserve, Jr.
- -----------------------------
Frederick L. Meserve, Jr.
Portfolio Manager
November 21, 1997
3
<PAGE>
FIVE LARGEST HOLDINGS
- --------------------------------------------------------------------------------
Percent of
Company Net Assets
- --------------------------------------------------------------------------------
o Sipex Corp. 6.3%
Designs, manufactures, markets and sells analog
integrated circuits.
o Manugistics Group, Inc. 4.8%
Develops, markets and supports a line of business opera-
tions software and services.
o Level One Communications, Inc. 4.5%
Designs, develops and markets integrated circuit products
for high speed digital signal transmission and networking
connectivity applications.
o Synopsys, Inc. 4.4%
Develops, markets and supports high-level design automa-
tion software for designers of integrated circuits and elec-
tronics systems. The company has license agreements with
over 400 customers, including major international semi-
conductor, computer, communications, military and aero-
space companies.
o Physician Sales and Service, Inc. 3.9%
Distributes medical supplies, equipment and pharmaceuti-
cals to primary care physicians in the United States.
- --------------------------------------------------------------------------------
4
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's initial public
offering on June 15, 1988 through the most recent fiscal year-end and must
reflect the impact of the Fund's total expenses and the currently effective
4.50% maximum sales charge for the Fund's Class A Shares and 4.00% maximum
contingent deferred sales charge for the Fund's Class B Shares. No graph is
given for the Fund's ABCAT Shares since the class commenced less than six months
ago.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the indices shown are not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of these indices
would have had to own the securities that they represent. Acquiring these
securities would require a considerable amount of money and would incur expenses
that are not reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective 4.50% maximum sales
charge for the Fund's Class A Shares and the 4.00% maximum contingent deferred
sales charge for the Fund's Class B Shares. These total returns correspond to
those experienced by individual shareholders only if their shares were purchased
on the first day of each time period and the maximum sales charge was paid. Any
performance figures shown are for the full period indicated. Since investment
return and principal value will fluctuate, an investor's shares may be worth
more or less than their original cost when redeemed.
5
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Class A Shares*
June 15, 1988-October 31, 1997
[Graph Appears Here--See Plot Points Below]
Flag Investors NASDAQ
Emerging Growth Fund S&P 500 Index (OTC) Industrial
6/88 $ 9,550 $10,000 $10,000
10/88 9,059 10,299 9,225
10/89 12,468 13,008 11,000
10/90 8,525 12,063 8,891
10/91 14,539 16,104 15,045
10/92 12,916 17,707 16,184
10/93 13,992 20,343 20,002
10/94 14,517 21,123 19,958
10/95 19,296 26,699 24,057
10/96 22,805 33,128 27,668
10/97 28,718 43,782 32,745
Average Annual Total Return*
Periods Ended 9/30/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares 21.58% 17.96% 12.77%
................................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% maximum sales charge. Past
performance is not an indicator of future results.
**6/15/88.
6
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class B Shares*
June 20, 1996-October 31, 1997
[Graph Appears Here--See Plot Points Below]
Flag Investors NASDAQ
Emerging Growth Fund S&P 500 Index (OTC) Industrial
6/96 $10,000 $10,000 $10,000
7/96 9,022 9,567 8,890
10/96 9,932 10,606 9,703
1/97 10,864 11,881 10,451
4/97 9,148 12,162 8,898
7/97 11,681 14,539 11,397
10/97 11,985 14,017 11,485
Average Annual Total Return*
Periods Ended 9/30/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Class B Shares 21.96% -- 21.18%
................................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.00% maximum contingent deferred sales
charge. Past performance is not an indicator of future results.
**6/20/96.
7
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Institutional Shares*
November 2, 1995-October 31, 1997
[Graph Appears Here--See Plot Points Below]
Flag Investors NASDAQ
Emerging Growth Fund S&P 500 Index (OTC) Industrial
11/95 $10,000 $10,000 $10,000
1/96 9,829 10,547 9,996
4/96 11,959 10,903 11,554
7/96 10,571 10,730 10,202
10/96 11,648 11,895 11,134
1/97 12,813 13,325 11,992
4/97 10,819 13,641 10,325
7/97 13,851 16,306 13,078
10/97 14,718 15,721 13,178
Average Annual Total Return*
Periods Ended 9/30/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Institutional Shares 27.60% -- 26.46%
................................................................................
