<PAGE>
As Filed With the Securities and Exchange Commission on June 2, 2000
Registration Nos. 33-21119/811-5320
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 18 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 22
FLAG INVESTORS EMERGING GROWTH FUND, INC.
-----------------------------------------
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, MD 21202
-------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (410) 727-1700
Daniel O. Hirsch, Esq. Copy to: Richard W. Grant, Esq.
One South Street Morgan, Lewis & Bockius LLP
Baltimore, MD 21202 1701 Market Street
(Name and address of agent for service) Philadelphia, PA 19103
It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
__X__ 60 days after filing pursuant to paragraph (a)
_____ 75 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph(a)(2) of Rule 485.
<PAGE>
[FLAG INVESTORS LOGO]
EMERGING GROWTH FUND, INC.
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(Class A, Class B, and Class C Shares)
Prospectus July 31, 2000
This mutual fund (the "Fund") seeks to achieve long-term capital appreciation
primarily through investment in a diversified portfolio of common stocks of
small and mid-sized emerging growth companies.
The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
("Class A Shares"), Flag Investors Class B Shares ("Class B Shares") and Flag
Investors Class C Shares ("Class C Shares") of the Fund. These separate classes
give you a choice of sales charges and fund expenses. (Refer to the section on
sales charges.)
TABLE OF CONTENTS
Investment Summary.......................................1
Fees And Expenses of The Fund............................3
Investment Program.......................................4
The Fund's Net Asset Value...............................5
How To Buy Shares........................................6
How To Redeem Shares.....................................7
Telephone Transactions...................................8
Sales Charges............................................9
How To Choose The Class
That Is Right For You...............................12
Dividends And Taxes.....................................13
Investment Advisor And Sub-Advisor......................14
Financial Highlights....................................16
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The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
INVESTMENT SUMMARY
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Objective and Strategies
The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of common stocks of small and
mid-sized emerging growth companies. These companies have relatively small
market capitalizations. The Fund's investment advisor and sub-advisor
(collectively, the "Advisors") will attempt to identify emerging growth
companies, that is, companies that they believe have the ability or potential to
sustain a high level of growth in their revenue, earnings, assets and cash flow.
The Advisors will focus on a number of key selection criteria including a
company's industry position, management quality and experience, accounting and
financial policies, marketing and service capabilities, and product development
efforts.
Risk Profile
The Fund may be suited for you if you are willing to accept the risks
and uncertainties of investing in emerging growth companies in the hope of
achieving above-average, long-term capital appreciation.
General Stock Risk. The value of an investment in the Fund will vary
from day to day, based on changes in the prices of securities the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies represented in the Fund's portfolio.
Emerging Growth and Small Cap Stock Risks. The stocks of small and
mid-sized companies may experience greater price volatility than those of larger
companies. The market for such stocks may be more limited and the companies
themselves may be more vulnerable to economic or company-specific problems. In
particular, these small companies may have limited product lines, markets and
financial resources, and may depend on a relatively small management group.
If you invest in the Fund, you could lose money. An investment in the
Fund is not a bank deposit and is not guaranteed by the FDIC or any other
government agency.
1
<PAGE>
Fund Performance
The following bar chart and table show the performance of the Fund both
year by year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
Class A Shares*
For years ended December 31,
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-21.07% 49.62% -9.18% -0.77% 5.03% 37.34% 18.20% 20.74% 6.61% 49.26%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
o The bar chart does not reflect sales charges. If it did, returns would be less
than those shown.
For the period from December 31, 1999 through June 30, 2000, the year
to date total return for Class A Shares was ____________%
During the 10-year period shown in the bar chart, the highest return
for a quarter was 52.16% (quarter ended 12/31/99) and the lowest return for a
quarter was (29.50)% (quarter ended 9/30/90).
Average Annual Total Return (for periods ended December 31, 1999)
Class A Shares(1) S&P 500(2) Russell 2000(2)
----------------- ---------- ---------------
Past One Year........... 41.04% 21.04% 21.26%
Past Five Years......... 24.13% 28.56% 16.69%
Past Ten Years.......... 12.66% 18.21% 13.40%
Class B Shares(1) S&P 500(2) Russell 2000(2)
----------------- ---------- ---------------
Past One Year........... 40.68% 21.04% 21.26%
Since Inception......... 18.95% (6/20/96) 27.15%(3) 12.84%(3)
---------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the current maximum sales charges, which
increased on January 18, 2000.
