<PAGE>
[GRAPHIC OMITTED]
EMERGING GROWTH FUND, INC.
(Class A and Class B Shares)
Prospectus & Application -- March 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks 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 your securities dealer or the Fund's
transfer agent. 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 you with alternatives as to sales load and
Fund expenses. (See "How to Invest in the Fund.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated March 1, 1998, 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.
TABLE OF CONTENTS
Fund Expenses ................................................... 1
Financial Highlights ............................................ 2
Investment Program .............................................. 4
Investment Restrictions ......................................... 5
How to Invest in the Fund ....................................... 5
How to Redeem Shares ............................................ 9
Telephone Transactions .......................................... 9
Dividends and Taxes ............................................. 10
Management of the Fund .......................................... 10
Investment Advisor .............................................. 11
Distributor ..................................................... 11
Custodian, Transfer Agent and
Accounting Services .......................................... 12
Performance Information ......................................... 12
General Information ............................................. 13
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>
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Shareholder Transaction Expenses: Alternative Alternative
--------------- ----------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ........................................... 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends ........................... None None
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 ................................................................ 0.85% 0.85%
12b-1 Fees ..................................................................... 0.25% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B Shares) 0.34% 0.59%***
------ -----------
Total Fund Operating Expenses .................................................. 1.44% 2.19%
====== ===========
</TABLE>
- -----------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How to
Invest in the Fund -- Class A Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem your Class B Shares within six years of purchase. The amount of the
charge declines in relation to the time you hold your shares. 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 your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you
with information about your investment.
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ---------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period:
Class A Shares ......................................... $59 $89 $120 $ 210
Class B Shares ......................................... $62 $99 $137 $ 216*
You would pay the following expenses on the same invest-
ment, assuming no redempton:*
Class B Shares ......................................... $22 $69 $117 $ 216*
</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 Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear directly or indirectly when you invest in the Fund.
If you purchase shares of either class through a financial institution, you may
be charged separate fees by that institution.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, you may qualify for reduced sales charges or no sales
charge at all. (See "How to Invest in the Fund -- Class A Shares.") Due to the
continuous nature of Rule 12b-1 fees, you may pay more than the equivalent of
the maximum sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc. if you hold your shares for a long time.
1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
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, 1997 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, 1997, which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................................ $ 19.14 $ 17.09 $ 12.90
------- ------- -------
Income from Investment Operations:
Expenses in excess of income .......................................... ( 0.18) ( 0.15) ( 0.09)
Net realized and unrealized gain/(loss) on investments ................ 4.95 3.10 4.32
Effect of other capital share activity ................................ -- -- --
-------- ------- -------
Total from Investment Operations ...................................... 4.77 2.95 4.23
-------- ------- -------
Less Distributions:
Distributions from net investment income and short-term gains ......... ( 0.21) ( 0.30) --
Distributions from net realized mid-term and long-term gains .......... ( 0.53) ( 0.60) ( 0.04)
-------- ------- -------
Total distributions ................................................... ( 0.74) ( 0.90) ( 0.04)
-------- ------- -------
Net asset value at end of period ...................................... $ 23.17 $ 19.14 $ 17.09
======== ======= =======
Total Return(2) ........................................................ 25.93% 18.19% 32.92%
Ratios to Average Daily Net Assets:
Expenses .............................................................. 1.44% 1.50% 1.50%
Expenses in excess of income .......................................... (0.97)% (0.83)% (0.64)%
Supplemental Data:
Net assets at end of period (000): .................................... $71,123 $45,325 $38,127
Portfolio turnover rate ............................................... 42% 24% 39%
Average commissions per share(4) ...................................... $0.0736 $ 0.07 --
</TABLE>
- -----------
(1) Commencecement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
2
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
- ---------------------------------------------------------------------------------- For the Period
For the Year Ended October 31, December 30, 1987(1)
- ---------------------------------------------------------------------------------- through
1994 1993 1992 1991 1990 1989 October 31, 1988
- ------------- ----------- ------------- ----------- ------------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
$ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90 $ 10.87 $ 10.00
-------- ------- --------- ------- --------- ------- --------
( 0.08) ( 0.08) ( 0.16) ( 0.10) ( 0.11) ( 0.05) 0.10
0.47 1.20 ( 1.54) 6.40 ( 4.00) 4.13 ( 0.88)
-- -- -- -- -- -- 1.65
--------- ------- --------- ------- --------- ------- ---------
0.39 1.12 ( 1.70) 6.30 ( 4.11) 4.08 0.87
--------- ------- --------- ------- --------- ------- ---------
-- -- -- -- ( 1.86) ( 0.05) --
( 1.51) ( 0.63) -- -- -- -- --
--------- ------- --------- ------- --------- ------- ---------
( 1.51) ( 0.63) -- -- ( 1.86) ( 0.05) --
--------- ------- --------- ------- --------- ------- ---------
$ 12.90 $ 14.02 $ 13.53 $ 15.23 $ 8.93 $ 14.90 $ 10.87
========= ======= ========= ======= ========= ======= =========
3.75% 8.33% (11.16)% 70.55% (31.63)% 37.64% 8.80%
1.50% 1.50% 1.46% 1.50% 1.50% 1.49% 1.47%(3)
( 0.73)% ( 0.52)% ( 0.92)% ( 0.76)% ( 0.92)% ( 0.42)% 1.02%(3)
$ 23,302 $28,867 $ 38,924 $48,656 $ 31,678 $44,396 $ 26,159
86% 133% 69% 79% 82% 108% 110%
-- -- -- -- -- -- --
<CAPTION>
Class B
- -------------------------------------
For the Period
For the June 20, 1996(1)
Year Ended through
October 31, 1997 October 31, 1996
- ------------------ -----------------
<C> <C>
$ 19.10 $ 19.22
------- -------
( 0.18) ( 0.12)
4.70 --
-- --
-------- --------
4.52 ( 0.12)
-------- --------
( 0.21) --
( 0.53) --
-------- --------
( 0.74) --
-------- --------
$ 22.88 $ 19.10
======== ========
24.69% ( 0.62)%
2.19% 2.25%(3)
( 1.73)% ( 1.67)%(3)
$ 5,719 $ 772
42% 24%(3)
$ 0.0736 $ 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. 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 (the "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 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 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" in the
Statement of Additional Information.) 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.
4
<PAGE>
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 has the right to lend portfolio
securities to approved institutional borrowers for the purpose of
increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at
least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund's custodian, or another affiliate
may act as securities lending agent.
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, you should not consider investing in
this Fund if you are unable or unwilling to assume the risk of loss inherent in
such a program, nor should you consider an investment in the Fund to be 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 is subject to a number of fundamental and non-fundamental
investment restrictions that are set forth in the Statement of Additional
Information.
HOW TO INVEST IN THE FUND
- --------------------------------------------------------------------------------
You may purchase Class A Shares and Class B Shares through your
securities dealer or through any financial institution that is authorized to
service shareholder accounts ("Shareholder Servicing Agents"). You may also
purchase shares of either class 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.
The Class A and Class B alternatives permit you to choose the method of
purchasing shares that is best for you given the amount of your purchase, the
length of time you expect to hold your shares, and other circumstances. You
should consider whether, during the anticipated life of your 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, if you plan to
purchase $100,000 or more of Fund shares you will pay lower aggregate charges
and expenses by purchasing Class A Shares. (See "Fee Table.") Your securities
dealer or Shareholder Servicing Agent and their investment representatives may
receive different levels of compensation depending on which class of shares you
buy.
Your initial investment in either class must be at least $2,000.
Subsequent investments must be at least $100. The following are exceptions to
these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
5
<PAGE>
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. Subsequent investments may
be as low as $100 if made monthly, but must be $250 if done
quarterly. (See "Purchases Through Automatic Investing Plan" below.)
o There is no minimum investment requirement for qualified retirement
plans (i.e., 401(k) plans or pension and profit sharing plans).
You may purchase shares on any day on which the New York Stock Exchange
is open for business (a "Business Day"). Your purchase order will be executed
at a per share purchase price equal to the net asset value next determined
after it is received plus any applicable front-end sales charge (the "Offering
Price"). If your purchase is made by mail, it must be accompanied by payment of
the Offering Price. Purchases made through your securities dealer or
Shareholder Servicing Agent must be in accordance with their payment
procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
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 will be given their
market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board of
Directors. Because the classes of shares have different distribution/service
fees, the net asset value per share of the classes differs at times.
Offering Price
Your share purchase is made at the Offering Price, which for Class A
Shares includes a sales charge that 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 in the following table:
Sales Charge Dealer
as % of Compensation
------------------------- as % of
Offering Net Amount Offering
Amount of Purchase Price Invested Price
- ----------------------------- ---------- ------------ -------------
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*
- --------------------------------------------------------------------------------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be subject to a contingent
deferred sales charge when you redeem your shares. (See below.) The Fund's
distributor may make payments to your securities dealer or Shareholder
Servicing Agent in an amount up to 1.00% of the Offering Price.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Class A Shares
of this Fund and Class A or Class D shares of any other Flag Investors fund.
The applicable sales charge will be determined based on the total value of your
current purchases plus the value of your existing investments. (For this
purpose, existing investments will be valued at the higher of cost or current
value.) You may combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation,
you must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
<PAGE>
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent that states your 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 does not require that you purchase the full amount indicated.
The minimum initial investment under a Letter of Intent is 5% of the full
amount. Class A Shares purchased with the first 5% of the full amount will be
held in escrow (while remaining registered in your name) to secure payment of
the higher sales charge applicable to the Class A Shares actually purchased if
you do not purchase the full amount. Such escrowed shares will be redeemed to
pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the escrowed shares will be released. If you wish to enter
into a Letter of Intent in conjunction with an investment in Class A Shares, you
may do so by completing the appropriate section of the Application Form attached
to this Prospectus.
6
<PAGE>
You will not be charged a sales charge on purchases of $1 million or more
of Class A Shares. You may, however, be required to pay a contingent deferred
sales charge if you redeem the purchased shares within 24 months. The charge
will be made at the rate of 0.50% 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 if your securities
dealer has agreed to return to the Fund's distributor (the "Distributor") 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.