ABCAT Shares -- -- 32.62%
................................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
**Inception dates: Institutional Shares, 11/2/95, ABCAT Shares, 5/9/97.
8
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1997
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS: 90.3%
Business Services: 21.4%
58,000 AHL Services, Inc.* $ 1,036,750 0.8%
134,900 Central Garden and Pet Co.* 3,541,125 2.8
207,700 Cidco, Inc.* 3,868,413 3.1
81,900 Dialogic Corp.* 3,378,375 2.7
103,050 Energy Biosystems Corp.* 515,250 0.4
168,000 Manugistics Group, Inc.* 5,985,000 4.8
137,050 QuickResponse Services, Inc.* 4,454,125 3.5
155,650 Wilmar Industries, Inc.* 4,085,812 3.3
----------- ----
26,864,850 21.4
----------- ----
Capital Goods: 6.9%
84,700 Advanced Lighting Technologies, Inc.* 1,704,588 1.4
41,800 Aspect Development, Inc.* 1,954,150 1.5
21,200 Harbinger Corp.* 630,700 0.5
166,775 Itron, Inc.* 3,418,888 2.7
74,900 Xeikon N.V. ADR* 1,020,512 0.8
----------- ----
8,728,838 6.9
----------- ----
Consumer Services: 16.7%
54,325 Apollo Group, Inc.* 2,295,231 1.8
190,300 Apple South, Inc. 3,544,338 2.8
60,700 Just For Feet, Inc.* 899,119 0.7
178,575 O'Charleys, Inc.* 3,303,638 2.6
113,343 Pacific Sunwear of California* 3,131,100 2.5
54,325 Papa John's International, Inc.* 1,605,983 1.3
269,700 PETsMART, Inc.* 2,056,462 1.7
58,950 Starbucks Corp.* 1,945,350 1.6
51,750 Sylvan Learning Systems, Inc.* 2,179,969 1.7
----------- ----
20,961,190 16.7
----------- ----
Health Care Services: 14.1%
136,700 Access Health, Inc.* 4,750,325 3.8
109,300 American Oncology Resources, Inc.* 1,598,512 1.3
117,775 Genesis Health Ventures, Inc.* 2,885,488 2.3
31,300 Guilford Pharmaceuticals, Inc.* 762,938 0.6
120,325 PhyCor, Inc.* 2,774,995 2.2
200,350 Physician Sales and Service, Inc.* 4,908,575 3.9
----------- ----
17,680,833 14.1
----------- ----
</TABLE>
9
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) October 31, 1997
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS (concluded)
Health Equipment and Services: 2.5%
34,000 Heartport, Inc.* $ 854,250 0.7%
90,975 Perclose, Inc.* 2,228,887 1.8
------------ ----
3,083,137 2.5
------------ ----
Media/Communications: 0.4%
29,800 Getty Communications plc ADR* 439,550 0.4
------------ ----
Technology -- Software/Services: 9.7%
244,725 Integrated Systems, Inc.* 4,313,278 3.4
93,650 MAPICS, Inc.* 1,065,269 0.8
79,600 Marcam Solutions, Inc.* 820,875 0.7
56,800 SELECT Software Tools ADR* 457,950 0.4
141,646 Synopsys, Inc.* 5,506,488 4.4
------------ ----
12,163,860 9.7
------------ ----
Technology -- Systems/Semiconductors: 13.2%
127,250 Level One Communications, Inc.* 5,726,250 4.5
89,000 Security Dynamics Technologies, Inc.* 3,014,875 2.4
240,650 Sipex Corp.* 7,911,369 6.3
------------ ----
16,652,494 13.2
------------ ----
Telecommunications -- Long Distance: 0.8%
27,750 Pacific Gateway Exchange, Inc.* 1,061,437 0.8
------------ ----
Transportation: 4.6%
92,775 Atlantic Coast Airlines, Inc.* 1,959,872 1.5
61,950 Coach USA, Inc.* 1,843,013 1.5
80,875 Landair Services, Inc.* 1,981,437 1.6
------------ ----
5,784,322 4.6
------------ ----
Total Common Stocks
(Cost $80,034,506) 113,420,511 90.3
</TABLE>
10
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S><C>
REPURCHASE AGREEMENT: 9.5%
$11,864 Goldman Sachs & Co., 5.60%
Dated 10/31/97, to be repurchased
on 11/3/97, collateralized by U.S.
