FLAG INVESTORS
[LOGO]
FLAG
INVESTORS
EMERGING
GROWTH
FUND
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
Dear Fellow Shareholder:
Five Years of Management Completed
Just five years ago, Charlie Reid and I assumed the responsibility of
managing your Fund. Our strategy has been to find companies early in their life
cycle that have the capability to grow for the long term. We also require a
proprietary advantage over competition in a very large market, and thus, an
opportunity to grow for many years. Each company must be guided by an
exceptional management team. Collectively, our portfolio has produced earnings
growth above 35% and has had turnover of only 32%, subsequent to the initial
restructuring period.
Some of the companies that have contributed to the success of the Fund
during the five years but are no longer owned by the Fund are: Clear Channel
Communications, Xilinx, Maxim Integrated Products, QualComm, Parametric
Technology, Atmel, Pacific Sunwear, Access Health Systems, Vivra and Target
Therapeutics. Some of the contributors that we still own with significant gains
are: Sipex, Synopsys, PSS World Medical, QRS Corporation, O'Charley's, Atlantic
Coast Airlines, MemberWorks, GeoTel Communications, Aspect Development, Apollo
Group, Starbucks, AHL Services, Sylvan Learning, Papa John's Pizza, Mapics and
Forward Air. Our thanks go to the management of all of these companies as well
as many others.
About two years ago, Nick Coutros joined Charlie and me to round out your
management team. Together, and with the help of the company managements
mentioned above, as well as many others that could have been listed, we were
able to achieve a 12.2% five year annualized return versus a 6.7% return for the
Russell 2000 Growth Index and a 9.4% return for the Russell 2000 Index.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
- -------------------------------------------------------------------------------
A complete table of results follows:
Fourth 3 Years 5 Years
Quarter One Year Annualized Annualized
7/31/98- 10/31/97- 10/31/95- 10/31/93-
10/31/98 10/31/98 10/31/98 10/31/98
--------- --------- ---------- ----------
Flag Investors Emerging Growth
Fund-Class A* -4.5% -13.5% 8.8% 12.2%
NASDAQ (OTC) Industrial Index -11.4% -12.1% 5.8% 6.9%
Russell 2000 Index -9.6% -11.8% 10.0% 9.4%
Russell 2000 Growth Index -10.9% -15.9% 4.9% 6.7%
Lipper Small Capitalization
Fund Index -12.1% -13.7% 6.2% 8.6%
S&P 500 Index -1.5% 22.0% 26.1% 21.4%
- ---------
*Please refer to the Additional Performance Section of this report starting on
page 7 for further information regarding performance. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge. The Russell 2000 Index, Russell 2000 Growth Index, NASDAQ
(OTC) Industrial Index and Standard & Poor's (S&P) 500 Index are unmanaged. The
Russell 2000 Index is an indicator of small company growth performance; the
Russell 2000 Growth Index is comprised of the Russell 2000 Index securities with
greater-than-average growth orientations; the NASDAQ (OTC) Industrial Index is
comprised of more than 3,000 industrial issues covered by the NASDAQ Composite
Index; and the S&P 500 Index is an indicator of general market performance.
While the Lipper Small Capitalization Fund Index is unmanaged, it is comprised
of the total return performance of the 30 largest funds in the Lipper Small
Capitalization Fund Average, which are managed. You cannot invest directly in an
index.
It is important to note that the results shown above were produced during
an extremely hostile market environment. The annual report date of October 31st
was only 16 trading days after the end of the second worst bear market since the
early 1970's. During that entire five year period, emerging growth stocks
under-performed larger capitalized stocks, with the Russell 2000 Growth Index
compounding at 6.7% versus the Standard & Poor 500 compounding at 21.4%.
1990-1998 Bull Market Ends, Bear Market of 1998
Bottoms on October 8th
One of the longest bull markets ever ended in 1998. For the general
markets, it peaked in mid-July. But for emerging growth investors the peak was
April 21st.
The graph, on the following page, shows what our management team achieved
in performance for the Fund beginning at the end of June 1994, when the
portfolio had been restructured to reflect our strategy and ending at the peak
of the market cycle, April 21, 1998:
2
<PAGE>
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
Russell 2000 Russell 2000
EG Fund S&P 500 Value Russell 2000 Growth
------- ------- ------------ ------------ ------------
Jun-94 100 100 100 100
103.83 103.31 101.85 101.64 101.43
112.87 107.51 105.84 107.31 108.87
115.39 104.92 104.73 106.94 109.32
120.34 107.34 102.81 106.51 110.49
115.67 103.41 98.66 102.21 106.02
Dec-94 119.24 104.93 101.62 104.94 108.52