You may purchase Class A Shares at net asset value (without sales charge)
under the following circumstances:
1) If you are purchasing shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your broker or agent if you purchase shares in this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a full
description of the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Distributor, the Advisor
and any broker-dealer authorized to sell Class A Shares.
You may also purchase Class A Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Class B Shares
You will not be charged a sales charge at the time of purchase of Class B
Shares. However, you will be charged a contingent deferred sales charge on
certain Class B Shares redeemed within six years of your 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. No charge is
assessed on redemptions of Class B Shares derived from reinvestment of
dividends or capital gains distributions.
<PAGE>
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 you have redeemed first,
any Class B Shares in your account that represent reinvested dividends and
distributions and second, Class B Shares you 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 since you purchased the shares (the
"holding period"). For purposes of determining this holding period, all
purchases 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.
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar
Payment was Made amount subject to charge)
- --------------------- ---------------------------------
First .............. 4.0%
Second ............. 4.0%
Third .............. 3.0%
Fourth ............. 3.0%
Fifth .............. 2.0%
Sixth .............. 1.0%
Thereafter ......... None*
- --------------------------------------------------------------------------------
* As described more fully below, Class B Shares automatically convert to Class
A Shares six years after the beginning of the calendar month of your
purchase.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived: (i) following your death or initial determination of
disability (as defined in the Internal Revenue Code of 1986, as amended); or
(ii) to the extent that the redemption represents a minimum required
distribution from your individual retirement account or other retirement plan.
The waiver with respect to (i) above is only applicable in cases where your
account is registered (a) in your individual name, (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. You, or your
representative, must notify the Fund's transfer agent (the "Transfer Agent")
prior to the time of redemption if such circumstances exist and you are
eligible for this waiver. For information on the imposition and waiver of the
contingent deferred sales charge, contact the Transfer Agent.
Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month of your purchase, Class B Shares will automatically convert
to
7
<PAGE>
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 charge. The
conversion is not a taxable event to you.
For purposes of conversion to Class A Shares, shares received as
dividends and other distributions paid on Class B Shares in your account will
be considered to be held in a separate sub-account. Each time any Class B
Shares in your 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.
You may also purchase Class B Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Purchases by Exchange
You may exchange shares of any other Flag Investors fund with the same
sales charge structure for an equal dollar amount of Class A or Class B Shares,
as applicable, without payment of the sales charges described above or any other
charge. In addition, you may exchange Class A shares of any Flag Investors fund
with a lower sales charge (with the exception of Flag Investors Cash Reserve
Prime Class A Shares) for an equal dollar amount of Class A Shares if you have
owned the shares you are redeeming for at least 24 months. If you have owned
them for less than 24 months, you may exchange them for Class A Shares if you
pay the difference in sales charges. You may enter both your redemption and
purchase orders on the same Business Day or, if you have already redeemed the
shares of the other fund, you may enter your purchase order within 90 days of
the redemption.
When you acquire Fund shares through an exchange from another fund in the
Flag Investors family of funds, the period for which the original shares were
held prior to the exchange will be combined with the holding period of the
shares acquired in the exchange for purposes of determining what, if any,
contingent deferred sales charge is applicable when those shares are redeemed.
The net asset value of shares purchased and redeemed in an exchange
request received on the same Business Day will be determined on that 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.
Your partnership interest in EGC Limited Partnership may be exchanged for
an equal dollar amount of Class A Shares. The Distributor will tender your
partnership interest offered for exchange for redemption by the issuer and will
use the proceeds to purchase Class A Shares on your behalf. Class A Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
You may exercise this exchange privilege with respect to other Flag
Investors funds 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
You 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 your checking account using a pre-authorized check and will be invested in
the class of shares selected 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 you or the Fund upon 30 days'
prior written notice to the other party. If you wish to enroll in the Automatic
Investing Plan or if you wish to obtain additional information, complete the
appropriate section of the Application Form attached to this Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and capital gains
distributions will be reinvested in additional Fund shares of the same class at
net asset value. You may elect to receive your distributions in cash or to
terminate automatic reinvestment by completing the appropriate section of the
attached Application Form or by giving written notice to the Transfer Agent at
the address listed on the inside back cover of this Prospectus, either directly
or through your securities dealer or Shareholder Servicing Agent, at least five
days before the next date on which dividends or distributions will be paid.
You may also have your distributions invested in shares of other funds in
the Flag Investors family of funds. Call your securities dealer or the Transfer
Agent for additional information.
8
<PAGE>
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day through
your securities dealer, your Shareholder Servicing Agent or the Transfer Agent.
You may redeem up to $50,000 of either class by telephone. (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 your order (or, if stock certificates have been
issued for the shares to be redeemed, after you tender 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 on the following Business Day.
You will be paid for redeemed shares by check which will be mailed within seven
days after your redemption order is received in proper form.
The Transfer Agent, your securities dealer or your Shareholder Servicing
Agent may require the following documents in order to redeem your shares:
1) A letter of instructions, specifying your account number and the number of
shares or dollar amount to be redeemed, signed by all owners of the shares
in the exact names in which the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature 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 your account have
been redeemed on a dividend payable date, the dividend will be remitted to you
by check.
The Fund has the power under its Articles of Incorporation to redeem your
account upon 60 days' written notice if its value falls below $500 due to your
redemptions.
Systematic Withdrawal Plan
If you hold Class A Shares or Class B Shares having a value of $10,000 or
more you may arrange to have a portion of your 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, your account may eventually be exhausted.
Because Class A Share purchases include a sales charge that you will not
recover at the time of redemption, you should not have a withdrawal plan in
effect at the same time you are making recurring purchases. In addition, you
may be subject to a contingent deferred sales charge upon redemption of Class B
Shares. (See "How to Invest in the Fund--Class B Shares.") If you wish to
participate in the Fund's Systematic Withdrawal Plan, complete the appropriate
section of the Application Form attached to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem shares of either class in amounts up to $50,000 or
exchange shares in any amount, 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).
Telephone transaction privileges are automatic unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. 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) 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 proce-
9
<PAGE>
dures include requiring you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by 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.")
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 summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are urged to consult with your tax advisor regarding any
specific questions.
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. Unless
you are otherwise exempt, you will be generally subject to federal income tax
on the amounts distributed to you, regardless of whether such distributions are
paid in cash or reinvested in additional shares.
You will be taxed on distributions from the Fund out of net capital
gains, if any, as gains from the sale or exchange of a capital asset held for
more than one year regardless of the length of time you have held the shares.
You will be taxed on all other income distributions as ordinary income. If you
are a corporate shareholder, you may be entitled to the dividends received
deduction on a portion of dividends received from the Fund. You will be advised
annually as to the federal income tax status of all distributions.
Ordinarily, you should include all dividends 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 you and paid by the Fund in the year
in which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of Fund shares is a taxable event for
you.
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. A majority of the
Directors of the Fund have no affiliation with the Distributor or the Advisor.
10
<PAGE>
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or
the "Advisor"), is an indirect subsidiary of Bankers Trust New York Corporation
and an affiliate of BT Alex. Brown Incorporated. ("BT Alex Brown") Since the mid
1970's, BT Alex. Brown, 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 together with the fund and BT Alex. Brown Cash Reserve
Fund, Inc., which funds, together with the Fund, had approximately $7.3 billion
of assets as of December 31, 1997.
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.
As compensation for its services for the fiscal year ended October 31,
1997, the Advisor received from the Fund a fee equal to 0.85% 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. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
Portfolio Manager
Frederick L. Meserve, Jr., a Managing Director of BT Alex. Brown, has had
primary responsibility for managing the Fund's assets since October of 1993. Mr.
Meserve joined BT Alex. Brown in 1977. He has been a member of BT 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
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31,
1997. ICC Distributors is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. ICC Distributors is not affiliated with the Advisor.
The Fund has adopted two separate 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 Investment Company Act of 1940. In addition,
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, including certain banks and BT Alex. Brown, to provide shareholder
services, pursuant to which the Distributor may allocate on a proportional basis
up to all of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
charge you separately for these services.
As compensation for providing distribution services for the Class A
Shares for the period from August 31, 1997 through October 31, 1997, the
Distributor received a fee equal to 0.25% (annualized) 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 August 31, 1997 through October 31,
1997, the Distributor received a distribution fee equal to 0.75% (annualized)
of the Class B Shares' average daily net assets and a shareholder servicing fee
equal to 0.25% (annualized) of the Class B Shares' average daily net assets.
The distribution fee is used to compensate the Distributor for its services and
expenses in distributing the Class B Shares. The shareholder servicing fee is
used to compensate the Distributor, securities dealers and Shareholder
Servicing Agents for services provided and expenses incurred in maintaining
your account, responding to your inquiries and providing you with information
on your investment.
11
<PAGE>
Payments under the Plans are made as described above, regardless of the
Distributor's actual cost of providing distribution services. If the cost of
providing distribution services is less than the payments received, the
Distributor may retain the unexpended portion of the distribution fee. The
Distributor or the Advisor, and their respective affiliates, may make payments
from their own resources to securities dealers or Shareholder Servicing Agents.
Payments by the Distributor will include additional discounts or promotional
incentives in the form of cash or other compensation (including merchandise or
travel).
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp., 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, 1997,
ICC received from the Fund a fee equal to 0.05% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares redeemed at the end of the specific period covered by the total return
figure, over one-, five- and ten-year periods or, if such periods have not yet
elapsed, shorter periods corresponding to the life of the Fund. Such total
return quotations will be computed by finding average annual compounded rates
of return over such periods that would equate an assumed initial investment of
$1,000 to the ending redeemable value, net of the maximum sales charge and
other fees according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability in
investment company advertising and is not equivalent to a yield calculation. If
the Fund compares its performance to other funds or to relevant indices, its
performance will be stated in the same terms in which such comparative data and
indices are stated, which is normally total return rather than yield. For these
purposes, the performance of the Fund, as well as the performance of such
investment companies or indices, may not reflect sales charges, which, if
reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Standard & Poor's 500 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 your bank
with respect to the account through which your shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
12
<PAGE>
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 the Fund 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 by 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
You will be furnished 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.