Treasury Bonds with a market
value of $12,102,152.
(Cost $11,864,000) $ 11,864,000 9.5%
------------ -----
Total Investment in Securities**
(Cost $91,898,506) 125,284,511 99.8
Other Assets in Excess of Liabilities, Net 278,012 0.2
------------ -----
Net Assets $125,562,523 100.0%
============ =====
Net Asset Value and Redemption Price Per:
Class A Share
($71,122,649 / 3,069,025 shares outstanding) $23.17
======
Class B Share
($5,719,048 / 249,987 shares outstanding) $22.88***
======
Institutional Share
($13,068,162 / 562,042 shares outstanding) $23.25
======
ABCAT Share
($35,652,664 / 1,533,892 shares outstanding) $23.24
======
Maximum Offering Price Per:
Class A Share
($23.17 / 0.955) $24.26
======
Class B Share $22.88
======
Institutional Share $23.25
======
ABCAT Share $23.24
======
</TABLE>
- ---------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $92,295,138.
*** Redemption value is $21.96 following a 4% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $ 415,195
Dividends 17,121
-----------
Total income 432,316
-----------
Expenses:
Investment advisory fee (Note 2) 782,095
Distribution fee (Note 2) 167,962
Legal 64,158
Registration fees 54,754
Accounting fee (Note 2) 53,054
Transfer agent fee (Note 2) 52,448
Printing and postage 29,132
Audit 25,314
Custodian fee (Note 2) 22,843
Miscellaneous 9,245
Directors' fees 3,284
-----------
Total expenses 1,264,289
-----------
Expenses in excess of income (831,973)
-----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 6,273,549
Change in unrealized appreciation or depreciation
of investments 17,299,788
-----------
Net gain on investments 23,573,337
-----------
Net increase in net assets resulting from operations $22,741,364
===========
See Notes to Financial Statements.
12
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
- -----------------------------------------------------------------------------------
1997 1996
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of income $ (831,973) $ (402,217)
Net realized gain from security transactions 6,273,549 3,148,580
Change in unrealized appreciation or
depreciation of investments 17,299,788 4,422,457
------------ -----------
Net increase in net assets resulting
from operations 22,741,364 7,168,820
------------ -----------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares (509,733) (614,007)
Class B Shares (12,155) --
Institutional Shares (262,737) (60,009)
Net realized mid-term and long-term gains:
Class A Shares (1,286,527) (1,228,016)
Class B Shares (28,797) --
Institutional Shares (663,099) (120,017)
------------ -----------
Total distributions (2,763,048) (2,022,049)
------------ -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 77,654,561 34,395,004
Value of shares issued in
reinvestment of dividends 2,667,198 1,913,272
Cost of shares repurchased (40,585,610) (13,733,625)
------------ -----------
Increase in net assets derived from capital
share transactions 39,736,149 22,574,651
------------ -----------
Total increase in net assets 59,714,465 27,721,422
Net Assets:
Beginning of year 65,848,058 38,126,636
------------ -----------
End of year $125,562,523 $65,848,058
============ ===========
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 19.14
-------
Income from Investment Operations:
Expenses in excess of income (0.18)
Net realized and unrealized gain on investments 4.95
-------
Total from Investment Operations 4.77
Less Distributions:
Distributions from net realized short-term gains (0.21)
Distributions from net realized mid-term and long-term gains (0.53)
-------
Total distributions (0.74)
-------
Net asset value end of year $ 23.17
=======
Total Return(1) 25.93%
Ratios to Average Daily Net Assets:
Expenses 1.44%
Expenses in excess of income (0.97)%
Supplemental Data:
Net assets at end of year (000) $71,123
Portfolio turnover rate 42%
Average commissions per share(2) $0.0736
- --------
(1) Total return excludes the effect of sales charge.
