<PAGE>
As Filed With the Securities and Exchange Commission on February 26, 1997
Registration No. 33-21119
811-5320
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 14 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 18 [x]
FLAG INVESTORS EMERGING GROWTH FUND, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, Maryland 21202
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 727-1700
---------------
Edward J. Veilleux
One South Street
Baltimore, Maryland 21202
--------------------------------------
(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esquire
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b)
__X__ on March 1, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on [date] pursuant to paragraph (a)(2) of Rule 485
- --------------------------------------------------------------------------------
Registrant has elected to maintain registration of an indefinite number of
shares of Common Stock pursuant to Rule 24f-2 under the Investment Company
Act of 1940. Registrant's Rule 24f-2 Notice for its fiscal year ended October
31, 1996 was filed with the Commission on December 20, 1996.
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Class A and Class B Shares)
Cross Reference Sheet
February 26, 1997
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Heading
- --------------------------- -------------
<S> <C> <C>
Part A - Information Required in a Prospectus
- ------
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ................................... Fund Expenses
Item 3. Condensed Financial Information ................ Financial Highlights
Item 4. General Description of Registrant .............. Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund .......................... Management of the Fund;
Investment Advisor;
Distributor; Custodian,
Transfer Agent and
Accounting Services
Item 5A. Management's Discussion of Fund
Performance...................................... *
Item 6. Capital Stock and Other Securities .............. Cover Page; Dividends and
Taxes; General Information
Item 7. Purchase of Securities Being Offered ............ How to Invest in the Fund;
Distributor
Item 8. Redemption or Repurchase ........................ How to Redeem Shares
Item 9. Pending Legal Proceedings ..................... **
</TABLE>
- ----------------
* Information required by Item 5A is contained in Registrant's 1996 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<CAPTION>
Part B - Information Required in a Statement of Additional Information
- ------
<S> <C> <C>
Item 10. Cover Page ...................................... Cover Page
Item 11. Table of Contents ............................... Table of Contents
Item 12. General Information and History ................. General Information and
History
Item 13. Investment Objectives and Policies ............. Investment Objectives and
Policies
Item 14. Management of the Fund .......................... Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities ................................... Control Persons and Principal
Holders of Securities
Item 16. Investment Advisory and Other Services ......... Investment Advisory and
Other Services; Custodian,
Transfer Agent and
Accounting Services;
Independent Accountants
Item 17. Brokerage Allocation ............................ Brokerage
Item 18. Capital Stock and Other Securities .............. Capital Shares; Semi-Annual
Reports
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ....................... Valuation of Shares and
Redemption
Item 20. Tax Status ...................................... Federal Tax Treatment of
Dividends and Distributions
Item 21. Underwriters .................................... Distribution of Fund
Shares
Item 22. Calculation of Performance Data ................. Performance Information
Item 23. Financial Statements ........................ Financial Statements
Part C - Other Information
- ------
Part C contains the information required by the items
contained therein under the items set forth in the form.
</TABLE>
<PAGE>
Supplement dated March 1, 1997
to Prospectus dated March 1, 1997 of
Flag Investors Emerging Growth Fund, Inc.
The prospectus dated March 1, 1997 of Flag Investors Emerging Growth Fund, Inc.
(the "Fund") is hereby amended and supplemented by the following:
The section entitled "Management of the Fund" is amended as follows:
A special meeting of shareholders, for the purpose of electing directors, has
been scheduled for March 7, 1997. Until such time, the Fund's directors are as
follows:
Truman T. Semans
Richard T. Hale
James J. Cunnane
John F. Kroeger
Louis E. Levy
Eugene J. McDonald
Two directors and all of the officers of the Fund are officers or employees of
the Distributor or the Advisor. The other directors have no affiliation with the
Distributor or the Advisor.
<PAGE>
LOGO
FLAG INVESTORS
EMERGING GROWTH FUND, INC.
(Class A and Class B Shares)
Prospectus & Application -- March 1, 1997
- -----------------------------------------------------------------------------
Flag Investors Emerging Growth Fund, Inc. (the "Fund") is a mutual fund seeking
long-term capital appreciation primarily through investment in a diversified
portfolio of small and mid-sized emerging growth companies.
Shares of the Fund are available through Alex. Brown & Sons Incorporated
("the Distributor") 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, 1997, 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.
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 the Distributor.
TABLE OF CONTENTS
Fund Expenses .................. 1
Financial Highlights ........... 2
Investment Program ............. 4
Investment Restrictions ........ 5
How to Invest in the Fund ...... 6
How to Redeem Shares ........... 9
Telephone Transactions ......... 10
Dividends and Taxes ............ 11
Management of the Fund ......... 12
Investment Advisor ............. 12
Distributor .................... 12
Custodian, Transfer Agent and
Accounting Services ........... 13
Performance Information ........ 13
General Information ............ 14
Application .................... A-1
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.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
[This page intentionally left blank]
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
SHAREHOLDER TRANSACTION EXPENSES: ---------------- ----------------
<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 (as a percentage of offering price) ...................... None None
Maximum Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ............................. 0.50%* 4.00%**
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
Management Fees ................................................................ .85% .85%
12b-1 Fees ..................................................................... .25% .75%
Other Expenses (including a .25% shareholder servicing fee for Class B Shares) . .39% .64%***
----- -----
Total Fund Operating Expenses .................................................. 1.49% 2.24%
</TABLE>
- ------
* 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 upon redemption. (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 services provided and expenses incurred in maintaining
shareholder accounts, responding to shareholder inquiries and providing
information on their investments.
<TABLE>
<CAPTION>
Example:
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
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Class A Shares ..................................................... $59 $ 90 $123 $215
Class B Shares ..................................................... $63 $100 $140 $221*
</TABLE>
You would pay the following expenses on the same investment, assuming
no redemption:*
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Class B Shares ..................................................... $23 $ 70 $120 $221*
</TABLE>
- ------
* 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.
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
appearing in the table above have been restated to reflect current, rather
than historical, fees. 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 Conduct Rules 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.")
1
<PAGE>
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
periods indicated and have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The financial statements and financial highlights
for the fiscal year ended October 31, 1996 and the report thereon of Coopers
& Lybrand L.L.P. are included in the Statement of Additional Information.
Additional performance information is contained in the Fund's Annual Report
for the fiscal year ended October 31, 1996, which can be obtained at no
charge by calling the Fund at (800) 767-FLAG.
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------
1996
---------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.09
----------
Income from Investment Operations:
Expenses in excess of income (0.15)
Net realized and unrealized gain/(loss) on investments 3.10
Effect of other capital share activity --
---------
Total from Investment Operations 2.95
---------
Less Distributions:
Distributions from net investment income and short-term
gains (0.30)
Distributions from net realized long-term gains (0.60)
---------
Total distributions (0.90)
---------
Net asset value at end of period $ 19.14
=========
Total Return(1) 18.19%
Ratios to Average Daily Net Assets:
Expenses 1.50%
Expenses in excess of income (0.83)%
Supplemental Data:
Net assets at end of period (000): $45,325
Portfolio turnover rate 24%
Average commissions per share(3) $ 0.07
</TABLE>
- ------
* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Disclosure is required for fiscal years beginning on or after September
1, 1995. Represents average commission rate per share charged to the
Fund on purchases and sales of investments during the period.
2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------ Class B
Class A ---------------
- ------------------------------------------------------------------------------------------------------------ For the Period
For the Period June 20,
For the Year Ended October 31, December 30, 1987** 1996** through
- ------------------------------------------------------------------------------------- through October 31,
1995 1994 1993 1992 1991 1990 1989 October 31, 1988 1996
--------- --------- --------- ---------- --------- ---------- --------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$12.90 $14.02 $13.53 $15.23 $8.93 $14.90 $10.87 $10.00 $ 19.22
--------- --------- --------- ---------- --------- ---------- --------- -------- ---------
(0.09) (0.08) (0.08) (0.16) (0.10) (0.11) (0.05) 0.10 (0.12)
4.32 0.47 1.20 (1.54) 6.40 (4.00) 4.13 (0.88) --
-- -- -- -- -- -- -- 1.65 --
--------- --------- --------- ---------- --------- ---------- --------- -------- ---------
4.23 0.39 1.12 (1.70) 6.30 (4.11) 4.08 0.87 (0.12)
--------- --------- ---------- --------- ---------- --------- -------- ---------
-- -- -- -- -- (1.86) (0.05) -- --
(0.04) (1.51) (0.63) -- -- -- -- -- --
--------- --------- --------- ---------- --------- ---------- --------- -------- ---------
(0.04) (1.51) (0.63) -- -- (1.86) (0.05) -- --
--------- --------- --------- ---------- --------- ---------- --------- -------- ---------
$17.09 $12.90 $14.02 $13.53 $15.23 $8.93 $ 14.90 $10.87 $ 19.10
========= ========= ========= ========== ========= ========== ========= ======== =========
32.92% 3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64% 8.80% (0.62)%
1.50% 1.50% 1.50% 1.46% 1.50% 1.50% 1.49% 1.47%(2) 2.25%(2)
(0.64)% (0.73)% (0.52)% (0.92)% (0.76)% (0.92)% (0.42)% 1.02%(2) (1.67)%(2)
$38,127 $23,302 $28,867 $38,924 $48,656 $31,678 $44,396 $26,159 $ 772
39% 86% 133% 69% 79% 82% 108% 110% 24%(2)
-- -- -- -- -- -- -- -- $ 0.07
</TABLE>
3
<PAGE>
INVESTMENT PROGRAM
Investment Objective, 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.
The Fund's investment advisor (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.
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.
<PAGE>
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 rated in one of the three highest rating categories of
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") (or, if unrated, determined by the Advisor to be of equivalent
quality), 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.
In addition, for temporary defensive purposes, the Fund may, without limit,
hold money market instruments that are rated in the top two categories published
by Moody's or S&P or, if unrated, of comparable quality as determined by the
Advisor.
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 creditworthy financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase the
securities at an established time and price. Default by or bankruptcy
proceedings with respect to the seller may, however, expose the Fund to
possible loss because of adverse market action or delay in connection with
the disposition of the underlying obligations.
2) Loans of Portfolio Securities. The Fund may also lend portfolio securities
to financial institutions in accordance with the investment restrictions
described in this Prospectus and the Statement of Additional Information.
The Fund lends portfolio securities only to those financial institutions
that are approved as creditworthy by the Fund's Board of Directors and
only against collateral consisting of cash or U.S. Government securities
with an aggregate value at all times equal to or greater than the value of
the securities loaned. The borrowers pay the Fund an amount equal to any
dividends or interest received on the securities they borrow. The Fund
retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower.
4
<PAGE>
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 have 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.
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.
1) As a matter of fundamental policy, the Fund will not 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. This restriction may not be
changed without the affirmative vote of a majority of the outstanding
shares.
2) Additionally, the Fund will not invest more than 10% of its net assets
in illiquid securities, including time deposits and repurchase
agreements with maturities of greater than seven days. This restriction
may be changed by a vote of the majority of the Board of Directors.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
5
<PAGE>
HOW TO INVEST IN THE FUND
Class A Shares and Class B Shares may be purchased from the Distributor,
through any securities dealer which has entered into a dealer agreement with the
Distributor ("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, 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.
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. (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 the Distributor and the Advisor. Orders for purchases of shares
are accepted on any day on which the New York Stock Exchange is open for
business (a "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 the Distributor or a Participating Dealer or
Shareholder Servicing Agent must be in accordance with such entity's payment
procedures. The Distributor may, in its sole discretion, refuse to accept any
purchase order.
The net asset value per share is determined 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 its share of the Fund's assets, deducting all liabilities
attributable to that 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 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. Because of differences between the classes
of shares in distribution/service fees, the net asset value per share of the
classes differs at times.
OFFERING PRICE
Shares may be purchased from the Distributor, 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:
6
<PAGE>
<TABLE>
<CAPTION>
Sales Charge as Dealer
Percentage of Retention as
------------------------------ Percentage
of
Amount of Offering Net Amount Offering
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
Short-Intermediate Income Fund, Inc. (formerly 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
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.
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 the Distributor 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
charge is payable, and, if so, the amount of the charge, it is assumed that
shares not subject to such charge are the first redeemed followed by other
Class A Shares held for the longest period of time.
<PAGE>
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 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 the Distributor, Participating Dealers and their
respective affiliates.
7
<PAGE>
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. 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
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
(as a percentage
Year Since Purchase 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.
<PAGE>
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.
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.
<PAGE>
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 with
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
8
<PAGE>
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. The Distributor will tender the partnership interests offered for
exchange for redemption by the issuer and will use the proceeds to purchase
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 the Distributor 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 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 will be withdrawn from the
shareholder's checking account using the pre-authorized check and 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 or
who wishes to obtain additional purchase information may do so by completing
the appropriate section of the Application Form attached to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
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. Unless the shareholder elects otherwise, all income dividends and
capital gains distributions will be reinvested in additional Fund shares of
the same class at net asset value, without a sales charge. Shareholders may
elect to terminate automatic reinvestment by giving written notice to the
Transfer Agent (see "Custodian, Transfer Agent and 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.
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 the Transfer Agent for additional
information.
HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through the Distributor, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to 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) or the
close of the New York Stock Exchange, whichever is earlier, will be effected
at the net asset value next determined
9
<PAGE>
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.
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 Class A 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 Class A 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 participate
in the Fund's Systematic Withdrawal Plan may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
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 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 and 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 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. 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.")
10
<PAGE>
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.
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 one year, but paid 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.
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.
11
<PAGE>
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 distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers, to the Distributor and to the Advisor. Three Directors and
all of the officers of the Fund are officers or employees of the Distributor or
the Advisor. The other Directors of the Fund have no affiliation with the
Distributor or the Advisor.
The Fund's Directors and officers are as follows:
Truman T. Semans Chairman Frederick L. Meserve, Jr. President
Charles W. Cole, Jr. 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 Scott J. Liotta Vice President
Louis E. Levy Director Sandra J. Doeller Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Edward J. Stoken Secretary
Carl W. Vogt Director Laurie D. Collidge Assistant
Secretary
INVESTMENT ADVISOR
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or the
"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 securities of such emerging growth companies. The
Advisor is also the investment advisor to other mutual funds in the Flag
Investors family of funds and Alex. Brown Cash Reserve Fund, Inc., which funds
had approximately $5.1 billion of assets as of December 31, 1996. The address of
the Advisor is One South 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, 1996, the Advisor received from the Fund a
fee equal to .75% of the Fund's average daily net assets.
ICC is also the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")
PORTFOLIO MANAGER
Frederick L. Meserve, Jr., President of the Fund and a principal of Alex.
Brown & Sons Incorporated, 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.
DISTRIBUTOR
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor"), One
South Street, Baltimore, Maryland 21202 acts as distributor of each class of the
Fund's shares. Alex. Brown is an investment banking firm which offers a broad
range of investment services to individual, institutional, corporate and
municipal clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated,
which has engaged directly and through subsidiaries and affiliates in the
investment business since 1800. Alex. Brown is a member of the New York Stock
Exchange and other leading securities exchanges. Headquartered in Baltimore,
Maryland, Alex. Brown has offices throughout the United States and, through
subsidiaries, maintains offices in London, England, Geneva, Switzerland and
Tokyo, Japan.
12
<PAGE>
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. 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 for the Class A Shares
for the fiscal year ended October 31, 1996, Alex. Brown received a fee equal
to .25% of the Class A Shares' average daily net assets.
As compensation for providing distribution and shareholder servicing for
the Class B Shares for the period from June 20, 1996 (commencement of
operations) through October 31, 1996, Alex. Brown received a distribution fee
equal to .75% (annualized) of the Class B Shares' average daily net assets
and a shareholder servicing fee equal to .25% (annualized) of the Class B
Shares' average daily net assets. The distribution fee is used to compensate
Alex. Brown for its services and expenses in distributing the Class B Shares.
The shareholder servicing fee is 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.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Investment Company Capital Corp., One South 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, 1996, ICC received
from the Fund a fee equal to .08% of the Fund's average daily net assets. (See
the Statement of Additional Information.)
PNC Bank, National Association, with offices at Airport Business Park, 200
Stevens Drive, Lester, Pennsylvania 19113, acts as custodian of the Fund's
assets.
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.
13
<PAGE>
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500
Stock Index, the Russell 2000 Index, the Dow Jones Industrial Average, and
the NASDAQ OTC Composite and OTC Industrial Indices. The Fund may also use
total return performance data as reported in national financial and industry
publications that monitor the performance of mutual funds such as Money
Magazine, Forbes, Business Week, Barron's, Investor's Daily, IBC/Donoghue's
Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund. 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.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on July 2, 1987 and is
authorized to issue 20 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 two other classes of
shares in addition to the shares offered hereby: "Flag Investors Emerging
Growth Fund Institutional Shares" and "Alex. Brown Capital Advisory & Trust
Emerging Growth Shares." Additional information concerning the Fund's other
classes of 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, the Fund at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
14
<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 419633
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, call 1-800-767-3524 to request 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 for each class of shares 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. 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
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
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>
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., as shown below, 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)
List the Account numbers of other Flag Investors Funds (except Class B Shares)
that you or your immediate family already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
A-1
<PAGE>
DISTRIBUTION OPTIONS
Please check 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
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] 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)
[ ] Quarterly ($250 minimum per class)
______________________________________________________________________________
Bank Name
______________________________________________________________________________
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
______________________________________________________________________________
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 per class.)
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
- --------------------------------------------------------------------------------
[The following information appears in a box]
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as required
by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct Social
Security Number or Tax ID Number and (2) I am not subject to any backup
withholding either because (a) I am exempt from backup withholding, or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above, I
have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I understand
that if I do not provide either number to the Transfer Agent within 60 days of
the date of this Application or if I fail to furnish my correct Social Security
Number or Tax ID Number, I may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please provide either
number on IRS Form W-9. You may request such form by calling the Transfer Agent
at 800-553-8080.)
[ ] Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes:___________________________________ Under penalties of perjury, I
certify that I am not a U.S. citizen or resident and I am an exempt foreign
person as defined by the Internal Revenue Service.
[end of box]
- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated March 1, 1997. 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.
- --------------------------------------------------------------------------------
[The following information appears in a box]
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
[end of box]
- --------------------------------------------------------------------------------
______________________________________________________________________________
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. __________________________
A-2
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Institutional Shares)
Cross Reference Sheet
February 26, 1997
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Heading
- --------------------------- -------------
<S> <C> <C>
Part A - Information Required in a Prospectus
- ------
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ................................... Fund Expenses
Item 3. Condensed Financial Information ................ Financial Highlights
Item 4. General Description of Registrant .............. Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund .......................... Management of the Fund;
Investment Advisor;
Distributor; Custodian,
Transfer Agent and
Accounting Services
Item 5A. Management's Discussion of Fund
Performance...................................... *
Item 6. Capital Stock and Other Securities .............. Cover Page; Dividends and
Taxes; General Information
Item 7. Purchase of Securities Being Offered ............ How to Invest in the
Institutional Shares;
Distributor
Item 8. Redemption or Repurchase ........................ How to Redeem Institutional
Shares
Item 9. Pending Legal Proceedings ..................... **
</TABLE>
- ----------------
* Information required by Item 5A is contained in Registrant's 1996 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<S> <C> <C>
Part B - Information Required in a Statement of Additional Information
- ------
Item 10. Cover Page ...................................... Cover Page
Item 11. Table of Contents ............................... Table of Contents
Item 12. General Information and History ................. General Information
and History
Item 13. Investment Objectives and Policies ............ Investment Objectives and
Policies
Item 14. Management of the Fund .......................... Management of the
Fund
Item 15. Control Persons and Principal Holders
of Securities ................................... Control Persons and
Principal Holders of
Securities
Item 16. Investment Advisory and Other Services ......... Investment Advisory
and Other Services;
Custodian, Transfer Agent
and Accounting Services;
Independent Accountants
Item 17. Brokerage Allocation ............................ Brokerage
Item 18. Capital Stock and Other Securities .............. Capital Shares; Semi-Annual
Reports
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ....................... Valuation of
Shares and Redemption
Item 20. Tax Status ...................................... Federal Tax Treatment of
Dividends and Distributions
Item 21. Underwriters .................................... Distribution of Fund
Shares
Item 22. Calculation of Performance Data ................. Performance Information
Item 23. Financial Statements ........................... Financial Statements
Part C - Other Information
- ------
Part C contains the information required by the items
contained therein under the items set forth in the form.
</TABLE>
<PAGE>
Supplement dated March 1, 1997
to Prospectus dated March 1, 1997 of
Flag Investors Emerging Growth Fund Institutional Shares
The prospectus dated March 1, 1997 of Flag Investors Emerging Growth Fund, Inc.
(the "Fund") is hereby amended and supplemented by the following:
The section entitled "Management of the Fund" is amended as follows:
A special meeting of shareholders, for the purpose of electing directors, has
been scheduled for March 7, 1997. Until such time, the Fund's directors are as
follows:
Truman T. Semans
Richard T. Hale
James J. Cunnane
John F. Kroeger
Louis E. Levy
Eugene J. McDonald
Two directors and all of the officers of the Fund are officers and employees of
the Distributor or the Advisor. The other directors have no affiliation with the
Distributor or the Advisor.
<PAGE>
LOGO
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Institutional Shares)
Prospectus & Application -- March 1, 1997
- -----------------------------------------------------------------------------
Flag Investors Emerging Growth Fund, Inc. (the "Fund") is a mutual fund seeking
long-term capital appreciation primarily through investment in a diversified
portfolio of small and mid-sized emerging growth companies.
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through Alex. Brown & Sons Incorporated or Participating Dealers and
may be purchased only by eligible institutions or by clients of investment
advisory affiliates of Alex. Brown. (See "How to Invest in Institutional
Shares.")
This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated March 1, 1997 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.
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.