120.92 107.65 101.13 103.62 106.30
128.78 111.82 104.87 107.93 111.22
131.22 115.14 105.38 109.78 114.47
127.76 118.53 108.51 112.22 116.19
129.72 123.22 110.84 114.15 117.71
Jun-95 143.76 126.11 114.63 120.07 125.82
150.78 130.34 118.81 126.99 135.63
157.05 130.70 122.34 129.61 137.30
165.85 136.19 124.17 131.93 140.13
159.95 135.69 119.21 126.03 133.24
163.07 141.66 123.95 131.32 139.12
Dec-95 163.76 144.28 127.79 134.79 142.20
159.71 149.22 128.63 134.64 141.02
173.94 150.66 130.65 138.84 147.45
174.53 152.15 133.39 141.66 150.37
194.28 154.41 137.03 149.24 161.91
203.07 158.40 140.50 155.12 170.21
Jun-96 195.77 159.05 138.84 148.75 159.15
171.67 151.97 131.46 135.76 139.72
185.49 155.22 137.16 143.64 150.07
199.02 163.95 140.91 149.25 157.80
189.05 168.53 142.54 146.95 150.99
195.17 181.35 150.21 153.01 155.19
Dec-96 193.57 177.82 155.09 157.02 158.21
207.71 188.88 157.47 160.16 162.17
191.28 190.41 158.97 156.27 152.37
174.63 182.48 154.71 148.90 141.62
175.25 193.33 156.98 149.31 139.97
208.02 205.19 169.48 165.92 161.01
Jun-97 218.90 214.32 178.05 173.04 166.47
224.13 231.51 185.53 181.08 174.99
233.47 218.54 188.48 185.23 180.24
253.30 230.45 201.01 198.79 194.63
238.00 222.85 195.55 190.06 182.93
236.45 233.05 197.70 188.82 178.57
Dec-97 233.64 237.02 204.40 192.13 179.65
231.25 239.69 200.70 189.09 177.26
254.56 256.93 212.84 203.07 192.91
273.45 270.11 221.48 211.43 201.01
4/21/98 276.38 276.21 225.74 216.23 206.28
_________
*This chart represents the performance of the Fund's A Shares for a certain time
frame. Past Performance is no guarantee of future return. The returns listed
assume the reinvestment of dividends and capital gains distributions and exclude
the impact of any sales charges. The average annual return of the Fund's Class A
Shares ending 9/30/98 for the 1 year, 5 year, and since inception time frames
are -29.57%, 8.95%, and 8.22%, respectively. These numbers include the impact of
the Fund's maximum 4.5% sales charge. Please review additional performance
information on page 8. Growth of $100 -- 6/30/94 through 4/21/98*
Annualized Returns 6/30/94 - 4/21/98
- -------------------------------------------------------------------------------
Emerging Growth Fund 30.4%
S&P 500 30.4%
Russell 2000 Value 23.7%
Russell 2000 22.3%
Russell 2000 Growth 20.9%
These data show that during the Bull Market, despite under-performance by
our sector, your Fund matched the performance of the Standard & Poor 500. The
30.4% compounded return more closely reflects the earnings growth of our
portfolio companies.
The bear market of 1998 has challenged the beliefs of long-term growth
stock investors. But in its aftermath, we are steadfast in our convictions and
our strategy remains unchanged.
During the five and one-half months between April 21st and October 8th, the
Russell 2000 Index declined 36.5% which was the second worst decline
3
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
- -------------------------------------------------------------------------------
since the early 1970's. The index was down 39.2% in 1987 and 34.3% in 1990.
No other decline has been over 30%. Furthermore, during this difficult period,
the Russell 2000 Growth Index was down 41.9%.
Against this backdrop, your Fund, which at the April 21st peak, was 3.5
percentage points ahead of the Russell 2000 Growth Index on a year-to-date basis
(18.3% versus 14.8%), declined 45.7% by the October 8th low. While our focus
remained purely on emerging growth companies, many of our peers had rotated to
other sectors which offered greater short-term momentum (larger companies) or
focused on the current "hot" phenomena (internet companies, media companies and
financial stocks). We did not raise a large cash position, sell stocks short,
employ options or attempt to shift toward "hot" or "in vogue" investment
concepts. As traumatic as the decline was, the best reason for enduring it and
staying in the Fund was the quick recovery that has taken place during the
period since the low. By November 10th, the Fund was up 42.5% from the low, well
ahead of the 28% gain for the Russell 2000 Index and the 37% gain in the Russell
2000 Growth Index and ahead of both indices on a year-to-date basis.
Outlook Favorable for Emerging Growth
Market and fundamental conditions appear favorable for emerging growth
stocks to become the leaders in a new bull market. Four favorable phenomena
converge setting the stage for this shift:
o Market leadership generally shifts after a "cleansing" bear market. We
have already shown that the market decline ending October 8th was the
second worst since the early 1970's. During its final days and weeks,
there were significant margin calls, mutual fund redemptions and
mindless portfolio decisions to cleanse excesses that might have built
up during the bull market.