Shareholder Inquiries
If you have questions concerning your shares, you should contact the
Transfer Agent at (800) 553-8080, the Fund at (800) 767-FLAG, or your
securities dealer or Shareholder Servicing Agent.
13
<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:
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).
Flag Investors Funds To open an IRA account, please call
P.O. Box 419663 1-800-767-3524 to request an IRA Attn:
Kansas City, MO 64141-6663 Flag Investors Emerging Growth Fund, Inc.
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 $____________
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
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 that you or your
immediate family already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Distribution Options
Please check the appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional shares of the same class of the
Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional
shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
A-1
<PAGE>
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)
Please attach a voided check.
__________________________________ _________________________________________
Bank Name Depositor's Signature Date
__________________________________ _________________________________________
Existing Flag Investors Fund Account Depositor's Signature Date
No., if any (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)
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: _____________________
___________________________
<PAGE>
Signature and Taxpayer Certification
- --------------------------------------------------------------------------------
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
your 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
800-882-8585.)
<PAGE>
[ ] 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.
- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
__________________________________ __________________________________________
Signature Date Signature (if a joint account, Date
both must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: _____________________ Dealer Code: ________________________
Dealer's Address: _____________________ Branch Code: ________________________
_____________________
Representative: _____________________ Rep. No.: ________________________
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Class A and Class B Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Distributor Independent Accountants
ICC DISTRIBUTORS, INC. COOPERS & LYBRAND L.L.P.
P.O. Box 7558 2400 Eleven Penn Center
Portland, Maine 04101 Philadelphia, Pennsylvania 19103
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
<PAGE>
[FLAG LOGO GRAPHIC]
EMERGING GROWTH FUND, INC.
(Institutional Shares)
Prospectus & Application -- March 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks 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 your securities dealer or the Fund's transfer agent and may be
purchased only by eligible institutions or by clients of investment advisory
affiliates of BT Alex. Brown Incorporated ("BT Alex. Brown"). (See "How to
Invest in Institutional Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A
Statement of Additional Information dated March 1, 1998 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.
TABLE OF CONTENTS
Fund Expenses ................................. 1
Financial Highlights .......................... 1
Investment Program ............................ 3
Investment Restrictions ....................... 4
How to Invest in Institutional Shares ......... 4
How to Redeem Institutional Shares ............ 5
Telephone Transactions ........................ 5
Dividends and Taxes ........................... 6
Management of the Fund ........................ 7
Investment Advisor ............................ 7
Distributor ................................... 7
Custodian, Transfer Agent and Accounting
Services ................................... 7
Performance Information ....................... 8
General Information ........................... 8
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 ............................................... 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 ......................................................................... 0.85%
12b-1 Fees .............................................................................. None
Other Expenses .......................................................................... 0.34%
----
Total Fund Operating Expenses ........................................................... 1.19%
====
</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: ............ $12 $38 $65 $144
</TABLE>
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional
Shares. If you purchase Institutional Shares through a financial institution
you may be charged separate fees by that institution.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
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, 1997 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, 1997, 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>
For the For the Period
Year Ended November 2, 1995(1)
October 31, through October 31,
1997 1996
------------- --------------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............................... $ 19.15 $ 17.45
-------- --------
Income from Investment Operations:
Expenses in excess of income ......................................... (0.26) (0.12)
Net realized and unrealized gain on investments ...................... 5.10 2.72
--------- ---------
Total from Investment Operations ..................................... 4.84 2.60
Less Distributions:
Distributions from net realized short-term gains ..................... (0.21) (0.30)
Distributions from net realized mid-term and long-term gains ......... (0.53) (0.60)
--------- ---------
Total distributions .................................................. (0.74) (0.90)
--------- ---------
Net asset value at end of period ..................................... $ 23.25 $ 19.15
========= =========
Total Return .......................................................... 26.36% 16.48%
Ratios to Average Daily Net Assets:
Expenses ............................................................. 1.19% 1.25%(2)
Expenses in excess of income ......................................... (0.74)% (0.61)%(2)
Supplemental Data:
Net assets at end of period (000) .................................... $ 13,068 $ 19,751
Portfolio turnover rate .............................................. 42% 24%(2)
Average commissions per share ........................................ $ 0.0736 $ 0.0700
</TABLE>
- -----------
(1) Commencement of operations.
(2) Annualized.
2
<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. 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 (the
"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 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 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" in the
Statement of Additional Information.) 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.
3
<PAGE>
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 has the right to lend portfolio
securities to approved institutional borrowers for the purpose of
increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the
securities or even loss of rights in the collateral should the borrower
of the securities fail financially. The Fund's custodian or another
affiliate may act as securities lending agent.
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, you should not consider investing in
this Fund if you are unable or unwilling to assume the risk of loss inherent in
such a program, nor should you consider an investment in the Fund 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 is subject to a number of fundamental and non-fundamental
investment restrictions that are set forth in the Statement of Additional
Information.
HOW TO INVEST IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may purchase Institutional Shares if you are either of the
following:
1. An eligible institution (e.g., a financial institution, corporation,
investment counselor, qualified retirement plan, trust, estate or
educational, religious or charitable institution). If you are a
qualified retirement plan, your initial investment must be at least
$1,000,000. If you are any of the other institutions listed, your
initial investment must be at least $500,000. You may purchase
Institutional Shares through your securities dealer or through any
financial institution that is authorized to service shareholder
accounts ("Shareholder Servicing Agents"). You may also purchase
Institutional Shares by completing the attached Application Form and
returning it, together with payment of the purchase price, as
instructed.
2. A client of an investment advisory affiliate of BT Alex. Brown
purchasing shares in your investment advisory account. Your initial
or subsequent investments may be in any amount. Your investment
advisor will assist you in purchasing Institutional Shares.
You may purchase Institutional Shares on any day on which the New York
Stock Exchange is open for business (a "Business Day"). Your purchase order
will be executed at a per share purchase price equal to the net asset value
next determined after it is received.
4
<PAGE>
Purchases made through your securities dealer or Shareholder Servicing Agent
must be in accordance with their payment procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
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 will be given
their market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board
of Directors.
Purchases by Exchange
You may exchange Institutional shares of other Flag Investors funds that
you own for an equal dollar amount of Institutional Shares of the Fund 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 the address
listed on the inside back cover of this Prospectus. If your shares are held in
an account with your securities dealer, Shareholder Servicing Agent or
investment advisor, ask them to effect the exchange for you.
The net asset value of Institutional 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 Fund may modify or terminate this offer of exchange at any time on
60 days' prior written notice to shareholders.
Other Information
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.
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day through
your securities dealer, your Shareholder Servicing Agent or the Transfer Agent.
You may redeem up to $500,000 worth of Institutional Shares by telephone. (See
"Telephone Transactions" below.) A redemption order is effected at the net asset
value per share next determined after receipt of your 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. You will be paid for
redeemed Institutional Shares by wire transfer of funds to your securities
dealer, Shareholder Servicing Agent or bank, 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 your account have been redeemed on a dividend payment date, the
dividend will be remitted by wire to your securities dealer, Shareholder
Servicing Agent or bank.
The Fund has the power, under its Articles of Incorporation, to redeem
your account upon 60 days' written notice if its value falls below $500 due to
your redemptions.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem Institutional Shares in amounts up to $500,000, or exchange
Institutional shares of other Flag Investors funds in any amount 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). If your shares are held in an account with
your securities dealer, Shareholder Servicing Agent or investment advisor, ask
them to effect your transaction. Telephone transaction privileges are automatic
unless you specifically request that no telephone redemptions or exchanges be
accepted for your account. This election may be made on the Application Form or
at any time thereafter by
5
<PAGE>
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 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 you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction request will be
recorded.
During periods of extreme economic or market changes, you 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 you elect otherwise, all income dividends and net capital gains
distributions, if any, will be reinvested in additional Institutional Shares
at net asset value. You may elect to terminate automatic reinvestment by
giving written notice to the Transfer Agent at the address listed on the
inside back cover of this Prospectus, either directly or through your
securities dealer or Shareholder Servicing Agent at least five days before the
next date on which dividends or distributions will be paid.
<PAGE>
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are urged to consult with your tax advisor regarding specific
questions.
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. Unless
you are otherwise exempt, you will be generally subject to income tax on the
amounts distributed to you, regardless of whether such distributions are paid
in cash or reinvested in additional Institutional Shares.
You will be taxed on distributions from the Fund out of net capital
gains, if any, as gains from the sale or exchange of a capital asset held for
more than one year regardless of the length of time you have held the
Institutional Shares. You will be taxed on all other income distributions as
ordinary income. If you are a corporate shareholder you may be entitled to the
dividends received deduction on a portion of dividends received from the Fund.
You will be advised annually as to the tax status of all distributions.
Ordinarily, you should include all dividends 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 you and paid by the Fund in
the year in which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of Institutional Shares is a taxable
event for you.
6
<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. A majority of the
Directors of the Fund have no affiliation with the Distributor or the Advisor.
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or
the "Advisor"), is an indirect subsidiary of Bankers Trust New York Corporation
and an affiliate of BT Alex. Brown. Since the mid 1970's, BT Alex. Brown,
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 BT Alex. Brown Cash Reserve Fund, Inc., which funds, together with the Fund,
had approximately $7.3 billion of assets as of December 31, 1997.
<PAGE>
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.
As compensation for its services for the fiscal year ended October 31,
1997, the Advisor received from the Fund a fee equal to 0.85% 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. An affiliate of ICC provides custody
services to the Fund (See "Custodian, Transfer Agent and Accounting
Services.")
Portfolio Manager
Frederick L. Meserve, Jr., a Managing Director of BT Alex. Brown, has had
primary responsibility for managing the Fund's assets since October of 1993.
Mr. Meserve joined BT Alex. Brown in 1977. He has been a member of BT 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
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31,
1997. ICC Distributors is a registered broker-dealer that offfers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. ICC Distributors is not affiliated with the Advisor. ICC Distributors
receives no compensation for distributing the Institutional Shares.
