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FLAG INVESTORS
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FLAG
INVESTORS
EMERGING
GROWTH
FUND
SEMI-ANNUAL REPORT
APRIL 30, 1997
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
o Despite the volatility for emerging growth investors during the period,
your Fund was able to perform in line with relative indices and somewhat
better than similar mutual funds.
o The market's volatility allowed us to add new companies to the Fund's
portfolio at more reasonable valuations than we have seen over the past two
years. This enabled us to sell the companies that have grown large because
of their success.
o In just the past few weeks, the Fund has regained all of its 1997 losses.
We feel explosive performance of this nature is typical of recoveries that
have occurred during similar market conditions and is partly a result of
the portfolio companies' continuing earnings growth.
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
The first six months of the Fund's fiscal year proved to be particularly
challenging for emerging growth investors. The period was characterized by
overall market volatility, which was exaggerated by divergence among market
segments. As the following table shows, the Fund performed in line with relative
indices and did somewhat better than other mutual funds with similar objectives.
Thus, your Fund declined 7.3% during the six-month period while the Russell 2000
Growth Index had the same performance and the NASDAQ (OTC) Industrial Index
declined 7.4%. The Lipper Small Capitalization Fund Index declined 8.2%. This
performance helped place your Fund in the top 17th and 20th percentiles of
Morningstar's Small Growth Funds Category(1) and Lipper Analytical's Small
Capitalization Fund Category(2), respectively, for the three years ended April
30, 1997.
Performance Comparisons(3)
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
April 30, 1997 April 30, 1997
<S> <C>
- -------------------------------------------------------------------------------------------
Flag Investors Emerging Growth Fund-Class A -7.3% -9.8%
...........................................................................................
NASDAQ (OTC) Industrial Index -7.4% -10.9%
- -------------------------------------------------------------------------------------------
Russell 2000 Index 1.6% 0.5%
- -------------------------------------------------------------------------------------------
Russell 2000 Growth Index -7.3% -13.5%
- -------------------------------------------------------------------------------------------
Lipper Small Capitalization Fund Index -8.2% -9.9%
- -------------------------------------------------------------------------------------------
S&P 500 Index 14.7% 25.2%
- -------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Funds are grouped according to investment objective and are ranked by total
return performance relative to other funds in their respective categories.
This ranking indicates that the Fund's performance ranked #22 out of 124
funds for the 3-year period. In addition, the Fund ranked #74 out of 204
funds for the 1-year period and #58 out of 65 funds for the 5-year period
ended April 30, 1997. Performance figures used in these rankings exclude
the impact of any sales charge.
(2) Lipper rankings are based on performance for the periods ended April 30,
1997 relative to other funds in the category. This ranking indicates that
the Fund's performance ranked #47 out of 236 funds for the 3-year period.
In addition, the Fund ranked #258 out of 395 funds for the 1-year period
and #101 out of 111 funds for the 5-year period ended April 30, 1997.
Performance figures used in these rankings exclude the impact of any sales
charge.
(3) These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. 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 Category, which are managed. Past
performance is not an indicator of future results. Please review the
Additional Performance Information on page 6.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
- --------------------------------------------------------------------------------
The table also shows that during the six-month period, larger
capitalization companies as represented by the Standard & Poor's 500 Index rose
14.7% while the Russell 2000 Index, driven by the Small Cap Value Component,
managed a 1.6% gain.
During this highly volatile market environment, our strategy has remained
unchanged. We continue to hold stocks for the long term. The earnings of our
companies have on average continued to grow at a rate greater than 35%, and our
analysis indicates that this should continue. Furthermore, as a result of the
market decline in the early months of 1997, we have been able to find a
significant number of new companies that we have added to your portfolio at more
reasonable valuations than we have seen over the past two years. As these new
opportunities have been uncovered, we have cut back on companies that have grown
large because of their success.
Most importantly, as the prices of portfolio companies' shares declined
over the past year, those same companies' earnings continued to rise rapidly.
Thus, the price-to-earnings multiple of the portfolio declined, bottoming during
April at 18 times next year's projected earnings. This level is historically
low, both absolutely and relatively. In fact, valuations at such a level for
companies with the high growth, high quality and consistency of those in the
Fund's portfolio have historically been very transitory. The explosive increase
of your portfolio in recent weeks has demonstrated this as illustrated by the
graph on page 3.