o The valuation of emerging growth stocks hits a low relative to the
market. The graph, on the following page, shows the P/E multiple of
the Russell 2000 Index versus the Standard and Poor 500 Index since
1979. It shows clearly the improved relative value in emerging growth.
4
<PAGE>
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
DEC-79 1.041
MAR-80 0.970
JUN-80 1.056
SEP-80 1.136
DEC-80 1.118
MAR-81 1.226
JUN-81 1.233
SEP-81 1.162
DEC-81 1.182
MAR-82 1.157
JUN-82 1.181
SEP-82 1.159
DEC-82 1.214
MAR-83 1.327
JUN-83 1.432
SEP-83 1.554
DEC-83 1.366
MAR-84 1.380
JUN-84 1.385
SEP-84 1.327
DEC-84 1.250
MAR-85 1.383
JUN-85 1.347
SEP-85 1.353
DEC-85 1.414
MAR-86 1.421
JUN-86 1.447
SEP-86 1.451
DEC-86 1.414
JAN-87 1.374
FEB-87 1.471
MAR-87 1.520
APR-87 1.471
MAY-87 1.520
JUN-87 1.350
JUL-87 1.268
AUG-87 1.267
SEP-87 1.246
OCT-87 1.148
NOV-87 1.202
DEC-87 1.154
JAN-88 1.227
FEB-88 1.254
MAR-88 1.388
APR-88 1.456
MAY-88 1.411
JUN-88 1.354
JUL-88 1.370
AUG-88 1.447
SEP-88 1.441
OCT-88 1.390
NOV-88 1.377
DEC-88 1.461
JAN-89 1.421
FEB-89 1.466
MAR-89 1.413
APR-89 1.431
MAY-89 1.449
JUN-89 1.384
JUL-89 1.326
AUG-89 1.363
SEP-89 1.351
OCT-89 1.276
NOV-89 1.288
DEC-89 1.261
JAN-90 1.231
FEB-90 1.255
MAR-90 1.264
APR-90 1.250
MAY-90 1.223
JUN-90 1.186
JUL-90 1.121
AUG-90 1.077
SEP-90 1.029
OCT-90 1.022
NOV-90 1.034
DEC-90 1.054
JAN-91 1.142
FEB-91 1.175
MAR-91 1.250
APR-91 1.297
MAY-91 1.335
JUN-91 1.188
JUL-91 1.220
AUG-91 1.258
SEP-91 1.316
OCT-91 1.314
NOV-91 1.274
DEC-91 1.195
JAN-92 1.216
FEB-92 1.192
MAR-92 1.142
APR-92 1.004
MAY-92 0.983
JUN-92 0.970
JUL-92 1.005
AUG-92 1.009
SEP-92 1.018
OCT-92 1.058
NOV-92 1.123
DEC-92 1.145
JAN-93 1.230
FEB-93 1.057
MAR-93 1.074
APR-93 1.058
MAY-93 1.096
JUN-93 1.043
JUL-93 1.069
AUG-93 1.101
SEP-93 1.147
OCT-93 1.167
NOV-93 1.165
DEC-93 1.210
JAN-94 1.153
FEB-94 1.228
MAR-94 1.201
APR-94 1.181
MAY-94 1.143
JUN-94 1.143
JUL-94 1.096
AUG-94 1.144
SEP-94 1.181
OCT-94 1.185
NOV-94 1.205
DEC-94 1.190
JAN-95 1.200
FEB-95 1.225
MAR-95 1.216
APR-95 1.234
MAY-95 1.205
JUN-95 1.280
JUL-95 1.344
AUG-95 1.375
SEP-95 1.341
OCT-95 1.315
NOV-95 1.308
DEC-95 1.320
JAN-96 1.222
FEB-96 1.261
MAR-96 1.289
APR-96 1.316
MAY-96 1.337
JUN-96 1.308
JUL-96 1.236
AUG-96 1.270
SEP-96 1.249
OCT-96 1.218
NOV-96 1.155
DEC-96 1.195
JAN-97 1.192
FEB-97 1.165
MAR-97 1.126
APR-97 1.066
MAY-97 1.111
JUN-97 1.144
JUL-97 1.122
AUG-97 1.162
SEP-97 1.183
OCT-97 1.131
NOV-97 1.065
DEC-97 1.082
JAN-98 1.047
FEB-98 1.020
MAR-98 1.027
APR-98 0.996
MAY-98 0.984
JUN-98 0.946
JUL-98 0.876
AUG-98 0.866
SEP-98 0.844
OCT-98 0.788
NOV-98 0.780
o The earnings growth outlook is better for emerging growth companies
than for the market overall. The graph below shows the relationship
between earnings growth for the Russell 2000 Index and the Standard &
Poor 500 Index, also since 1979. It is clear from the graph that the
smaller company earnings growth averages over 50% greater than larger
company earnings growth. Furthermore, your portfolio's earnings
outlook for better than 35% growth far exceeds that of the Russell
2000 outlook of 20%.
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
DEC-79 1.432
MAR-80 1.741
JUN-80 1.658
SEP-80 1.257
DEC-80 1.295
MAR-81 1.758
JUN-81 1.691
SEP-81 1.330
DEC-81 1.564
MAR-82 1.894
JUN-82 2.131
SEP-82 1.344
DEC-82 1.246
MAR-83 1.284
JUN-83 1.591
SEP-83 1.471
DEC-83 1.633
MAR-84 1.427
JUN-84 1.355
SEP-84 1.396
DEC-84 1.374
MAR-85 1.587
JUN-85 1.586
SEP-85 1.722
DEC-85 1.491
MAR-86 1.777
JUN-86 1.833
SEP-86 1.813
DEC-86 1.888
JAN-87 1.647
FEB-87 1.594
MAR-87 1.562
APR-87 1.520
MAY-87 1.582
JUN-87 1.386
JUL-87 1.502
AUG-87 1.401
SEP-87 1.401
OCT-87 1.541
NOV-87 1.406
DEC-87 1.495
JAN-88 1.719
FEB-88 1.737
MAR-88 1.801
APR-88 1.768
MAY-88 1.561
JUN-88 1.396
JUL-88 1.482
AUG-88 1.402
SEP-88 1.363
OCT-88 1.372
NOV-88 1.389
DEC-88 1.345
JAN-89 1.966
FEB-89 1.814
MAR-89 1.754
APR-89 1.889
MAY-89 1.807
JUN-89 1.610
JUL-89 1.630
AUG-89 1.741
SEP-89 1.800
OCT-89 1.783
NOV-89 1.768
DEC-89 1.898
JAN-90 1.634
FEB-90 1.836
MAR-90 1.901
APR-90 2.102
MAY-90 2.041
JUN-90 1.876
JUL-90 1.677
AUG-90 1.802
SEP-90 1.879
OCT-90 1.826
NOV-90 1.938
DEC-90 1.843
JAN-91 1.709
FEB-91 1.907
MAR-91 2.141
APR-91 2.662
MAY-91 2.803
JUN-91 2.965
JUL-91 2.000
AUG-91 1.943
SEP-91 2.058
OCT-91 2.188
NOV-91 2.330
DEC-91 2.435
JAN-92 1.503
FEB-92 1.543
MAR-92 1.541
APR-92 1.567
MAY-92 1.587
JUN-92 1.409
JUL-92 1.562
AUG-92 1.583
SEP-92 1.574
OCT-92 1.593
NOV-92 1.669
DEC-92 1.729
JAN-93 1.469
FEB-93 1.675
MAR-93 1.716
APR-93 1.799
MAY-93 1.848
JUN-93 1.549
JUL-93 1.465
AUG-93 1.497
SEP-93 1.481
OCT-93 1.542
NOV-93 1.553
DEC-93 1.564
JAN-94 1.748
FEB-94 1.838
MAR-94 1.811
APR-94 2.031
MAY-94 2.031
JUN-94 1.727
JUL-94 1.494
AUG-94 1.513
SEP-84 1.525
OCT-94 1.488
NOV-94 1.481
DEC-94 1.448
JAN-95 1.469
FEB-95 1.487
MAR-95 1.461
APR-95 1.338
MAY-95 1.452