The Distributor bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to individuals and entities other than Fund shareholders. The Advisor or its
affiliates may make payments from its own resources to securities dealers
and Shareholder Servicing Agents.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp., 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, 1997,
ICC received from the Fund a fee equal to 0.05% of the Fund's average daily
net assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
7
<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. Any fees charged
by your bank with respect to accounts through which your Institutional Shares
may be purchased, although not included in calculations of performance, will
reduce your 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 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 & Trust Emerging
Growth Shares." Additional information concerning the Fund's other classes of
shares may be obtained by calling the Fund 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 by 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.
8
<PAGE>
Reports
You will be furnished 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.
Shareholder Inquiries
If you have questions concerning your Institutional Shares, you should
contact the Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080 or
your securities dealer or Shareholder Servicing Agent.
9
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this Application please call: 1-800-553-
Flag Investors Funds 8080, Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
330 West 9th Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Emerging Growth Fund, Inc.
</TABLE>
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)
<TABLE>
<CAPTION>
<S> <C>
Name on Account Mailing Address
- ----------------------------------------- --------------------------------------------
Name of Corporation, Trust or Partnership Name of Individual to Receive Correspondence
- ----------------------------------------- --------------------------------------------
Tax ID Number Street
--------------------------------------------
/ / Corporation / / Partnership / / Trust City State Zip
/ / Non-Profit or Charitable Organization / / Other _______ --------------------------------------------
If a Trust, please provide the following: Daytime Phone
- -----------------------------------------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
</TABLE>
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 BT Alex. Brown Incorporated.
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 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 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 are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in cash [ ] 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 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.
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid
backup withholding.
- --------------------------------------------------------------------------------
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.
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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Institutional Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Distributor Transfer Agent
ICC DISTRIBUTORS, INC. INVESTMENT COMPANY CAPITAL CORP.
P.O. Box 7558 One South Street
Portland, Maine 04101 Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants Custodian
COOPERS & LYBRAND L.L.P. BANKERS TRUST COMPANY
2400 Eleven Penn Center 130 Liberty Street
Philadelphia, Pennsylvania 19103 New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
<PAGE>
[GRAPHIC OMITTED]
ALEX. BROWN CAPITAL ADVISORY & TRUST EMERGING GROWTH SHARES
(A Class of Flag Investors Emerging Growth Fund, Inc.)
Prospectus -- March 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks long-term capital appreciation 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, 1998 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.
TABLE OF CONTENTS
Fund Expenses .......................................................... 1
Financial Highlights ................................................... 1
Investment Program ..................................................... 3
Investment Restrictions ................................................ 4
How to Invest in ABCAT Shares .......................................... 4
How to Redeem ABCAT Shares ............................................. 5
Dividends and Taxes .................................................... 5
Management of the Fund ................................................. 6
Investment Advisor ..................................................... 6
Distributor ............................................................ 6
Custodian, Transfer Agent and Accounting................................
Services ............................................................ 7
Performance Information ................................................ 7
General Information .................................................... 7
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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FUND EXPENSES
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses:
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 .............................................. 0.85%
12b-1 Fees ................................................... None
Other Expenses ............................................... 0.34%
-----
Total Fund Operating Expenses ................................ 1.19%*
=====
- -----------
*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 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period: ....................... $12 $38 $65 $144
</TABLE>
The Expenses and 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 indirectly.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
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, 1997 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, 1997, which can be obtained
at no charge by calling the Fund at (800) 767-3524.
1
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
May 9, 19971 through
October 31, 1997
---------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................. $ 18.64
--------
Income from Investment Operations:
Expenses in excess of income ............................ ( 0.06)
Net realized and unrealized gain on investments ......... 4.66
Total from Investment Operations ........................ 4.60
---------
Net asset value at end of period ......................... $ 23.24
=========
Total Return ............................................. 24.68 %
Ratios to Average Daily Net Assets:
Expenses ................................................ 1.19%2
Expenses in excess of income ............................ ( 0.69)%2
Supplemental Data:
Net assets at end of period (000) ....................... $ 35,653
Portfolio turnover rate ................................. 42%
Average commissions per share ........................... $ 0.0736
</TABLE>
- -----------
1 Commencement of operations.
2 Annualized.
2
<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. 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 (the "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 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 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" in the
Statement of Additional Information.) 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.
3
<PAGE>
1) Repurchase Agreements. The Fund may agree to purchase U.S. Government
securities from credit- worthy 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 has the right to lend portfolio
securities to approved institutional borrowers for the purpose of
increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at
least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund's custodian or another affiliate
may act as securities lending agent.
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.
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund is subject to a number of fundamental and non-fundamental
investment restrictions that are set forth in the Statement of Additional
Information.
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
4
<PAGE>
the resulting amount by the number of then outstanding shares of the class. For
this purpose, portfolio securities will be given their market value which is
normally based on current prices but which may be determned according to "fair
value" procedures approved 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 on the inside back cover of this Prospectus. 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.
<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.
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.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its Shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the Shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, Shareholders are advised to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
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.
Shareholders, unless otherwise exempt, generally will be subject to income tax
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, if any, will be
taxed to Shareholders as gains from the sale or exchange of a capital asset
held for more than one year 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 federal income tax status of
all distributions.
5
<PAGE>
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 Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of ABCAT Shares is a taxable event for
the Shareholder.
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, includ-ing 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. A majority of the
Directors of the Fund have no affiliation with the Distributor or the Advisor.
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp., the Fund's investment advisor ("ICC" or the
"Advisor"), is an indirect subsidiary of Bankers Trust New York Corporation and
an affiliate of both BT Alex. Brown Incorporated ("BT Alex Brown") and Alex.
Brown Capital Advisory & Trust Company. Since the mid 1970's, BT Alex. Brown,
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. ICC is also the
investment advisor to other mutual funds in the Flag Investors family of funds
together with the Fund and BT Alex. Brown Cash Reserve Fund, Inc., which funds,
together with the Fund, had approximately $7.3 billion of assets as of
December 31, 1997.
<PAGE>
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.
As compensation for its services for the fiscal year ended October 31,
1997, the Advisor received from the Fund a fee equal to 0.85% 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. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
Portfolio Manager
Frederick L. Meserve, Jr., a Managing Director of BT Alex. Brown, has had
primary responsibility for managing the Fund's assets since October of 1993. Mr.
Meserve joined BT Alex. Brown in 1977. He has been a member of BT 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
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31, 1997.
ICC Distributors is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. The Distributor is not affiliated with the Advisor. The Distributor
receives no compensation for distributing the ABCAT Shares.
The Distributor bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to individuals and entities other than the Fund shareholders.
6
<PAGE>
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. 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, 1997,
ICC received from the Fund a fee equal to 0.05% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
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.
<PAGE>
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
7
<PAGE>
by calling the Fund 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 by Maryland law, the Fund does not expect tohold 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 semi-annual reports containing information about the
Fund and its operations, including a list of investments held in the Fund's
port-folio and financial statements. The annual financial statements are
audited by the Fund's independent accountants, Coopers & Lybrand L.L.P.
Shareholder Inquiries
Shareholders with inquiries concerning their ABCAT Shares should contact
their account manager at Alex. Brown Capital Advisory & Trust Company.
8
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(ABCAT Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Distributor Transfer Agent
ICC DISTRIBUTORS, INC. INVESTMENT COMPANY CAPITAL CORP.
P.O. Box 7558 One South Street
Portland, Maine 04101 Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants Custodian
COOPERS & LYBRAND L.L.P. BANKERS TRUST COMPANY
2400 Eleven Penn Center 130 Liberty Street
Philadelphia, Pennsylvania 19103 New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
<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 SHAREHOLDER
SERVICING AGENT OR BY WRITING OR CALLING THE FUND, ONE
SOUTH STREET, BALTIMORE, MARYLAND 21202, (800)
767-FLAG.
Statement of Additional Information Dated: March 1, 1998
Relating to Prospectuses dated March 1, 1998 for:
Flag Investors Class A and Flag Investors Class B Shares
Flag Investors Institutional Shares
and
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........................................ 8
6. Investment Advisory and Other Services........................ 13
7. Distribution of Fund Shares................................... 14
8. Brokerage..................................................... 17
9. Capital Shares................................................ 19
10. Semi-Annual Reports........................................... 20
11. Custodian, Transfer Agent and Accounting Services ............ 20
12. Independent Accountants....................................... 20
13. Performance Information....................................... 21
14. Control Persons and Principal Holders of
Securities.................................................. 23
15. Financial Statements ......................................... 23
<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 by the
Fund and may be obtained without charge from the Fund's distributor (the
"Distributor") 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 Shares, Flag Investors Class B
Shares and Flag Investors Institutional 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 an open-end diversified 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 May 9, 1997.
Under a license agreement dated December 29, 1987 between the Fund and
Alex. Brown Incorporated (now BT Alex. Brown Incorporated), BT 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 shareholder approval.
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
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. 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 lend its investment securities to approved institutional
borrowers who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund may lend its investment securities so long as the
terms, structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act or the Rules and Regulations or interpretations
of the SEC thereunder, which currently require that (a) the borrower pledge and
maintain with the Fund collateral consisting of liquid, unencumbered assets
having a value at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the Fund
investing any cash collateral in interest bearing short-term investments), and
distributions on the loaned securities and any increase in their market value.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, loans will only be made to borrowers deemed by the Advisors to be of
good standing and when, in the judgment of the Advisors, the consideration which
can be earned currently from such securities loans justifies the attendant risk.
All relevant facts and circumstances, including the creditworthiness of the
borrower, will be considered in making decisions with respect to the lending of
securities, subject to review by the Board of Directors of the Fund.