2
<PAGE>
- --------------------------------------------------------------------------------
Short-Term Performance Comparisons(1)
(2/25/97 - 5/12/97)
[Graph appears here--see plot points below]
Russell 2000 NASDAQ (OTC)
Fund Growth Index Industrial Index
---- ------------ ----------------
2/25 $100 $100 $100
99.73573 98.92744 99.28826
98.83721 97.60252 97.95374
98.41438 97.22397 97.5089
3/3 97.93869 97.22397 97.06608
99.52431 97.66562 96.88895
100.0529 98.35962 97.42033
99.78858 98.17035 98.30597
99.26004 98.61199 97.95172
98.78436 98.86435 98.04028
99.15433 98.80126 98.30597
97.51586 97.60252 97.86315
96.24736 96.2776 97.06608
97.19873 96.65615 96.00331
95.29598 95.07886 96.18044
94.60888 94.13249 94.94054
93.12896 92.74448 94.0549
93.39323 93.12303 92.63788
94.34461 92.93375 93.34639
92.9704 91.92429 92.37219
92.75899 92.42902 92.63788
93.34038 93.3123 93.43496
92.60042 92.42902 91.92937
89.85201 90.347 90.06953
4/1 88.74207 89.653 89.44958
88.21353 88.51735 88.29825
89.48203 88.20189 88.56394
92.17759 90.09464 90.24665
94.02748 91.35647 91.30942
93.28753 91.67192 91.22086
93.71036 91.79811 91.13229
92.54757 91.1041 90.42378
90.27484 89.33754 88.74107
90.48626 89.14826 88.47538
90.22199 89.40063 88.56394
89.37632 89.02208 88.20968
89.42918 89.08517 88.47538
89.11205 89.21136 88.12112
87.36786 87.94953 86.26128
86.68076 87.69716 86.52697
87.57928 87.94953 86.79266
87.7907 88.01262 87.05835
87.36786 87.00315 85.99558
87.47357 86.94006 86.17271
88.10782 88.32808 87.32404
90.16913 89.27445 88.20968
5/1 91.27907 90.22082 89.00676
92.60042 93.05994 91.48655
97.83298 96.2776 94.32059
97.72727 96.02524 93.96634
96.98732 95.5836 93.87778
97.09302 95.70978 94.32059
98.36152 96.08833 94.67485
5/12 100.0529 96.78233 95.2948
- ----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions, but do not reflect the impact of any sales charge. Past
performance is not an indicator of future results.
This graph shows the value of $100 invested in your Fund, the Russell 2000
Growth Index and the NASDAQ (OTC) Industrial Index on February 25. As you can
see, between February 25 and April 25, each declined approximately in tandem.
However, as selling ended in the general market, your Fund regained most of its
decline within a matter of days and it was up for the year and had surpassed the
indices by mid-May. In a very few weeks, your portfolio regained all the growth
it lost earlier in 1997, and by May 12 was up for the year. In doing so it
handily outperformed the indices.
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
We feel that this type of explosive performance is typical of recoveries
that have occurred during similar market conditions. It is important in such
trying environments for investors to recognize that the underlying portfolio
companies are continuing to grow. Their growing earnings represent an underlying
asset whose value rises inexorably despite the market's fluctuations. It is the
essence of our approach to investing that this earnings stream in emerging
growth companies, and thus the value of the asset, rises rapidly, at greater
than 35% per year in the case of the Fund. Invariably, when the market
temporarily ignores that fact and share prices decline, enormous long-term
investment opportunities are created for patient, insightful investors.
We are proud to announce that Nick Coutros, formerly a Senior Technology
Analyst at Alex. Brown & Sons, has joined our team to help manage your Fund. We
couldn't be more delighted.
Sincerely,
/s/ Frederick L. Meserve, Jr.
- -----------------------------
Frederick L. Meserve, Jr.