JUN-95 1.167
JUL-95 1.438
AUG-95 1.439
SEP-95 1.448
OCT-95 1.484
NOV-95 1.471
DEC-95 1.516
JAN-96 1.698
FEB-96 1.797
MAR-96 1.777
APR-96 1.781
MAY-96 1.771
JUN-96 1.593
JUL-96 1.588
AUG-96 1.622
SEP-96 1.701
OCT-96 1.628
NOV-96 1.587
DEC-96 1.594
JAN-97 1.344
FEB-97 1.390
MAR-97 1.460
APR-97 1.429
MAY-97 1.385
JUN-97 1.510
JUL-97 1.565
AUG-97 1.581
SEP-97 1.651
OCT-97 1.629
NOV-97 1.660
DEC-97 1.659
JAN-98 1.657
FEB-98 1.736
MAR-98 1.926
APR-98 2.020
MAY-98 2.020
JUN-98 1.906
JUL-98 1.855
AUG-98 1.806
SEP-98 1.560
OCT-98 1.545
NOV-98 1.529
o A shift in leadership could favor small company stocks. This could
happen when the conspicuous "flight to quality" flow of funds of the
last bull market is diverted only slightly. We think that the
fundamental concerns that have recently surrounded several of these
widely held "high quality" stocks such as Proctor & Gamble, Gillette,
General Electric, Walt Disney, etc. can create just such a diversion
of fund's flow.
5
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- -------------------------------------------------------------------------------
Your management team thanks you for investing with us during these lasts
five years. With aggregate earnings growth of over 35% expected and a P/E
multiple of less than 23 times next year's earnings, we think the opportunity
ahead is large.
Sincerely yours,
/s/ Frederick L. Meserve, Jr.
- -----------------------------
Frederick L. Meserve, Jr.
Portfolio Manager
November 23, 1998
6
<PAGE>
FIVE LARGEST HOLDINGS
- -------------------------------------------------------------------------------
Percent of
Company Net Assets
- -------------------------------------------------------------------------------
o Sipex Corp. 6.6%
Designs, manufactures, markets and sells analog integrated
circuits.
o Synopsys, Inc. 5.8%
Develops, markets and supports high-level design automation
software for designers of integrated circuits and electronics
systems. The company has license agreements with over 400
customers, including major international semi-conductor,
computer, communications, military and aerospace companies.
o PSS World Medical, Inc. 4.8%
Distributes medical supplies, equipment and pharmaceuticals
to office-based physicians, alternate-site imaging centers, long-
term care providers, and hospitals.
o QRS Corp. (Computer Services) 4.5%
Provides merchandise and logistics solutions throughout the
entire retail demand chain.Facilitates and optimizes the flow
of information, goods, and services throughout the retail
industry.
o Level One Communications, Inc. 4.2%
Designs, develops and markets integrated circuit products for
high speed digital signal transmission and networking connec-
tivity applications.
- -------------------------------------------------------------------------------
7
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's initial public
offering on June 15, 1988 through the most recent fiscal year-end and must
reflect the impact of the Fund's total expenses and the currently effective
4.50% maximum sales charge for the Fund's Class A Shares and 4.00% maximum
contingent deferred sales charge for the Fund's Class B Shares.
While the following charts are required by SECrules, such comparisons are
of limited utility since the indices shown are not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of these indices
would have had to own the securities that they represent. Acquiring these
securities would require a considerable amount of money and would incur expenses
that are not reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SECtotal return figures differ from those we
reported because the time periods may be different and because the
SECcalculation includes the impact of the currently effective 4.50% maximum
sales charge for the Fund's Class AShares and the 4.00% maximum contingent
deferred sales charge for the Fund's Class B Shares. These total returns
correspond to those experienced by individual shareholders only if their shares
were purchased on the first day of each time period and the maximum sales charge
was paid. Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed.
8
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Class A Shares*
June 15, 1988-October 31, 1998
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
Average Annual Total Return*
- ------- ------ -------------
9550 10000 10000
9059 10313 9225
12468 13036 11000
8524 12061 8891
14539 16101 15045
12916 17705 16184
13992 20350 20001
14517 21137 19957
19296 26726 24057
22805 33167 27668
28718 43816 32745
23729 53452 28642
Periods Ended 10/31/98 1 Year 5 Years Since Inception**
- -------------------------------------------------------------------------------
Class A Shares -17.37% 11.14% 9.17%
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% maximum sales charge. Past