TABLE OF CONTENTS
Fund Expenses ..................................................... 2
Financial Highlights .............................................. 2
Investment Program ................................................ 5
Investment Restrictions ........................................... 6
How to Invest in Institutional Shares ............................. 7
How to Redeem Institutional Shares ................................ 7
Telephone Transactions ............................................ 8
Dividends and Taxes ............................................... 8
Management of the Fund ............................................ 9
Investment Advisor ................................................ 10
Distributor ....................................................... 10
Custodian, Transfer Agent and Accounting
Services ........................................................ 10
Performance Information ........................................... 11
General Information ............................................... 11
Application ....................................................... A-1
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.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
[This page intentionally left blank]
<PAGE>
FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) .. None
Maximum Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) ................................................. None
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees ........................................................................... .85%
12b-1 Fees ................................................................................ None
Other Expenses ............................................................................ .39%
Total Fund Operating Expenses ............................................................. 1.24%
=====
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- --------- ----------- ----------- ------------
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: .................................... $13 $39 $68 $150
</TABLE>
The Example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly or indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor" and "Distributor.") The Expenses
and Example appearing in the table above have been restated to reflect
current, rather than historical, fees.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Fund has offered the Institutional Shares since November 2, 1995.
However, the Fund has offered Class A Shares since 1987. Historical financial
information about the Fund is not fully applicable to the Institutional
Shares because the expenses paid by the Fund in the past differ from those
the Institutional Shares will incur. (See "Fund Expenses.") Nevertheless,
historical information about the Fund may be useful to investors if they take
into account the differences in expenses. Accordingly, the financial
highlights included in this table are a part of the Fund's financial
statements for the periods indicated and have been audited by Coopers &
Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the periods ended October 31, 1996 and the report
thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information is contained in
the Fund's Annual Report for the fiscal year ended October 31, 1996, which
can be obtained at no charge by calling the Fund at (800) 767-FLAG.
1
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL
SHARES
------------------- ---------
FOR THE PERIOD FROM
NOVEMBER 2, 1995**
THROUGH
OCTOBER 31, 1996 1996
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.45 $ 17.09
------------------- ---------
Income from Investment Operations:
Expenses in excess of income (0.12) (0.15)
Net realized and unrealized gain/(loss) on investments 2.72 3.10
Effect of other capital share activity -- --
------------------- ---------
Total from Investment Operations 2.60 2.95
Less Distributions:
Distributions from net investment income and short-term
gains (0.30) (0.30)
Distributions from net realized long-term gains (0.60) (0.60)
------------------- ---------
Total distributions (0.90) (0.90)
------------------- ---------
Net asset value at end of period $ 19.15 $ 19.14
=================== =========
Total Return(1) 16.48% 18.19%
Ratios to Average Daily Net Assets:
Expenses 1.25%(2) 1.50%
Expenses in excess of income (0.61)%(2) (0.83)%
Supplemental Data:
Net assets at end of period (000) $19,751 $45,325
Portfolio turnover rate 24%(2) 24%
Average commissions per share(3) $ 0.07 $ 0.07
</TABLE>
- ------
* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Disclosure is required for fiscal years beginning on or after
September 1, 1995. Represents average commission rate per share charged to
the Fund on purchases and sales of investments during the period.
2
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, DECEMBER 30, 1987**
------------------------------------------------------------------------------------- THROUGH
1995 1994 1993 1992 1991 1990 1989 OCTOBER 31, 1988
--------- --------- --------- ---------- --------- ---------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$12.90 $14.02 $ 13.53 $15.23 $ 8.93 $ 14.90 $ 10.87 $ 10.00
------ ------ ------- ------ ------ -------- ------- --------
(0.09) (0.08) (0.08) (0.16) (0.10) (0.11) (0.05) 0.10
4.32 0.47 1.20 (1.54) 6.40 (4.00) 4.13 (0.88)
-- -- -- -- -- -- -- 1.65
------ ------ ------- ------ ------ -------- ------- --------
4.23 0.39 1.12 (1.70) 6.30 (4.11) 4.08 0.87
-- -- -- -- -- (1.86) (0.05) --
(0.04) (1.51) (0.63) -- -- -- -- --
------ ------ ------- ------ ------ -------- ------- --------
(0.04) (1.51) (0.63) -- -- (1.86) (0.05) --
------ ------ ------- ------ ------ -------- ------- --------
$17.09 $12.90 $ 14.02 $13.53 $15.23 $ 8.93 $ 14.90 $ 10.87
====== ====== ======= ====== ====== ======== ======= ========
32.92% 3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64% 8.80%
1.50% 1.50% 1.50% 1.46% 1.50% 1.50% 1.49% 1.47%(2)
(0.64)% (0.73)% (0.52)% (0.92)% (0.76)% (0.92)% (0.42)% 1.02%(2)
$38,127 $23,302 $28,867 $38,924 $48,656 $31,678 $44,396 $26,159
39% 86% 133% 69% 79% 82% 108% 110%
- -- -- -- -- -- -- -- --
</TABLE>
3
<PAGE>
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, 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.
The Fund's investment advisor (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.
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 rated in one of the three highest rating categories of
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") (or, if unrated, determined by the Advisor to be of equivalent
quality), 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.
In addition, for temporary defensive purposes, the Fund may, without limit,
hold money market instruments that are rated in the top two categories published
by Moody's or S&P or, if unrated, of comparable quality as determined by the
Advisor.
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
4
<PAGE>
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 creditworthy financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase the
securities at an established time and price. Default by or bankruptcy
proceedings with respect to the seller may, however, expose the Fund to
possible loss because of adverse market action or delay in connection with
the disposition of the underlying obligations.
2) Loans of Portfolio Securities. The Fund may also lend portfolio securities
to financial institutions in accordance with the investment restrictions
described in this Prospectus and the Statement of Additional Information.
The Fund lends portfolio securities only to those financial institutions
that are approved as creditworthy by the Fund's Board of Directors and
only against collateral consisting of cash or U.S. Government securities
with an aggregate value at all times equal to or greater than the value of
the securities loaned. The borrowers pay the Fund an amount equal to any
dividends or interest received on the securities they borrow. The Fund
retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower.
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 have 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.
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.
1) As a matter of fundamental policy, the Fund will not 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. This restriction may not be changed
without the affirmative vote of a majority of the outstanding shares.
2) Additionally, the Fund will not 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. This restriction
may be changed by a vote of the majority of the Board of Directors.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
5
<PAGE>
HOW TO INVEST IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of Alex.
Brown & Sons Incorporated ("Alex. Brown") may purchase Institutional Shares
through Alex. Brown, through any securities dealer which has entered into a
dealer agreement with Alex. Brown ("Participating Dealers"), or by completing
the Application Form attached to this Prospectus and returning it, together with
payment of the purchase price, as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000 except
that the minimum initial investment is $1,000,000 for qualified retirement
plans. There is no minimum for clients of investment advisory affiliates of
Alex. Brown or for subsequent investments. The Fund reserves the right to
suspend the sale of Institutional Shares at any time at the discretion of
Alex. Brown and the Advisor.
Orders for purchases of Institutional Shares are accepted on any day on
which the New York Stock Exchange is open for business (a "Business Day").
Purchase orders for Institutional Shares will be executed at a per share
purchase price equal to the net asset value next determined after receipt of
the purchase order. Purchases made through Alex. Brown or a Participating
Dealer must be in accordance with such entity's payment procedures. Alex.
Brown may, in its sole discretion, refuse to accept any purchase order.
The net asset value per share is determined 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 its share of the Fund's assets, deducting all liabilities
attributable to that class, and dividing the resulting amount by the number
of then outstanding shares of the class. For this purpose, portfolio secur-
ities are given their market value where feasible. If a portfolio security is
traded on a national exchange or on an automated dealer quotation system,
such as NASDAQ, on the valuation date, the last quoted sale price 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 will be valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors.
PURCHASES BY EXCHANGE
Shareholders of other Flag Investors funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined
on the same day, provided that the exchange request is received prior to 4:00
p.m. (Eastern Time), or the close of the New York Stock Exchange, whichever
is earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone on any Business Day between the
hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone Transactions"
below) or by regular or express mail at its address listed under "Custodian,
Transfer Agent and Accounting Services."
The Fund may modify or terminate this offer of exchange at any time on 60
days' prior written notice to shareholders.
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are
confirmed and credited to the shareholder's account on the Fund's books
maintained by the Transfer Agent. Shareholders will have the same rights and
ownership with respect to such shares as if certificates had been issued.
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at
its address listed under "Custodian, Transfer Agent and Accounting Services."
Shareholders may
6
<PAGE>
also redeem Institutional Shares by telephone (in amounts up to $500,000).
(See "Telephone Transactions" below.) A redemption order is effected at the
net asset value per share next determined after receipt of the order in
proper form. Redemption orders received after 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, will be effected
at the net asset value next determined on the following Business Day. Payment
for redeemed Institutional Shares will be made by wire transfer of funds to
the shareholder's bank, or to a Participating Dealer, as appropriate, upon
receipt of a duly authorized redemption request as promptly as feasible and,
under most circumstances within three Business Days upon receipt of a duly
authorized redemption request as promptly as feasible and, under most
circumstances, within three Business Days.
Dividends payable up to the date of redemption of Institutional Shares
will be paid on the next dividend payable date. If all of the Institutional
Shares in an account have been redeemed on a dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone 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 and 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 effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value as next determined on the following Business
Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. 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 express mail or facsimile. (See
"How to Invest in Institutional Shares -- Purchases by Exchange" and "How to
Redeem Institutional Shares.")
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income (consisting of dividend and interest income
and the excess, if any, of net short-term capital gains over net long-term
capital losses) in the form of annual dividends. The Fund anticipates that it
will distribute substantially all of its "net capital gain" income (the
excess of net long-term capital gains over net short-term capital losses) for
each taxable year as a capital gains distribution.
Unless the shareholder elects otherwise, all income dividends and net
capital gains distributions, if any, will be reinvested in additional
Institutional Shares at net asset value. Shareholders may elect to terminate
automatic reinvestment by giving written notice to the Transfer Agent (see
"Custodian, Transfer Agent and Accounting Services"), either directly or
through Alex. Brown or a Participating Dealer, at least five days before the
next date on which dividends or distributions will be paid.
7
<PAGE>
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will be taxed on the amounts so
distributed, regardless of whether such distributions are paid in cash or
reinvested in additional Institutional Shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time a shareholder has held the Institutional Shares. All other income
distributions are taxed to the shareholders as ordinary income. Corporate
shareholders may be entitled to the dividends received deduction on a portion
of dividends received from the Fund. Shareholders will be advised annually as
to the tax status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record of one year, but paid the following year, will be deemed
for tax purposes to have been received by the shareholders and paid by the Fund
in the year in which the dividends were declared.
The sale, exchange, or redemption of Institutional Shares is a taxable
event for the shareholder.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income (the excess of short and long-term capital gains
over short and long-term capital losses) prior to the end of each calendar
year to avoid liability for federal excise tax.
Shareholders are advised to consult their tax advisors concerning the
application of the rules described above to their particular circumstances
and the application of federal, state and local income taxes to investments
in the Fund.
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 distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers, to Alex. Brown 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:
Truman T. Semans Chairman Frederick L. Meserve, Jr. President
Charles W. Cole, Jr. 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 Scott J. Liotta Vice President
Louis E. Levy Director Sandra J. Doeller Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Edward J. Stoken Secretary
Carl W. Vogt Director Laurie D. Collidge Assistant
Secretary
8
<PAGE>
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or the
"Advisor"), is an indirect subsidiary of Alex. Brown Incorporated. Since the mid
1970's, Alex. Brown has provided services to and in respect of emerging growth
and later stage private companies in the United States, including research and
analysis, venture capital participation, investment banking and investment
advisory services. Subject to review by the Board of Directors and to any
limitations imposed by applicable law, the Fund may purchase securities of such
emerging growth companies. The Advisor is also the investment advisor to other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash Reserve
Fund, Inc., which funds had approximately $5.1 billion of assets as of December
31, 1996. The address of the Advisor is One South 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
Fund's average daily net assets. However, the actual amount of the fee is
contractually limited to an amount that would result in total expenses on
Class A Shares of no more than 1.50%. As compensation for its services for
the fiscal year ended October 31, 1996, the Advisor received from the Fund a
fee equal to .75% 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 and
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.
DISTRIBUTOR
- --------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202,
acts as distributor of each class of the Fund's shares. Alex. Brown is an
investment banking firm which offers a broad range of investment services to
individual, institutional, corporate and municipal clients. It is a wholly-owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and through
subsidiaries and affiliates in the investment business since 1800. Alex. Brown
is a member of the New York Stock Exchange and other leading securities
exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has offices
throughout the United States and, through subsidiaries, maintains offices in
London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown receives no
compensation for distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to
individuals and entities other than Fund shareholders.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp., One South 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, 1996, ICC received
from the Fund a fee equal to .08% of the Fund's average daily net assets. (See
the Statement of Additional Information.) ICC also serves as the Fund's
investment advisor.
PNC Bank, National Association, with offices at Airport Business Park,
200 Stevens Drive, Lester, Pennsylvania 19113, acts as custodian of the
Fund's assets.
9
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return over one, five and ten year periods or, if such
periods have not yet elapsed, shorter periods corresponding to the life of
the Fund. Such total return quotations will be computed by finding average
annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value according
to the required standardized calculation. The standardized calculation is
required by the SEC to provide consistency and comparability in investment
company advertising and is not equivalent to a yield calculation. If the Fund
compares its performance to other funds or to relevant indices, 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.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500
Stock Index, the Russell 2000 Index, the Dow Jones Industrial Average, and
the NASDAQ OTC Composite and OTC Industrial Indices. The Fund may also use
total return performance data as reported in national financial and industry
publications that monitor the performance of mutual funds such as Money
Magazine, Forbes, Business Week, Barron's, Investor's Daily, IBC/Donoghue's
Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Institutional Shares may be purchased, although not
included in calculations of performance, will reduce performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on July 2, 1987 and is
authorized to issue 20 million shares of capital stock, with a par value of
$.001 per share. Shares have equal rights with respect to voting. Voting
rights are not cumulative, so the holders of more than 50% of the outstanding
shares voting together for the election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share is entitled to its pro rata portion of
the Fund's assets after all debts and expenses have been paid.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
Emerging Growth Fund Institutional Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have three other classes of shares in addition to the shares offered hereby:
"Flag Investors Emerging Growth Fund Class A Shares", "Flag Investors
Emerging Growth Fund Class B Shares" and "Alex. Brown Capital Advisory and
Trust Emerging Growth Shares." Additional information concerning the Fund's
other classes of 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 Institutional Shares. All classes of the Fund share a common
investment objective, portfolio of investments and advisory fee, but the
classes may have different distribution fees or sales load structures and the
net asset value per share of classes may differ at times.
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.
10
<PAGE>
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants, Coopers & Lybrand
L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact the Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080
or a Participating Dealer, as appropriate.
11
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Emerging Growth Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
If you are paying by check, make check payable to "Flag Investors Emerging
Growth Fund, Inc." and mail with this Application. If you are paying by wire,
see instructions below.
- --------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Name on Account
________________________________________________________________________________
Name of Corporation, Trust or Partnership
________________________________________________________________________________
Tax ID Number
[ ] Corporation [ ] Partnership [ ] Trust
[ ] Non-Profit or Charitable Organization [ ] Other ________
If a Trust, please provide the following:
________________________________________________________________________________
Date of Trust For the Benefit of
________________________________________________________________________________
Name of Trustees (If to be included in the Registration)
Mailing Address
________________________________________________________________________________
Name of Individual to Receive Correspondence
________________________________________________________________________________
Street
________________________________________________________________________________
City State Zip
( )
_______________________________________________________________________________
Daytime Phone
- --------------------------------------------------------------------------------
INITIAL INVESTMENT
The minimum initial purchase for the Institutional Shares of the Fund is
$500,000, except that the minimum initial purchase is $1,000,000 for
qualified retirement plans. There is no minimum for clients of investment
advisory affiliates of Alex. Brown.
Indicate the amount to be invested and the method of payment:
__ A. By Mail: Enclosed is a check in the amount of $_____ payable to Flag
Investors Emerging Growth Fund, Inc.
__ B. By Wire: A bank wire in the amount of $____ has been sent
from __________________________ _________________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for
initial investment:
o Send completed Application by overnight carrier to Alex. Brown &
Sons Incorporated/Flag Investors Funds at the address listed
above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7528183
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Emerging Growth Fund, Inc. -- Institutional Shares
o "For further credit to ____________________________________."
(Investor's Fund Account Number)
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in cash
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, I do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank
account designated below.
- --------------------------------------------------------------------------------
BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)
Please attach a blank, voided check to provide account and bank routing
information.
_______________________________________________________________________________
Name of Bank Branch
_______________________________________________________________________________
Bank Address City/State/Zip
_______________________________________________________________________________
Name(s) on Account
_______________________________________________________________________________
Account Number A.B.A. Number
A-1
<PAGE>
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE
[The following information appears in a box.]
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Tax ID Number and (2) I am not subject to any backup withholding
either because (a) I am exempt from backup withholding, or (b) I have
not been notified by the Internal Revenue Service ("IRS") that I am
subject to backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
[ ] If no Tax ID Number has been provided above, I have applied, or intend
to apply, to the IRS for a Tax ID Number, and I understand that if I
do not provide such number to the Transfer Agent within 60 days of the
date of this Application or if I fail to furnish my correct Tax ID
Number, I may be subject to a penalty and a 31% backup withholding on
distributions and redemption proceeds. (Please provide your Tax ID
Number on IRS Form W-9. You may request such form by calling the
Transfer Agent at 800-553-8080.)
[ ] Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes:
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[end of box]
I have received a copy of the Fund's prospectus dated March 1, 1997. 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.
[The following information appears in a box.]
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
[end of box]
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
- --------------------------------------------------------------------------------
Person(s) Authorized to Conduct Transactions
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
- ------* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
______________________________________ _______________________________
Name/Title Signature Date
______________________________________ _______________________________
Name/Title Signature Date
______________________________________ _______________________________
Name/Title Signature Date
______________________________________ _______________________________
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
<PAGE>
- --------------------------------------------------------------------------------
Certificate of Authority
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)
I _________________, Secretary of the above-named investor, do hereby certify
that at a meeting on ___________, at which a quorum was present throughout, the
Board of Directors (Board of Trustees) of the investor duly adopted a resolution
which is in full force and effect and in accordance with the investor's charter
and by-laws, which resolution did the following: (1) empowered the
officers/trustees executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names and titles of
the officers of the investor and to notify ICC when changes in officers occur;
and (4) authorized the Secretary to certify that such a resolution has been duly
adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor:
This _____ day of __________, 199__ Secretary ______________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
_______________________________________________________________________________
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of this Certificate B and attach
it to the Application).
_______________________________________________________________________________
Signature and title Date
_______________________________________________________________________________
Signature and title Date
A-2
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(ABCAT Shares)
Cross Reference Sheet
February 26, 1997
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Heading
- --------------------------- -------------
<S> <C> <C>
Part A - Information Required in a Prospectus
- ------
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ................................... Fund Expenses
Item 3. Condensed Financial Information ................ Financial Highlights (with
respect to Flag Investors
Class A Shares and Flag
Investors Institutional Shares
only)
Item 4. General Description of Registrant .............. Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund .......................... Management of the Fund;
Investment Advisor;
Distributor; Custodian,
Transfer Agent and
Accounting Services
Item 5A. Management's Discussion of Fund
Performance...................................... *
Item 6. Capital Stock and Other Securities .............. Cover Page; Dividends and
Taxes; General Information
Item 7. Purchase of Securities Being Offered ............ How to Invest in the ABCAT
Shares; Distributor
Item 8. Redemption or Repurchase ........................ How to Redeem ABCAT
Shares
Item 9. Pending Legal Proceedings ..................... **
- ----------------
</TABLE>
* Information required by Item 5A will be contained in Registrant's Annual
Report to Shareholders containing results of operations of the ABCAT Shares,
when available.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<S> <C> <C>
Part B - Information Required in a Statement of Additional Information
- ------
Item 10. Cover Page ...................................... Cover Page
Item 11. Table of Contents ............................... Table of Contents
Item 12. General Information and History ................. General Information
and History
Item 13. Investment Objectives and Policies ............ Investment Objectives and
Policies
Item 14. Management of the Fund .......................... Management of the
Fund
Item 15. Control Persons and Principal Holders
of Securities ................................... Control Persons and
Principal Holders of
Securities
Item 16. Investment Advisory and Other Services ......... Investment Advisory
and Other Services;
Custodian, Transfer Agent
and Accounting Services;
Independent Accountants
Item 17. Brokerage Allocation ............................ Brokerage
Item 18. Capital Stock and Other Securities .............. Capital Shares; Semi-Annual
Reports
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ....................... Valuation of
Shares and Redemption
Item 20. Tax Status ...................................... Federal Tax Treatment of
Dividends and Distributions
Item 21. Underwriters .................................... Distribution of Fund
Shares
Item 22. Calculation of Performance Data ................. Performance Information
Item 23. Financial Statements ........................ Financial Statements (relating
to the Fund's other classes)
Part C - Other Information
- ------
Part C contains the information required by the items
contained therein under the items set forth in the form.
</TABLE>
<PAGE>
Supplement dated March 1, 1997
to Prospectus dated March 1, 1997 of
Alex. Brown Capital Advisory & Trust Emerging Growth Shares
The prospectus dated March 1, 1997 of Flag Investors Emerging Growth Fund, Inc.
(the "Fund") is hereby amended and supplemented by the following:
The section entitled "Management of the Fund" is amended as follows:
A special meeting of shareholders, for the purpose of electing directors, has
been scheduled for March 7, 1997. Until such time, the Fund's directors are as
follows:
Truman T. Semans
Richard T. Hale
James J. Cunnane
John F. Kroeger
Louis E. Levy
Eugene J. McDonald
Two directors and all of the officers of the Fund are officers and employees of
the Distributor or the Advisor. The other directors have no affiliation with the
Distributor or the Advisor.