President
May 19, 1997
4
<PAGE>
FIVE LARGEST HOLDINGS
- --------------------------------------------------------------------------------
Percent of
Company Net Assets
- --------------------------------------------------------------------------------
o Manugistics Group, Inc. 5.8%
Develops, markets and supports a line of business
operations software and services.
o Synopsys, Inc. 4.5%
Develops, markets and supports high-level design
automation software for designers of integrated
circuits and electronics systems. The company has
license agreements with over 400 customers, including
major international semiconductor, computer,
communications, military and aerospace companies.
o QuickResponse Services, Inc. 4.0%
Provides a product information database and related
network services that automate and improve merchandise
management.
o Genesis Health Ventures, Inc. 3.6%
Provides geriatric health care services and operates
approximately 107 geriatric care facilities. The company
also provides rehabilitation therapy, pharmacy and subacute
care services.
o Apple South, Inc. 3.4%
Owns and operates Applebee's and Don Pablos restaurants.
- --------------------------------------------------------------------------------
5
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include 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
4.00% maximum contingent deferred sales charge for the Fund's Class B Shares.
Average Annual Total Return
Periods Ended 3/31/97 1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Class A Shares -4.42% 6.65% 8.84%
................................................................................
Class B Shares -- -- -12.74%
................................................................................
Institutional Shares 0.37% -- 5.48%
- --------------------------------------------------------------------------------
*Inception dates: Class A 6/15/88, Class B 6/20/96, Institutional 11/2/95.
The Fund's 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. Past performance is not an indicator of future results.
6
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- -------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS: 90.0%
Business Services: 19.9%
113,900 Central Garden and Pet Co.* $ 2,270,881 3.0%
203,650 Cidco, Inc.* 2,596,538 3.4
12,100 Dialogic Corp.* 238,975 0.3
86,450 Energy Biosystems Corp.* 432,250 0.6
82,050 Manugistics Group, Inc.* 4,410,187 5.8
112,450 QuickResponse Services, Inc.* 3,036,150 4.0
131,550 Wilmar Industries, Inc.* 2,170,575 2.8
- -------------------------------------------------------------------------------------
15,155,556 19.9
- -------------------------------------------------------------------------------------
Capital Goods: 6.7%
62,400 Advanced Lighting Technologies, Inc.* 1,185,600 1.5
16,400 Aspect Development, Inc.* 350,550 0.5
65,800 Desktop Data, Inc.* 477,050 0.6
18,000 Harbinger Corp.* 360,000 0.5
108,175 Itron, Inc.* 2,271,675 3.0
62,900 Xeikon N.V. ADR* 452,093 0.6
- -------------------------------------------------------------------------------------
5,096,968 6.7
- -------------------------------------------------------------------------------------
Consumer Services: 17.2%
45,925 Apollo Group, Inc.* 1,234,234 1.6
200,150 Apple South, Inc. 2,601,950 3.4
38,500 Gemstar International Group Ltd. 490,875 0.6
120,575 O'Charleys, Inc.* 1,582,546 2.1
63,762 Pacific Sunwear of California* 1,992,562 2.6
46,025 Papa John's International, Inc.* 1,185,143 1.6
91,200 PETsMART, Inc.* 1,533,300 2.0
49,650 Starbucks Corp.* 1,483,294 1.9
35,125 Sylvan Learning Systems, Inc.* 1,058,141 1.4
- -------------------------------------------------------------------------------------
13,162,045 17.2
- -------------------------------------------------------------------------------------
Health Care Services: 15.2%
115,500 Access Health, Inc.* 1,645,875 2.1
92,500 American Oncology Resources, Inc.* 820,938 1.1
91,075 Genesis Health Ventures, Inc.* 2,720,866 3.6
15,700 Guilford Pharmaceuticals, Inc.* 363,063 0.5
38,000 HPR, Inc.* 536,750 0.7
53,075 PhyCor, Inc.* 1,413,122 1.8
</TABLE>
7
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
(Unaudited)
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- -------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS: concluded
Health Care Services: concluded
147,850 Physician Sales and Service, Inc.* $ 2,143,825 2.8%
75,375 Vivra, Inc.* 1,950,328 2.6
- -------------------------------------------------------------------------------------
11,594,767 15.2
- -------------------------------------------------------------------------------------
Health Equipment and Services: 2.5%
13,700 Heartport, Inc.* 351,063 0.5
62,475 Perclose, Inc.* 1,546,256 2.0
- -------------------------------------------------------------------------------------
1,897,319 2.5
- -------------------------------------------------------------------------------------
Media/Communications: 1.5%