performance is not an indicator of future results. Investment return and
principal value may fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
**6/15/88.
9
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Class B Shares* June 20, 1996-October
31, 1998 Average Annual Total Return*
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
10000 10000 10000
9932 10593 9703
9148 12151 8998
12385 13994 11485
13892 13994 11485
10337 17071 10046
Periods Ended 10/31/98 1 Year Since Inception**
- -------------------------------------------------------------------------------
Class B Shares -18.11% 1.41%
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.00% maximum contingent deferred sales
charge. Past performance is not an indicator of future results. Investment
return and principal value may fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
**6/20/96.
10
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Institutional Shares* November 2,
1995-October 31, 1998 Average Annual Total Return*
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
10000 10000 10000
11959 10897 11554
11648 11887 11134
10819 13635 10325
14718 15702 13178
16565 15702 13178
12748 19155 11527
Periods Ended 10/31/98 1 Year Since Inception**
- -------------------------------------------------------------------------------
Institutional Shares -13.39% 8.44%
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
**11/2/95.
11
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in ABCAT Shares* November 2,
1995-October 31, 1998 Average Annual Total Return*
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
10000 10000 10000
12468 11516 12866
10815 14048 11254
Periods Ended 10/31/98 1 Year Since Inception**
- -------------------------------------------------------------------------------
ABCAT Shares -13.26% 5.44%
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
**5/9/97.
12
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Value Percent of
Shares Security (Note 1) Net Assets
------ -------- -------- ----------
Common Stock: 94.9%
- -------------------------------------------------------------------------------
Business Services: 18.5%
80,550 AHL Services, Inc.* $ 2,718,562 2.2%
160,500 Central Garden & Pet Co.* 3,169,875 2.6
99,700 Dialogic Corp.* 2,243,250 1.8
149,400 Manugistics* 2,147,625 1.7
117,400 MemberWorks, Inc.* 2,714,875 2.2
145,600 QRS Corporation* 5,532,800 4.5
173,850 Wilmar Industries, Inc.* 4,302,787 3.5
------------ -----
22,829,774 18.5
Capital Goods: 2.5%
208,300 Advanced Lighting Technologies, Inc.* 1,692,437 1.4
101,400 ATMI, Inc.* 1,394,250 1.1
------------ -----
3,086,687 2.5
Consumer Services: 19.2%
91,037 Apollo Group, Inc. Cl-A* 2,924,564 2.4
331,150 Avado Brands, Inc. 2,607,806 2.1
69,800 Il Fornaio (America) Corp.* 558,400 0.5
236,000 Just For Feet* 3,997,250 3.2
299,112 O'Charleys, Inc.* 3,589,344 2.9
60,625 Papa John's International* 2,301,855 1.9
301,400 PETsMART, Inc.* 2,166,313 1.8
65,750 Starbucks Corp.* 2,851,906 2.3
85,725 Sylvan Learning Systems, Inc.* 2,646,759 2.1
------------ -----
23,644,197 19.2
Health Care Services: 10.9%
357,100 American Oncology Resources, Inc.* 4,753,894 3.9
34,900 Guilford Pharmaceuticals, Inc.* 571,487 0.5
24,900 Incyte Pharmaceuticals, Inc.* 759,450 0.6
267,350 PSS World Medical, Inc.* 5,915,119 4.8
132,700 Transition Systems, Inc.* 1,385,056 1.1
------------ -----
13,385,006 10.9
13
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Value Percent of
Shares Security (Note 1) Net Assets
------ -------- -------- ----------
Common Stock (concluded)
- -------------------------------------------------------------------------------
Health Equipment and Services: 4.0%
81,950 Arthrocare Corp* $ 1,454,613 1.2%
53,900 Bionx Implants, Inc.* 380,669 0.3
56,350 Heartport, Inc.* 239,488 0.2
117,775 Perclose* 2,811,878 2.3
------------ -----
4,886,648 4.0
Media/ Communications: 0.3%
32,900 Getty Images, Inc.* 405,081 0.3
------------ -----
Technology -- Software/Services: 15.0%
93,400 Aspect Development, Inc.* 2,950,856 2.4
153,600 Broadvision Inc.* 2,304,000 1.9
312,525 Integrated Systems, Inc.* 3,515,906 2.8
104,650 Mapics* 1,975,269 1.6
67,900 Summit Design, Inc.* 568,663 0.5
158,146 Synopsys, Inc.* 7,156,107 5.8
------------ -----
18,470,801 15.0
Technology -- Systems/Semiconductors: 13.1%
186,200 Applied Digital Access, Inc.* 581,875 0.5
197,925 Level One Communications, Inc.* 5,207,902 4.2
224,700 Security Dynamics Technologies, Inc.* 2,303,175 1.9
291,500 Sipex Corp.* 8,089,125 6.5
------------ -----
16,182,077 13.1
Telecommunication -- Long Distance: 4.9%
118,400 Geotel Communications Corp.* 3,078,400 2.5
102,500 Pacific Gateway Exchange, Inc.* 2,959,688 2.4
------------ -----
6,038,088 4.9
Transportation: 6.5%
161,150 Atlantic Coast Airlines, Inc.* 3,867,600 3.1
102,050 Coach USA, Inc.* 2,736,216 2.2
69,075 Forward Air Corporation* 1,062,028 0.9
69,075 Landair Services, Inc.* 345,375 0.3
------------ -----
8,011,219 6.5
Total Common Stock
(Cost $99,511,758) 116,939,578 94.9
------------ -----
14
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Statement of Net Assets (concluded) October 31, 1998
Par Value Percent of
(000) Security (Note 1) Net Assets
Repurchase Agreement: 4.4%
- -------------------------------------------------------------------------------
$5,490 Goldman Sachs & Co. 5.25%
Dated 10/30/98, to be repurchased
@ 5, 718,402 on 11/02/98, collater-
alized by U.S Treasury Bonds with
a market value of $5,600,451
(Cost $5,490,000) $ 5,490,000 4.4%
------------ -----
Total Investments in Securities
(Cost $105,001,758)** 122,429,578 99.3
------------
Other Assets in Excess of Liabilities 843,699 0.7
------------ -----
Net Assets $123,273,277 100.0%
============ =====
Net Asset Value and Redemption Price Per:
Class A Share
($65,247,480 / 3,419,651 shares outstanding) $19.08
======
Class B Share
($5,154,618 / 275,767 shares outstanding) $18.69***
======
Institutional Share
($6,242,969 / 325,623 shares outstanding) $19.17
======
ABCAT Share
($46,628,210 / 2,430,133 shares outstanding) $19.19
======
Maximum Offering Price Per:
Class A Share
($19.08 / 0.955) $19.98
======
Class B Share $18.69
======
Institutional Share $19.17
======
ABCAT Share $19.19
======
- --------------------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $105,001,758.