<PAGE>
[This page intentionally left blank]
<PAGE>
LOGO
ALEX. BROWN CAPITAL ADVISORY & TRUST EMERGING GROWTH SHARES
(A Class of Flag Investors Emerging Growth Fund, Inc.)
Prospectus -- March 1, 1997
- -----------------------------------------------------------------------------
This mutual fund (the "Fund") seeks long-term capital appreciation. The Fund
will invest primarily through investment in a diversified portfolio of small and
mid-sized emerging growth companies.
Alex. Brown Capital Advisory & Trust Shares of the Fund ("ABCAT Shares") are
available solely for the discretionary accounts of Alex. Brown Capital Advisory
& Trust Company and its affiliates. (See "How to Invest in ABCAT Shares.")
This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated March 1, 1997 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 Alex.
Brown Capital Advisory & Trust Company.
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.
TABLE OF CONTENTS
Fund Expenses .............................. 1
Financial Highlights ....................... 1
Investment Program ......................... 4
Investment Restrictions .................... 5
How to Invest in ABCAT Shares .............. 6
How to Redeem ABCAT Shares ................. 6
Dividends and Taxes ........................ 6
Management of the Fund ..................... 7
Investment Advisor ......................... 8
Distributor ................................ 8
Custodian, Transfer Agent and Accounting
Services .................................. 8
Performance Information .................... 9
General Information ........................ 9
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES
- -------------------------------------------------------------------------------
Shareholder Transaction Expenses:
(as a percentage of offering price)
Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Maximum Deferred Sales Charge .......................... None
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees ........................................ .85%
12b-1 Fees ............................................. None
Other Expenses ......................................... .39%
Total Fund Operating Expenses .......................... 1.24%*
=====
- ----------
*Alex. Brown Capital Advisory & Trust Company intends to waive its advisory
fee at the account level for client assets invested in ABCAT Shares.
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ----------
<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: .......... $13 $39 $68 $150
</TABLE>
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. (For
more complete descriptions of the various costs and expenses, see "How to Invest
in ABCAT Shares," "Investment Advisor" and "Distributor.") The ABCAT Shares have
been offered only since January 10, 1997. Accordingly, the Expenses and Example
appearing in the table above are based on the Fund's expenses for the Flag
Investors Class A Shares, another class of shares offered by the Fund, less
12b-1 fees of .25%. The Expenses and Example have been restated to reflect
current, rather than historical, fees.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The Fund has offered the ABCAT Shares since January 10, 1997. However, the
Fund has offered Flag Investors Class A Shares since December 30, 1987 and Flag
Investors Institutional Shares since November 2, 1995. Historical financial
information about the Fund is not fully applicable to the ABCAT Shares because
the expenses paid by the Fund in the past differ from those the ABCAT Shares
will incur. (See "Fund Expenses.") Nevertheless, historical information about
the Fund may be useful to investors if they take into account the differences in
expenses. Accordingly, the financial highlights included in this table are a
part of the Fund's financial statements for the Flag Investors Class A Shares
and the Flag Investors Institutional 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 Fund's other classes for the fiscal
year ended October 31, 1996 and the report thereon of Coopers & Lybrand L.L.P.
are included in the Statement of Additional Information. Additional performance
information for the Fund's other classes is contained in the Fund's Annual
Report for the fiscal year ended October 31, 1996, which can be obtained at no
charge by calling the Fund at (800) 767-3524.
1
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------
(For a share outstanding throughout each period)+
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Flag Investors
Institutional Shares
-------------------- ---------
For the period
November 2, 1995*
through
October 31, 1996 1996
-------------------- ---------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.45 $ 17.09
---------- ----------
Income from Investment Operations:
Expenses in excess of income (0.12) (0.15)
Net realized and unrealized gain/(loss) on investments 2.72 3.10
Effect of other capital share activity -- --
---------- ----------
Total from Investment Operations 2.60 2.95
---------- ----------
Less Distributions:
Dividends from net investment income and short-term
gains (0.30) (0.30)
Distributions from net realized long-term gains (0.60) (0.60)
---------- ----------
Total distributions (0.90) (0.90)
---------- ----------
Net asset value at end of period $ 19.15 $ 19.14
========== ==========
Total Return** 16.48% 18.19%
Ratios to Average Daily Net Assets:
Expenses 1.25%(1) 1.50%
Expenses in excess of income (0.61)%(1) (0.83)%
Supplemental Data:
Net assets at end of period (000) $ 19,751 $45,325
Portfolio turnover rate 24%(1) 24%(1)
Average commissions per share(2) $ 0.07 $ 0.07
</TABLE>
- ------
+ Computed based upon average shares outstanding.
* Commencement of operations.
** Total return excludes the effect of sales charge.
(1) Annualized.
(2) Disclosure is required for fiscal years beginning on or after September
1, 1995. Represents average commission rate per share charged to the
Fund in purchases and sales of investments during the period.
2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Flag Investors Class A Shares
- -----------------------------------------------------------------------------------------------------------
For the period
For the Year Ended October 31, December 30, 1987*
- ------------------------------------------------------------------------------------- through
1995 1994 1993 1992 1991 1990 1989 October 31, 1988
---- ---- ---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90 $ 10.87 $ 10.00
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.09) (0.08) (0.08) (0.16) (0.10) (0.11) (0.05) 0.10
4.32 0.47 1.20 (1.54) 6.40 (4.00) 4.13 (0.88)
-- -- -- -- -- -- -- 1.65
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
4.23 0.39 1.12 (1.70) 6.30 (4.11) 4.08 0.87
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
-- -- -- -- -- (1.86) (0.05) --
---------- ---------
(0.04) (1.51) (0.63) -- -- -- -- --
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.04) (1.51) (0.63) -- -- (1.86) (0.05) --
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 17.09 $ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90 $ 10.87
========== ========== ========== ========== ========== ========== ========== ==========
32.92% 3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64% 8.80%
1.50% 1.50% 1.50% 1.46% 1.50% 1.50% 1.49% 1.47%(1)
(0.64)% (0.73)% (0.52)% (0.92)% (0.76)% (0.92)% (0.42)% 1.02%(1)
$ 38,127 $ 23,302 $ 28,867 $ 38,924 $ 48,656 $ 31,678 $ 44,396 $ 26,159
39% 86% 133% 69% 79% 82% 108% 110%
-- -- -- -- -- -- -- --
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
3
<PAGE>
INVESTMENT PROGRAM
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, 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.
The Fund's investment advisor (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.
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 rated in one of the three highest rating categories of Standard &
Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") (or,
if unrated, determined by the Advisor to be of equivalent quality), 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.
In addition, for temporary defensive purposes, the Fund may, without limit,
hold money market instruments that are rated in the top two categories published
by Moody's or S&P or, if unrated, are of comparable quality as determined by the
Advisor.
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
4
<PAGE>
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 creditworthy financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase the
securities at an established time and price. Default by or bankruptcy
proceedings with respect to the seller may, however, expose the Fund to
possible loss because of adverse market action or delay in connection with
the disposition of the underlying obligations.
2) Loans of Portfolio Securities. The Fund may also lend portfolio securities
to financial institutions in accordance with the investment restrictions
described in this Prospectus and the Statement of Additional Information.
The Fund lends portfolio securities only to those financial institutions
that are approved as creditworthy by the Fund's Board of Directors and
only against collateral consisting of cash or U.S. Government securities
with an aggregate value at all times equal to or greater than the value of
the securities loaned. The borrowers pay the Fund an amount equal to any
dividends or interest received on the securities they borrow. The Fund
retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower.
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 have 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.
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.
1) As a matter of fundamental policy, the Fund will not 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. This restriction may not be changed without the
affirmative vote of a majority of the outstanding shares.
2) Additionally, the Fund will not 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. This restriction
may be changed by a vote of the majority of the Board of Directors.
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
5
<PAGE>
HOW TO INVEST IN ABCAT SHARES
- -------------------------------------------------------------------------------
Alex. Brown Capital Advisory & Trust Company and its affiliates may acquire
ABCAT Shares on behalf of their discretionary accounts by placing orders with
the Fund's distributor (the "Distributor"). Beneficial ownership of ABCAT Shares
will be reflected on books maintained by Alex. Brown Capital Advisory & Trust
Company or an affiliate. There is no minimum for initial or subsequent
investments in ABCAT Shares.
It is the responsibility of Alex. Brown Capital Advisory & Trust Company and
its affiliates to transmit orders for ABCAT Share purchases and to deliver
required funds to the Distributor. Orders for purchases of ABCAT Shares are
accepted on any day on which the New York Stock Exchange is open for business (a
"Business Day"). Purchase orders for ABCAT Shares will be executed at a per
share purchase price equal to the net asset value next determined after receipt
of the purchase order and immediately available funds. The Fund reserves the
right to suspend the sale of ABCAT Shares at any time or reject any order.
The net asset value per share is determined 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 its
share of the Fund's assets, deducting all liabilities attributable to that
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 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 will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
In the interest of economy and convenience and because of the operating
procedures for the ABCAT Shares, certificates representing such shares will not
be issued. Beneficial owners of ABCAT Shares ("Shareholders") will have the same
rights and ownership with respect to such shares as if certificates had been
issued.
HOW TO REDEEM ABCAT SHARES
- -------------------------------------------------------------------------------
ABCAT Shares may be redeemed by, or at the direction of, Alex. Brown Capital
Advisory & Trust Company or an affiliate, as appropriate, on any Business Day by
transmission of a redemption order through the Distributor, or by regular or
express mail to the Fund's transfer agent (the "Transfer Agent") at its address
listed under "Custodian, Transfer Agent and Accounting Services." A redemption
order is effected at the net asset value per share next determined after receipt
of the order in proper form. Redemption orders received after 4:00 p.m. (Eastern
Time), or the close of the New York Stock Exchange, whichever is earlier, will
be effected at the net asset value next determined on the following Business
Day. Payment for redeemed ABCAT Shares will be made to, or at the direction of,
Alex. Brown Capital Advisory & Trust Company or an affiliate, as appropriate,
for the benefit of Shareholders. Payment will be made as promptly as feasible
and, under most circumstances, within three Business Days.
Dividends payable up to the date of the redemption of ABCAT Shares will be
paid on the next dividend payment date.
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 other arrangements are made, all income dividends and net capital
gains distributions, if any, will be reinvested in additional ABCAT Shares at
net asset value.
6
<PAGE>
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 ABCAT 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 ABCAT 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. The Fund will provide advice 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 ABCAT Shares is a taxable event for the
Shareholder.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income (the excess of short and long-term capital gains over
short and long-term capital losses) prior to the end of each calendar year to
avoid liability for federal excise tax.
Shareholders are advised to consult their tax advisors concerning the
application of the rules described above to their particular circumstances and
the application of federal, state and local income taxes to investments in the
Fund.
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 distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers, to the Distributor and to the Advisor. Three Directors and
all of the officers of the Fund are officers or employees of the Distributor or
the Advisor. The other Directors of the Fund have no affiliation with the
Distributor or the Advisor.
The Fund's Directors and officers are as follows:
Truman T. Semans Chairman Frederick L. Meserve, Jr. President
Charles W. Cole, Jr. 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 Sandra J. Doeller Vice President
Louis E. Levy Director Scott J. Liotta Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Edward J. Stoken Secretary
Carl W. Vogt Director Laurie D. Collidge Assistant
Secretary
7
<PAGE>
INVESTMENT ADVISOR
- -------------------------------------------------------------------------------
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or the
"Advisor"), is an indirect subsidiary of Alex. Brown Incorporated (described
below) and an affiliate of Alex. Brown Capital Advisory & Trust Company. Since
the mid 1970's, Alex. Brown Incorporated has provided services to and in respect
of emerging growth and later stage private companies in the United States,
including research and analysis, venture capital participation, investment
banking and investment advisory services. Subject to review by the Board of
Directors and to any limitations imposed by applicable law, the Fund may
purchase securities of such emerging growth companies. ICC is also the
investment advisor to other mutual funds in the Flag Investors family of funds
and Alex. Brown Cash Reserve Fund, Inc., which funds had approximately $5.1
billion of assets as of December 31, 1996. The address of ICC is One South
Street, Baltimore, Maryland 21202.
ICC 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
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 Flag
Investors Class A Shares of no more than 1.50%. As compensation for its services
for the fiscal year ended October 31, 1996, the Advisor received from the Fund a
fee equal to .75% 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 and
Accounting Services.")
PORTFOLIO MANAGER
Frederick L. Meserve, Jr., President of the Fund and a principal of Alex.
Brown & Sons Incorporated, 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.
DISTRIBUTOR
- -------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown"), One South Street, Baltimore,
Maryland 21202, acts as distributor of each class of the Fund's shares. Alex.
Brown is an investment banking firm which offers a broad range of investment
services to individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated, which has engaged directly
and through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the ABCAT Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to individuals
and entities other than Fund shareholders.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------
Investment Company Capital Corp., One South 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, 1996, ICC received
from the Fund a fee equal to .08% of the Fund's average daily net assets. (See
the Statement of Additional Information.)
PNC Bank, National Association, with offices at Airport Business Park,
200 Stevens Drive, Lester, Pennsylvania 19113, acts as custodian of the Fund's
assets.
8
<PAGE>
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return over one, five and ten year periods or, if such periods have
not yet elapsed, shorter periods corresponding to the life of the Fund. Such
total return quotations will be computed by finding average annual compounded
rates of return over such periods that would equate an assumed initial
investment of $1,000 to the ending redeemable value according to the required
standardized calculation. The standardized calculation is required by the SEC to
provide consistency and comparability in investment company advertising and is
not equivalent to a yield calculation. If the Fund compares its performance to
other funds or to relevant indices, 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.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500 Stock
Index, the Russell 2000 Index, the Dow Jones Industrial Average, and the NASDAQ
OTC Composite and OTC Industrial Indices. The Fund may also use total return
performance data as reported in national financial and industry publications
that monitor the performance of mutual funds such as Money Magazine, Forbes,
Business Week, Barron's, Investor's Daily, IBC/Donoghue's Money Fund Report and
The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of instruments held by the Fund,
operating expenses and market conditions.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Fund is an open-end diversified management investment company organized
under the laws of the State of Maryland on July 2, 1987 and is authorized to
issue 20 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 "Alex. Brown Capital Advisory &
Trust Emerging Growth Shares." The Board has no present intention of
establishing any additional series of the Fund but the Fund does have three
other classes of shares in addition to the shares offered hereby: "Flag
Investors Emerging Growth Fund Class A Shares," "Flag Investors Emerging Growth
Fund Class B Shares" and "Flag Investors Emerging Growth Fund Institutional
Shares." Additional information concerning the Fund's other classes of shares
may be obtained by calling Alex. Brown at (800) 767-3524. 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 ABCAT Shares. All classes
of the Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different distribution fees or sales load
structures and the net asset value per share of classes may differ at times.
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund retain
the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.
9
<PAGE>
REPORTS
The Fund furnishes semi-annual reports containing information about the Fund
and its operations, including a list of investments held in the Fund's portfolio
and financial statements. The annual financial statements are audited by the
Fund's independent accountants, Coopers & Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their ABCAT Shares should contact
their account manager at Alex. Brown Capital Advisory & Trust Company.
10
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------
FLAG INVESTORS EMERGING GROWTH FUND, INC.
One South 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, ONE SOUTH ST., BALTIMORE,
MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated: March 1, 1997
Relating to Prospectuses dated March 1, 1996 for:
Flag Investors Class A and Flag Investors Class B Shares
Flag Investors Institutional Shares
Alex. Brown Capital Advisory & Trust Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History........................ 1
2. Investment Objectives and Policies..................... 2
3. Valuation of Shares and Redemption..................... 4
4. Federal Tax Treatment of Dividends and
Distributions........................................ 5
5. Management of the Fund................................. 7
6. Investment Advisory and Other Services................. 13
7. Distribution of Fund Shares............................ 14
8. Brokerage.............................................. 18
9. Capital Shares......................................... 20
10. Semi-Annual Reports.................................... 21
11. Custodian, Transfer Agent and Accounting Services ..... 21
12. Independent Accountants................................ 22
13. Performance Information................................ 22
14. Control Persons and Principal Holders of
Securities........................................... 24
15. Financial Statements .................................. 25
<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 four classes
of shares: Flag Investors Emerging Growth Fund Class A Shares (the "Flag
Investors Class A Shares"), Flag Investors Emerging Growth Fund Class B Shares
(the "Flag Investors Class B Shares"), Flag Investors Emerging Growth Fund
Institutional Shares (the "Flag Investors Institutional Shares") and Alex. Brown
Capital Advisory & Trust Emerging Growth Shares (the "ABCAT Shares")
(collectively, the "Shares").
There are three separate prospectuses for the Fund's shares: one for the
Flag Investors Class A and Flag Investors Class B Shares, one for the Flag
Investors Institutional Shares and one for the ABCAT 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 (the "Distributor"), One South Street, Baltimore, Maryland 21202
(telephone: (800) 767-FLAG) or, with respect to each class except the ABCAT
Shares class, from Participating Dealers that offer such Shares to prospective
investors. Prospectuses for the Flag Investors Class A and Flag Investors 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
four 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 Flag Investors Class A Shares since its inception on
December 30, 1987, the Flag Investors Institutional Shares since November 2,
1995, the Flag Investors Class B Shares since June 20, 1996 and the ABCAT Shares
since January 10, 1997.
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
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<PAGE>
$500 million, the Fund will discontinue sales of Shares with the exception of
purchases made by pre-existing IRA accounts.
2. INVESTMENT OBJECTIVES AND POLICIES
Investment Objective and Policies of the Fund
The Fund's investment objective and its general investment policies are
described in the Prospectus. As stated in the Prospectus, the Fund's investment
objective is long-term capital appreciation. Realization of income is not a
significant investment consideration and any income realized on the Fund's
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 the Fund's investment advisor (the "Advisor"). The list of
approved banks and broker-dealers will be monitored regularly by the Advisor 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.
-2-
<PAGE>
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
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) 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 no 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) 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;
5) Purchase or sell commodities or commodities contracts;
6) 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;
7) Issue senior securities;
8) 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;
9) Effect short sales of securities;
10) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions); or
-3-
<PAGE>
11) 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) Invest in shares of any other investment company registered
under the Investment Company Act, except as a temporary investment in an
investment company that invests only in securities the Fund could
purchase directly for temporary investment, provided that the Fund will
pay any sales charges in connection with such purchases without
reduction to the sales charges on purchases of Shares, and provided
further, that the Fund shall acquire not more than 3% of the total
outstanding voting stock of such company, or invest more than 5% of the
Fund's assets in any one such company or 10% of the Fund's assets in all
such investment companies, and only as otherwise permitted by law. (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);
2) 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.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) on each
day on which the New York Stock Exchange is open for business (a "Business
Day"). 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.
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 Flag Investors Class A
and Flag Investors Class B Shares by check, Flag Investors Institutional Shares
by wire transfer of funds, and ABCAT Shares by transfer of funds by, or at the
direction of, Alex. Brown Capital Advisory & Trust Company or an affiliate, as
described in the Prospectus relating to each class of Shares. However, if the
Board of Directors
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<PAGE>
determines that it would be in the best interests of the remaining shareholders
of the Fund to make payment of the redemption price in whole or in part by a
distribution in kind of readily marketable securities from the portfolio of the
Fund in lieu of cash, in conformity with applicable rules of the SEC, the Fund
will redeem Shares by distributions in kind. If Shares are redeemed in kind, a
redeeming shareholder will incur brokerage costs when the assets are later
converted into cash. The valuation of portfolio securities, by the method
described under "Valuation of Shares," will be made as of the same time the
redemption price is determined. The Fund's ability to make payment of the
redemption price by distribution in kind is further limited because the Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following discussion of federal income tax consequences is based on
the Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund expects to be taxed as a regulated investment company ("RIC")
under Subchapter M of the Code. However, in order to qualify as a RIC for any
taxable year, the Fund must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from sale or other disposition of stock or securities or foreign currencies, and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"), and (2) derive less
than 30% of its gross income (exclusive of certain gains from the designated
hedging transactions that are offset by realized or unrealized losses on
offsetting positions) from gains on the sale or other disposition of any of the
following investments if such investments are held for less than three months
(the "Short-Short Gain Test"): (a) stock or securities (as defined in Section
2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies); and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities).
The Fund must also diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. government securities, securities of other
RICs, and other securities (so long as such other securities with respect to any
issuer do not constitute more than 5% of the total assets of the Fund or more
than 10% of the outstanding voting securities of such issuer), and (ii) not more
than 25% of the value of its total assets is invested in the securities (other
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.
-5-
<PAGE>
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and capital gains which it distributes to shareholders,
provided that it distributes at least 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gains
over net long-term capital losses) for the year (the "Distribution Requirement")
and complies with the other requirements of the Code described above.
Distributions of investment company taxable income made during the taxable year
or, under certain specified circumstances, within twelve months after the close
of the taxable year, will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if a RIC establishes to the satisfaction
of the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below).
Although the Fund intends to distribute substantially all of its net
investment income and capital gains for any taxable (i.e., fiscal) year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
The foregoing requirements of the Code may inhibit the Fund in its
efforts to achieve its investment objectives.
Fund Distributions
The Fund anticipates that it will distribute substantially all of its
investment company taxable income for each taxable year. Distributions of
investment company taxable income will be taxable to shareholders as ordinary
income, regardless of whether such distributions are paid in cash or are
invested in additional Shares.
The Fund also anticipates that it will distribute substantially all of
its "net capital gains" income (the excess of net long-term capital gains over
net short-term capital losses) for each taxable year as a capital gains
distribution. Such a distribution, whether paid in cash or reinvested in Shares,
is taxable to shareholders as long-term capital gains, regardless of the length
of time a shareholder has held Fund Shares or whether such gains were reflected
in the price paid for the Shares. The aggregate amount of distributions
designated by the Fund as capital gains distributions may not exceed the net
capital gains of the Fund for any taxable year, determined by excluding any net
capital losses or net long-term capital losses attributable to transactions
occurring after October 31 of such year and by treating any such losses as if
they arose on the first day of the following taxable year.