(2) Disclosure is required for fiscal year beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
14
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S><C>
Per Share Operating Performance:
Net asset value at beginning of year $ 17.09 $ 12.90 $ 14.02 $ 13.53
------- ------- ------- -------
Income from Investment Operations:
Expenses in excess of income (0.15) (0.09) (0.08) (0.08)
Net realized and unrealized gain on investments 3.10 4.32 0.47 1.20
------- ------- ------- -------
Total from Investment Operations 2.95 4.23 0.39 1.12
Less Distributions:
Distributions from net realized short-term gains (0.30) -- -- --
Distributions from net realized mid-term and long-term gains (0.60) (0.04) (1.51) (0.63)
------- ------- ------- -------
Total distributions (0.90) (0.04) (1.51) (0.63)
------- ------- ------- -------
Net asset value end of year $ 19.14 $ 17.09 $ 12.90 $ 14.02
======= ======= ======= =======
Total Return(1) 18.19% 32.92% 3.75% 8.33%
Ratios to Average Daily Net Assets:
Expenses 1.50% 1.50% 1.50% 1.50%
Expenses in excess of income (0.83)% (0.64)% (0.73)% (0.52)%
Supplemental Data:
Net assets at end of year (000) $45,325 $38,127 $23,302 $28,867
Portfolio turnover rate 24% 39% 86% 133%
Average commissions per share(2) $0.0700 -- -- --
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the June 20, 1996(1)
Year Ended through
October 31, October 31,
- -------------------------------------------------------------------------------------------
1997 1996
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 19.10 $ 19.22
------- -------
Income from Investment Operations:
Expenses in excess of income (0.18) (0.12)
Net realized and unrealized gain/(loss)
on investments 4.70 --
------- -------
Total from Investment Operations 4.52 (0.12)
Less Distributions:
Distributions from net realized short-term gains (0.21) --
Distributions from net realized mid-term and
long-term gains (0.53) --
------- -------
Total distributions (0.74) --
------- -------
Net asset value at end of period $ 22.88 $ 19.10
======= =======
Total Return(2) 24.69% (0.62)%
Ratios to Average Daily Net Assets:
Expenses 2.19% 2.25%(3)
Expenses in excess of income (1.73)% (1.67)%(3)
Supplemental Data:
Net assets at end of period (000) $ 5,719 $ 772
Portfolio turnover rate 42% 24%
Average commissions per share $0.0736 $0.0700
</TABLE>
- --------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
16
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the November 2, 1995(1)
Year Ended through
October 31, October 31,
- -------------------------------------------------------------------------------------------
1997 1996
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 19.15 $ 17.45
------- -------
Income from Investment Operations:
Expenses in excess of income (0.26) (0.12)
Net realized and unrealized gain
on investments 5.10 2.72
------- -------
Total from Investment Operations 4.84 2.60
Less Distributions:
Distributions from net realized short-term gains (0.21) (0.30)
Distributions from net realized mid-term and
long-term gains (0.53) (0.60)
------- -------
Total distributions (0.74) (0.90)
------- -------
Net asset value at end of period $ 23.25 $ 19.15
======= =======
Total Return 26.36% 16.48%
Ratios to Average Daily Net Assets:
Expenses 1.19% 1.25%(2)
Expenses in excess of income (0.74)% (0.61)%(2)
Supplemental Data:
Net assets at end of period (000) $13,068 $19,751
Portfolio turnover rate 42% 24%
Average commissions per share $0.0736 $0.0700
</TABLE>
- --------
(1) Commencement of operations.
(2) Annualized.
See Notes to Financial Statements.