17,164 Clear Channel Communications, Inc.* 832,454 1.1
24,900 Getty Communications plc ADR* 342,375 0.4
- -------------------------------------------------------------------------------------
1,174,829 1.5
- -------------------------------------------------------------------------------------
Technology--Software/Services: 12.9%
192,625 Integrated Systems, Inc.* 1,854,016 2.4
133,800 Marcam Corp.* 1,572,150 2.1
16,700 Parametric Technology Co.* 755,675 1.0
47,400 SELECT Software Tools ADR* 628,050 0.8
108,646 Synopsys, Inc.* 3,463,091 4.5
134,025 XcelleNet, Inc.* 1,591,547 2.1
- -------------------------------------------------------------------------------------
9,864,529 12.9
- -------------------------------------------------------------------------------------
Technology--Systems/Semiconductor: 11.4%
69,400 Level One Communications, Inc.* 2,220,800 2.9
16,400 Maxim Integrated Products, Inc.* 867,150 1.1
12,850 QUALCOMM, Inc.* 600,738 0.8
75,100 Security Dynamics Technologies, Inc.* 1,896,275 2.5
99,425 Sipex Corp.* 2,386,200 3.1
15,750 Xilinx, Inc.* 771,750 1.0
- -------------------------------------------------------------------------------------
8,742,913 11.4
- -------------------------------------------------------------------------------------
Transportation: 2.7%
78,175 Atlantic Coast Airlines, Inc.* 957,644 1.3
80,875 Landair Services, Inc.* 1,091,813 1.4
- -------------------------------------------------------------------------------------
2,049,457 2.7
- -------------------------------------------------------------------------------------
Total Common Stocks
(Cost $60,564,946) 68,738,383 90.0
</TABLE>
8
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security (Note 1) Net Assets
- -------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT: 9.8%
$7,517 Goldman Sachs & Co., 5.25%
Dated 4/30/97, to be repurchased
on 5/1/97, collateralized by U.S.
Treasury Bonds with a market
value of $7,604,913.
(Cost $7,517,000) $ 7,517,000 9.8%
- -------------------------------------------------------------------------------------
Total Investment in Securities**
(Cost $68,081,946) 76,255,383 99.8
Other Assets in Excess of Liabilities, Net 157,698 0.2
- -------------------------------------------------------------------------------------
Net Assets $76,413,081 100.0%
=====================================================================================
Net Asset Value and Redemption Price Per:
Class A Share
($47,523,419 / 2,785,769 shares outstanding) $17.06
=====================================================================================
Class B Share
($2,023,935 / 119,753 shares outstanding) $16.90***
=====================================================================================
Institutional Share
($26,865,727 / 1,572,268 shares outstanding) $17.09
=====================================================================================
Maximum Offering Price Per:
Class A Share
($17.06 / .955) $17.86
=====================================================================================
Class B Share $16.90
=====================================================================================
Institutional Share $17.09
=====================================================================================
</TABLE>
- ----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $68,213,304.
*** Redemption value is $16.22 following a 4% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
9
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Six
Months Ended
April 30,
- --------------------------------------------------------------------------------
1997(1)
Investment Income (Note 1):
Interest $ 167,018
Dividends 12,902
Other income 167,173
- --------------------------------------------------------------------------------
Total income 347,093
- --------------------------------------------------------------------------------
Expenses:
Investment advisory fee (Note 2) 328,739
Distribution fee (Note 2) 67,714
Registration fees 28,027
Accounting fee (Note 2) 24,730
Legal 22,661
Printing and postage 19,068
Transfer agent fee (Note 2) 18,984
Audit 13,776
Custodian fee 7,419
Miscellaneous 3,445
Directors' fees 1,042
- --------------------------------------------------------------------------------
Total expenses 535,605
- --------------------------------------------------------------------------------
Expenses in excess of income (188,512)
- --------------------------------------------------------------------------------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 1,977,511
Change in unrealized appreciation or depreciation
of investments (7,912,780)
- --------------------------------------------------------------------------------
Net loss on investments (5,935,269)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(6,123,781)
================================================================================
- ----------
(1) Unaudited.