Shareholders who invest either distributions of investment company
taxable income or capital gains in additional Shares will generally be treated
as receiving a distribution in an amount equal to the fair market value,
determined as of the payment date, of the Shares received. Such shareholders
will have a cost basis in each Share received equal to the fair market value of
a Share of the Fund on the payment date.
Ordinary income dividends paid by the Fund to corporate shareholders
will be eligible for the 70% dividends received deduction to the extent of the
gross amount of qualified dividends received by the Fund for the year.
Generally, and subject to certain limitations, a dividend is a qualified
dividend if it is received from a domestic corporation. The Fund will provide a
statement annually to shareholders of the amount of dividends eligible for the
deduction. The dividends received deduction is not available for capital gains
distributions.
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
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<PAGE>
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, the Fund may in
certain circumstances be required to liquidate portfolio investments in order to
make sufficient distributions to avoid excise tax liability. The liquidation of
such investments in such circumstances may affect the ability of the Fund to
satisfy the Short-Short Gain Test.
Generally, gain or loss on the sale, exchange or redemption of a Share
will be capital gain or loss, which will be long-term capital gain or loss if
the Share is held for more than one year and otherwise will be short-term
capital gain or loss. However, if a shareholder realizes a loss on the sale,
exchange or redemption of a Share held for six months or less, such loss will be
treated as a long-term capital loss to the extent that any capital gains
distributions have been paid with respect to such Share (or any undistributed
net capital gains of the Fund with respect to such Share have been included in
determining the shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). 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 to the
-7-
<PAGE>
Fund's Advisor and Distributor. Three Directors and all of the officers of
the Fund, are officers or employees of the Advisor or the Distributor. The other
Directors of the Fund have no affiliation with the Advisor or the Distributor.
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 One South Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated and Director,
Investment Company Capital Corp. (registered investment advisor);
Formerly, Vice Chairman, Alex. Brown & Sons Incorporated.
*CHARLES W. COLE, JR., Director (11/11/35)+
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Chairman, Investment Company Capital Corp.
(registered investment advisor); Director, Provident Bankshares
Corporation and Provident Bank of Maryland; Formerly, President, Chief
Executive Officer, Chief Administrative Officer and Director, First
Maryland Bancorp, The First National Bank of Maryland and First Omni
Bank; Director, York Bank and Trust Company. +
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); Chartered Financial Analyst.
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).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); 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); Director, Central Carolina Bank & Trust
(banking), Key Funds (registered investment companies), and AMBAC
Treasurers Trust (registered investment companies).
-8-
<PAGE>
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103-7017; President and Chief Executive
Officer, The Pew Charitable Trusts; Director and Executive Vice
President, The Glenmede Trust Company; Formerly, Executive Director, The
Pew Charitable Trusts.
CARL W. VOGT, Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking); Formerly, Chairman National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak) and Member, Aviation System Capacity Advisory
Committee (Federal Aviation Administration).
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; Vice President, Armata
Financial Corp. (registered broker-dealer); Executive Vice President,
Investment Company Capital Corp. (registered investment advisor).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
CHARLES A. REID, Vice President (7/28/43)
Principal, Alex. Brown & Sons Incorporated, 1980-Present; Principal,
Alex. Brown Capital Advisory & Trust Company; General Partner, Baltimore
Street Capital III (growth companies investor).
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.
SCOTT J. LIOTTA, Vice President (3/18/65) +
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc.(registered investment companies), April 1994-July 1996;
and Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present; Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company Inc. (investments), 1980-August
1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April 1995-Present;
Formerly, Legal Advisor, Federated Investors (registered investment
advisor), 1991-1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present.
- --------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
+ Mr. Liotta is Mr. Cole's son-in-law.
-9-
<PAGE>
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by the Distributor or its affiliates. There are currently twelve
funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Semans serves as Chairman of five funds
and as a director of five other funds in the Fund Complex. Mr. Cole serves as
Chairman of one Fund and as a director of seven other funds in the Fund Complex.
Mr. Hale serves as President and director of one fund, as Chairman of three
funds and as a director of each of the other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as directors of each fund in the Fund
Complex. Ms. Rimel serves as a director of ten funds in the Fund Complex. Mr.
Vogt serves as a director of nine funds in the Fund Complex. Mr. Fearnow serves
as Vice President of ten funds in the Fund Complex. Mr. Veilleux serves as
Executive Vice President of one fund and as Vice President of eleven funds in
the Fund Complex. Mr. Liotta serves as Vice President, Mr. Finelli serves as
Treasurer, Mr. Stoken serves as Secretary and Ms. Collidge serves as Assistant
Secretary, respectively, of each of the funds in the Fund Complex.
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 the Advisor may be considered to have received remuneration
indirectly. As compensation for his or her 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 or her attendance at board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he or she
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, 1996, Non-Interested
Directors' fees attributable to the assets of the Fund totalled $1,136. The
following table shows aggregate compensation payable to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the year ended October
31, 1996.
-10-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund for Benefits Accrued as from the Fund and Fund
the Fiscal Year Ended Part of Fund Complex Payable to
October 31, 1996 Expenses Directors for the Fiscal
Year Ended
October 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Truman T. Semans, Chairman $0 $0 $0
*Charles W. Cole, Jr., Director**** $0 $0 $0
*W. James Price, Director*** $0 $0 $0
*Richard T. Hale, Director $0 $0 $0
James J. Cunnane, Director $355(1) + $39,000 for service on 12
Boards in the Fund Complex
N. Bruce Hannay, Director** $106(1) + $13,071 for service on 12
Boards in the Fund Complex
John F. Kroeger, Director $446(1) + $49,000 for service on 12
Boards in the Fund Complex
Louis E. Levy, Director $355(1) + $39,000 for service on 12
Boards in the Fund Complex
Eugene J. McDonald, Director $355(1) + $39,000 for service on 12
Boards in the Fund Complex
Rebecca W. Rimel, Director**** N/A + $39,000 for service on 6
Boards in the Fund Complex
Carl W. Vogt, Director**** N/A + $29,250 for service on 5
Boards in the Fund Complex
Harry Woolf, Director*** $355(1) + $39,000 for service on 12
Boards in the Fund Complex
</TABLE>
* Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
** Retired on January 31, 1996 and is now deceased.
*** Retired, effective December 31, 1996.
**** Not a Fund Director in the fiscal year ended October 31, 1996.
+ The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense allocated to the
Fund for the year ended October 31,1996 was approximately $1,837.
(1) Of amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and
Woolf, $196, $0, $0, $0, $196 and $196, respectively, was deferred
pursuant to a Deferred Compensation Plan.
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
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<PAGE>
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 the
Participant in his or her last year of service. Upon retirement, each
Participant will receive annually 10% of such fee for each year that he or she
served after completion of the first five years, up to a maximum annual benefit
of 50% of the fee earned by the Participant in his or her last year of service.
The fee will be paid quarterly, for life, by each Fund for which he or she
serves. The Retirement Plan is unfunded and unvested. Mr. Kroeger has qualified
but has not received benefits. The Fund has two Participants, a Director who
retired effective December 31, 1994 and a Director who retired effective
December 31, 1996, who have qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and each of whom will be paid a quarterly fee of $4,875 by the Fund
Complex for the rest of his life. Another Participant, who retired on January
31, 1996 and died on June 2, 1996 was paid fees of $8,090 by the Fund Complex
under the Retirement Plan in the fiscal year ended October 31, 1996. Such fees
are allocated to each fund in the Fund Complex based upon the relative net
assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service for each
Participant at December 31, 1996, are as follows: for Mr. Cunnane, 2 years; for
Mr. Kroeger, 14 years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms.
Rimel, 1 year; and for Mr. Vogt, 1 year.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<C> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
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, Levy, McDonald and Vogt and Ms.
Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select various Flag Investors and Alex. Brown Cash
Reserve 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 ten
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 applies to
the personal investing activities of all directors and officers of the Fund, as
well as to designated officers, directors and employees of the Advisor and Alex.
Brown. As described below, the Code of Ethics imposes significant restrictions
on the Advisor's investment personnel, including the portfolio managers and
employees who execute or help execute a portfolio
-12-
<PAGE>
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 covered employees of the Advisor,
certain directors or officers of the Distributor, and all Fund Directors who are
"interested persons", preclear 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 special 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.
Officers, directors and employees of the Advisor and the Distributor may comply
with codes of ethics instituted by those entities so long as they contain
similar requirements and restrictions.
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
the Advisor, which contract is described in greater detail below.
The Advisor
Investment Company Capital Corp. ("ICC" or the "Advisor") is a
wholly-owned subsidiary of Alex. Brown Financial Corporation and an indirect
subsidiary of Alex. Brown Incorporated.
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 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. ICC is
free to render similar services to others.
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
-13-
<PAGE>
contractually limited to an amount that would result in total expenses on Flag
Investors Class A Shares of no more than 1.50% of the Flag Investors Class A
Shares' average daily net assets.
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
30, 1996. 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,
1996, October 31, 1995 and October 31, 1994, ICC received fees from the Fund of
$381,086, $201,199 and $206,444, 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 & Sons Incorporated ("Alex. Brown" or the "Distributor")
serves as the distributor of each class of the Fund's Shares pursuant to four
separate Distribution Agreements, one for the Flag Investors Class A Shares, one
for the Flag Investors Class B Shares, one for the Flag Investors Institutional
Shares and one for the ABCAT Shares.
The Flag Investors Class A Shares and the Flag Investors Class B Shares
The Flag Investors Class A and the Flag Investors 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 Flag Investors Class A or Flag Investors 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 Flag Investors Class A or
Flag Investors Class B Shares. Alex. Brown has not undertaken to sell any
specific number of Flag Investors Class A or Flag Investors Class B Shares. The
Flag Investors Class A and the Flag Investors 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 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, pursuant to which such broker-dealers
have agreed to
-14-
<PAGE>
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 Flag Investors Class A Shares as described above, Alex. Brown
receives an annual fee, calculated and paid monthly, equal to .25% of the
average daily net assets of the Flag Investors 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, 1996, October 31, 1995 and October 31, 1994, Alex. Brown received from the
Fund $100,191, $74,639 and $60,719, respectively, in fees for distribution and
related administrative services for the Flag Investors Class A Shares. Alex.
Brown received no brokerage commissions from the Fund during these periods.
As compensation for providing distribution services for the Flag
Investors 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 Flag Investors 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. For the period from June 20, 1996
(commencement of offering of the Flag Investors Class B Shares) through October
31, 1996 , such fees totalled $765.
In addition, with respect to the Flag Investors Class B Shares, the Fund
will pay Alex. Brown a shareholder servicing fee at an annual rate equal to .25%
of the Flag Investors Class B Shares' average daily net assets. Alex. Brown
expects to allocate most of its shareholder servicing fee to its investment
representatives or to Participating Dealers. For the period from June 20, 1996
(commencement of offering of the Flag Investors Class B Shares) through October
31, 1996 , such fees totalled $255.
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 Flag Investors Class A Shares (the "Flag Investors
Class A Plan") and one for the Flag Investors Class B Shares (the "Flag
Investors 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 Flag Investors Class A and Flag
Investors Class B Distribution Agreements has an initial term of two years. The
Flag Investors Class A and Flag Investors 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.
The Flag Investors Class A Distribution Agreement, including the Plan of
Distribution was approved by the Fund's Board of Directors, including a majority
of the Non-Interested Directors initially on July 2, 1987 and most recently on
September 30, 1996. The Flag Investors Class B Distribution Agreement including
the Plan of Distribution was approved by the Fund's Board of Directors and by
the affirmative vote of a majority of the Non-Interested Directors initially on
September 22, 1994 and most recently on September 30, 1996.
-15-
<PAGE>
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 related Distribution Agreement without the approval of the shareholders of
the related class. The Plans may be terminated at any time and the Flag
Investors Class A and Flag Investors 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 be terminated in the same
manner at any time. Any Shareholder Servicing Agreement may be terminated at any
time, without penalty, upon 10 days' notice. The Flag Investors Class A and Flag
Investors 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 Agreement, to broker-dealers pursuant to Sub-Distribution
Agreements and to Shareholder Servicing Agents pursuant to Shareholder Servicing
Agreements described below. Such reports shall be made by the persons authorized
to make such payments. In addition, during the continuance of the 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.
In addition, with respect to the Flag Investors Class A or Flag
Investors 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.
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 Flag Investors Class A
Shares is less than .25% of the Flag Investors Class A Shares' average daily net
assets for any period or in connection with the sale of the Flag Investors Class
B Shares is less than .75% of the Flag Investors 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
return for payments received pursuant to the Plans in the fiscal years
-16-
<PAGE>
ended October 31, 1996, October 31, 1995 and October 31, 1994, Alex. Brown paid
the distribution related expenses of the related classes including one or more
of the following: printing and mailing of prospectuses to other than current
shareholders; compensation to dealers and sales personnel; and interest,
carrying, or other financing charges.
In the fiscal years ended October 31, 1996, October 31, 1995 and
October 31, 1994, Alex. Brown received sales commissions on the Flag Investors
Class A Shares of $210,390, $153,431 and $44,802 and from such amounts retained
$201,445, $106,239 and $37,546 for each such year, respectively.
In the period from June 20, 1996 through October 31, 1996, Alex. Brown
received contingent deferred sales charges on the Flag Investors Class B Shares
of $29,712 and retained all of this amount.
The Flag Investors Institutional Shares and the ABCAT Shares
The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement provide that Alex. Brown either directly or through other
broker-dealers has the exclusive right to distribute the related class of shares
and further provide that Alex. Brown will solicit and receive orders for the
purchase of Flag Investors Institutional or ABCAT Shares, as appropriate, 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, 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 related class of shares. Alex. Brown has not
undertaken to sell any specific number of Flag Investors Institutional or ABCAT
Shares. The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement 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. Alex. Brown is free to provide similar services to others.
Alex. Brown shall not be liable to the Fund or its shareholders for any act or
omission by Alex. Brown or any losses sustained by the Fund or its shareholders,
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
Alex. Brown receives no compensation for distributing the Flag
Investors Institutional Shares or the ABCAT Shares.
With respect to the Flag Investors 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. It is not currently
anticipated that Alex. Brown will enter into Sub-Distribution Agreements for the
ABCAT Shares.
The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement were approved by the Fund's Board of Directors on
September 25, 1995 and October 1, 1996, respectively. Each such Agreement 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. Each Agreement may
be terminated at any time upon sixty days' written notice, without penalty,
-17-
<PAGE>
by the vote of a majority of the Fund's Non-Interested Directors or by a vote of
a majority of the shares of the class (as defined under Capital Shares). The
Flag Investors Institutional Distribution Agreement, the ABCAT 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; all
taxes, including securities issuance and transfer taxes, and corporate fees
payable by the Fund to federal, state or other governmental agencies; the costs
and expenses of engraving or printing of certificates representing Shares; all
costs and expenses in connection with the maintenance of registration of the
Fund and its Shares with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs and
expenses of printing, including typesetting and distributing prospectuses and
statements of additional information of the Fund and supplements thereto to the
Fund's shareholders; all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Non-Interested Directors and Non-Interested Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and independent accountants, in connection with any
matter relating to the Fund; membership dues of industry associations; interest
payable on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and indemnification related thereto); and all
other charges and cost of the Fund's operation unless otherwise explicitly
assumed by Alex. Brown or ICC.
8. BROKERAGE
Purchases and sales of securities on a securities exchange are effected
through brokers who charge a commission for their services. These brokerage
commissions are subject to negotiation between ICC and the broker-dealer. ICC
may direct purchase and sale orders to any broker-dealer, including, to the
extent and in the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown serves as a principal.
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
-18-
<PAGE>
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
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, 1996, October 31, 1995 and
October 31, 1994, ICC directed $4,091,824, $25,120,072 and $11,425,223,
respectively of transactions to broker-dealers and paid $11,346, $12,495 and
$35,863, respectively to broker-dealers in related commissions because of
research services provided to ICC. 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, 1996, the Fund held a 5.45% repurchase agreement
issued by Goldman Sachs & Co. valued at $4,029,000. Goldman Sachs & Co. is a
"regular broker or dealer" of the Fund.
-19-
<PAGE>
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 20 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 four 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, Flag Investors Emerging
Growth Fund Institutional Shares and Alex. Brown Capital Advisory & Trust
Emerging Growth Shares. The Flag Investors Institutional Shares are offered only
to certain eligible institutions and to clients of investment advisory
affiliates of Alex. Brown. The ABCAT Shares are offered only to clients of Alex.
Brown Capital Advisory & Trust Company and its affiliates. 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 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. 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.
-20-
<PAGE>
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
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.,
One South 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, 1996, such fees totalled $36,629.
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.
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, 1996, ICC received fees of $41,911.
-21-
<PAGE>
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 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 for
the Flag Investors Class A Shares, the maximum sales load (4.5%) 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. In calculating
performance for the Flag Investors Class B Shares, the applicable contingent
deferred sales charge (4.0% for the one-year period, 2.0% for the five-year
period and no sales charge thereafter) is deducted from the ending redeemable
value 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 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
-22-
<PAGE>
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. 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, 1996, the ending redeemable value of a hypothetical $1,000 payment
for Flag Investors Class A Shares was $1,146, resulting in a total return for
such Shares equal to 14.60%. For the five year period ended September 30, 1996,
the ending redeemable value of a hypothetical $1,000 payment for Flag Investors
Class A Shares was $1,652, resulting in an average annual total return for such
Shares equal to 10.56%. 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, 1996, the ending redeemable value of a
hypothetical $1,000 payment for Flag Investors Class A Shares was $2,401,
resulting in an average annual total return for such Shares equal to 11.14%.
Calculated according to the SEC rules, for the period from November 2,
1995 (commencement of operations of Flag Investors Institutional Shares) through
September 30, 1996, the ending redeemable value of a hypothetical $1,000 payment
for Flag Investors Institutional Shares was $1,224, resulting in an aggregate
total return for such Shares equal to 22.4%.
Calculated according to the SEC rules, for the period from June 20,
1996 (commencement of operations of Flag Investors Class B Shares) through
September 30, 1996, the ending redeemable value of a hypothetical $1,000 payment
for Flag Investors Class B Shares was $1,007, resulting in an aggregate total
return for such Shares equal to 0.68%.
Calculated according to the alternative computation for the one year
period ended October 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Flag Investors Class A Shares was $11,819, resulting in a
total return equal to 18.19%. For the five year period ended October 31, 1996,
the ending redeemable value of a hypothetical $10,000 investment in Flag
Investors Class A Shares was $15,686, resulting in an average annual total
return equal to 9.42%. 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, 1996, the ending redeemable value of a hypothetical $10,000
investment in the Flag Investors Class A Shares was $23,880, resulting in an
average annual total return equal to 10.94%.
Calculated according to the alternative computation for the period from
November 2, 1995 (commencement of operations of Flag Investors Institutional
Shares) through October 31, 1996, the ending
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<PAGE>
redeemable value of a hypothetical $10,000 investment in Flag Investors
Institutional Shares was $11,621, resulting in an aggregate total return for
such Shares equal to 16.21%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from June
20, 1996 (commencement of operations of Flag Investors Class B Shares) through
October 31, 1996, the ending redeemable value of a hypothetical $10,000
investment in Flag Investors Class B Shares was $9,932, resulting in an
aggregate total return for such Shares equal to (0.68)%.
The ABCAT Shares were not offered in any period ended October 31, 1996.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding securities with maturities of one
year or less) may vary from year to year, as well as within a year, depending on
market conditions. For the fiscal years ended October 31, 1996 and October 31,
1995, the Fund's portfolio turnover rate was 24% and 39%, 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
To Fund management's knowledge, the following persons owned of record
or beneficially 5% or more of the Fund's outstanding Shares as of January 31,
1996:
Name & Address % Ownership
-------------- -----------
T. Rowe Price 11.32%*
Trustee for Alex. Brown & Sons Incorporated
Plan 100460
Flag Investors Emerging Growth
ATTN: ASSET RECON
P.O. Box 17215
Baltimore, MD 21203-7215
Lauer & Co Cust 22.43%
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market Street, Suite 1200
Philadelphia, PA 19103-7301
* As of such date, to Fund management's knowledge, Alex.
Brown & Sons Incorporated owned beneficially less than 5%
of such shares.
To Fund management's knowledge, the Directors and officers of the Fund
as a group (15 persons) beneficially owned approximately 1.7% of the Fund's
total outstanding shares, as of January 31, 1996.
-24-
<PAGE>
15. FINANCIAL STATEMENTS
See next page.