At the present time, the staff of the SEC does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal 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) 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 equaling 5% or more of the Fund's total assets
are outstanding, the Fund will not purchase securities;
2) Concentrate 25% or more of its total assets in securities of
issuers in any one industry (for these purposes the U.S. Government and
its agencies and instrumentalities are not considered an issuer);
3) 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-
<PAGE>
5) 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;
6) 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;
7) Purchase or sell commodities or commodities contracts;
8) 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;
9) Issue senior securities;
10) 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;
11) Effect short sales of securities;
12) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions); or
13) 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, Martin Luther King, Jr. Day,
-4-
<PAGE>
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund may enter into agreements that allow a third party, as
agent for the Fund, to accept orders from its customers up until the Fund's
close of business which is ordinarily 4:00 p.m. (Eastern Time). So long as a
third party receives an order prior to the Fund's close of business, the order
is deemed to have been received by the Fund and, accordingly, may receive the
net asset value computed at the close of business that day. These "late day"
agreements are intended to permit shareholders placing orders with a third party
to place orders up to the same time as other shareholders.
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
Shares and Flag Investors Class B Shares by check, Flag Investors Institutional
Shares by wire transfer of funds, and ABCAT Shares by wire 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 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 "How to Invest"
in each Prospectus 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 Internal Revenue Code of 1986, as amended (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
-5-
<PAGE>
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").
The Fund must also diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. government securities, securities of other
RICs, and other securities (so long as such other securities with respect to any
issuer do not constitute more than 5% of the total assets of the Fund or more
than 10% of the outstanding voting securities of such issuer), and (ii) not more
than 25% of the value of its total assets is invested in the securities (other
than U.S. government securities or the securities of other RICs) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same or similar trades or businesses or related trades or businesses (the
"Asset Diversification Test"). The Fund will not lose its status as a RIC if it
fails to meet the Asset Diversification Test solely as a result of a fluctuation
in value of portfolio assets not attributable to a purchase. The Fund may
curtail its investments in and trading of other securities where the application
thereto of the Asset Diversification Test is uncertain.
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and capital gains which it distributes to shareholders,
provided that it distributes at least 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gains
over net long-term capital losses) for the year (the "Distribution Requirement")
and complies with the other requirements of the Code described above.
Distributions of investment company taxable income made during the taxable year
or, under certain specified circumstances, within twelve months after the close
of the taxable year, will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if a RIC establishes to the satisfaction
of the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below).
Although the Fund intends to distribute substantially all of its net
investment income and capital gains for any taxable (i.e., fiscal) year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
The foregoing requirements of the Code may inhibit the Fund in its
efforts to achieve its investment objectives.
Fund Distributions
The Fund anticipates that it will distribute substantially all of its
investment company taxable income for each taxable year. Distributions of
investment company taxable income will be taxable to shareholders as ordinary
income, regardless of whether such distributions are paid in cash or are
reinvested 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
-6-
<PAGE>
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 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.
Generally, gain or loss on the sale, exchange or redemption of Shares
will be capital gain or loss, which will be long-term capital gain or loss if
the Shares have been held for eighteen months or more, mid-term capital gain if
the Shares have been held for more than twelve, but less than eighteen months,
and otherwise will be short-term capital gain or loss. However, if a shareholder
realizes a loss on the sale, exchange or redemption of Shares held for six
months or less, such loss will be treated as a loss from the
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<PAGE>
sale of a capital asset held for more than one year to the extent that any
capital gains distributions have been paid with respect to such Shares (or any
undistributed net capital gains of the Fund with respect to such Shares 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 advisors as to the
consequences of federal, state and local tax rules affecting an investment in
the Fund.
5. MANAGEMENT OF THE FUND
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 (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated); Vice Chairman, Alex. Brown Capital Advisory & Trust
Company; and Director, Investment Company Capital Corp. (registered
investment advisor).
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor) and
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 and 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 &
-8-
<PAGE>
Trust (banking), Key Funds (registered investment companies) and DP
Mann Holdings (insurance). Formerly, Director, AMBAC Treasurers Trust
(registered investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 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, Esq., 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) and American Science &
Engineering (x-ray detection equipment); Formerly, Chairman National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak) and Member, Aviation System Capacity Advisory
Committee (Federal Aviation Administration).
HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540.
Professor-at-Large Emeritus, Institute for Advanced Study; Director,
ATL and Spacelabs Medical Corp. (medical equipment) and Family Health
International (non-profit research and education); Director, Research
America (non-profit medical research); Formerly, Trustee, Rockefeller
Foundation; Director, Merrill Lynch Cluster C Funds (registered
investment companies); Trustee, Reed College (education) and Director,
Flag Investors/ISI and BT Alex. Brown, Family of Funds.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown 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.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994-July
1996; Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.
- --------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of six other funds in the Fund Complex.
Mr. Hale serves as Chairman of four funds and as a Director of eight other funds
in the Fund Complex. Messrs. Cunnane, Kroeger, Levy and McDonald serve as
Directors of each fund in the Fund Complex. Ms. Rimel and Mr. Vogt serve as
Directors of 11 funds in the Fund Complex. Mr. Woolf serves as President of
seven funds in the Fund Complex. Mr. Finelli serves as Treasurer, Ms. Olmert
serves as Secretary and Mr. Liotta serves as Assistant Secretary, respectively,
of each of the funds in the Fund Complex.
-9-
<PAGE>
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, BT 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.
With the exception of the Fund's President, 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 BT 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) (an "Independent Director") and
Mr. Woolf, the Fund's President, 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 BT 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, 1997,
Independent Directors' fees attributable to the assets of the Fund totalled
$3,303. 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, 1997.
-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, 1997 Expenses Directors for the Fiscal
Year Ended
October 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans, Chairman(1) $0 $0 $0
Charles W. Cole, Jr., Director(1,2) $0 $0 $0
Richard T. Hale, Director(1) $0 $0 $0
W. James Price, Director(1,3) $0 $0 $0
$542(4) (5) $39,000 for service on 13
James J. Cunnane, Director Boards in the Fund Complex
$681(4) (5) $49,000 for service on 13
John F. Kroeger, Director Boards in the Fund Complex
$542(4) (5) $39,000 for service on 13
Louis E. Levy, Director Boards in the Fund Complex
$542(4) (5) $39,000 for service on 13
Eugene J. McDonald, Director Boards in the Fund Complex
$439(4) (5) $39,000 for service on 11(6)
Rebecca W. Rimel, Director Boards in the Fund Complex
Carl W. Vogt, Esq., Director $443(4) (5) $39,000 for service on 11(6)
Boards in the Fund Complex
Harry Woolf, Director(3) $113(4) (5) $9,750 for service on 12
Boards in the Fund Complex
</TABLE>
- ----------
(1) Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
(2) Resigned as Director effective September 1, 1997.
(3) Retired as Director of the Fund on December 31, 1996. Mr. Woolf was
appointed President of the Fund effective September 1, 1997. For
serving as President, Mr. Woolf receives compensation from the Fund and
certain other funds in the Fund Complex, in addition to his retirement
benefits.
(4) Of amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt
and Woolf and Ms. Rimel, $542, $0, $0, $542, $443, $113 and $439,
respectively, was deferred pursuant to a Deferred Compensation Plan.
(5) 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 fiscal year ended October 31,1997 was approximately
$1,993.
(6) Ms. Rimel and Mr. Vogt receive proportionally higher compensation from
each fund for which they serve.
The Fund Complex has adopted a retirement plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by 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
-11-
<PAGE>
received benefits. The Fund has two Participants, a Director who retired
effective December 31, 1994 and Mr. Woolf 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. 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, 1997, are as follows: for Mr. Cunnane, 3 years; for
Mr. Kroeger, 15 years; for Mr. Levy, 2 years; for Mr. McDonald, 5 years; for Ms.
Rimel, 2 years; and for Mr.
Vogt, 2 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <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, Levy, McDonald and Vogt and Ms. Rimel have
each executed a Deferred Compensation Agreement. Currently, the deferring
Directors may select from among various Flag Investors funds and BT Alex. Brown
Cash Reserve Fund, Inc. 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 the Distributor. 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
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 any officer, director, or employee of
the Fund or the Advisor, preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases which are part of an
automatic dividend reinvestment plan). The foregoing applies to any officer,
director or employee of the Distributor that is an access person. 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. Trading by investment personnel and certain other employees
of the Advisor would be exempt from this "blackout period" provided that (1) the
market
-12-
<PAGE>
capitalization of a particular security exceeds $2 billion; and (2) orders of
the Advisor do not exceed ten percent of the daily average trading volume of the
security for the prior 15 days. 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
The Advisor
On June 17, 1997 the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor").
The Investment Advisory Agreement was approved by a vote of shareholders of the
Fund on August 14, 1997. ICC is an indirect subsidiary of Bankers Trust New York
Corporation. ICC is also the investment advisor to other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc.
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 0.85% of the Fund's average daily net assets.
However, the actual amount of the fee is contractually limited to an amount that
would result in total expenses on 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 Independent 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.
Advisory fees paid by the Fund to ICC for the last three fiscal years
were as follows:
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
$ 782,095 $ 381,086 $ 201,199
- --------------------------------------------------------------------------------
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. See "Custodian, Transfer Agent and Accounting Services."
-13-
<PAGE>
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the distributor of each class of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997. Prior to
August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown") was distributor
of the Fund's Shares for the same rate of compensation and on substantially the
same terms and conditions as ICC Distributors.
The Distribution Agreement provides that ICC Distributors shall; (i) use
reasonable efforts to sell Shares upon the terms and conditions contained in the
Distribution Agreement and the Fund's then current Prospectus; (ii) use its best
efforts to conform with the requirements of all federal and state laws relating
to the sale of the Shares; (iii) adopt and follow procedures as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. and any other applicable self-regulatory organization; (iv)
perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful
misfeasance, or gross negligence in the performance of ICC Distributors' duties
or obligations under the Distribution Agreement or by reason of ICC
Distributors' reckless disregard of its duties and obligations under the
Distribution Agreement. The Distribution Agreement further provides that the
Fund and ICC Distributors will mutually indemnify each other for losses relating
to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997.