See Notes to Financial Statements.
10
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six For the Year
Months Ended Ended
April 30, October 31,
- --------------------------------------------------------------------------------
1997(1) 1996
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of income $ (188,512) $ (402,217)
Net realized gain from security transactions 1,977,511 3,148,580
Change in unrealized appreciation or
depreciation of investments (7,912,780) 4,422,457
- --------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from operations (6,123,781) 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 long-term gains:
Class A Shares (1,286,467) (1,228,016)
Class B Shares (30,677) --
Institutional Shares (663,099) (120,017)
- --------------------------------------------------------------------------------
Total distributions (2,764,868) (2,022,049)
- --------------------------------------------------------------------------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 24,656,789 34,395,004
Value of shares issued in
reinvestment of dividends 2,667,198 1,913,272
Cost of shares repurchased (7,870,315) (13,733,625)
- --------------------------------------------------------------------------------
Increase in net assets derived from capital
share transactions 19,453,672 22,574,651
- --------------------------------------------------------------------------------
Total increase in net assets 10,565,023 27,721,422
Net Assets:
Beginning of period 65,848,058 38,126,636
- --------------------------------------------------------------------------------
End of period $76,413,081 $ 65,848,058
================================================================================
- ----------
(1) Unaudited.
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
April 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 19.14
- --------------------------------------------------------------------------------
Income from Investment Operations:
Expenses in excess of income (0.05)
Net realized and unrealized gain/(loss) on investments (1.29)
- --------------------------------------------------------------------------------
Total from Investment Operations (1.34)
Less Distributions:
Distributions from net realized short-term gains (0.21)
Distributions from net realized long-term gains (0.53)
- --------------------------------------------------------------------------------
Total distributions (0.74)
- --------------------------------------------------------------------------------
Net asset value at end of period $ 17.06
================================================================================
Total Return(2) (7.28)%
Ratios to Average Daily Net Assets:
Expenses 1.50%(3)
Expenses in excess of income (0.83)%(3)
Supplemental Data:
Net assets at end of period (000) $47,523
Portfolio turnover rate 29%(3)
Average commissions per share(4) $ 0.07
- ----------
(1) Unaudited.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
12
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.09 $ 12.90 $ 14.02 $ 13.53 $ 15.23
- ----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Expenses in excess of income (0.15) (0.09) (0.08) (0.08) (0.16)
Net realized and unrealized gain/(loss) on investments 3.10 4.32 0.47 1.20 (1.54)
- ----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.95 4.23 0.39 1.12 (1.70)
Less Distributions:
Distributions from net realized short-term gains (0.30) -- -- -- --
Distributions from net realized long-term gains (0.60) (0.04) (1.51) (0.63) --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (0.90) (0.04) (1.51) (0.63) --
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at end of period $ 19.14 $ 17.09 $ 12.90 $ 14.02 $ 13.53
======================================================================================================================
Total Return(2) 18.19% 32.92% 3.75% 8.33% (11.16)%
Ratios to Average Daily Net Assets:
Expenses 1.50% 1.50% 1.50% 1.50% 1.46%
Expenses in excess of income (0.83)% (0.64)% (0.73)% (0.52)% (0.92)%
Supplemental Data:
Net assets at end of period (000) $45,325 $38,127 $23,302 $28,867 $38,924
Portfolio turnover rate 24% 39% 86% 133% 69%
Average commissions per share(4) $ 0.07 -- -- -- --
</TABLE>
See Notes to Financial Statements.