-25-
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
COMMON STOCK -- 94.2%
Business Services--15.4%
<S> <C> <C> <C>
100,350 Cidco, Inc.* $ 1,894,106 2.9%
29,150 Corporate Express, Inc.* 951,019 1.4
70,150 Energy Biosystems Corp.* 473,512 0.7
78,150 Manugistics Group, Inc.* 3,360,450 5.1
84,450 QuickResponse Services, Inc.* 3,135,206 4.8
15,750 Wilmar Industries, Inc.* 338,625 0.5
----------- ----
10,152,918 15.4
----------- ----
Capital Goods--2.1%
67,425 Itron, Inc.* 1,120,941 1.7
25,400 Xeikon N.V. ADR* 238,125 0.4
----------- ----
1,359,066 2.1
----------- ----
Consumer Services--21.1%
35,925 Apollo Group, Inc.* 987,937 1.5
128,550 Apple South, Inc. 1,510,462 2.3
220,643 Buffets, Inc.* 2,454,653 3.7
120,575 O'Charleys, Inc.* 1,356,469 2.1
117,062 Pacific Sunwear of California* 2,604,629 4.0
26,150 Papa John's International, Inc.* 1,300,963 2.0
54,800 PETsMART, Inc.* 1,479,600 2.2
40,750 Starbucks Corp.* 1,324,375 2.0
20,550 Sylvan Learning Systems, Inc.* 868,238 1.3
----------- ----
13,887,326 21.1
----------- ----
Financial Services--2.4%
33,900 First Investors Corp.* 347,475 0.5
49,325 PXRE Corp. 1,220,794 1.9
----------- ----
1,568,269 2.4
----------- ----
Health Care Services--12.1%
32,300 Access Health, Inc.* 1,065,900 1.6
86,675 Genesis Health Ventures, Inc.* 1,982,691 3.0
43,275 PhyCor, Inc.* 1,341,525 2.0
78,950 Physician Sales and Service, Inc.* 1,677,688 2.5
61,475 Vivra, Inc.* 1,959,516 3.0
----------- ----
8,027,320 12.1
----------- ----
</TABLE>
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<PAGE>
Flag Investors Emerging Growth Fund
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
COMMON STOCK -- concluded
Health Equipment and Services--2.1%
<S> <C> <C> <C>
40,400 Perclose, Inc.* $ 666,600 1.0%
18,950 Target Therapeutics, Inc.* 701,150 1.1
----------- ----
1,367,750 2.1
----------- ----
Media/Communications--1.1%
9,732 Clear Channel Communications, Inc.* 710,436 1.1
----------- ----
Technology--Software/Services--17.4%
28,150 EPIC Design Technology, Inc.* 689,675 1.0
81,925 Integrated Systems, Inc.* 2,211,975 3.4
112,500 Marcam Corp.* 1,378,125 2.1
17,400 Parametric Technology Co.* 850,425 1.3
98,500 Progress Software Corp.* 1,539,063 2.3
67,275 Synopsys, Inc.* 3,027,375 4.6
108,325 XcelleNet, Inc.* 1,760,281 2.7
----------- ----
11,456,919 17.4
----------- ----
Technology--Systems/Semiconductor--15.7%
49,385 Atmel Corp.* 1,253,144 1.9
83,250 Level One Communications, Inc.* 2,351,812 3.6
26,600 Maxim Integrated Products, Inc.* 931,000 1.4
30,350 QUALCOMM, Inc.* 1,206,413 1.8
13,650 Security Dynamics Technologies, Inc.* 1,109,063 1.7
80,975 Sipex Corp.* 2,135,716 3.3
40,650 Xilinx, Inc.* 1,331,288 2.0
----------- ----
10,318,436 15.7
----------- ----
Transportation--4.8%
64,075 Atlantic Coast Airlines, Inc.* 672,787 1.0
91,200 Fritz Companies, Inc.* 1,459,200 2.2
122,500 Great Lakes Aviation Ltd.* 352,187 0.5
80,875 Landair Services, Inc.* 707,656 1.1
----------- ----
3,191,830 4.8
----------- ----
Total Common Stock
(Cost $45,954,052) 62,040,270 94.2
----------- ----
</TABLE>
-27-
<PAGE>
Flag Investors Emerging Growth Fund
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security (Note 1) Net Assets
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--6.1%
<S> <C> <C> <C>
$4,029 Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased
on 11/1/96, collateralized by U.S.
Treasury Bonds with a market value
of $4,109,879.
(Cost 4,029,000) $ 4,029,000 6.1%
----------- -----
Total Investment in Securities
(Cost $49,983,052)** 66,069,270 100.3
Liabilities in Excess of Other Assets, Net (221,212) (0.3)
----------- -----
Net Assets $65,848,058 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($45,324,973 / 2,367,961 shares outstanding) $19.14
======
Class B Share
($772,495 / 40,442 shares outstanding) $19.10
======
Institutional Share
($19,750,590 / 1,031,427 shares outstanding) $19.15
======
Maximum Offering Price Per:
Class A Share
($19.14 / .955) $20.04
======
Class B Share $19.10
======
Institutional Share $19.15
======
</TABLE>
- -----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $50,119,496.
See Notes to Financial Statements.
-28-
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
October 31,
- -------------------------------------------------------------------------------------------
1996
<S> <C>
Investment Income (Note 1):
Interest $ 292,171
Dividends 32,827
Other income 12,622
----------
Total income 337,620
----------
Expenses:
Investment advisory fee (Note 2) 381,086
Distribution fee (Note 2) 101,211
Accounting fee (Note 2) 41,911
Audit 41,623
Printing and postage 40,249
Legal 39,913
Transfer agent fee (Note 2) 36,629
Registration fees 35,952
Custodian fee 14,067
Miscellaneous 6,060
Directors' fees 1,136
----------
Total expenses 739,837
----------
Expenses in excess of income (402,217)
----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 3,148,580
Change in unrealized appreciation or depreciation of investments 4,422,457
----------
Net gain on investments 7,571,037
----------
Net increase in net assets resulting from operations $7,168,820
==========
</TABLE>
See Notes to Financial Statements.
-29-
<PAGE>
Flag Investors Emerging Growth Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of income $ (402,217) $ (190,378)
Net realized gain from security transactions 3,148,580 2,180,561
Change in unrealized appreciation or
depreciation of investments 4,422,457 6,850,511
----------- -----------
Net increase in net assets resulting
from operations 7,168,820 8,840,694
----------- -----------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares (614,007) --
Institutional Shares (60,009) --
Net realized long-term gains:
Class A Shares (1,228,016) (73,772)
Institutional Shares (120,017) --
----------- -----------
Total distributions (2,022,049) (73,772)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 34,395,004 10,561,629
Value of shares issued in
reinvestment of dividends 1,913,272 68,962
Cost of shares repurchased (13,733,625) (4,572,632)
----------- -----------
Increase in net assets derived from capital
share transactions 22,574,651 6,057,959
----------- -----------
Total increase in net assets 27,721,422 14,824,881
Net Assets:
Beginning of year 38,126,636 23,301,755
----------- -----------
End of year $65,848,058 $38,126,636
=========== ===========
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)(1)
<TABLE>
<CAPTION>
For the Year Ended
October 31, For the Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 17.09 $ 12.90 $ 14.02 $ 13.53 $ 15.23
------- ------- ------- ------- -------
Income from Investment Operations:
Expenses in excess of income (0.15) (0.09) (0.08) (0.08) (0.16)
Net realized and unrealized gain/(loss) on investments 3.10 4.32 0.47 1.20 (1.54)
------- ------- ------- ------- -------
Total from Investment Operations 2.95 4.23 0.39 1.12 (1.70)
Less Distributions:
Distributions from net realized short-term gains (0.30) -- -- -- --
Distributions from net realized long-term gains (0.60) (0.04) (1.51) (0.63) --
------- ------- ------- ------- -------
Total distributions (0.90) (0.04) (1.51) (0.63) --
------- ------- ------- ------- -------
Net asset value at end of year $ 19.14 $ 17.09 $ 12.90 $ 14.02 $ 13.53
======= ======= ======= ======= =======
Total Return(2) 18.19% 32.92% 3.75% 8.33% (11.16)%
Ratios to Average Daily Net Assets:
Expenses 1.50% 1.50% 1.50% 1.50% 1.46%
Expenses in excess of income (0.83)% (0.64)% (0.73)% (0.52)% (0.92)%
Supplemental Data:
Net assets at end of year (000) $45,325 $38,127 $23,302 $28,867 $38,924
Portfolio turnover rate 24% 39% 86% 133% 69%
Average commissions per share $ 0.07(3) -- -- -- --
</TABLE>
- ------------------
(1) Computed based on average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
-31-
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights--Class B Shares
(For a share outstanding throughout the period)(1)
For the Period
June 20, 1996(2) through
October 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $19.22
------
Income from Investment
Operations:
Expenses in excess of income (0.12)
Net realized and unrealized gain/(loss) on investments --
------
Total from Investment Operations (0.12)
Less Distributions:
Distributions from net realized short-term gains --
Distributions from net realized long-term gains --
------
Total distributions --
------
Net asset value at end of period $19.10
======
Total Return(3) (0.62)%
Ratios to Average Daily Net Assets:
Expenses(4) 2.25%
Expenses in excess of income(4) (1.67)%
Supplemental Data:
Net assets at end of period (000) $ 772
Portfolio turnover rate(4) 24%
Average commissions per share $ 0.07(5)
- ----------------
(1) Computed based on average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
-32-
<PAGE>
Flag Investors Emerging Growth Fund
Financial Highlights --Institutional Shares
(For a share outstanding throughout the period)(1)
For the Period
November 2, 1995(2)
through October 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $ 17.45
-------
Income from Investment Operations:
Expenses in excess of income (0.12)
Net realized and unrealized gain/(loss) on investments 2.72
-------
Total from Investment Operations 2.60
Less Distributions:
Distributions from net realized short-term gains (0.30)
Distributions from net realized long-term gains (0.60)
-------
Total distributions (0.90)
-------
Net asset value at end of period $ 19.15
=======
Total Return(3) 16.48%
Ratios to Average Daily Net Assets:
Expenses(4) 1.25%
Expenses in excess of income(4) (0.61)%
Supplemental Data:
Net assets at end of period (000) $19,751
Portfolio turnover rate(4) 24%
Average commissions per share $ 0.07(5)
- ------------
(1) Computed based on average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
-33-
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Emerging Growth Fund, Inc. (the "Fund") was organized as a
Maryland Corporation on July 2, 1987 and commenced operations on December 30,
1987, consisting of Class A Shares, which are subject to a maximum front-end
sales charge of 4.50% and a 0.25% distribution fee. On November 2, 1995, the
Fund began offering Institutional Shares, which are not subject to a front-end
sales charge or distribution fee. On June 20, 1996, the Fund began offering
Class B Shares, which are subject to a maximum contingent deferred sales charge
of 4.00%, a 0.75% distribution fee and a 0.25% shareholder servicing fee. The
Fund is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
A. Security Valuation--Portfolio securities that are primarily traded on a
recognized U.S. securities exchange are valued on the basis of their
last sale price. In the event that there are no sales or the security is
not listed, it is valued at the average between the last reported bid
and asked prices or at the fair value as determined by the Investment
Advisor under procedures established and monitored by the Board of
Directors. Short-term obligations with maturities of 60 days or less are
valued at amortized cost.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The
agreement ensures that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default. If the
counterparty defaults and the value of the collateral declines or if the
counterparty enters into an insolvency proceeding, realization of the
collateral by the Fund may be delayed or limited.
C. Federal Income Tax--No provision is made for federal income taxes as it
is the Fund's intention to continue to qualify as a regulated
investment
-34-
<PAGE>
Flag Investors Emerging Growth Fund
NOTE 1--concluded
company and to make requisite distributions to shareholders that will be
sufficient to relieve it from all or substantially all federal income
and excise taxes. The Fund's policy is to annually distribute to
shareholders substantially all of its taxable net investment income and
net realized long-term capital gains, if any.
Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles.
Accordingly, periodic reclassifications are made within the Fund's
capital accounts to reflect income and gains available for distribution
under income tax regulations.
D. Other--Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed in kind is determined by use of the
specific identification method for both financial reporting and income
tax purposes. Interest income is recorded on an accrual basis. Dividend
income is recorded on the ex-dividend date.
NOTE 2--Investment Advisory Fee, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor. The Advisory Agreement
provides for a maximum annual fee equal to .85% of the Fund's average daily net
assets. However, the actual amount of the fee is contractually limited to an
amount that would result in total expenses on Class A Shares of no more than
1.50%. As compensation for its services for the fiscal year ended October 31,
1996, the Advisor received $381,086 in fees, which was equivalent to .75% of the
Fund's average daily net assets.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $36,629 for
transfer agent services for the year ended October 31, 1996.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $41,911 for accounting services for the year ended October
31, 1996.
-35-
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements (continued)
NOTE 2--concluded
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated receives from the Fund an annual fee, calculated daily and paid
monthly, at an annual rate equal to .25% of the Class A Shares' average daily
net assets, .75% of the Class B Shares' average daily net assets plus an
additional .25% shareholder servicing fee for the Class B Shares. For the year
ended October 31, 1996, distribution fees were $101,211, of which $100,191 were
allocated to Class A Shares and $1,020 were allocated to Class B Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $1,837, and the accrued liability was approximately $4,689.
NOTE 3--Capital Share Transactions
At October 31, 1996, the Fund was authorized to issue up to 15 million
shares of $.001 par value common stock (8 million Class A, 1 million Class B, 5
million Institutional and 1 million undesignated). Transactions in shares of the
Fund were as follows:
Class A Shares
---------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
Shares sold 706,114 735,343
Shares issued to shareholders on
reinvestment of dividends 106,529 5,714
Shares redeemed (675,793) (316,169)
------------ -----------
Net increase in shares outstanding 136,850 424,888
============ ===========
Proceeds from sale of shares $ 13,138,521 $10,561,629
Value of reinvested dividends 1,733,222 68,962
Cost of shares redeemed (11,827,481) (4,572,632)
------------ -----------
Net increase from capital share
transactions $ 3,044,262 $ 6,057,959
============ ===========
-36-
<PAGE>
Flag Investors Emerging Growth Fund
NOTE 3--concluded
Class B Shares
-----------------
For the Period
June 20, 1996* to
October 31, 1996
-----------------
Shares sold 40,579
Shares issued to shareholders on
reinvestment of dividends --
Shares redeemed (137)
--------
Net increase in shares outstanding 40,442
========
Proceeds from sale of shares $779,667
Value of reinvested dividends --
Cost of shares redeemed (2,766)
--------
Net increase from capital share
transactions $776,901
========
Institutional Shares
--------------------
For the Period
November 2, 1995* to
October 31, 1996
--------------------
Shares sold 1,127,123
Shares issued to shareholders on
reinvestment of dividends 11,073
Shares redeemed (106,769)
-----------
Net increase in shares outstanding 1,031,427
===========
Proceeds from sale of shares $20,476,816
Value of reinvested dividends 180,050
Cost of shares redeemed (1,903,378)
-----------
Net increase from capital share
transactions $18,753,488
===========
- -----------
*Commencement of operations.
-37-
<PAGE>
Flag Investors Emerging Growth Fund
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term
obligations, aggregated $31,474,614 and $10,747,940, respectively, for the year
ended October 31, 1996.
At October 31, 1996, net unrealized appreciation for all securities in
which there is an excess of value over tax cost was $15,949,774, of which
$19,803,268 related to appreciated securities and $3,853,494 related to
depreciated securities.
NOTE 5--Net Assets
At October 31, 1996, net assets consisted of:
Paid-in capital $47,163,090
Accumulated net realized gain from security transactions 2,598,751
Unrealized appreciation of investments 16,086,217
-----------
$65,848,058
===========
NOTE 6--Tax Information (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1996.
Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
- -------- -------- -------- -------------
11/21/96 11/29/96 $0.30 $0.60
-38-
<PAGE>
Flag Investors Emerging Growth Fund
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Emerging Growth Fund, Inc. as of October 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Emerging Growth Fund, Inc. as of October 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
December 2, 1996
-39-
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
List all financial statements and exhibits filed as part of the
Registration Statement.
(a) Financial statements:
(1) Included in Part A of the Registration Statement:
- Financial Highlights for the Flag Investors Class A
Shares for the fiscal years ended October 31, 1996,
October 31, 1995, October 31, 1994, October 31, 1993,
October 31, 1992, October 31, 1991, October 31, 1990
and October 31, 1989 and for the period from December
30, 1987 (commencement of operations) through October
31, 1988
- Financial Highlights for the Flag Investors
Institutional Shares for the period from November 2,
1995 (commencement of operations) through October 31,
1996
(2) Included in Part B of the Registration Statement:
- Statement of Net Assets as of October 31, 1996
- Statement of Operations for the fiscal year ended
October 31, 1996
- Statement of Changes in Net Assets for the fiscal
years ended October 31, 1996 and October 31, 1995
- Financial Highlights for the fiscal years ended
October 31, 1996, October 31, 1995, October 31, 1994,
October 31, 1993, October 31, 1992 and October 31,
1991
- Notes to the Financial Statements
- Report of Independent Accountants
(3) All required financial statements are included in Parts A and
B of the Registration Statement. All other financial
statements and schedules are inapplicable.
(b) Exhibits:
(1) (a)(1) Registrant's Articles of Incorporation.
(b)(1) Registrant's Articles of Amendment.
(c)(1) Registrant's Articles Supplementary.
(d)(3) Registrant's Articles Supplementary.
C-1
<PAGE>
(e) Registrant's Articles Supplementary with respect to
creation of ABCAT Shares Class, filed herewith.
(2) Registrant's By-Laws as amended through December 18,
1996, filed herewith.
(3) None.
(4)(2) Registrant's Specimen Security with respect to Flag
Investors Shares.
(5)(1) Registrant's Investment Advisory Agreement between
Registrant and Investment Company Capital Corp.
(6) (a)(1) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors
Emerging Growth Fund Class A Shares.
(b) Registrant's Form of Sub-Distribution
Agreement between Alex. Brown & Sons
Incorporated and Participating Dealers, filed
herewith.
(c)(1) Registrant's Shareholder Servicing Agreement
between Registrant and Shareholder Servicing
Agents.
(d)(3) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors
Emerging Growth Fund Institutional Shares.
(e)(4) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors
Emerging Growth Fund Class B Shares.
(f) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Alex. Brown
Capital Advisory & Trust Emerging Growth
Shares, filed herewith.
(7) None.
(8)(1) Custodian Agreement between Registrant and Provident
National Bank, as in effect from February 1, 1991.
(9)(1) Master Services Agreement between Registrant and
Investment Company Capital Corp. with Appendices for
the provision of Transfer Agency and Accounting
Services.
(10)(1) Opinion of Counsel.
(11) Consent of Coopers & Lybrand L.L.P., filed herewith.
(12) None.
(13)(1) Subscription Agreements between Registrant and
Investors.
(14) None.
(15) (a)(1)Distribution Plan with respect to Flag
Investors Emerging Growth Fund Class A Shares.
C-2
<PAGE>
(b)(4) Distribution Plan with respect to Flag
Investors Emerging Growth Fund Class B
Shares.
(16)(1) Schedule of Computation of Performance Data
(unaudited).
(18) (a)(5) Rule 18f-3 Plan
(b) Rule 18f-3 Plan, filed herewith
(24)(5) Powers of Attorney
(27) Financial Data Schedule, filed herewith.
- ----------
1 Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-21119), filed with the Securities and Exchange Commission via EDGAR on
August 18, 1995.
2 Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A (Registration No. 33-21119), filed with the Securities and
Exchange Commission on April 7, 1988.
3 Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-21119), filed with the Securities and Exchange Commission via EDGAR on
February 28, 1996.
4 Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-21119), filed with the Securities and Exchange Commission via EDGAR on
March 25, 1996.
5 Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-21119), filed with the Securities and Exchange Commission via EDGAR on
October 18, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant.
Furnish a list or diagram of all persons directly or indirectly controlled
by or under common control with the Registrant and as to each such person
indicate (1) if a company, the state or other sovereign power under the laws of
which it is organized, and (2) the percentage of voting securities owned or
other basis of control by the person, if any, immediately controlling it.
None.
Item 26. Number of Holders of Securities.
State in substantially the tabular form indicated, as of a specified date
within 90 days prior to the date of filing, the number of record holders of each
class of securities of the Registrant.
The following information is given as of January 31, 1997.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C> <C>
Common Stock Flag Investors Class A Shares 1,913
Flag Investors Class B Shares 103
Flag Investors Institutional Shares 121
</TABLE>
C-3
<PAGE>
Item 27. INDEMNIFICATION.
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE UNDER
WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE REGISTRANT
IS INSURED OR INDEMNIFIED IN ANY MANNER AGAINST ANY LIABILITY WHICH MAY BE
INCURRED IN SUCH CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR,
OFFICER, AFFILIATED PERSON OR UNDERWRITER FOR THEIR OWN PROTECTION.
Section 17(h) of the Investment Company Act of 1940, as amended (the "1940
Act"), MD Corps. & Ass'ns Code Ann. Section 2-418 (1985 repl. vol.) and Article
VIII of Registrant's Articles of Incorporation, provide that in certain
situations the Registrant may indemnify any person who was or is a director,
officer or employee of the Registrant against all liabilities and expenses,
including but not limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees reasonably incurred by
any such indemnified person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body except with respect to any matter as to which
such person shall have been finally adjudicated in any such action, suit or
other proceeding (a) not to have acted in good faith in the reasonable belief
that such person's action was in the best interests of the Registrant or (b) to
be liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office. Expenses, including counsel
fees so incurred by any such person, shall be paid from time to time by the
Registrant in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay amounts so paid to the Registrant if it is ultimately determined that
indemnification of such expenses is not authorized under the Articles of
Incorporation, provided, however, that either (a) such person shall have
provided appropriate security for such undertaking, (b) the Registrant shall be
insured against losses arising from any such advance payments or (c) either a
majority of the Directors who are not "interested persons" of the Registrant as
defined in Section 2(a)(19) of the 1940 Act acting on the matter (provided that
a majority of the Directors who are not "interested persons" then in office act
on the matter), or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts that there is reason
to believe that such person will be found entitled to indemnification under the
Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1940 Act and
is, therefore, unenforceable. In the event of a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered) the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed by
the final adjudication of such issue. In the absence of a determination by a
court of competent jurisdiction, the determinations that indemnification against
such liabilities is proper, and advances can be made, are made by a majority of
a quorum of the disinterested, non-party directors of the Fund, or an
independent legal counsel in a written opinion, based on review of readily
available facts.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE IN WHICH THE INVESTMENT ADVISOR OF THE REGISTRANT, AND EACH
DIRECTOR, OFFICER OR PARTNER OF ANY SUCH
C-4
<PAGE>
INVESTMENT ADVISOR, IS OR HAS BEEN, AT ANY TIME DURING THE PAST TWO FISCAL
YEARS, ENGAGED FOR HIS OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER,
EMPLOYEE, PARTNER OR TRUSTEE.