(2) The Standard & Poor's 500 Composite Index is an unmanaged index that is a
widely recognized benchmark of general market performance. The Russell 2000
Index is an unmanaged index that is a widely recognized benchmark of small
company stock performance. Each index is a passive measure of equity market
returns. Neither index factors in the costs of buying, selling and holding
securities -- costs which are reflected in the Fund's results. The Russell
2000's performance may be a better comparison for the Fund than the S&P 500,
which tracks larger, more developed stocks.
(3) For the period from 6/30/96 through 12/31/99.
2
<PAGE>
No performance information is provided for the Class C Shares because they have
not been offered prior to the date of this prospectus. However, performance of
the Class C Shares is expected to be similar to that of the Fund's other classes
and will differ only to the extent that Class C Shares have different expenses.
FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
Initial Deferred Deferred
Sales Charge Sales Charge Sales Charge
------------ ------------ ------------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of
offering price)......................................... 5.50%* None None
Maximum deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ 1.00%* 5.00%** 1.00%***
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends.................................... None None None
Redemption Fee............................................... None None None
Exchange Fee................................................. None None None
Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)
Management Fees.............................................. 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees..................... 0.25% 0.75% 0.75%
Other Expenses (including a 0.25% shareholder
servicing fee for Class B and Class C Shares)........... 0.30% 0.55% 0.55%
----- ----- -----
Total Annual Fund Operating Expenses......................... 1.40% 2.15% 2.15%
===== ===== =====
</TABLE>
---------
* You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem your
shares. (See "Sales Charges -- Redemption Price.")
** Contingent deferred sales charges decline over time and reach zero after six
years. After seven years, Class B Shares convert automatically to Class A
Shares. (See "Sales Charges" and "How to Choose the Class That Is Right for
You.")
*** You will be required to pay a contingent deferred sales charge if you redeem
your Class C Shares within one year after purchase. (See "Sales Charges-
Redemption Price.")
3
<PAGE>
Example:
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares............................................................. $685 $969 $1,274 $2,137
Class B Shares............................................................. $718 $973 $1,354 $2,208
Class C Shares............................................................. $318 $673 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A Shares............................................................. $685 $969 $1,274 $2,137
Class B Shares............................................................. $218 $673 $1,154 $2,208
Class C Shares............................................................. $218 $673 N/A N/A
</TABLE>
Federal regulations require that the table above reflect the maximum
sales charge. However, you may qualify for reduced sales charges or no sales
charge at all. (Refer to the section on sales charges.) If you hold your shares
for a long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
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Investment Objective, Policies and
Risk Considerations
The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of small and mid-sized emerging
growth companies.
The Advisors are responsible for managing the Fund's investments.
(Refer to the section on the Investment Advisor and Sub-Advisor.) The Advisors
will seek to identify companies that, in their opinion, are well managed and
have experienced or have the potential to experience rapid growth in their
revenue, earnings, assets and cash flow. The selection criteria will include a
company's industry position, management qualifications and experience,
accounting and financial policies, marketing and service capabilities and
product development efforts. The Advisors will invest in a broad cross-section
of industries in an effort to limit the Fund's volatility. The Fund will invest
primarily, but not exclusively, in the businesses of technology, health care,
business services, energy, transportation, financial services, consumer products
and services and capital goods.
4
<PAGE>
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. In
general, stock prices are sensitive to developments affecting particular
companies and to general economic conditions that affect particular industry
sectors or the securities markets as a whole.
In addition to the general risks of the stock markets, investing in
small to mid-sized companies entails special risks. The stock prices of emerging
growth companies tend to be more volatile than investments in larger, more
established companies, making such investments more speculative. In particular,
companies in the Fund's portfolio may have limited product lines, markets, and
financial resources, and may depend on a relatively small management group.
There can be no guarantee that the Fund will achieve its goals.
To reduce the Fund's risk under adverse market conditions, the Advisors
may make temporary defensive investments in money market instruments that
ordinarily would not be consistent with the Fund's objectives. While engaged in
a temporary defensive strategy, the Fund may not achieve its investment
objective. The Advisors would follow such a strategy only if they believed the
risk of loss in pursuing the Fund's primary investment strategies outweighed the
opportunity for gain.