*** Redemption value is $17.94 following a 4% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Dividends ................................................ $ 11,447
Interest ................................................. 480,434
------------
Total income .................................... 491,881
------------
Expenses:
Investment advisory fee .................................. 1,103,023
Distribution fee ......................................... 237,630
Legal .................................................... 88,253
Transfer agent fee ....................................... 87,294
Accounting fee ........................................... 59,460
Registration fees ........................................ 55,889
Printing and postage ..................................... 43,716
Audit fees ............................................... 29,226
Custodian fee ............................................ 25,373
Directors' fees .......................................... 5,951
Miscellaneous ............................................ 8,726
------------
Total expenses .................................. 1,744,541
------------
Expenses in excess of investment income .................. (1,252,660)
------------
Realized and unrealized loss on investments:
Net realized lossfrom security transactions .............. (1,729,647)
Change in unrealized appreciation/depreciation
of investments ........................................ (15,958,185)
------------
Net loss on investments .................................. (17,687,832)
------------
Net decrease in net assets resulting from operations ........ $(18,940,492)
============
See Notes to Financial Statements.
16
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of investment income ......................................... $ (1,252,660) $ (831,973)
Net realized gain/(loss) from security transactions ............................. (1,729,647) 6,273,549
Change in unrealized appreciation/
depreciation of investments .................................................. (15,958,185) 17,299,788
------------- -------------
Net increase/(decrease) in net assets resulting
from operations .............................................................. (18,940,492) 22,741,364
------------- -------------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares ............................................................... (655,545) (509,733)
Class B Shares ............................................................... (53,761) (12,155)
Institutional Shares ......................................................... (117,815) (262,737)
ABCAT Shares ................................................................. (320,098) --
Net realized mid-term and long-term gains:
Class A Shares ............................................................... (2,622,180) (1,286,527)
Class B Shares ............................................................... (215,043) (28,797)
Institutional Shares ......................................................... (471,259) (663,099)
ABCAT Shares ................................................................. (1,280,392) --
------------- -------------
Total distributions ............................................................. (5,736,093) (2,763,048)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares .................................................... 51,002,445 77,654,561
Value of shares issued in
reinvestment of dividends .................................................... 5,494,066 2,667,198
Cost of shares repurchased ...................................................... (34,109,172) (40,585,610)
------------- -------------
Increase in net assets derived from capital
share transactions ........................................................... 22,387,339 39,736,149
------------- -------------
Total increase/(decrease) in net assets ......................................... (2,289,246) 59,714,465
Net Assets:
Beginning of year ............................................................... 125,562,523 65,848,058
------------- -------------
End of year ..................................................................... $ 123,273,277 $ 125,562,523
============= =============
</TABLE>
See Notes to Financial Statements
17
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
-----------
1998
----
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year ....................... $ 23.17
-------
Income from Investment Operations:
Expenses in excess of investment income .................... (0.22)
Net realized and unrealized gain/(loss) on investments ..... (2.82)
-------
Total from Investment Operations ........................... (3.04)
Less Distributions:
Distributions from net realized short-term gains ........... (0.21)
Distributions from net realized mid-term and long-term gains (0.84)
-------
Total distributions ........................................ (1.05)
-------
Net asset value end of year ................................ $ 19.08
=======
Total Return(1) ............................................... (13.48)%
Ratios to Average Daily Net Assets:
Expenses ................................................... 1.41%
Expenses in excess of investment income .................... (1.03)%
Supplemental Data:
Net assets at end of year (000) ............................ $65,247
Portfolio turnover rate .................................... 23%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended October 31,
---------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ....................... $19.14 $ 17.09 $ 12.90 $ 14.02
------- ------- ------- -------
Income from Investment Operations:
Expenses in excess of investment income .................... (0.18) (0.15) (0.09) (0.08)
Net realized and unrealized gain/(loss) on investments ..... 4.95 3.10 4.32 0.47
------- ------- ------- -------
Total from Investment Operations ........................... 4.77 2.95 4.23 0.39
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) (0.04) (1.51)
------- ------- ------- -------
Total distributions ........................................ (0.74) (0.90) (0.04) (1.51)
------- ------- ------- -------
Net asset value end of year ................................ $23.17 $19.14 $17.09 $12.90
======= ======= ======= =======
Total Return(1) ............................................... 25.93% 18.19% 32.92% 3.75%
Ratios to Average Daily Net Assets:
Expenses ................................................... 1.44% 1.50% 1.50% 1.50%
Expenses in excess of investment income .................... (0.97)% (0.83)% (0.64)% (0.73)%
Supplemental Data:
Net assets at end of year (000) ............................ $71,123 $45,325 $38,127 $23,302
Portfolio turnover rate .................................... 42% 24% 39% 86%
</TABLE>
- ----------
(1) Total return excludes the effect of sales charge.