With respect to the Flag Investors Class A, Flag Investors Class B and
Institutional Shares, ICC Distributors and Participating Dealers ("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
ICC Distributors will enter into Sub-Distribution Agreements for the ABCAT
Shares. Any Sub-Distribution Agreement may be terminated in the same manner as
the Distribution Agreement at any time and shall automatically terminate in the
event of an assignment.
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 BT Alex. Brown and
certain banks, to act as Shareholder Servicing Agents, pursuant to which ICC
Distributors will allocate a portion of its distribution fee as compensation for
such financial institutions' ongoing shareholder
-14-
<PAGE>
services. The Fund may also enter into Shareholder Servicing Agreements pursuant
to which the Advisor or its affiliates will provide compensation out of its own
resources for 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. Any Shareholder Servicing Agreement may be
terminated at any time, without penalty, upon 10 days' notice and shall
automatically terminate in the event of an assignment.
As compensation for providing distribution and related administrative
services for the Flag Investors Class A Shares as described above, ICC
Distributors receives an annual fee, calculated and paid monthly, equal to .25%
of the average daily net assets of the Flag Investors Class A Shares. ICC
Distributors expects to allocate a substantial portion of its annual fee to
Participating Dealers and Shareholder Servicing Agents. As compensation for
providing distribution services for the Flag Investors Class B Shares as
described above, ICC Distributors receives an annual fee, calculated and paid
monthly, equal to 0.75% of the average daily net assets of the Flag Investors
Class B Shares. ICC Distributors expects to retain the entire distribution fee
as reimbursement for front-end payments to Participating Dealers. In addition,
with respect to the Flag Investors Class B Shares, the Fund will pay ICC
Distributors a shareholder servicing fee at an annual rate equal to 0.25% of the
Flag Investors Class B Shares' average daily net assets. ICC Distributors
expects to allocate most of its shareholder servicing fee to Participating
Dealers and Shareholder Servicing Agents. ICC Distributors receives no
compensation for distributing the Flag Investors Institutional Shares or the
ABCAT Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12b-1 Fee $ 161,564(1) $ 100,956(3) $ 74,697(3)
- ---------------------------------------------------------------------------------------------------------------------
Class B Shareholder Servicing Fee $ 6,398(2) $ 255(3,4) N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $124,346 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $37,218.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $4,330 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $2,068.
(3) Fees received by Alex. Brown, the Fund's distributor for the fiscal
years ended October 31, 1996 and October 31, 1995.
(4) For Flag Investors Class B Shares, amounts represent fees received for
the period from June 20, 1996 (commencement of offering of Flag
Investors Class B Shares) through October 31, 1996.
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 ICC Distributors for distribution and other shareholder servicing
assistance as set forth in Distribution Agreement, and ICC Distributors is
authorized to make
-15-
<PAGE>
payments out of its fee to Participating Dealers and Shareholder Servicing
Agents. The Plans 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 Independent Directors, by votes cast
in person at a meeting called for such purpose. The Plans were most recently
approved by the Board of Directors, including a majority of the Independent
Directors, on September 16, 1997.
In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreement without the approval of the shareholders of the
related class. The Plans may be terminated at any time upon sixty days' notice,
in either case without penalty, by the vote of a majority of the Fund's
Independent Directors or by a vote of a majority of the outstanding shares (as
defined under "Capital Shares") of the related class.
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 ICC Distributors pursuant to the
Distribution Agreement, to broker-dealers pursuant to Sub-Distribution
Agreements and to Shareholder Servicing Agents pursuant to Shareholder Servicing
Agreements. 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 Independent Directors shall be committed to the
discretion of the Independent Directors then in office.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
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 ICC
Distributors' actual cost of providing distribution services and may be used to
pay ICC Distributors' 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 0.25% 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 0.75% 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 ICC Distributors. The Plans do not provide for any charges to
the Fund for excess amounts expended by ICC Distributors and, if either Plan is
terminated in accordance with its terms, the obligation of the Fund to make
payments to ICC Distributors pursuant to such Plan will cease and the Fund will
not be required to make any payments past the date the Distribution Agreement
terminates with respect to the related class of the Fund. In return for payments
received pursuant to the Plans for the last three fiscal years, the Fund's
distributor 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.
The Fund's distributor received commissions on the sale of the Flag
Investors Class A Shares and contingent deferred sales loads on the Flag
Investors Class B Shares and retained such commissions or sales loads in the
following amounts:
-16-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 293,651(1) $213,280(3) $210,390(5) $201,445(5) $153,431(5) $106,239(5)
Commissions
- ---------------------------------------------------------------------------------------------------------------------
Class B $ 180,270(2) $ 78,625(4) $29,712(5,6) $29,712(5,6) N/A N/A
Contingent
Deferred Sales
Charge
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $227,165 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $66,486.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $89,798 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $90,472.
(3) Of commissions received, Alex. Brown retained $213,280 and ICC
Distributors retained $0, respectively.
(4) Of sales charges received, Alex. Brown retained $78,625 and ICC
Distributors retained $0, respectively.
(5) By Alex. Brown, the Fund's distributor for the fiscal years ended
October 31, 1996 and October 31, 1995.
(6) For the period from June 20, 1996 (commencement of offering of Flag
Investors Class B Shares) through October 31, 1996.
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 Independent Directors and Independent 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 Independent
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 ICC or ICC
Distributors.
<PAGE>
8. BROKERAGE
Purchases and sales of securities on a securities exchange are effected
through brokers who charge a commission for their services. These brokerage
commissions are subject to negotiation between ICC and the broker-dealer. ICC
may direct purchase and sale orders to any broker-dealer, including, to the
extent and in the manner permitted by applicable law, its affiliates and ICC
Distributors.
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 the
Advisor or its affiliates in any transaction in which the Advisor or its
affiliates serves as a principal.
If the Advisor or its affiliates 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
-17-
<PAGE>
believes that the limitation will not significantly affect its ability to carry
out its present investment objective, the Fund may be at a disadvantage in the
future in comparison to other funds which have similar investment objectives,
but which are not subject to such limitations.
ICC's primary consideration in effecting securities transactions is to
obtain, on an overall basis, the best price and execution of orders. As
described below, however, to the extent that the price and execution offered by
more than one broker-dealer are comparable, ICC may, in its discretion, effect
transactions with broker-dealers that furnish statistical, research or other
information or services which are deemed by ICC to be beneficial to the Fund's
investment program. ICC is also authorized to pay higher commissions on
brokerage transactions for the Fund to non-affiliated brokers in order to secure
research and investment services described below, subject to periodic review by
the Fund's Board of Directors. Research services may include the following:
statistical and background information on the U.S. economy, industry groups and
individual small and mid-sized companies; forecasts and interpretations with
respect to specific industry groups and individual small and mid-sized
companies; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indices and investment accounts; information concerning prices of
securities; provision of equipment used to communicate research information;
arrangement of meetings with management of companies; and provision of access to
consultants who supply research information. Certain research services furnished
by broker-dealers may be useful to ICC with clients other than the Fund.
Similarly, any research services received by ICC through placement of portfolio
transactions of other clients may be of value to ICC in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to ICC by a broker-dealer. ICC is of
the opinion that because the material must be analyzed and reviewed by its
staff, its receipt does not tend to reduce expenses, but may be beneficial in
supplementing ICC's research and analysis. Therefore, it may tend to benefit the
Fund by improving ICC's investment advice. ICC's policy is to pay a
broker-dealer higher commissions for particular transactions than might be
charged if a different broker-dealer had been chosen when, in ICC's opinion,
this policy furthers the overall objective of obtaining the best price and
execution. The allocation of orders among broker-dealers and the commission
rates paid by the Fund will be reviewed periodically by the Board.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through the Advisor or its affiliates pursuant to certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid the Advisor or its
affiliates 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.
ICC directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Transactions Directed $ 98,445,406 $ 4,091,824 $25,120,072
- --------------------------------------------------------------------------------
Commissions Paid $ 13,853 $ 11,346 $ 12,495
- --------------------------------------------------------------------------------
For the period from September 1, 1997 through December 31, 1997, the
Fund did not pay brokerage commissions to BT Alex. Brown or its affiliates. For
the period from January 1, 1997 through August 31, 1997 and for the fiscal years
ended December 31, 1996 and December 31, 1995, the Fund did not pay brokerage
commissions to Alex. Brown. The Fund is required to identify any securities of
its
-18-
<PAGE>
"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, 1997, the Fund held a 5.60% repurchase agreement issued by Goldman
Sachs & Co. valued at $12,102,152. Goldman Sachs & Co. is a "regular broker or
dealer" of the Fund.
ICC manages other investment accounts and it is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ICC. ICC may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
9. CAPITAL SHARES
The Fund is authorized to issue 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 BT 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
-19-
<PAGE>
than 50% of the outstanding Shares are present or represented by proxy, or (ii)
more than 50% of the outstanding Shares.
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
Effective September 22, 1997, Bankers Trust Company ("Bankers Trust")
has been retained to act as custodian of the Fund's investments. Bankers Trust
receives such compensation from the Fund for its services as custodian as may be
agreed to from time to time by Bankers Trust and the Fund. For the period from
September 22, 1997 through October 31, 1997, Bankers Trust accrued fees of
$2,440. Investment Company Capital Corp. 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,
1997, such fees totalled $52,448.
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 Daily 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, 1997, ICC received fees of $53,054.
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.
-20-
<PAGE>
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.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 investment for the periods
ended October 31, 1997 were as follows:
-21-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
One-Year Period Ended Five-Year Period Ended
October 31, 1997 October 31, 1997 Since Inception
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Ending Annual Ending Annual Ending Annual
Class Redeemable Total Redeemable Total Redeemable Total
Value Return Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
*December 30, 1987 $1,202.60 20.26% $1,987.08 16.25% $3,293.97 12.89%
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
*June 20, 1996 $1,206.92 20.69% N/A N/A $1,198.49 14.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional
*November 2, 1995 $1,263.58 26.36% N/A N/A $1,471.84 17.3%
- ------------------------------------------------------------------------------------------------------------------------------------
ABACAT Shares
*May 9, 1997 N/A N/A N/A N/A $1,246.78 24.68%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
** Aggregate Annual Total Return
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., the Fund calculates its aggregate
and average annual total return for the specified periods of time by assuming
the investment of $10,000 in Shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges. 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.