13
<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 Six June 20, 1996(2)
Months Ended through
April 30, October 31,
- -----------------------------------------------------------------------------------
1997(1) 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 (0.09) (0.12)
Net realized and unrealized gain/(loss)
on investments (1.37) --
- -----------------------------------------------------------------------------------
Total from Investment Operations (1.46) (0.12)
Less Distributions:
Distributions from net realized short-term gains (0.21) --
Distributions from net realized long-term gains (0.53) --
- -----------------------------------------------------------------------------------
Total distributions (0.74) --
- -----------------------------------------------------------------------------------
Net asset value at end of period $16.90 $19.10
===================================================================================
Total Return(3) (7.90)% (0.62)%
Ratios to Average Daily Net Assets:
Expenses(4) 2.25% 2.25%
Expenses in excess of income(4) (1.36)% (1.67)%
Supplemental Data:
Net assets at end of period (000) $2,024 $ 772
Portfolio turnover rate(4) 29% 24%
Average commissions per share(5) $ 0.07 $ 0.07
</TABLE>
- ----------
(1) Unaudited.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights --Institutional Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the Six November 2, 1995(2)
Months Ended through
April 30, October 31,
- ---------------------------------------------------------------------------------------
1997(1) 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 (0.05) (0.12)
Net realized and unrealized gain/(loss)
on investments (1.37) 2.72
- ---------------------------------------------------------------------------------------
Total from Investment Operations (1.42) 2.60
Less Distributions:
Distributions from net realized short-term gains (0.21) (0.30)
Distributions from net realized long-term gains (0.53) (0.60)
- ---------------------------------------------------------------------------------------
Total distributions (0.74) (0.90)
- ---------------------------------------------------------------------------------------
Net asset value at end of period $ 16.99 $ 19.15
=======================================================================================
Total Return (7.12)% 16.48%
Ratios to Average Daily Net Assets:
Expenses(3) 1.25% 1.25%
Expenses in excess of income(3) (0.61)% (0.61)%
Supplemental Data:
Net assets at end of period (000) $26,866 $19,751
Portfolio turnover rate(3) 29% 24%
Average commissions per share(4) $ 0.07 $ 0.07
</TABLE>
- ----------
(1) Unaudited.
(2) Commencement of operations.
(3) Annualized.
(4) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
15
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FLAG INVESTORS EMERGING GROWTH FUND
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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, commenced operations December 30,
1987. The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end Investment Management Company. Its objective is to seek
long-term growth of capital through investment in a diversified portfolio of
small and mid-sized emerging growth companies.
The Fund consists of three share classes: Class A Shares, which commenced
December 30, 1987; Institutional Shares, which commenced November 2, 1995; and
Class B Shares, which commenced June 20, 1996.
The Class A and Class B Shares are subject to different sales charges. The
Class A Shares have a front-end sales charge and the Class B Shares have a
contingent deferred sales charge. The Institutional Shares have neither a
front-end sales charge nor a contingent deferred sales charge. In addition, each
class has a different 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 buys a debt
security that the broker agrees to repurchase at a set time
16
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FLAG INVESTORS EMERGING GROWTH FUND
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NOTE 1--concluded
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. Other income consists of settlements from class action suits in
which the Fund is a participant. The income is recorded when the cash
is received since the amount and collectibility cannot be determined
until that time.
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FLAG INVESTORS EMERGING GROWTH FUND
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Notes to Financial Statements (continued)
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., 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 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 $328,739 in fees, which was equal to 0.85% of
the Fund's average daily net assets, for advisory services for the six months
ended April 30, 1997.
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 $24,730 for accounting services for the six months
ended April 30, 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 $18,984 for
transfer agent services for the six months ended April 30, 1997.
As compensation for providing distribution services, the Fund pays Alex.
Brown & Sons Incorporated 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 six
months ended April 30, 1997, distribution fees aggregated $67,714, of which
$59,863 was attributable to the Class A Shares and $7,851 was attributable to
the Class B Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
November 1, 1996 through April 30, 1997 was $661, and the accrued liability was
$4,974.
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 on the following pages.