During the last two fiscal years, no director or officer of Investment
Company Capital Corp., the Registrant's Investment Advisor, has engaged in any
other business, profession, vocation or employment of a substantial nature other
than as an officer or employee of Alex. Brown.
Item 29. PRINCIPAL UNDERWRITERS
(a) Alex. Brown & Sons Incorporated acts as distributor for Alex.
Brown Cash Reserve Fund, Inc., Flag Investors Telephone Income
Fund, Inc., Flag Investors International Fund, Inc., the Flag
Investors Total Return U.S. Treasury Fund Shares of Total Return
U.S. Treasury Fund, Inc., the Flag Investors Managed Municipal
Fund Shares of Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc. (formerly known as Flag
Investors Intermediate-Term Income Fund, Inc.), Flag Investors
Value Builder 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., all registered open-end management investment companies.
(b)
<TABLE>
<CAPTION>
Names and Principal Position with offices Position and Offices
Business Address* and Principal Underwriter with Registrant
- ------------------- ------------------------- --------------------
<S> <C> <C>
Alvin B. Krongard Chairman, Chief Executive Officer, None
Director
Benjamin Howell Griswold, IV Director None
Mayo A. Shattuck III President, Director None
Beverly L. Wright Chief Financial Officer and Treasurer None
Robert F. Price Secretary and General Counsel None
</TABLE>
- --------------------
* One South Street
Baltimore, Maryland 21202
(c) Not Applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
WITH RESPECT TO EACH ACCOUNT, BOOK OR OTHER DOCUMENT REQUIRED TO BE
MAINTAINED BY SECTION 31(A) OF THE 1940 ACT [15 U.S.C. 80A-30(A)] AND THE RULES
[17 CFR 270.31A-1 TO 31A-3] PROMULGATED THEREUNDER, FURNISH THE NAME AND ADDRESS
OF EACH PERSON MAINTAINING PHYSICAL POSSESSION OF EACH SUCH ACCOUNT, BOOK OR
OTHER DOCUMENT.
Alex. Brown & Sons Incorporated (Registrant's distributor) and
Investment Company Capital Corp. (Registrant's investment advisor,
transfer agent and dividend disbursing agent), One South Street,
Baltimore, Maryland 21202, will maintain physical possession of each such
C-5
<PAGE>
account, book or other document of the Registrant, except for those
maintained by the Registrant's custodian, PNC Bank, Airport Business
Park, 200 Stevens Drive, Lester, Pennsylvania 19113.
Item 31. MANAGEMENT SERVICES.
FURNISH A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY MANAGEMENT-RELATED
SERVICE CONTRACT NOT DISCUSSED IN PART A OR PART B OF THIS FORM (BECAUSE THE
CONTRACT WAS NOT BELIEVED TO BE OF INTEREST TO A PURCHASER OF SECURITIES OF THE
REGISTRANT) UNDER WHICH SERVICES ARE PROVIDED TO THE REGISTRANT, INDICATING THE
PARTIES TO THE CONTRACT, THE TOTAL DOLLARS PAID AND BY WHOM, FOR THE LAST THREE
FISCAL YEARS.
See Exhibit 8.
Item 32. Undertakings.
Furnish the following undertakings in substantially the following form in
all initial Registration Statements filed under the 1933 Act:
(a) Not Applicable.
(b) Not Applicable.
(c) A copy of the Registrant's latest Annual Report to Shareholders
is available upon request, without charge by contacting
Registrant at (800) 767-3524.
C-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940 the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized in the City of Baltimore,
in the State of Maryland, on the 26th day of February, 1997.
FLAG INVESTORS EMERGING GROWTH
FUND, INC.
By: /s/ Frederick L. Meserve, Jr.
------------------------------
Frederick L. Meserve, Jr.
President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities on the date(s) indicated:
* Director February 26, 1997
- ------------------------ -------------------
Truman T. Semans Date
* Director February 26, 1997
- ------------------------ -------------------
Richard T. Hale Date
* Director February 26, 1997
- ------------------------ -------------------
James J. Cunnane Date
* Director February 26, 1997
- ------------------------ -------------------
John F. Kroeger Date
* Director February 26, 1997
- ------------------------ -------------------
Louis E. Levy Date
* Director February 26, 1997
- ------------------------ -------------------
Eugene J. McDonald Date
/s/ Frederick L. Meserve, Jr. President February 26, 1997
- ------------------------ -------------------
Frederick L. Meserve, Jr. Date
/s/ Joseph A. Finelli Chief Financial February 26, 1997
- ------------------------ and Accounting -------------------
Joseph A. Finelli Officer Date
* By: /s/ Edward J. Veilleux
--------------------------
Edward J. Veilleux
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit
Number Description Page No.
------ ----------- --------
<S> <C> <C> <C>
(1) (a) Registrant's Articles of Incorporation.(1)
(1) (b) Registrant's Articles of Amendment.(1)
(1) (c) Registrant's Articles Supplementary.(1)
(1) (d) Registrant's Articles Supplementary.(3)
EX-99.B (1) (e) Registrant's Articles Supplementary with respect to
creation of ABCAT Shares Class, filed herewith.
EX-99.B (2) Registrant's By-Laws as amended through December 18,
1996, filed herewith.
(3) None.
(4) Registrant's Specimen Security with respect to Flag
Investors Shares.(2)
(5) Registrant's Investment Advisory Agreement between
Registrant and Investment Company Capital Corp.(1)
(6) (a) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons Incorporated
with respect to Flag Investors Emerging Growth
Fund Class A Shares.(1)
EX-99.B (6) (b) Registrant's Form of Sub-Distribution Agreement
between Alex. Brown & Sons Incorporated and
Participating Dealers, filed herewith.
(6) (c) Registrant's Shareholder Servicing Agreement
between Registrant and Shareholder Servicing
Agents.(1)
(6) (d) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons Incorporated
with respect to Flag Investors Emerging Growth
Fund Institutional Shares.(3)
(6) (e) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors
Emerging Growth Fund Class B Shares.(4)
EX-99.B (6) (f) Registrant's Distribution Agreement between
Registrant and Alex. Brown & Sons Incorporated
with respect to Alex. Brown Capital Advisory &
Trust Emerging Growth Shares, filed herewith.
(7) None.
<PAGE>
(8) Custodian Agreement between Registrant and Provident
National Bank, as in effect from February 1, 1991.(1)
(9) Master Services Agreement between Registrant and
Investment Company Capital Corp. with Appendices for
the provision of Transfer Agency and Accounting
Services.(3)
(10) Opinion of Counsel.(1)
EX-99.B (11) Consent of Coopers & Lybrand L.L.P., filed herewith.
(12) None.
(13) Subscription Agreements between Registrant and
Investors.(1)
(14) None.
(15) (a) Distribution Plan with respect to Flag
Investors Emerging Growth Fund Class A
Shares.(1)
(15) (b) Distribution Plan with respect to Flag
Investors Emerging Growth Fund Class B
Shares.(4)
(16) Schedule of Computation of Performance Quotations
(unaudited).(1)
(18) (a) Rule 18f-3 Plan(5)
EX-99.B (18) (b) Rule 18f-3 Plan, filed herewith
(24) (a) Powers of Attorney(5).
EX-27 Financial Data Schedule, filed herewith.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 10
to Registrant's Registration Statement on Form N-1A (Registration
No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on August 18, 1995.
(2) Incorporated herein by reference to Registrant's Registration
Statement on Form N-1A (Registration No. 33-21119), filed with the
Securities and Exchange Commission on April 7, 1988.
(3) Incorporated herein by reference to Post-Effective Amendment No. 11
to Registrant's Registration Statement on Form N-1A (Registration
No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on February 28, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 12
to Registrant's Registration Statement on Form N-1A (Registration
No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on March 25, 1996.
(5) Incorporated herein by reference to Post-Effective Amendment
No. 13 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR on October 18, 1996.
<PAGE>
EX-99.B(1)(e)
FLAG INVESTORS EMERGING GROWTH FUND, INC.
ARTICLES SUPPLEMENTARY
FLAG INVESTORS EMERGING GROWTH FUND, INC. (the "Corporation"), having
its principal office in the City of Baltimore, certifies that:
FIRST: The Corporation's Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law has
adopted a resolution increasing the total number of shares of capital stock
which the Corporation has the authority to issue to twenty million (20,000,000)
shares of Common Stock, of the par value of 1 mil ($.001) per share and of the
aggregate par value of twenty thousand dollars ($20,000), all of which shares
are designated and classified as follows: eight million (8,000,000) shares are
designated "Flag Investors Emerging Growth Fund Class A Shares," one million
(1,000,000) shares are designated "Flag Investors Emerging Growth Fund Class B
Shares," five million (5,000,000) shares are designated "Flag Investors Emerging
Growth Fund Institutional Shares," five million (5,000,000) shares are
designated "Alex. Brown Capital Advisory & Trust Emerging Growth Shares" and one
million (1,000,000) shares remain undesignated.
SECOND: Immediately before the increase, the
Corporation was authorized to issue fifteen million (15,000,000) shares of
Common Stock, of the par value of 1 mil ($.001) per share and of the aggregate
par value of fifteen thousand dollars ($15,000), all of which shares were
designated and classified as follows: eight million (8,000,000) shares were
designated "Flag Investors Emerging Growth Fund Class A Shares," one million
(1,000,000) shares were designated "Flag Investors Emerging Growth Fund Class B
Shares," five million (5,000,000) shares were designated "Flag Investors
Emerging Growth Fund Institutional Shares" and one million (1,000,000) shares
remained undesignated.
THIRD: The Corporation is registered as an open-end
investment company under the Investment Company Act of 1940, as amended.
IN WITNESS WHEREOF, Flag Investors Emerging Growth Fund, Inc.
has caused these Articles Supplementary to be executed by one of its Vice
Presidents and its corporate seal to be affixed and attested by its Secretary on
this 31st day of October, 1996.
<PAGE>
[CORPORATE SEAL]
FLAG INVESTORS EMERGING GROWTH FUND, INC.
By: /s/ Edward J. Veilleux
----------------------------
Edward J. Veilleux
Vice President
Attest: /s/ Edward J. Stoken
----------------------------
Edward J. Stoken
Secretary
The undersigned, Vice President of FLAG INVESTORS EMERGING
GROWTH FUND, INC., who executed on behalf of said corporation the foregoing
Articles Supplementary to the Articles of Incorporation of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles Supplementary to the Articles of
Incorporation to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
By: /s/ Edward J. Veilleux
-------------------------------
Edward J. Veilleux
Vice President
<PAGE>
EX-99.B(2)
BY-LAWS As ammended through
December 18, 1996
OF
FLAG INVESTORS EMERGING GROWTH FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive
office of the Corporation shall be in the City of Baltimore, State of Maryland.
Section 3. Other Offices. The Corporation may have
such other offices in such places as the Board of Directors may
from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Stockholder Meetings. The Corporation may, but
shall not be required to, hold a regular meeting of stockholders in any year in
which the Corporation is not required, under the Investment Company Act of 1940,
as amended, (the "1940 Act") to submit for stockholder approval (i) the election
of director(s), (ii) any contract with an investment adviser or principal
underwriter (as such terms are defined in the 1940 Act) that the Corporation
enters into or any renewal or amendment thereof, or (iii) the selection of the
Corporation's independent public accountants. If stockholder approval is
required for any of the purposes in (i) through (iii) above, the regular meeting
shall be held, at which stockholders shall vote on the proposal necessitating
such meeting and shall transact any other business as may properly be brought
before the meeting. Regular meetings of stockholders, if any, shall be held on
such day during the month of June and at such time as shall be designated by the
Board of Directors and stated in the notice of the meeting.
<PAGE>
Section 2. Special Meetings. Special meetings of the
stockholders, unless otherwise provided by law or by the Charter may be called
for any purpose or purposes by a majority of the Board of Directors or the
President, and shall be called by the President or Secretary on the written
request of the stockholders as provided by the Maryland General Corporation Law.
Such request shall state the purpose or purposes of the proposed meeting and the
matters proposed to be acted on at it; provided, however, that unless requested
by stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting, a special meeting need not be called to consider any matter
which is substantially the same as a matter voted on at any special meeting of
the stockholders held during the preceding twelve (12) months.
Section 3. Place of Meetings. The regular meeting, if any, and
any special meeting of the stockholders shall be held at such place within the
United States as the Board of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice; Shareholder
List. (a) Notice of the place, date and time of the holding of each regular and
special meeting of the stockholders and the purpose or purposes of the meeting
shall be given personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder at his address as it appears on the
records of the Corporation, with postage thereon prepaid. The notice of every
meeting of stockholders may be accompanied by a form of proxy approved by the
Board of Directors in favor of such actions or persons as the Board of Directors
may select.
(b) Notice of any meeting of stockholders shall be
deemed waived by any stockholder who shall attend such meeting in person or by
proxy, or who shall, either before or after the meeting, submit a signed waiver
of notice which is filed with the records of the meeting. A meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice to a date not more than 120 days after the
original record date.
(c) At least five (5) days prior to each meeting of
stockholders, the officer or agent having charge of the share transfer books of
the Corporation shall make a complete list of stockholders entitled to vote at
such meeting, in alphabetical order with the address of and the number of shares
held by each stockholder.
- 2 -
<PAGE>
Section 5. Organization. At each meeting of the stockholders,
the Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, or in the
absence or the inability to act of the Chairman of the Board, the President and
all the Vice Presidents, a chairman chosen by the stockholders shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
Section 6. Voting. (a) Except as otherwise provided by statute
or the Charter, each holder of record of shares of stock of the Corporation
having voting power shall be entitled at each meeting of the stockholders to one
vote for every share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 8 of Article VII hereof or if such record date shall not have been so
fixed, then at the later of (i) the close of business on the day on which notice
of the meeting is mailed or (ii) the thirtieth (30) day before the meeting. In
all elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
(b) Each stockholder entitled to vote at any meeting
of stockholders may authorize another person or persons to act for him by a
proxy signed by such stockholder or his attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof, unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the stockholder executing it, except in those cases where such proxy states
that it is irrevocable and where an irrevocable proxy is permitted by law.
Except as otherwise provided by statute, the Charter or these By-Laws, any
corporate action to be taken by vote of the stockholders shall be authorized by
a majority of the total votes cast at a meeting of stockholders at which a
quorum is present by the holders of shares present in person or represented by
proxy and entitled to vote on such action, except that a plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
director.
(c) If a vote shall be taken on any question other
than the election of directors, which shall be by written ballot, then unless
required by statute or these By-Laws, or determined by the chairman of the
meeting to be advisable, any such vote need not be by ballot. On a vote by
ballot, each ballot shall be signed by the stockholder voting, or by his proxy,
if there be such proxy, and shall state the number of shares voted.
- 3 -
<PAGE>
Section 7. Inspectors. The Board may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If the inspectors shall not be so appointed or if
any of them shall fail to appear or act, the chairman of the meeting may, and on
the request of any stockholder entitled to vote at the meeting shall, appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote at it, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders.
Section 8. Consent of Stockholders in Lieu of Meeting. Except
as otherwise provided by statute any action required to be taken at any regular
or special meeting of stockholders, or any action which may be taken at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders' meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote at it.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise
provided in the Charter, the business and affairs of the Corporation shall be
managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law or by the Charter
or these By-Laws.
- 4 -
<PAGE>
Section 2. Number of Directors. The number of directors shall
be fixed from time to time by resolution of the Board of Directors adopted by a
majority of the Directors then in office; provided, however, that the number of
directors shall in no event be less than three (except for any period during
which shares of the corporation are held by fewer than three shareholders) nor
more than fifteen. Any vacancy created by an increase in directors may be filled
in accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his term unless such director is specifically removed pursuant
to Section 5 of this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors shall be
elected by plurality vote of a quorum cast by written ballot at the regular
meeting of stockholders, if any, or at a special meeting held for that purpose.
The term of office of each director shall be from the time of his election and
qualification and until his successor shall have been elected and shall have
qualified, or until his death, or until he shall have resigned, or have been
removed as hereinafter provided in these By-Laws, or as otherwise provided by
statute or the Charter.
Section 4. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to the Board or
the Chairman of the Board or the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the
Corporation may be removed by the stockholders by a vote of a majority of the
votes entitled to be cast for the election of directors.
Section 6. Vacancies. The stockholders may elect a successor
to fill a vacancy on the Board of Directors which results from the removal of a
director. A majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the Board of Directors which results
from any cause except an increase in the number of directors, and a majority of
the entire Board of Directors may fill a vacancy which results from an increase
in the number of directors; provided however, that no vacancies shall be filled
by action of the remaining directors, if after the filling of said vacancy or
vacancies, fewer than two-thirds of the directors then holding office shall have
been elected by the stockholders of the Corporation. In the event that at any
time there is a vacancy in any office of a director which vacancy may not be
- 5 -
<PAGE>
filled by the remaining directors, a special meeting of the stockholders shall
be held as promptly as possible and in any event within sixty days, for the
purpose of filling said vacancy or vacancies. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of stockholders
and until his successor is elected and qualifies. A director elected by the
stockholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director.
Section 7. Regular Meetings. Regular meetings of the Board may
be held with notice at such times and places as may be determined by the Board
of Directors.
Section 8. Special Meetings. Special meetings of the Board may
be called by the Chairman of the Board, the President, or by a majority of the
directors either in writing or by vote at a meeting, and may be held at any
place in or out of the State of Maryland as the Board may from time to time
determine.
Section 9. Notice of Special Meetings. Notice of each special
meeting of the Board shall be given by the Secretary as hereinafter provided, in
which notice shall be stated the time and place of the meeting. Notice of each
such meeting shall be delivered to each director, either personally or by
telephone, telegraph, cable or wireless, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, or by commercial delivery services addressed to him at his residence or
usual place of business, at least three days before the day on which such
meeting is to be held.
Section 10. Waiver of Notice of Special Meetings. Notice of
any special meeting need not be given to any director who shall, either before
or after the meeting, sign a written waiver of notice which is filed with the
records of the meeting or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 11. Quorum and Voting. One-third, but not fewer than
three members, of the members of the entire Board shall be present in person at
any meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting, and except as otherwise expressly required by statute,
the Charter, these By-Laws, the 1940 Act or other applicable statute, the act of
a majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board; provided, however, that the approval of any
contract with an investment adviser or principal underwriter, as such terms are
- 6 -
<PAGE>
defined in the 1940 Act, which the Corporation enters into or any renewal or
amendment thereof, the approval of the fidelity bond required by the 1940 Act,
and the selection of the Corporation's independent public accountants shall each
require the affirmative vote of a majority of the directors who are not
interested persons, as defined in the 1940 Act, of the Corporation. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present thereat may adjourn the meeting from time to time, but not for a period
greater than thirty (30) days at any one time, to another time and place until a
quorum shall attend. Notice of the time and place of any adjourned meeting shall
be given to the directors who were not present at the time of the adjournment
and, unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 12. Chairman. The Board of Directors may at any time
appoint one of its members as Chairman of the Board. who shall serve at the
pleasure of the Board and who shall perform and execute such duties and powers
as may be conferred upon or assigned to him by the Board or these By-Laws, but
who shall not by reason of performing and executing these duties and powers be
deemed an officer or employee of the Corporation.
Section 13. Organization. At every meeting of the Board of
Directors, the Chairman of the Board, if one has been selected and is present,
shall preside. In the absence or inability of the Chairman of the Board to
preside at a meeting, the President, or, in his absence or inability to act,
another director chosen by a majority of the directors present, shall act as
chairman of the meeting and preside at it. The Secretary (or, in his absence or
inability to act, any person appointed by the Chairman) shall act as secretary
of the meeting and keep the minutes thereof.
Section 14. Written Consent of Directors in Lieu of a Meeting.
Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
Section 15. Meeting by Conference Telephone. Members of the
Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time.
- 7 -
<PAGE>
Section 16. Compensation. Any director, whether or not he is a
salaried officer, employee or agent of the Corporation, may be compensated for
his services as director or as a member of a committee, or as Chairman of the
Board or chairman of a committee, and in addition may be reimbursed for
transportation and other expenses, all in such manner and amounts as the
directors may from time to time determine.
Section 17. Investment Policies. It shall be the duty of the
Board of Directors to ensure that the purchase, sale, retention and disposal of
portfolio securities and the other investment practices of the Corporation are
at all times consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corporation, as recited
in the current Prospectus of the Corporation filed from time to time with the
Securities and Exchange Commission and as required by the 1940 Act. The Board,
however, may delegate the duty of management of the assets and the
administration of its day-to-day operations to an individual or corporate
management company or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors or the stockholders of
the Corporation in accordance with the provisions of the 1940 Act.
ARTICLE IV
Committees
Section 1. Committees of the Board. The Board may, by
resolution adopted by a majority of the entire Board, designate an Executive
Committee, Compensation Committee, Audit Committee and Nomination Committee,
each of which shall consist of two or more of the directors of the Corporation,
which committee shall have and may exercise all the powers and authority of the
Board with respect to all matters other than as set forth in Section 3 of this
Article.
Section 2. Other Committees of the Board. The Board of
Directors may from time to time, by resolution adopted by a majority of the
whole Board, designate one or more other committees of the Board, each such
committee to consist of two or more directors and to have such powers and duties
as the Board of Directors may, by resolution, prescribe.
Section 3. Limitation of Committee Powers. No committee of the
Board shall have power or authority to:
(a) recommend to stockholders any action requiring
authorization of stockholders pursuant to statute or the Charter;
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(b) approve or terminate any contract with an
investment adviser or principal underwriter, as such terms are defined in the
1940 Act, or take any other action required to be taken by the Board of
Directors by the 1940 Act;
(c) amend or repeal these By-Laws or adopt new
By-Laws;
(d) declare dividends or other distributions or
issue capital stock of the Corporation; and
(e) approve any merger or share exchange which
does not require stockholder approval.