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. The Fund's portfolio turnover rate in fiscal year 1997 was
42% and in fiscal year 1996 was 24%. 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".)
-22-
<PAGE>
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 February 2,
1998.
Name & Address % Ownership
-------------- -----------
T. Rowe Price, Trustee 13.74%
Alex. Brown & Sons Inc. Plan #100460
Flag Investors Emerging Growth
Attn: Asset Recon
P.O. Box 17215
Baltimore, MD 21297
* As of such date, to Fund management's knowledge, BT
Alex. Brown Incorporated owned beneficially less than
1% of such shares.
To Fund management's knowledge, the Directors and Officers of the Fund
as a group (12 persons) beneficially owned approximately less than 1% of the
Fund's total outstanding shares, as of February 2, 1998.
15. FINANCIAL STATEMENTS
See next page.
-23-
<PAGE>
Alex Brown FI Emerging Growth Fund AR
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1997
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS: 90.3%
Business Services: 21.4%
58,000 AHL Services, Inc.* $ 1,036,750 0.8%
134,900 Central Garden and Pet Co.* 3,541,125 2.8
207,700 Cidco, Inc.* 3,868,413 3.1
81,900 Dialogic Corp.* 3,378,375 2.7
103,050 Energy Biosystems Corp.* 515,250 0.4
168,000 Manugistics Group, Inc.* 5,985,000 4.8
137,050 QuickResponse Services, Inc.* 4,454,125 3.5
155,650 Wilmar Industries, Inc.* 4,085,812 3.3
----------- ----
26,864,850 21.4
----------- ----
Capital Goods: 6.9%
84,700 Advanced Lighting Technologies, Inc.* 1,704,588 1.4
41,800 Aspect Development, Inc.* 1,954,150 1.5
21,200 Harbinger Corp.* 630,700 0.5
166,775 Itron, Inc.* 3,418,888 2.7
74,900 Xeikon N.V. ADR* 1,020,512 0.8
----------- ----
8,728,838 6.9
----------- ----
Consumer Services: 16.7%
54,325 Apollo Group, Inc.* 2,295,231 1.8
190,300 Apple South, Inc. 3,544,338 2.8
60,700 Just For Feet, Inc.* 899,119 0.7
178,575 O'Charleys, Inc.* 3,303,638 2.6
113,343 Pacific Sunwear of California* 3,131,100 2.5
54,325 Papa John's International, Inc.* 1,605,983 1.3
269,700 PETsMART, Inc.* 2,056,462 1.7
58,950 Starbucks Corp.* 1,945,350 1.6
51,750 Sylvan Learning Systems, Inc.* 2,179,969 1.7
----------- ----
20,961,190 16.7
----------- ----
Health Care Services: 14.1%
136,700 Access Health, Inc.* 4,750,325 3.8
109,300 American Oncology Resources, Inc.* 1,598,512 1.3
117,775 Genesis Health Ventures, Inc.* 2,885,488 2.3
31,300 Guilford Pharmaceuticals, Inc.* 762,938 0.6
120,325 PhyCor, Inc.* 2,774,995 2.2
200,350 Physician Sales and Service, Inc.* 4,908,575 3.9
----------- ----
17,680,833 14.1
----------- ----
</TABLE>
- 24 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) October 31, 1997
<TABLE>
<CAPTION>
Value Percent of
Shares Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (concluded)
Health Equipment and Services: 2.5%
34,000 Heartport, Inc.* $ 854,250 0.7%
90,975 Perclose, Inc.* 2,228,887 1.8
------------ ----
3,083,137 2.5
------------ ----
Media/Communications: 0.4%
29,800 Getty Communications plc ADR* 439,550 0.4
------------ ----
Technology -- Software/Services: 9.7%
244,725 Integrated Systems, Inc.* 4,313,278 3.4
93,650 MAPICS, Inc.* 1,065,269 0.8
79,600 Marcam Solutions, Inc.* 820,875 0.7
56,800 SELECT Software Tools ADR* 457,950 0.4
141,646 Synopsys, Inc.* 5,506,488 4.4
------------ ----
12,163,860 9.7
------------ ----
Technology -- Systems/Semiconductors: 13.2%
127,250 Level One Communications, Inc.* 5,726,250 4.5
89,000 Security Dynamics Technologies, Inc.* 3,014,875 2.4
240,650 Sipex Corp.* 7,911,369 6.3
------------ ----
16,652,494 13.2
------------ ----
Telecommunications -- Long Distance: 0.8%
27,750 Pacific Gateway Exchange, Inc.* 1,061,437 0.8
------------ ----
Transportation: 4.6%
92,775 Atlantic Coast Airlines, Inc.* 1,959,872 1.5
61,950 Coach USA, Inc.* 1,843,013 1.5
80,875 Landair Services, Inc.* 1,981,437 1.6
------------ ----
5,784,322 4.6
------------ ----
Total Common Stocks
(Cost $80,034,506) 113,420,511 90.3
</TABLE>
- 25 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security (Note 1) Net Assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT: 9.5%
$11,864 Goldman Sachs & Co., 5.60%
Dated 10/31/97, to be repurchased
on 11/3/97, collateralized by U.S.
Treasury Bonds with a market
value of $12,102,152.
(Cost $11,864,000) $ 11,864,000 9.5%
------------ -----
Total Investment in Securities**
(Cost $91,898,506) 125,284,511 99.8
Other Assets in Excess of Liabilities, Net 278,012 0.2
------------ -----
Net Assets $125,562,523 100.0%
============ =====
Net Asset Value and Redemption Price Per:
Class A Share
($71,122,649 / 3,069,025 shares outstanding) $23.17
======
Class B Share
($5,719,048 / 249,987 shares outstanding) $22.88***
======
Institutional Share
($13,068,162 / 562,042 shares outstanding) $23.25
======
ABCAT Share
($35,652,664 / 1,533,892 shares outstanding) $23.24
======
Maximum Offering Price Per:
Class A Share
($23.17 / 0.955) $24.26
======
Class B Share $22.88
======
Institutional Share $23.25
======
ABCAT Share $23.24
======
</TABLE>
- ---------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $92,295,138.
*** Redemption value is $21.96 following a 4% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
- 26 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $ 415,195
Dividends 17,121
-----------
Total income 432,316
-----------
Expenses:
Investment advisory fee (Note 2) 782,095
Distribution fee (Note 2) 167,962
Legal 64,158
Registration fees 54,754
Accounting fee (Note 2) 53,054
Transfer agent fee (Note 2) 52,448
Printing and postage 29,132
Audit 25,314
Custodian fee (Note 2) 22,843
Miscellaneous 9,245
Directors' fees 3,284
-----------
Total expenses 1,264,289
-----------
Expenses in excess of income (831,973)
-----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 6,273,549
Change in unrealized appreciation or depreciation
of investments 17,299,788
-----------
Net gain on investments 23,573,337
-----------
Net increase in net assets resulting from operations $22,741,364
===========
See Notes to Financial Statements.
- 27 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
- -----------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of income $ (831,973) $ (402,217)
Net realized gain from security transactions 6,273,549 3,148,580
Change in unrealized appreciation or
depreciation of investments 17,299,788 4,422,457
------------ -----------
Net increase in net assets resulting
from operations 22,741,364 7,168,820
------------ -----------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares (509,733) (614,007)
Class B Shares (12,155) --
Institutional Shares (262,737) (60,009)
Net realized mid-term and long-term gains:
Class A Shares (1,286,527) (1,228,016)
Class B Shares (28,797) --
Institutional Shares (663,099) (120,017)
------------ -----------
Total distributions (2,763,048) (2,022,049)
------------ -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 77,654,561 34,395,004
Value of shares issued in
reinvestment of dividends 2,667,198 1,913,272
Cost of shares repurchased (40,585,610) (13,733,625)
------------ -----------
Increase in net assets derived from capital
share transactions 39,736,149 22,574,651
------------ -----------
Total increase in net assets 59,714,465 27,721,422
Net Assets:
Beginning of year 65,848,058 38,126,636
------------ -----------
End of year $125,562,523 $65,848,058
============ ===========
</TABLE>
See Notes to Financial Statements.
- 28 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 19.14
-------
Income from Investment Operations:
Expenses in excess of income (0.18)
Net realized and unrealized gain on investments 4.95
-------
Total from Investment Operations 4.77
Less Distributions:
Distributions from net realized short-term gains (0.21)
Distributions from net realized mid-term and long-term gains (0.53)
-------
Total distributions (0.74)
-------
Net asset value end of year $ 23.17
=======
Total Return(1) 25.93%
Ratios to Average Daily Net Assets:
Expenses 1.44%
Expenses in excess of income (0.97)%
Supplemental Data:
Net assets at end of year (000) $71,123
Portfolio turnover rate 42%
Average commissions per share(2) $0.0736
- --------
(1) Total return excludes the effect of sales charge.
(2) Disclosure is required for fiscal year beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
- 29 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 17.09 $ 12.90 $ 14.02 $ 13.53
------- ------- ------- -------
Income from Investment Operations:
Expenses in excess of income (0.15) (0.09) (0.08) (0.08)
Net realized and unrealized gain on investments 3.10 4.32 0.47 1.20
------- ------- ------- -------
Total from Investment Operations 2.95 4.23 0.39 1.12
Less Distributions:
Distributions from net realized short-term gains (0.30) -- -- --
Distributions from net realized mid-term and long-term gains (0.60) (0.04) (1.51) (0.63)
------- ------- ------- -------
Total distributions (0.90) (0.04) (1.51) (0.63)
------- ------- ------- -------
Net asset value end of year $ 19.14 $ 17.09 $ 12.90 $ 14.02
======= ======= ======= =======
Total Return(1) 18.19% 32.92% 3.75% 8.33%
Ratios to Average Daily Net Assets:
Expenses 1.50% 1.50% 1.50% 1.50%
Expenses in excess of income (0.83)% (0.64)% (0.73)% (0.52)%
Supplemental Data:
Net assets at end of year (000) $45,325 $38,127 $23,302 $28,867
Portfolio turnover rate 24% 39% 86% 133%
Average commissions per share(2) $0.0700 -- -- --
</TABLE>
See Notes to Financial Statements.