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FLAG INVESTORS EMERGING GROWTH FUND
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NOTE 3--continued
Class A Shares
--------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1997* Oct. 31, 1996
--------------- -------------
Shares sold 646,892 706,114
Shares issued to shareholders on
reinvestment of dividends 92,972 106,529
Shares redeemed (322,057) (675,793)
----------- -----------
Net increase in shares outstanding 417,807 136,850
=========== ===========
Proceeds from sale of shares $12,211,594 $13,138,521
Value of reinvested dividends 1,709,779 1,733,222
Cost of shares redeemed (6,032,783) (11,827,481)
----------- -----------
Net increase from capital share
transactions $ 7,888,590 $ 3,044,262
=========== ===========
Class B Shares
----------------------------------
For the Six For the Period
Months Ended June 20, 1996** to
April 30, 1997* Oct. 31, 1996
--------------- ------------------
Shares sold 92,318 40,579
Shares issued to shareholders on
reinvestment of dividends 2,231 --
Shares redeemed (15,238) (137)
---------- --------
Net increase in shares outstanding 79,311 40,442
========== ========
Proceeds from sale of shares $1,739,502 $779,667
Value of reinvested dividends 40,890 --
Cost of shares redeemed (288,539) (2,766)
---------- --------
Net increase from capital share
transactions $1,491,853 $776,901
========== ========
- ----------
*Unaudited.
**Commencement of operations.
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FLAG INVESTORS EMERGING GROWTH FUND
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Notes to Financial Statements (concluded)
NOTE 3--concluded
Institutional Shares
----------------------------------
For the Six For the Period
Months Ended Nov. 2, 1995** to
April 30, 1997* Oct. 31, 1996
--------------- -----------------
Shares sold 571,789 1,127,123
Shares issued to shareholders on
reinvestment of dividends 49,811 11,073
Shares redeemed (80,759) (106,769)
----------- -----------
Net increase in shares outstanding 540,841 1,031,427
=========== ===========
Proceeds from sale of shares $10,705,693 $20,476,816
Value of reinvested dividends 916,529 180,050
Cost of shares redeemed (1,548,993) (1,903,378)
----------- -----------
Net increase from capital share
transactions $10,073,229 $18,753,488
=========== ===========
- ----------
*Unaudited.
**Commencement of operations.
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $32,316,761 and sales of investment securities aggregated $19,683,378
for the six months ended April 30, 1997.
On April 30, 1997, aggregate gross unrealized appreciation over tax cost
for portfolio securities was $8,042,079, of which $14,650,483 related to
appreciated securities and $6,608,404 related to depreciated securities.
20
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FLAG INVESTORS EMERGING GROWTH FUND
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NOTE 5--Net Assets
On April 30, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $35,521,291
Class B Shares 2,268,755
Institutional Shares 28,826,717
Accumulated net realized gain from security transactions 1,622,881
Unrealized appreciation of investments 8,173,437
-----------
$76,413,081
===========
NOTE 6--Shareholder Meeting
On March 7, 1997, the Flag Investors Emerging Growth Fund held a special
meeting of its shareholders. During the meeting, shareholders elected the
following Directors: Charles W. Cole, Jr., James J. Cunnane, Richard T. Hale,
John F. Kroeger, Louis E. Levy, Eugene J. McDonald, Rebecca W. Rimel, Truman T.
Semans and Carl W. Vogt.
NOTE 7--Merger Agreement
On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they had signed a definitive agreement to merge. The
merger, which is expected to be completed by the fourth quarter of 1997, is
subject to customary closing conditions, including certain regulatory and
shareholder approvals.
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FLAG INVESTORS EMERGING GROWTH FUND
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Directors and Officers
TRUMAN T. SEMANS
Chairman
CHARLES W. COLE, JR. FREDERICK L. MESERVE, JR.
Director President
JAMES J. CUNNANE SANDRA J. DOELLER
Director Vice President
RICHARD T. HALE GARY V. FEARNOW
Director Vice President
JOHN F. KROEGER CHARLES A. REID
Director Vice President
LOUIS E. LEVY EDWARD J. VEILLEUX
Director Vice President
EUGENE J. MCDONALD SCOTT J. LIOTTA
Director Vice President and Secretary
REBECCA W. RIMEL JOSEPH A. FINELLI
Director Treasurer
CARL W. VOGT, ESQ. LAURIE D. COLLIDGE
Director Assistant Secretary
Investment Objective
An open-end mutual fund seeking long-term growth of capital through investment
in a diversified portfolio of small and mid-sized emerging growth companies.
22
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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:
ALEX. BROWN & SONS
INCORPORATED