17
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- ABCAT Shares
(For a share outstanding throughout each year)
For the Period
May 9, 1997(1)
through
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 18.64
-------
Income from Investment Operations:
Expenses in excess of income (0.06)
Net realized and unrealized gain on investments 4.66
-------
Total from Investment Operations 4.60
-------
Net asset value at end of period $ 23.24
=======
Total Return 24.68%
Ratios to Average Daily Net Assets:
Expenses 1.19%(2)
Expenses in excess of income (0.69)%(2)
Supplemental Data:
Net assets at end of period (000) $35,653
Portfolio turnover rate 42%
Average commissions per share $0.0736
- ---------
(1) Commencement of operations.
(2) Annualized.
See Notes to Financial Statements.
18
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FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1 -- Significant Accounting Policies
Flag Investors Emerging Growth Fund, Inc. (the "Fund"), which was organized
as a Maryland Corporation on July 2, 1987 and commenced operations December 30,
1987, is registered under the Investment Company Act of 1940 as a diversified,
open-end investment management company. Its objective is to seek long-term
capital appreciation primarily through investment in a diversified portfolio of
small and mid-sized emerging growth companies.
The Fund consists of four share classes: Class A Shares, which commenced
June 15, 1988; Institutional Shares, which commenced November 2, 1995; Class B
Shares, which commenced June 20, 1996; and Alex. Brown Capital Advisory & Trust
Shares (ABCAT Shares), which commenced May 9, 1997.
The Class A and Class B Shares are subject to different sales charges and
distribution fees. The Class A Shares have a front-end sales charge and the
Class B Shares have a contingent deferred sales charge. The Institutional Shares
and ABCAT Shares do not have a front-end sales charge, a contingent deferred
sales charge or a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation -- The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.
The Fund values short-term obligations with maturities of 60 days or
less at amortized cost.
B. Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund
19
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1 -- concluded
buys a debt security that the broker agrees to repurchase at a set time
and price. The third party, which is the broker's custodial bank, holds
the collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes -- The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. Securities Transactions, Investment Income, Distributions and Other --
The Fund uses the trade date to account for security transactions and
the specific identification method for financial reporting and income
tax purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated to
each class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, is the Fund's investment advisor. The Advisory
Agreement provides for ICC to receive a maximum annual fee equal to 0.85% of the
Fund's average daily net assets. However, the actual amount of
20
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 2 -- concluded
the fee is contractually limited to an amount that would result in total
expenses on Class A Shares of no more than 1.50%. The Fund paid ICC $782,095 in
fees, which was equal to 0.85% of the Fund's average daily net assets, for
advisory services for the year ended October 31, 1997.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $53,054 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $52,448 for
transfer agent services for the year ended October 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's custodian.
From September 22, 1997 to October 31, 1997, the Fund accrued $2,440 in custody
expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), a member of the Forum Financial Group
of companies, an annual fee that is calculated daily and paid monthly. This fee
is paid at an annual rate equal to 0.25% of the Class A Shares' average daily
net assets and 1.00% (including a 0.25% shareholder servicing fee) of the Class
B Shares' average daily net assets. For the year ended October 31, 1997,
distribution fees aggregated $167,962, of which $142,369 was attributable to the
Class A Shares and $25,593 was attributable to the Class B Shares. No
distribution fees were charged to the Institutional and ABCAT Shares. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated served as the Fund's
distributor for the same compensation and on substantially the same terms as ICC
Distributors.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1997 was $1,993, and the accrued liability was $5,287.
21
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3 -- Capital Share Transactions
The Fund is authorized to issue up to 20 million shares of $.001 par value
capital stock (8 million Class A, 1 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory and Trust and 1 million undesignated).
Transactions in shares of the Fund are listed below.
Class A Shares
-------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1997 Oct. 31, 1996
------------- -------------
Shares sold 1,220,895 706,114
Shares issued to shareholders on
reinvestment of dividends 92,972 106,529
Shares redeemed (612,803) (675,793)
------------ ------------
Net increase in shares outstanding 701,064 136,850
============ ============
Proceeds from sale of shares $ 24,515,195 $ 13,138,521
Value of reinvested dividends 1,709,779 1,733,222
Cost of shares redeemed (12,465,235) (11,827,481)
------------ ------------
Net increase from capital share
transactions $ 13,759,739 $ 3,044,262
============ ============
Class B Shares
---------------------------------
For the For the Period
Year Ended June 20, 1996* to
Oct. 31, 1997 Oct. 31, 1996
------------- -----------------
Shares sold 234,480 40,579
Shares issued to shareholders on
reinvestment of dividends 2,231 --
Shares redeemed (27,166) (137)
---------- --------
Net increase in shares outstanding 209,545 40,442
========== ========
Proceeds from sale of shares $5,012,881 $779,667
Value of reinvested dividends 40,890 --
Cost of shares redeemed (564,373) (2,766)
---------- --------
Net increase from capital share
transactions $4,489,398 $776,901
========== ========
- ---------
*Commencement of operations.