(2) Calculation based on average shares.
See Notes to Financial Statements.
19
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
June 20, 1996(1)
through
For the Years Ended October 31, October 31,
------------------------------ ----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 22.88 $ 19.10 $ 19.22
------------ ------------ ----------
Income from Investment Operations:
Expenses in excess of income .......... (0.37)(2) (0.18) (0.12)
Net realized and unrealized gain/(loss)
on investments ..................... (2.77) 4.70 --
------------ ------------ ----------
Total from Investment Operations ...... (3.14) 4.52 (0.12)
------------ ------------ ----------
Less Distributions:
Distributions from net realized
short-term gains ................... (0.21) (0.21) --
Distributions from net realized
mid-term and long-term gains ....... (0.84) (0.53) --
------------ ------------ ----------
Total distributions ................... (1.05) (0.74) --
------------ ------------ ----------
Net asset value at end of period ...... $ 18.69 $ 22.88 $ 19.10
============ ============ ==========
Total Return(2) .......................... (14.11)% 24.69% (0.62)%
Ratios to Average Daily Net Assets:
Expenses .............................. 2.16% 2.19% 2.25%(3)
Expenses in excess of income .......... (1.77)% (1.73)% (1.67)%(3)
Supplemental Data:
Net assets at end of period (000) ..... $ 5,155 $ 5,719 $ 772
Portfolio turnover rate ............... 23% 42% 24%
</TABLE>
- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
See Notes to Financial Statements.
20
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
November 2,
1995(1) through
For the Years Ended October 31, October 31,
------------------------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $23.25 $ 19.15 $ 17.45
------ ------- -------
Income from Investment Operations:
Expenses in excess of investment
income ............................. (0.17)(2) (0.26) (0.12)
Net realized and unrealized gain/(loss)
on investments ..................... (2.86) 5.10 2.72
------ ------- -------
Total from Investment Operations ...... (3.03) 4.84 2.60
------ ------- -------
Less Distributions:
Distributions from net realized
short-term gains ................... (0.21) (0.21) (0.30)
Distributions from net realized
mid-term and long-term gains ....... (0.84) (0.53) (0.60)
------ ------- -------
Total distributions ................... (1.05) (0.74) (0.90)
------ ------- -------
Net asset value at end of period ...... $19.17 $ 23.25 $ 19.15
====== ======= =======
Total Return ............................. (13.39)% 26.36% 16.48%
Ratios to Average Daily Net Assets:
Expenses .............................. 1.16% 1.19% 1.25%(2)
Expenses in excess of income .......... (0.76)% (0.74)% (0.61)%(2)
Supplemental Data:
Net assets at end of period (000) ..... $6,243 $13,068 $19,751
Portfolio turnover rate ............... 23% 42% 24%
</TABLE>
- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Annualized.
See Notes to Financial Statements.
21
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Financial Highlights -- ABCAT Shares
(For a share outstanding throughout each period)
For the Period
For the May 9, 1997(1)
Year Ended through
October 31, October 31,
---------- --------------
1998 1997
---- ----
Per Share Operating Performance:
Net asset value at beginning of period $ 23.24 $ 18.64
-------- --------
Income from Investment Operations:
Expenses in excess of income (0.17)(2) (0.06)
Net realized and unrealized
gain/(loss) on investments (2.83) 4.66
-------- --------
Total from Investment Operations (3.00) 4.60
-------- --------
Less Distributions:
Distributions from net realized
short-term gains (0.21) --
Distributions from net realized
mid-term and long-term gains (0.84) --
-------- --------
Total Distributions (1.05) --
-------- --------
Net asset value at end of period $ 19.19 $ 23.24
======== ========
Total Return (13.26)% 24.68%
Ratios to Average Daily Net Assets:
Expenses 1.16% 1.19%(2)
Expenses in excess of income (0.80)% (0.69)%(2)
Supplemental Data:
Net assets at end of period (000) $46,628 $35,653
Portfolio turnover rate 23% 42%
- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Annualized.
See Notes to Financial Statements.
22
<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 management investment 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 not readily available, 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
23
<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 has a capital loss carryforward in
the amount of $1,873,591 expiring in 2006.
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 or excise 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
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 Corporation, is the Fund's investment advisor. The Advisory
24
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
NOTE 2 -- concluded
Agreement provides for ICC to receive an annual fee equal to 0.85% of the Fund's
average daily net assets. However, the actual amount of the fee is contractually
limited to an amount that would result in total expenses on Class A Shares of no
more than 1.50%. The Fund paid ICC $1,103,023 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, 1998. At October 31, 1998, the Fund owed $76,693 in advisory fees.
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 based upon its average daily net assets and paid
monthly. The Fund paid ICC $59,460 for accounting services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $4,744 in accounting
services fees.
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 $87,294 for
transfer agent services for the year ended October 31, 1998. At October 31,
1998, the Fund owed $16,361 in transfer agent services fees.
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, 1998,
distribution fees aggregated $237,630, of which $179,510 was attributable to the
Class A Shares and $58,120 was attributable to the Class B Shares. No
distribution fees were charged to the Institutional and ABCAT Shares. At October
31, 1998, the Fund owed $15,703 in distribution fees of which $11,992 was
attributable to Class A and $3,711 was attributable to Class B.
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, 1998 was $2,643, and the accrued liability was $5,974.