Section 4. General. One-third, but not less than two members,
of the members of any committee shall be present in person at any meeting of
such committee in order to constitute a quorum for the transaction of business
at such meeting, and the act of a majority present shall be the act of such
committee. The Board may designate a chairman of any committee and such chairman
or any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence of disqualification of
any member or any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. The Board
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members, to replace any absent or
disqualified member, or to dissolve any such committee.
All committees shall keep written minutes of their proceedings and
shall report such minutes to the Board. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties shall
not be prejudiced by such revision or alteration.
ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents and may also appoint such other officers,
agents and employees as it may deem necessary or proper. Any two or more offices
may be held by the same person, except the offices of President and Vice
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<PAGE>
President, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity. The Board may from time to time elect or appoint, or
delegate to the President the power to appoint, such other officers (including
one or more Assistant Vice Presidents, one or more Assistant Treasurers and one
or more Assistant Secretaries) and such agents, as may be necessary or desirable
for the business of the Corporation. Such other officers and agents shall have
such duties and shall hold their offices for such terms as may be prescribed by
the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may
resign at any time by giving written notice of his resignation to the Board, the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer,
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate such power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer, agent or
employee of the Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising
from death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any committee or to any officer in respect of other officers under
his control. No officer shall be precluded from receiving such compensation by
reason of the fact that he is also a director of the Corporation.
Section 6. Bonds or other Security. If required by the Board,
any officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
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Section 7. President. The President shall be the chief
executive officer of the Corporation. In the absence of the Chairman of the
Board (or if there be none), he shall preside at all meetings of the
stockholders and of the Board of Directors. He shall have, subject to the
control of the Board of Directors, general charge of the business and affairs of
the Corporation. He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he may delegate
these powers.
Section 8. The Vice Presidents. In the absence or disability
of the President, or when so directed by the President, any Vice President
designated by the Board of Directors may perform any or all of the duties of the
President, and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the President; provided, however, that no Vice
President shall act as a member of or as chairman of any committee of which the
President is a member or chairman by designation of ex-officio, except when
designated by the Board. Each Vice President shall perform such other duties as
from time to time may be conferred upon or assigned to him by the Board or the
President.
Section 9. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible
for, all the funds and securities of the Corporation, except those which the
Corporation has placed in the custody of a bank or trust company or member of a
national securities exchange (as that term is defined in the Securities Exchange
Act of 1934) pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian of the property
of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due and
payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and
supervise the investment of its funds as ordered or authorized by the Board,
taking proper vouchers therefor; and
(f) in general, perform all the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him by the Board or the President.
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Section 10. Assistant Treasurers. In the absence or disability of the
Treasurer, or when so directed by the Treasurer, any Assistant Treasurer may
perform any or all of the duties of the Treasurer, and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
Treasurer. Each Assistant Treasurer shall perform all such other duties as from
time to time may be conferred upon or assigned to him by the Board of Directors,
the President or the Treasurer.
Section 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a facsimile,
as hereinafter provided) and affix and attest the seal to all other documents to
be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are properly
kept and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 12. Assistant Secretaries. In the absence or disability of the
Secretary, or when so directed by the Secretary, any Assistant Secretary may
perform any or all of the duties of the Secretary, and, when so acting, shall
have all the powers of, and be subject to all restrictions upon, the Secretary.
Each Assistant Secretary shall perform such other duties as from time to time
may be conferred upon or assigned to him by the Board of Directors, the
President or the Secretary.
Section 10. Delegation of Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or any
of them, of such officer upon any other officer or upon any director.
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ARTICLE VI
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing the
number of shares of stock of the Corporation owned by him, provided, however,
that certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by the President, a
Vice President, or the Chairman of the Board, and countersigned by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed
with the seal of the Corporation. Any or all of the signatures or the seal on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 2. Rights of Inspection. There shall be kept at the
principal executive office, which shall be available for inspection during usual
business hours in accordance with the General Laws of the State of Maryland, the
following corporate documents: (a) By-Laws, (b) minutes of proceedings of the
stockholders, (c) annual statements of affairs, and (d) voting trust agreements,
if any. One or more persons who together are and for at least six months have
been stockholders of record of at least five percent of the outstanding stock of
any class may inspect and copy during usual business hours the Corporation's
books of account and stock ledger in accordance with the General Laws of the
State of Maryland.
Section 3. Transfer of Shares. Transfers of shares of stock of
the Corporation shall be made on the stock records of the Corporation at the
direction of the person named on the Corporation's books or named in the
certificate or certificates for such shares (if issued) only by the registered
holder thereof, or by his attorney authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates, if issued, for such shares
properly endorsed or accompanied by a duly executed stock transfer power and the
payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such
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owner, and the Corporation shall not be bound to recognize any equitable or
legal claim to or interest in any such share or shares on the part of any other
person.
Section 4. Transfer Agents and Registrars. The Corporation may
have one or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent, if
the Corporation shall have a Transfer Agent or until registered by a Registrar,
if the Corporation shall have a Registrar. The duties of Transfer Agent and
Registrar may be combined.
Section 5. Record Date and Closing of Transfer Books. The
Board of Directors may set a record date for the purpose of making any proper
determination with respect to stockholders, including which stockholders are
entitled to notice of a meeting, vote at a meeting (or any adjournment thereof),
receive a dividend, or be allotted or exercise other rights. The record date may
not be more than ninety (90) days before the date on which the action requiring
the determination will be taken; and, in the case of a meeting of stockholders,
the record date shall be at least ten (10) days before the date of the meeting.
The Board of Directors shall not close the books of the Corporation against
transfers of shares during the whole or any part of such period.
Section 6. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates.
The holder of any certificate representing shares of stock of the Corporation
shall immediately notify the Corporation of any loss, theft, destruction or
mutilation of such certificate, and the Corporation may issue a new certificate
of stock in the place of any certificate theretofore issued by it which the
owner thereof shall allege to have been lost, stolen or destroyed or which shall
have been mutilated, and the Board may, in its discretion, require such owner or
his legal representatives to give to the Corporation a bond in such sum, limited
or unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
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<PAGE>
Section 8. Stock Ledgers. The Corporation shall not be
required to keep original or duplicate stock ledgers at its principal office in
the City of Baltimore, Maryland, but stock ledgers shall be kept at the
respective offices of the Transfer Agents of the Corporation's capital stock.
ARTICLE VII
Seal
The Board of Directors shall provide a suitable seal, bearing the name
of the Corporation, which shall be in the charge of the secretary. The Board of
Directors may authorize one or more duplicate seals and provide for the custody
thereof. If the corporation is required to place its corporate seal on a
document, it is sufficient to meet any requirement of any law, rule, or
regulation relating to a corporate seal to place the word "Seal" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
ARTICLE VIII
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the last day of December in each year.
ARTICLE IX
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments
shall be deposited in the safekeeping of such banks or other companies as the
Board of Directors of the Corporation may from time to time determine. Every
arrangement entered into with any bank or other company for the safekeeping of
the securities and investments of the Corporation shall contain provisions
complying with the 1940 Act, and the general rules and regulations thereunder.
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<PAGE>
ARTICLE X
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Money market
instruments, bonds or other securities at any time owned by the Corporation may
be held on behalf of the Corporation or sold, transferred or otherwise disposed
of subject to any limits imposed by these By-Laws, and pursuant to authorization
by the Board and, when so authorized to be held on behalf of the Corporation or
sold, transferred or otherwise disposed of, may be transferred from the name of
the Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
ARTICLE XI
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors and
ratified by the Board of Directors or the stockholders in accordance with the
provisions of the 1940 Act.
ARTICLE XII
Annual Statements
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report to
the stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be placed on file
at the Corporation's principal office in the State of Maryland. Each such report
shall show the assets and liabilities of the Corporation as of the close of the
annual or semi-annual period covered by the report and the securities in which
the funds of the Corporation were then invested. Such report shall also show the
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Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or semi-annual
period covered by the report and any other information required by the 1940 Act,
and shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIII
Amendments
These By-Laws or any of them may be amended, altered or repealed at
any annual meeting of the stockholders or at any special meeting of the
stockholders at which a quorum is present or represented, provided that notice
of the proposed amendment, alteration or repeal be contained in the notice of
such special meeting. These By-Laws may also be amended, altered or repealed by
the affirmative vote of a majority of the Board of Directors at any regular or
special meeting of the Board of Directors.
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<PAGE>
EX-99.B(6)(b)
FLAG INVESTORS FAMILY OF FUNDS
One South Street
Baltimore, Maryland 21202
FORM OF
SUB-DISTRIBUTION AGREEMENT
_____________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a Maryland
corporation, serves as distributor (the "Distributor") of the Flag Investors
Funds (collectively, the "Funds", individually a "Fund"). The Funds are open-end
investment companies registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Funds offer their shares ("Shares")
to the public in accordance with the terms and conditions contained in the
Prospectus of each Fund. The term "Prospectus" used herein refers to the
prospectus on file with the Securities and Exchange Commission which is part of
the registration statement of each Fund under the Securities Act of 1933 (the
"Securities Act"). In connection with the foregoing you may serve as a
participating dealer (and, therefore, accept orders for the purchase or
redemption of Shares, respond to shareholder inquiries and perform other related
functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a Participating
Dealer and as such are authorized (i) to accept orders for the purchase of
Shares and to transmit to the Funds such orders and the payment made therefore,
(ii) to accept orders for the redemption of Shares and to transmit to the Funds
such orders and all additional material, including any certificates for Shares,
as may be required to complete the redemption and (iii) to assist shareholders
with the foregoing and other matters relating to their investments in each Fund,
in each case subject to the terms and conditions set forth in the Prospectus of
each Fund. You are to review each Share purchase or redemption order submitted
through you or with your assistance for completeness and accuracy. You further
agree to undertake from time to time certain shareholder servicing activities
for customers of yours who have purchased Shares and who use your facilities to
communicate with the Funds or to effect redemptions or additional purchases of
Shares.
<PAGE>
2. Limitation of Authority. No person is authorized to make any
representations concerning the Funds or the Shares except those contained in the
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you will look
solely to the Distributor, and you acknowledge that the Funds shall have no
direct responsibility for any compensation. In addition to any sales charge
payable to you by your customer pursuant to a Prospectus, the Distributor will
pay you no less often than annually a shareholder processing and service fee (as
we may determine from time to time in writing) computed as a percentage of the
average daily net assets maintained with each Fund during the preceding period
by shareholders who purchase their shares through you or with your assistance,
provided that said assets are at least $250,000 for each Fund for which you are
to be compensated, and provided that in all cases your name is transmitted with
each shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the provisions
contained in the Securities Act governing the distribution of prospectuses to
persons to whom you offer Shares. You further agree to deliver, upon our
request, copies of any amended Prospectus of the relevant Fund to purchasers
whose Shares you are holding as record owner and to deliver to such persons
copies of the annual and interim reports and proxy solicitation materials of the
Funds. We agree to furnish to you as many copies of each Prospectus, annual and
interim reports and proxy solicitation materials as you may reasonably request.
5. Qualification to Act. You represent that you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD").
Your expulsion or suspension from the NASD will automatically terminate this
Agreement on the effective date of such expulsion or suspension. You agree that
you will not offer Shares to persons in any jurisdiction in which you may not
lawfully make such offer due to the fact that you have not registered under, or
are not exempt from, the applicable registration or licensing requirements of
such jurisdiction. You agree that in performing the services under this
Agreement, you at all times will comply with the NASD's Conduct Rules,
including, without limitation, the provisions of Rule 2830. You agree that you
will not combine customer orders to reach breakpoints in commissions for any
purposes whatsoever unless authorized by the then current Prospectus in respect
of Shares of a particular class or by us in writing. You also agree that you
will place orders immediately upon their receipt and will not withhold any order
so as to profit therefrom. In determining the amount payable to you hereunder,
we reserve the right to exclude any sales which we reasonably determine are not
made in accordance with the terms of the Prospectus and provisions of the
Agreement.
6. Blue Sky. The Funds have registered an indefinite number of Shares
under the Securities Act. The Funds intend to register or qualify in certain
states where
<PAGE>
registration or qualification is required. We will inform you as to the states
or other jurisdictions in which we believe the Shares have been qualified for
sale under, or are exempt from the requirements of, the respective securities
laws of such states. You agree that you will offer Shares to your customers only
in those states where such Shares have been registered, qualified, or an
exemption is available. We assume no responsibility or obligation as to your
right to sell Shares in any jurisdiction. We will file with the Department of
State in New York a State Notice and a Further State Notice with respect to the
Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full authority to
take such action as it deems advisable in respect of all matters pertaining to
the offering of its Shares, including the right not to accept any order for the
purchase of Shares.
8. Record Keeping. You will (i) maintain all records required by law to
be kept by you relating to transactions in Shares and, upon request by any Fund,
promptly make such of these records available to the Fund as the Fund may
reasonably request in connection with its operations and (ii) promptly notify
the Fund if you experience any difficulty in maintaining the records described
in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability to you except
for lack of good faith and for obligations expressly assumed by it hereunder. In
carrying out your obligations, you agree to act in good faith and without
negligence. Nothing contained in this Agreement is intended to operate as a
waiver by the Distributor or you of compliance with any provision of the
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by either party,
without penalty, upon ten days' notice to the other party and shall
automatically terminate in the event of its assignment (as defined in the
Investment Company Act). This Agreement may also be terminated at any time for
any particular Fund without penalty by the vote of a majority of the members of
the Board of Directors or Trustees of such Fund who are not "interested persons"
(as defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Distribution Agreement between such
Fund and the Distributor or by the vote of a majority of the outstanding voting
securities of the Fund.
11. Communications. All communications to us should be sent to the
above address. Any notice to you shall be duly given if mailed or telegraphed to
you at the address specified by you below.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
--------------------------------------
(Authorized Signature)
Confirmed and accepted:
Firm Name: ________________________
By: _______________________________
Address: __________________________
Date:______________________________
<PAGE>
EX-99.B(6)(f)
FLAG INVESTORS EMERGING GROWTH FUND, INC.
ALEX. BROWN CAPITAL ADVISORY & TRUST SHARES
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the 9th day of January, 1996, by
and between FLAG INVESTORS EMERGING GROWTH FUND, INC., a Maryland corporation
(the "Fund"), and ALEX. BROWN & SONS INCORPORATED, a Maryland corporation
("Alex. Brown").
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end,
diversified, management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Fund's Articles of Incorporation, filed with
the Secretary of State of the State of Maryland on July 2, 1987 (the
"Articles"), authorize the Board of Directors of the Fund to increase or
decrease the number of shares of capital stock of the Fund and the number of
shares of any class of capital stock of the Fund; and
WHEREAS, the Fund's Board of Directors has authorized the
designation of three classes of shares of the Fund known respectively as the
Flag Investors Emerging Growth Fund Class A Shares, the Flag Investors Emerging
Growth Fund Class B Shares and the Flag Investors Emerging Growth Fund
Institutional Shares; and
WHEREAS, the Fund's Board of Directors has further
authorized the creation of an additional class of shares of the Fund known as
the Alex. Brown Capital Advisory & Trust Emerging Growth Shares (the "Shares") ;
and
WHEREAS, the Fund wishes to appoint Alex. Brown as the
exclusive distributor of the Shares and Alex. Brown wishes to become the
distributor of the Shares.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and of other good and valuable consideration, the receipt
whereof is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
1. Appointment. The Fund appoints Alex. Brown as
Distributor for the Shares for the period and on the terms set forth in this
Agreement. Alex. Brown accepts such appointment and agrees to render the
services set forth herein.
2. Delivery of Documents. The Fund has furnished Alex.
Brown with copies properly certified or authenticated of each of the following:
(a) The Fund's Articles and all amendments
thereto;
(b) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors
and shareholders authorizing the appointment of Alex. Brown as the Fund's
Distributor of the Shares and approving this Agreement;
(d) The Fund's Notification of Registration filed
pursuant to Section 8(a) of the 1940 Act on Form N-8A under the 1940 Act, as
filed with the Securities and Exchange Commission (the "SEC") on April 7, 1988;
(e) The Fund's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
33-21119) and under the 1940 Act as filed with the SEC on April 7, 1988 relating
to the Shares of the Fund, and all amendments thereto; and
(f) The Fund's most recent prospectus for the
Shares (such prospectus and all amendments and supplements thereto are herein
called "Prospectus").
The Fund will furnish Alex. Brown from time to time with
copies, properly certified or authenticated, of all amendments or supplements to
the foregoing, if any, and all documents, notices and reports filed with the
SEC.
3. Duties as Distributor. Alex. Brown shall give the Fund
the benefit of its best judgment, efforts and facilities in rendering its
services as Distributor of the Shares. Alex. Brown shall:
(a) respond to inquiries from the Fund's
shareholders concerning the status of their accounts with the Fund; and
(b) take, on behalf of the Fund, all actions
deemed necessary to carry into effect the distribution of the Shares.
2
<PAGE>
4. Distribution of Shares. Alex. Brown shall be the
exclusive distributor of the Shares. It is mutually understood and agreed that
Alex. Brown does not undertake to sell all or any specific portion of the
Shares. The Fund shall not sell any of the Shares except through Alex. Brown.
Notwithstanding the provisions of the foregoing sentence,
(a) the Fund may issue its Shares at their net
asset value to any shareholder of the Fund purchasing such Shares with dividends
or other cash distributions received from the Fund pursuant to an offer made to
all shareholders;
(b) Alex. Brown may enter into shareholder
processing and servicing agreements;
(c) Alex. Brown may, and when requested by the
Fund shall, suspend its efforts to effectuate sales of the Shares at any time
when in the opinion of Alex. Brown or of the Fund no sales should be made
because of market or other economic considerations or abnormal circumstances of
any kind; and
(d) the Fund may withdraw the offering of the
Shares (i) at any time with the consent of Alex. Brown, or (ii) without such
consent when so required by the provisions of any statute or of any order, rule
or regulation of any governmental body having jurisdiction.
5. Control by Board of Directors. Any distribution
activities undertaken by Alex. Brown pursuant to this Agreement, as well as any
other activities undertaken by Alex. Brown on behalf of the Fund pursuant
hereto, shall at all times be subject to any directives of the Board of
Directors of the Fund. The Board of Directors may agree, on behalf of the Fund,
to amendments to this Agreement.
6. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, Alex. Brown shall at all times conform
to:
(a) all applicable provisions of the 1940 Act and
any rules and regulations adopted thereunder as amended;
(b) the provisions of the Registration Statement
of the Fund under the 1933 Act and the 1940 Act and any amendments and
supplements thereto;
(c) the provisions of the Articles of
Incorporation of the Fund and any amendments thereto;
(d) the provisions of the By-Laws of the Fund;
3
<PAGE>
(e) the rules and regulations of the National
Association of Securities Dealers, Inc. ("NASD") and all other self-regulatory
organizations applicable to the sale of investment company shares; and
(f) any other applicable provisions of Federal and
State law.
7. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and Alex. Brown as follows:
(a) Alex. Brown shall furnish, at its expense and
without cost to the Fund, the services of personnel to the extent that such
services are required to carry out their obligations under this Agreement;
(b) Alex. Brown shall bear the expenses of any
promotional or sales literature used by Alex. Brown or furnished by Alex. Brown
to purchasers or dealers in connection with the public offering of the Shares,
the expenses of advertising in connection with such public offering and all
legal expenses in connection with the foregoing;
(c) the Fund assumes and shall pay or cause to be
paid all other expenses of the Fund, including, without limitation: the fees of
the Fund's investment advisor; the charges and expenses of any registrar,
custodian or depositary appointed by the Fund for the safekeeping of its cash,
portfolio securities and other property, and any stock 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; all costs and expenses in connection with maintenance of
registration of the Fund and the Shares with the SEC and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel) except as provided in subparagraph (a) above; the expenses of printing,
including typesetting, and distributing prospectuses of the Fund and supplements
thereto to the Fund's shareholders; all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing of proxy statements and reports
to shareholders; fees and travel expenses of Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) or 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; charges and
expenses of legal counsel, including counsel to the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), and of
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 any indemnification related thereto); and all other charges and costs
of the Fund's operation unless otherwise explicitly provided herein.
4
<PAGE>
8. Delegation of Responsibilities. Alex. Brown may, but
shall be under no duty to, perform services on behalf of the Fund which are not
required by this Agreement upon the request of the Fund's Board of Directors.
Such services will be performed on behalf of the Fund and Alex. Brown's charge
in rendering such services may be billed monthly to the Fund, subject to
examination by the Fund's independent accountants. Payment or assumption by
Alex. Brown of any Fund expense that Alex. Brown is not required to pay or
assume under this Agreement shall not relieve Alex. Brown of any of its
obligations to the Fund or obligate Alex. Brown to pay or assume any similar
Fund expense on any subsequent occasions.
9. Compensation. Alex. Brown shall receive no compensation
for the services to be rendered and the expenses assumed by it pursuant to this
Agreement.
10. Compensation for Servicing Shareholder Accounts. The
Fund acknowledges that Alex. Brown may, from its own resources, compensate its
investment representatives for opening accounts, processing investor letters of
transmittals and applications and withdrawal and redemption orders, responding
to inquiries from Fund shareholders concerning the status of their accounts and
the operations of the Fund, and communicating with the Fund and its transfer
agent on behalf of the Fund shareholders.
11. Sub-Distribution Agreements. Alex. Brown may enter
into Sub-Distribution Agreements (the "Sub-Distribution Agreements") with any
securities dealer who is registered under the Securities Exchange Act of 1934
and a member in good standing of the NASD, who may wish to act as a
Participating Dealer in connection with the proposed offering. All
Sub-Distribution Agreements shall be in substantially the form of the agreement
attached hereto as Exhibit "A". For processing Fund shareholders' redemption
orders, responding to the inquiries from Fund shareholders concerning the status
of their accounts and the operations of the Fund and communicating with the
Fund, its transfer agent and Alex. Brown, Alex. Brown may, from its own
resources, compensate each such Participating Dealer for such services.