- 30 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the June 20, 1996(1)
Year Ended through
October 31, October 31,
- -------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 19.10 $ 19.22
------- -------
Income from Investment Operations:
Expenses in excess of income (0.18) (0.12)
Net realized and unrealized gain/(loss)
on investments 4.70 --
------- -------
Total from Investment Operations 4.52 (0.12)
Less Distributions:
Distributions from net realized short-term gains (0.21) --
Distributions from net realized mid-term and
long-term gains (0.53) --
------- -------
Total distributions (0.74) --
------- -------
Net asset value at end of period $ 22.88 $ 19.10
======= =======
Total Return(2) 24.69% (0.62)%
Ratios to Average Daily Net Assets:
Expenses 2.19% 2.25%(3)
Expenses in excess of income (1.73)% (1.67)%(3)
Supplemental Data:
Net assets at end of period (000) $ 5,719 $ 772
Portfolio turnover rate 42% 24%
Average commissions per share $0.0736 $0.0700
</TABLE>
- --------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
- 31 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the November 2, 1995(1)
Year Ended through
October 31, October 31,
- -------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 19.15 $ 17.45
------- -------
Income from Investment Operations:
Expenses in excess of income (0.26) (0.12)
Net realized and unrealized gain
on investments 5.10 2.72
------- -------
Total from Investment Operations 4.84 2.60
Less Distributions:
Distributions from net realized short-term gains (0.21) (0.30)
Distributions from net realized mid-term and
long-term gains (0.53) (0.60)
------- -------
Total distributions (0.74) (0.90)
------- -------
Net asset value at end of period $ 23.25 $ 19.15
======= =======
Total Return 26.36% 16.48%
Ratios to Average Daily Net Assets:
Expenses 1.19% 1.25%(2)
Expenses in excess of income (0.74)% (0.61)%(2)
Supplemental Data:
Net assets at end of period (000) $13,068 $19,751
Portfolio turnover rate 42% 24%
Average commissions per share $0.0736 $0.0700
</TABLE>
- --------
(1) Commencement of operations.
(2) Annualized.
See Notes to Financial Statements.
- 32 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- ABCAT Shares
(For a share outstanding throughout each year)
For the Period
May 9, 1997(1)
through
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 18.64
-------
Income from Investment Operations:
Expenses in excess of income (0.06)
Net realized and unrealized gain on investments 4.66
-------
Total from Investment Operations 4.60
-------
Net asset value at end of period $ 23.24
=======
Total Return 24.68%
Ratios to Average Daily Net Assets:
Expenses 1.19%(2)
Expenses in excess of income (0.69)%(2)
Supplemental Data:
Net assets at end of period (000) $35,653
Portfolio turnover rate 42%
Average commissions per share $0.0736
- ---------
(1) Commencement of operations.
(2) Annualized.
See Notes to Financial Statements.
- 33 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1 -- Significant Accounting Policies
Flag Investors Emerging Growth Fund, Inc. (the "Fund"), which was organized
as a Maryland Corporation on July 2, 1987 and commenced operations December 30,
1987, is registered under the Investment Company Act of 1940 as a diversified,
open-end investment management company. Its objective is to seek long-term
capital appreciation primarily through investment in a diversified portfolio of
small and mid-sized emerging growth companies.
The Fund consists of four share classes: Class A Shares, which commenced
June 15, 1988; Institutional Shares, which commenced November 2, 1995; Class B
Shares, which commenced June 20, 1996; and Alex. Brown Capital Advisory & Trust
Shares (ABCAT Shares), which commenced May 9, 1997.
The Class A and Class B Shares are subject to different sales charges and
distribution fees. The Class A Shares have a front-end sales charge and the
Class B Shares have a contingent deferred sales charge. The Institutional Shares
and ABCAT Shares do not have a front-end sales charge, a contingent deferred
sales charge or a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation -- The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.
The Fund values short-term obligations with maturities of 60 days or
less at amortized cost.
B. Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund
- 34 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1 -- concluded
buys a debt security that the broker agrees to repurchase at a set time
and price. The third party, which is the broker's custodial bank, holds
the collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes -- The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. Securities Transactions, Investment Income, Distributions and Other --
The Fund uses the trade date to account for security transactions and
the specific identification method for financial reporting and income
tax purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated to
each class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, is the Fund's investment advisor. The Advisory
Agreement provides for ICC to receive a maximum annual fee equal to 0.85% of the
Fund's average daily net assets. However, the actual amount of
- 35 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 2 -- concluded
the fee is contractually limited to an amount that would result in total
expenses on Class A Shares of no more than 1.50%. The Fund paid ICC $782,095 in
fees, which was equal to 0.85% of the Fund's average daily net assets, for
advisory services for the year ended October 31, 1997.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $53,054 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $52,448 for
transfer agent services for the year ended October 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's custodian.
From September 22, 1997 to October 31, 1997, the Fund accrued $2,440 in custody
expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), a member of the Forum Financial Group
of companies, an annual fee that is calculated daily and paid monthly. This fee
is paid at an annual rate equal to 0.25% of the Class A Shares' average daily
net assets and 1.00% (including a 0.25% shareholder servicing fee) of the Class
B Shares' average daily net assets. For the year ended October 31, 1997,
distribution fees aggregated $167,962, of which $142,369 was attributable to the
Class A Shares and $25,593 was attributable to the Class B Shares. No
distribution fees were charged to the Institutional and ABCAT Shares. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated served as the Fund's
distributor for the same compensation and on substantially the same terms as ICC
Distributors.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1997 was $1,993, and the accrued liability was $5,287.
- 36 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3 -- Capital Share Transactions
The Fund is authorized to issue up to 20 million shares of $.001 par value
capital stock (8 million Class A, 1 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory and Trust and 1 million undesignated).
Transactions in shares of the Fund are listed below.
Class A Shares
-------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1997 Oct. 31, 1996
------------- -------------
Shares sold 1,220,895 706,114
Shares issued to shareholders on
reinvestment of dividends 92,972 106,529
Shares redeemed (612,803) (675,793)
------------ ------------
Net increase in shares outstanding 701,064 136,850
============ ============
Proceeds from sale of shares $ 24,515,195 $ 13,138,521
Value of reinvested dividends 1,709,779 1,733,222
Cost of shares redeemed (12,465,235) (11,827,481)
------------ ------------
Net increase from capital share
transactions $ 13,759,739 $ 3,044,262
============ ============
Class B Shares
---------------------------------
For the For the Period
Year Ended June 20, 1996* to
Oct. 31, 1997 Oct. 31, 1996
------------- -----------------
Shares sold 234,480 40,579
Shares issued to shareholders on
reinvestment of dividends 2,231 --
Shares redeemed (27,166) (137)
---------- --------
Net increase in shares outstanding 209,545 40,442
========== ========
Proceeds from sale of shares $5,012,881 $779,667
Value of reinvested dividends 40,890 --
Cost of shares redeemed (564,373) (2,766)
---------- --------
Net increase from capital share
transactions $4,489,398 $776,901
========== ========
- ---------
*Commencement of operations.
- 37 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 3 -- concluded
Institutional Shares
----------------------------------
For the For the Period
Year Ended Nov. 2, 1995* to
Oct. 31, 1997 Oct. 31, 1996
------------- ----------------
Shares sold 834,599 1,127,123
Shares issued to shareholders on
reinvestment of dividends 49,811 11,073
Shares redeemed (1,353,795)** (106,769)
------------ -----------
Net increase/(decrease) in shares
outstanding (469,385) 1,031,427
============ ===========
Proceeds from sale of shares $ 16,289,665 $20,476,816
Value of reinvested dividends 916,529 180,050
Cost of shares redeemed (26,372,242)** (1,903,378)
------------ -----------
Net increase/(decrease) from capital share
transactions $ (9,166,048) $18,753,488
============ ===========
ABCAT Shares
---------------
For the Period
May 9, 1997* to
Oct. 31, 1997
---------------
Shares sold 1,587,453***
Shares issued to shareholders on reinvestment of dividends --
Shares redeemed (53,561)
-----------
Net increase in shares outstanding 1,533,892
===========
Proceeds from sale of shares $31,836,820***
Value of reinvested dividends --
Cost of shares redeemed (1,183,760)
-----------
Net increase from capital share transactions $30,653,060
===========
- --------
*Commencement of operations.
**The number of shares redeemed and cost of shares redeemed for the year ended
October 31, 1997 include the exchange from Institutional Shares into ABCAT
Shares.
***The number of shares sold and proceeds from sale of shares for the
year ended October 31, 1997 include the exchange from Institutional Shares
into ABCAT Shares.
- 38 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4 -- Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $63,082,113 and sales of investment securities aggregated $35,363,293
for the year ended October 31, 1997.
On October 31, 1997, aggregate net unrealized appreciation over tax cost
for portfolio securities was $32,989,373, of which $35,959,081 related to
appreciated securities and $2,969,708 related to depreciated securities.
NOTE 5 -- Net Assets
On October 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $ 41,392,440
Class B Shares 5,266,299
Institutional Shares 9,587,440
ABCAT Shares 30,653,060
Accumulated net realized gain from security transactions 5,277,279
Unrealized appreciation of investments 33,386,005
------------
$125,562,523
============
NOTE 6 -- Tax Information (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1997.
Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
------ ------- -------- -------------
12/20/96 12/30/96 $0.21 $0.53
NOTE 7 -- Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Emerging Growth Fund held a special meeting for
its shareholders on August 14, 1997. During the meeting, shareholders approved a
new Investment Advisory Agreement between the Fund and ICC. The new agreement is
substantially the same as the former agreement.
- 39 -
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Emerging Growth Fund, Inc. as of October 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented herein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Emerging Growth Fund, Inc. as of October 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the respective periods presented herein, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
November 26, 1997
- 40 -