22
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
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NOTE 3 -- concluded
Institutional Shares
----------------------------------
For the For the Period
Year Ended Nov. 2, 1995* to
Oct. 31, 1997 Oct. 31, 1996
------------- ----------------
Shares sold 834,599 1,127,123
Shares issued to shareholders on
reinvestment of dividends 49,811 11,073
Shares redeemed (1,353,795)** (106,769)
------------ -----------
Net increase/(decrease) in shares
outstanding (469,385) 1,031,427
============ ===========
Proceeds from sale of shares $ 16,289,665 $20,476,816
Value of reinvested dividends 916,529 180,050
Cost of shares redeemed (26,372,242)** (1,903,378)
------------ -----------
Net increase/(decrease) from capital share
transactions $ (9,166,048) $18,753,488
============ ===========
ABCAT Shares
---------------
For the Period
May 9, 1997* to
Oct. 31, 1997
---------------
Shares sold 1,587,453***
Shares issued to shareholders on reinvestment of dividends --
Shares redeemed (53,561)
-----------
Net increase in shares outstanding 1,533,892
===========
Proceeds from sale of shares $31,836,820***
Value of reinvested dividends --
Cost of shares redeemed (1,183,760)
-----------
Net increase from capital share transactions $30,653,060
===========
- --------
*Commencement of operations.
**The number of shares redeemed and cost of shares redeemed for the year ended
October 31, 1997 include the exchange from Institutional Shares into ABCAT
Shares.
***The number of shares sold and proceeds from sale of shares for the
year ended October 31, 1997 include the exchange from Institutional Shares
into ABCAT Shares.
23
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4 -- Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $63,082,113 and sales of investment securities aggregated $35,363,293
for the year ended October 31, 1997.
On October 31, 1997, aggregate net unrealized appreciation over tax cost
for portfolio securities was $32,989,373, of which $35,959,081 related to
appreciated securities and $2,969,708 related to depreciated securities.
NOTE 5 -- Net Assets
On October 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $ 41,392,440
Class B Shares 5,266,299
Institutional Shares 9,587,440
ABCAT Shares 30,653,060
Accumulated net realized gain from security transactions 5,277,279
Unrealized appreciation of investments 33,386,005
------------
$125,562,523
============
NOTE 6 -- Tax Information (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1997.
Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
------ ------- -------- -------------
12/20/96 12/30/96 $0.21 $0.53
NOTE 7 -- Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Emerging Growth Fund held a special meeting for
its shareholders on August 14, 1997. During the meeting, shareholders approved a
new Investment Advisory Agreement between the Fund and ICC. The new agreement is
substantially the same as the former agreement.
24
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Emerging Growth Fund, Inc. as of October 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented herein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Emerging Growth Fund, Inc. as of October 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the respective periods presented herein, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
November 26, 1997
25
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Directors and Officers
TRUMAN T. SEMANS
Chairman
JAMES J. CUNNANE CARL W. VOGT, ESQ.
Director Director
RICHARD T. HALE HARRY WOOLF
Director President
JOHN F. KROEGER AMY M. OLMERT
Director Secretary
LOUIS E. LEVY JOSEPH A. FINELLI
Director Treasurer
EUGENE J. MCDONALD LAURIE D. COLLIDGE
Director Assistant Secretary
REBECCA W. RIMEL
Director
Investment Objective
An open-end mutual fund seeking long-term capital appreciation primarily through
investment in a diversified portfolio of small and mid-sized emerging growth
companies.
26
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
-----------------------------------------------------------------------------
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