12. Non-Exclusivity. The services of Alex. Brown to the
Fund are not to be deemed exclusive and Alex. Brown shall be free to render
distribution or other services to others (including other investment companies)
and to engage in other activities. It is understood and agreed that Directors,
officers or employees of Alex. Brown may serve as Directors or officers of the
Fund, and that Directors or officers of the Fund may serve as Directors,
officers and employees of Alex. Brown to the extent permitted by law; and that
Directors, officers and employees of Alex. Brown are not prohibited from
engaging in any other business activity or from rendering services to any other
person, or from serving as partners, Directors or officers of any other firm or
corporation, including other investment companies.
13. Term and Approval. This Agreement shall become
effective at the close of business on the date hereof and shall remain in force
and effect for an initial term of two years and from year to year thereafter,
provided that such continuance is specifically approved at least annually:
5
<PAGE>
(a) (i) by the Fund's Board of Directors or (ii)
by the vote of a majority of the outstanding voting securities of the Shares (as
defined in the 1940 Act), and
(b) by the affirmative vote of a majority of the
Directors who are not "interested persons" of the Fund (as defined in the 1940
Act) and do not have a financial interest in the operation of this Agreement, by
votes cast in person at a meeting specifically called for such purpose.
14. Termination. This Agreement may be terminated at any
time, on sixty (60) days' written notice to the other party without the payment
of any penalty, (i) by vote of the Fund's Board of Directors, (ii) by vote of a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the 1940 Act) and do not have a financial interest in the operation
of this Agreement, (iii) by vote of a majority of the Fund's outstanding voting
securities (as defined in the 1940 Act) or (iv) by Alex. Brown. The notice
provided for herein may be waived by each party. This Agreement shall
automatically terminate in the event of its assignment (as the term is defined
in the 1940 Act).
15. Liability. In the performance of its duties hereunder,
Alex. Brown shall be obligated to exercise care and diligence and to act in good
faith and to use its best efforts within reasonable limits in performing all
services provided for under this Agreement, but shall not be liable for any act
or omission which does not constitute willful misfeasance, bad faith or gross
negligence on the part of Alex. Brown or reckless disregard by Alex. Brown of
its duties under this Agreement.
16. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other parties, it is agreed that the address of both
Alex. Brown and the Fund for this purpose shall be 135 East Baltimore Street,
Baltimore, Maryland 21202.
17. Questions of Interpretation. Any question of
interpretation of any term or provision of this Agreement having a counterpart
in or otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the SEC issued pursuant to the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Maryland.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their respective officers as of the day
and year first above written.
[SEAL] FLAG INVESTORS EMERGING GROWTH
FUND, INC.
Attest: /s/ Laurie D. Collidge By /s/ Edward J. Veilleux
---------------------- ---------------------------------
Title: Vice President
[SEAL] ALEX. BROWN & SONS INCORPORATED
Attest: /s/ Laurie D. Collidge By /s/ Richard T. Hale
---------------------- ---------------------------------
Title: Managing Director
7
<PAGE>
Exhibit A
FLAG INVESTORS FAMILY OF FUNDS 135 East Baltimore
Street Baltimore, Maryland 21202
SUB-DISTRIBUTION AGREEMENT
_____________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a
Maryland corporation, serves as distributor (the "Distributor") of the Flag
Investors Funds (collectively, the "Funds", individually a "Fund"). The Funds
are open-end investment companies registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Funds offer their shares
("Shares") to the public in accordance with the terms and conditions contained
in the Prospectus of each Fund. The term "Prospectus" used herein refers to the
prospectus on file with the Securities and Exchange Commission which is part of
the registration statement of each Fund under the Securities Act of 1933 (the
"Securities Act"). In connection with the foregoing you may serve as a
participating dealer (and, therefore, accept orders for the purchase or
redemption of Shares, respond to shareholder inquiries and perform other related
functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a
Participating Dealer and as such are authorized (i) to accept orders for the
purchase of Shares and to transmit to the Funds such orders and the payment made
therefore, (ii) to accept orders for the redemption of Shares and to transmit to
the Funds such orders and all additional material, including any certificates
for Shares, as may be required to complete the redemption and (iii) to assist
shareholders with the foregoing and other matters relating to their investments
in each Fund, in each case subject to the terms and conditions set forth in the
Prospectus of each Fund. You are to review each Share purchase or redemption
order submitted through you or with your assistance for completeness and
accuracy. You further agree to undertake from time to time certain shareholder
servicing activities for customers of yours who have purchased Shares and who
use your facilities to communicate with the Funds or to effect redemptions or
additional purchases of Shares.
2. Limitation of Authority. No person is authorized to
make any representations concerning the Funds or the Shares except those
contained in the
8
<PAGE>
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you
will look solely to the Distributor, and you acknowledge that the Funds shall
have no direct responsibility for any compensation. In addition to any sales
charge payable to you by your customer pursuant to a Prospectus, the Distributor
will pay you no less often than annually a shareholder processing and service
fee (as we may determine from time to time in writing) computed as a percentage
of the average daily net assets maintained with each Fund during the preceding
period by shareholders who purchase their shares through you or with your
assistance, provided that said assets are at least $250,000 for each Fund for
which you are to be compensated, and provided that in all cases your name is
transmitted with each shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the
provisions contained in the Securities Act governing the distribution of
prospectuses to persons to whom you offer Shares. You further agree to deliver,
upon our request, copies of any amended Prospectus of the relevant Fund to
purchasers whose Shares you are holding as record owner and to deliver to such
persons copies of the annual and interim reports and proxy solicitation
materials of the Funds. We agree to furnish to you as many copies of each
Prospectus, annual and interim reports and proxy solicitation materials as you
may reasonably request.
5. Qualification to Act. You represent that you are a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"). Your expulsion or suspension from the NASD will automatically
terminate this Agreement on the effective date of such expulsion or suspension.
You agree that you will not offer Shares to persons in any jurisdiction in which
you may not lawfully make such offer due to the fact that you have not
registered under, or are not exempt from, the applicable registration or
licensing requirements of such jurisdiction. You agree that in performing the
services under this Agreement, you at all times will comply with the NASD's
Conduct Rules, including, without limitation, the provisions of Rule 2830 of
such Rules. You agree that you will not combine customer orders to reach
breakpoints in commissions for any purposes whatsoever unless authorized by the
then current Prospectus in respect of Shares of a particular class or by us in
writing. You also agree that you will place orders immediately upon their
receipt and will not withhold any order so as to profit therefrom. In
determining the amount payable to you hereunder, we reserve the right to exclude
any sales which we reasonably determine are not made in accordance with the
terms of the Prospectus and provisions of the Agreement.
6. Blue Sky. The Funds have registered an indefinite
number of Shares under the Securities Act. The Funds intend to register or
qualify in certain states where registration or qualification is required. We
will inform you as to the states or other jurisdictions in which we believe the
Shares have been qualified for sale under, or are
9
<PAGE>
exempt from the requirements of, the respective securities laws of such states.
You agree that you will offer Shares to your customers only in those states
where such Shares have been registered, qualified, or an exemption is available.
We assume no responsibility or obligation as to your right to sell Shares in any
jurisdiction. We will file with the Department of State in New York a State
Notice and a Further State Notice with respect to the Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full
authority to take such action as it deems advisable in respect of all matters
pertaining to the offering of its Shares, including the right not to accept any
order for the purchase of Shares.
8. Record Keeping. You will (i) maintain all records
required by law to be kept by you relating to transactions in Shares and, upon
request by any Fund, promptly make such of these records available to the Fund
as the Fund may reasonably request in connection with its operations and (ii)
promptly notify the Fund if you experience any difficulty in maintaining the
records described in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability
to you except for lack of good faith and for obligations expressly assumed by it
hereunder. In carrying out your obligations, you agree to act in good faith and
without negligence. Nothing contained in this Agreement is intended to operate
as a waiver by the Distributor or you of compliance with any provision of the
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by
either party, without penalty, upon ten days' notice to the other party and
shall automatically terminate in the event of its assignment (as defined in the
Investment Company Act). This Agreement may also be terminated at any time for
any particular Fund without penalty by the vote of a majority of the members of
the Board of Directors or Trustees of such Fund who are not "interested persons"
(as defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Distribution Agreement between such
Fund and the Distributor or by the vote of a majority of the outstanding voting
securities of the Fund.
11. Communications. All communications to us should be
sent to the above address. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
10
<PAGE>
If the foregoing is in accordance with your understanding
of our agreement, please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
------------------------------------------
(Authorized Signature)
Confirmed and accepted:
Firm Name: ________________________
By: _______________________________
Address: __________________________
Date:______________________________
11
<PAGE>
EX-99.B(11)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated December 2, 1996 on our
audit of the financial statements and financial highlights of Flag Investors
Emerging Growth Fund, Inc. in the Statement of Additional Information with
respect to Post-Effective Amendment No. 14 to the Registration Statement (File
Nos. 33-21119 and 811-5320) on Form N-1A under the Securities Act of 1933 and
the Investment Company Act of 1940, respectively, of Flag Investors Emerging
Growth Fund, Inc. We also consent to the reference to our Firm under the
headings "Financial Highlights" and "General Information" in the Prospectus
and under the heading "Independent Accountants" in the Statement of Additional
Information.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 24, 1997
<PAGE>
EX-99.B(18)(b)
Flag Investors Emerging Growth Fund, Inc.
Rule 18f-3 Multiple Class Plan
for
Flag Investors Class A, Flag Investors Class B,
Flag Investors Institutional and
Alex. Brown Capital Advisory & Trust Shares Classes
Originally Adopted December 13, 1995
(as revised to reflect the addition of Flag Investors Class B Shares
and ABCAT Shares)
I. Introduction.
A. Authority. This Rule 18f-3 Multiple Class Plan (the "Plan") has been
adopted by the Board of Directors (the "Board") of Flag Investors Emerging
Growth Fund, Inc. (the "Fund"), including a majority of the Directors of the
Fund who are not "interested persons" of the Fund (the "Independent Directors")
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act").
B. History. The Fund is entitled to rely on an exemptive order dated
December 30, 1994, which amended and supplemented prior multi-class exemptive
orders dated August 27, 1985 and February 27, 1987, respectively, (Inv. Co. Act
Releases Nos. IC-20813, IC-14695 and IC-15592, respectively) (collectively, the
"Order"). On December 13, 1995, the Fund elected to rely on Rule 18f-3 rather
than the Order, as permitted by Rule 18f-3 subject to certain conditions, and
created a multiple class distribution arrangement for its classes of shares of
the common stock of the Fund's one existing series (the "Series"). The multiple
class distribution arrangement will be effective on the date of effectiveness of
the post-effective amendment to the Fund's registration statement that
incorporates the arrangement. The multi-class distribution arrangement will
apply to all existing (Flag Investors Class A, Flag Investors Class B, Flag
Investors Institutional and Alex. Brown Capital Advisory & Trust) and future
classes of Fund shares. The Flag Investors Class A Shares have been offered
since the Fund's inception on December 30, 1987 and the Flag Investors
Institutional Shares have been offered since November 1, 1995. The Flag
Investors Class B Shares have been offered since June 20, 1996 and the Alex.
Brown Capital Advisory & Trust Shares have been offered since January 10, 1997.
C. Adoption of Plan; Amendment of Plan; and Periodic Review. Pursuant
to Rule 18f-3, the Fund is required to create a written plan specifying all of
the differences among the Fund's classes, including shareholder services,
distribution arrangements, expense allocations, and any related conversion
features or exchange options. The Board has created the Plan to meet this
requirement. The Board, including a majority of the Independent Directors, must
periodically review the Plan for its continued appropriateness, and must approve
any material amendment of the Plan as it relates to any class of any Series
covered by the Plan. This Plan must be amended to properly describe (through
additional exhibits hereto or otherwise) each additional class of shares
approved by the Fund's Board of Directors after the date hereof. Before any
material amendment
<PAGE>
of the Plan, the Fund is required to obtain a finding by a majority of the
Board, and a majority of the Independent Directors, that the Plan as proposed to
be amended, including the expense allocations, is in the best interests of each
class individually and the Fund as a whole.
II. Attributes of Share Classes
A. The rights of each existing class of the Fund are not being changed
hereby, and the rights, obligations and features of each of the classes of the
Fund shall be as set forth in the Fund's Articles of Incorporation and Bylaws,
as each such document is amended or restated to date, the resolutions that are
adopted with respect to the classes of the Fund and that are adopted pursuant to
the Plan to date, and related materials of the Board, as set forth in Exhibit A
hereto.
B. With respect to any class of shares of a Series, the following
requirements shall apply. Each share of a particular Series shall represent an
equal pro rata interest in the Series and shall have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that (i) each
class shall have a different class designation (e.g., Class A, Class B, Class C,
etc.); (ii) each class of shares shall separately bear any distribution expenses
in connection with the plan adopted pursuant to Rule 12b-1 under the 1940 Act (a
"Rule 12b-1 Plan"), if any, for such class (and any other costs relating to
obtaining shareholder approval of the Rule 12b-1 Plan for such class, or an
amendment of such plan) and shall separately bear any expenses associated with
any non-Rule 12b-1 Plan service payments ("service fees") that are made under
any servicing agreement, if any, entered into with respect to that class; (iii)
holders of the shares of the class shall have exclusive voting rights regarding
the Rule 12b-1 Plan relating to such class (e.g., the adoption, amendment or
termination of a Rule 12b-1 Plan), regarding the servicing agreements relating
to such class and regarding any matter submitted to shareholders in which the
interests of that class differ from the interests of any other class; (iv) each
new class of shares may bear, to the extent consistent with rulings and other
published statements of position by the Internal Revenue Service, the expenses
of the Fund's operation that are directly attributable to such class ("Class
Expenses")(1); and (v) each class may have conversion features unique to such
class, permitting conversion of shares of such class to shares of another class,
subject to the requirements set forth in Rule 18f-3.
- --------
(1) Class Expenses are limited to any or all of the following: (i) transfer
agent fees identified as being attributable to a specific class of shares, (ii)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class, (iii) Blue Sky
registration fees incurred by a class of shares, (iv) SEC registration fees
incurred by a class of shares, (v) expenses of administrative personnel and
services as required to support the shareholders of a specific class, (vi)
directors' fees or expenses incurred as a result of issues relating solely to a
class of shares, (vii) account expenses relating solely to a class of shares,
(viii) auditors' fees, litigation expenses, and legal fees and expenses relating
solely to a class of shares, and (ix) expenses incurred in connection with
shareholder meetings as a result of issues relating solely to a class of shares.
<PAGE>
III. Expense Allocations
Expenses of each class created after the date hereof must be
allocated as follows: (i) distribution and shareholder servicing payments
associated with any Rule 12b-1 Plan or servicing agreement, if any, relating to
each respective class of shares (including any costs relating to implementing
such plans or any amendment thereto) will be borne exclusively by that class;
(ii) any incremental transfer agency fees relating to a particular class will be
borne exclusively by that class; and (iii) Class Expenses relating to a
particular class will be borne exclusively by that class.
The methodology and procedures for calculating the net asset
value and dividends and distributions of the various classes of shares of the
Fund and the proper allocation of income and expenses among the various classes
of shares of the Fund are required to comply with the Fund's internal control
structure pursuant to applicable auditing standards, including Statement on
Auditing Standards No. 55, and to be reviewed as part of the independent
accountants' review of such internal control structure. The independent
accountants' report on the Fund's system of internal controls required by Form
N-SAR, Item 77B, is not required to refer expressly to the procedures for
calculating the classes' net asset values.
<PAGE>
Approved: September 26, 1995
Resolutions of Board Creating
Institutional Class of Shares
RESOLVED, that the total number of shares of common stock, par value
$.001 per share, that Flag Investors Emerging Growth Fund, Inc. is authorized to
issue is hereby increased from ten million (10,000,000) to fifteen million
(15,000,000) and that from such amount, five million (5,000,000) authorized and
unissued shares be, and hereby are, designated and classified as the "Flag
Investors Emerging Growth Fund Institutional Shares";
FURTHER RESOLVED, that the proper officers of the Fund be, and each of
them hereby is, authorized and directed to file Articles Supplementary to the
Fund's Articles of Incorporation to effectuate the increase in authorized shares
and to designate and classify the new class;
FURTHER RESOLVED, that any filings previously made and any actions
previously taken by the appropriate officers of each Fund in connection with the
establishment and registration of the new class be, and they hereby are
ratified, confirmed and approved as the act and deed of such Fund.
Approved: September 26, 1995
Approval of Distribution Agreements
for New Flag Investors Institutional Shares
FURTHER RESOLVED, that the Distribution Agreement between Flag
Investors Emerging Growth Fund, Inc. and Alex. Brown & Sons Incorporated for the
Flag Investors Institutional Shares of said Fund be, and the same hereby is,
approved;
FURTHER RESOLVED, that the proper officers of Flag Investors Emerging
Growth Fund, Inc. be, and each of them hereby is, authorized and directed to
enter into and execute the Distribution Agreement on behalf of the Fund, and to
take all other actions that such officer deems necessary or appropriate in
connection with the execution of such agreement, the taking of any action to
establish conclusively such officer's authority therefore and the approval and
ratification thereof by the Fund.
Approved: October 1, 1996
<PAGE>
Resolutions of Board Creating
Alex. Brown Capital Advisory & Trust Shares
RESOLVED, that the total number of shares of common stock, par
value $.001 per share, that Flag Investors Emerging Growth Fund, Inc. is
authorized to issue is hereby increased from fifteen million (15,000,000) to
twenty million (20,000,000) and that from such amount, five million (5,000,000)
authorized and unissued shares be, and hereby are, designated and classified as
the "Alex. Brown Advisory & Trust Emerging Growth Shares";
FURTHER RESOLVED, that the proper officers of Flag Investors
Emerging Growth Fund, Inc. be, and each of them hereby is, authorized and
directed to file Articles Supplementary to the Fund's Articles of Incorporation
to effectuate the increase in authorized shares and to designate and classify
the new class;
Approved: October 1, 1996
Approval of Distribution Agreements for
New Alex. Brown Capital Advisory & Trust Shares
RESOLVED, that the Distribution Agreement between Flag Investors
Emerging Growth Fund, Inc. and Alex. Brown & Sons Incorporated for the Alex.
Brown Capital Advisory & Trust Shares of said Fund be, and the same hereby is,
approved in substantially the form presented to this meeting;
FURTHER RESOLVED, that the proper officers of Flag Investors
Emerging Growth Fund, Inc. be, and they hereby are, authorized and directed to
enter into and execute the appropriate Distribution Agreement on behalf of the
Fund, and to take all other actions that such officer deems necessary or
appropriate in connection with the execution of such agreement, the taking of
any action to establish conclusively such officer's authority therefore and the
approval and ratification thereof by the Fund.
<PAGE>
Flag Investors Emerging Growth Fund, Inc.
18f-3 Plan Exhibits
1. Registrant's Articles of Incorporation filed as Exhibit (1)(a) to
Post-Effective Amendment No. 10 to Registrant's Registration Statement on Form
N-1A (Registration No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-95-000392) on August 18, 1995 is
incorporated herein by reference.
2. Registrant's Articles Supplementary establishing the ABCAT Shares are filed
as Exhibit (1)(e) to this Registration Statement on Form N-1A (Registration No.
33-21119) and are incorporated herein by reference.
3. Registrant's By-Laws are filed as Exhibit (2) to this Registration Statement
on Form N-1A (Registration No. 33-21119) and are incorporated herein by
reference.
4. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors Emerging Growth Fund Class A Shares
filed as Exhibit (6)(a) to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0000950116-95-000392) on August 18, 1995 is incorporated herein by reference.
5. Registrant's Sub-Distribution Agreement between Alex. Brown & Sons
Incorporated and Participating Broker-Dealers is filed as Exhibit (6)(b) to this
Registration Statement on Form N-1A (Registration No. 33-21119) and is
incorporated herein by reference.
6. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors Emerging Growth Fund Institutional
Shares filed as Exhibit (6)(d) to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-21119),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000107) on February 28, 1996 is incorporated herein by reference.
7. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors Emerging Growth Fund Class B Shares
filed as Exhibit (6)(e) to Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000161) on March 25, 1996 is incorporated herein by reference.
8. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Alex. Brown Capital Advisory & Trust Emerging
Growth Shares is filed as Exhibit (6)(f) to this Registration Statement on Form
N-1A (Registration No. 33-21119) and is incorporated herein by reference.
<PAGE>
9. Registrant's Distribution Plan with respect to Flag Investors Emerging Growth
Fund Class A Shares filed as Exhibit (15)(a) to Post-Effective Amendment No. 10
to Registrant's Registration Statement on Form N-1A (Registration No. 33-21119),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-95-000392) on August 18, 1995 is incorporated herein by reference.
10. Registrant's Distribution Plan with respect to Flag Investors Emerging
Growth Fund Class B Shares filed as Exhibit (15)(b) to Post-Effective Amendment
No. 12 to Registrant's Registration Statement on Form N-1A (Registration No.
33-21119), filed with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-96-000161) on March 25, 1996 is incorporated herein by
reference.
11. Registrant's Prospectus relating to its Class A and Class B Shares is filed
as part of this Registration Statement on Form N-1A (Registration No. 33-21119),
and, as amended from time to time, is incorporated herein by reference.
12. Registrant's Prospectus relating to its Institutional Class Shares is filed
as part of this Registration Statement on Form N-1A (Registration No. 33-21119),
and, as amended from time to time, is incorporated herein by reference.
13. Registrant's Prospectus relating to its Alex. Brown Capital Advisory & Trust
Class Shares is filed as part of this Registration Statement on Form N-1A
(Registration No. 33-21119), and, as amended from time to time, is incorporated
herein by reference.
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