25
<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, 1998 Oct. 31, 1997
------------ -----------
Shares sold 1,026,573 1,220,895
Shares issued to shareholders on
reinvestment of dividends 148,041 92,972
Shares redeemed (823,988) (612,803)
------------ -----------
Net increase in shares outstanding 350,626 701,064
============ ===========
Proceeds from sale of shares $ 21,111,802 $24,515,195
Value of reinvested dividends 3,068,894 1,709,779
Cost of shares redeemed (16,839,860) (12,465,235)
------------ -----------
Net increase from capital share
transactions $ 7,340,836 $13,759,739
============ ===========
Class B Shares
------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1998 Oct. 31, 1997
------------ -----------
Shares sold 107,106 234,480
Shares issued to shareholders on
reinvestment of dividends 12,906 2,231
Shares redeemed (94,232) (27,166)
------------ -----------
Net increase in shares outstanding 25,780 209,545
============ ===========
Proceeds from sale of shares $ 2,245,546 $ 5,012,881
Value of reinvested dividends 263,666 40,890
Cost of shares redeemed (1,909,628) (564,373)
------------ -----------
Net increase from capital share
transactions $ 599,584 $ 4,489,398
============ ===========
26
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
NOTE 3 -- concluded
Institutional Shares
------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1998 Oct. 31, 1997
------------- ------------
Shares sold 20,073 834,599
Shares issued to shareholders on
reinvestment of dividends 27,198 49,811
Shares redeemed (283,690) (1,353,795)(2)
------------ -----------
Net decrease in shares
outstanding (236,419) (469,385)
============ ===========
Proceeds from sale of shares $ 509,820 $16,289,665
Value of reinvested dividends 566,256 916,529
Cost of shares redeemed (6,892,979) (26,372,242)(2)
------------ -----------
Net decrease from capital share
transactions $(5,816,903) $ (9,166,048)
============ ===========
ABCAT Shares
------------------------------
For the For the Period
Year Ended May 9, 1997(1) to
Oct. 31, 1998 Oct. 31, 1997
------------- -----------------
Shares sold 1,257,491 1,587,453(3)
Shares issued to shareholders on
reinvestment of dividends 76,695 --
Shares redeemed (437,945) (53,561)
------------ -----------
Net increase in shares outstanding 896,241 1,533,892
============ ===========
Proceeds from sale of shares $27,135,277 $31,836,820(3)
Value of reinvested dividends 1,595,250 --
Cost of shares redeemed (8,466,705) (1,183,760)
------------ -----------
Net increase from capital share
transactions $ 20,263,822 $30,653,060
============ ===========
- -----------
(1) Commencement of operations.
(2) The number of shares redeemed and cost of shares redeemed for the year ended
October 31, 1998 include an exchange of shares from Institutional Shares into
ABCAT Shares.
(3) The number of shares sold and proceeds from sale of shares for
the year ended October 31, 1998 include an exchange of shares from Institutional
Shares into ABCAT Shares.
27
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FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4 -- Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $49,818,578 and sales of investment securities aggregated $28,611,680
for the year ended October 31, 1998.
For federal income tax purposes, the tax cost of investments held at
October 31, 1998 was $105,293,620. On October 31, 1998, aggregate net unrealized
appreciation over tax cost for portfolio securities was $17,427,820 of which
$30,217,516 related to appreciated securities and $12,789,696 related to
depreciated securities.
NOTE 5 -- Net Assets
On October 31, 1998, net assets consisted of:
Paid-in capital
Class A Shares $48,166,449
Class B Shares 5,797,620
Institutional Shares 3,726,681
ABCAT Shares 50,324,632
Accumulated net realized loss from security transactions (2,169,925)
Unrealized appreciation of investments 17,427,820
------------
$123,273,277
============
NOTE 6 -- Risks of Investing Small and Emerging Growth Companies
There are risks to investors inherent in the characteristics of emerging
growth companies. 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.
28
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
NOTE 7 -- Federal Income Tax Information
On October 31, 1998, there was a tax capital loss carryforward of
approximately $1,828,277, expiring October 31, 2006. This carryforward will be
used to offset future net capital gains.
NOTE 8 -- Tax Information (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1998.
Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
-------- -------- -------- -----------
12/15/97 12/19/97 $0.21 $0.84
NOTE 9 -- Shareholder Meeting
On September 25, 1998, the Flag Investors Emerging Growth Fund held a
special meeting for its shareholders. During the meeting, the shareholders
elected the following directors: Truman T. Semans, James J. Cunnane, Richard T.
Hale, Joseph R. Hardiman, Louis E. Levy, Rebecca W. Rimel, and Carl W. Vogt. The
shareholders also approved a new sub-advisory agreement amongst the Fund,
Investment Conference Capital Corp., and Alex. Brown Capital Advisory and Trust
Company.
29
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Flag Investors Emerging Growth Fund, Inc. (the "Fund") at October 31, 1998, and
the results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
December 1, 1998
Tax Information (unaudited) for the Tax Year Ended October 31, 1998
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $4,588,874 from long-term
capital gains; of which $4,125,398 was subject to the 20% rate gains category.
30
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND
- -------------------------------------------------------------------------------
Directors and Officers
TRUMAN T. SEMANS
Chairman
JAMES J. CUNNANE REBECCA W. RIMEL
Director Director
RICHARD T. HALE CARL W. VOGT, ESQ.
Director Director
JOSEPH R. HARDIMAN HARRY WOOLF
Director President
LOUIS E. LEVY AMY M. OLMERT
Director Secretary
EUGENE J. MCDONALD JOSEPH A. FINELLI
Director Treasurer
SCOTT J. LIOTTA
Assistant Secretary
Investment Objective
An open-end mutual fund seeking long-term capital appreciation primarily through
investment in a diversified portfolio of small and mid-sized emerging growth
companies.
31
<PAGE>
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
<PAGE>
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Real Estate Securities Fund
Flag Investors Communications Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