THE FUND'S NET ASSET VALUE
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The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. When you buy Class A Shares,
the price you pay may be increased by a sales charge. When you redeem any class
of shares, the amount you receive may be reduced by a sales charge. Read the
section on sales charges for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 p.m. Eastern Time,
it could be earlier on the day before a holiday. Contact the Transfer Agent to
determine whether the Fund will close early before a particular holiday. The net
asset value is calculated by subtracting the liabilities attributable to a class
from its proportionate share of the Fund's assets and dividing the result by the
outstanding shares of the class. Because the different classes have different
distribution or service fees, their net asset values may differ.
In valuing the Fund's assets, its investments are priced at their
market value. When price quotes for a particular security are not readily
available, the security is priced at its "fair value" using procedures approved
by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.
The following sections describe how to buy and redeem shares.
5
<PAGE>
HOW TO BUY SHARES
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You may buy any class of the Fund's shares through your securities
dealer or through any financial institution that is authorized to act as a
shareholder servicing agent. Contact them for details on how to enter and pay
for your order. You may also buy shares by sending your check (along with a
completed Application Form) directly to the Fund.
You may invest in Class A Shares unless you are a defined contribution
plan with assets of $75 million or more.
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.
Investment Minimums
Your initial investment 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.
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. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments
may be as low as $250. Refer to the section on the Fund's Automatic
Investing Plan for details.
o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
Investing Regularly
You may make regular investments in the Fund through any of the
following methods. If you wish to enroll in any of these programs or if you need
any additional information, complete the appropriate section of the Application
Form or contact your securities dealer, your servicing agent or the Transfer
Agent.
Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent , it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
6
<PAGE>
Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
Systematic Purchase Plan. You may also purchase any class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.
HOW TO REDEEM SHARES
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You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.
Your securities dealer, your servicing agent or the Transfer Agent may
require the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the shares exactly as their names appear on the account.
2) If you are redeeming more than $50,000, a guarantee of your signature. You
can obtain one from most banks or securities dealers.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly executed
stock power.
4) Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.
7
<PAGE>
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.
If you own Fund shares having a value of at least $10,000, you may
arrange to have some of your shares redeemed monthly or quarterly under the
Fund's Systematic Withdrawal Plan. Each redemption under this plan involves all
the tax and sales charge implications normally associated with Fund redemptions.
Contact your securities dealer, your servicing agent or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
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If your shares are in an account with the Transfer Agent, you may
redeem them in any amount up to $50,000 or exchange them for shares in another
Flag Investors fund by calling the Transfer Agent on any Business Day between
the hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are automatically
entitled to telephone transaction privileges, but you may specifically request
that no telephone redemptions or exchanges be accepted for your account. You may
make this election when you complete the Application Form or at any time
thereafter by completing and returning documentation supplied by the Transfer
Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that either 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 contacting the Transfer Agent by telephone. In such
event, you should make your request by mail or facsimile. If you hold your
shares in certificate form, you may not exchange or redeem them by telephone.
8
<PAGE>
SALES CHARGES
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Purchase Price
The price you pay to buy shares is the Fund's offering price, which is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
Class A
Sales Charge
as % of
---------------------------------------------
Offering Net Amount Class B Class C
Amount of Purchase Price Invested Sales Charge Sales Charge
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% None None
$50,000 - $99,999 4.50% 4.71% None None
$100,000 - $249,999 3.50% 3.63% None None
$250,000 - $499,999 2.50% 2.56% None None
$500,000 - $999,999 2.00% 2.04% None None
$1,000,000 and over None None None None
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest
$1,000,000 or more in Class A Shares or when you buy any amount of Class B or
Class C Shares, you may pay a sales charge when you redeem your shares. Refer to
the section on redemption price for details. Your securities dealer may be paid
a commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may
be reduced under the following circumstances.
Rights of Accumulation. If you are purchasing additional Class A Shares
of this Fund or Class A shares of any other Flag Investors fund or if you
already have investments in Class A shares, you may combine the value of your
purchases with the value of your existing investments to determine whether you
qualify for reduced sales charges. (For this purpose your existing investments
will be valued at the higher of cost or current value.) You may also combine
your purchases and investments with those of your spouse and your children under
the age of 21 for this purpose. You must be able to provide sufficient
information to verify that you qualify for this right of accumulation.
Letter of Intent. If you anticipate making additional purchases of
Class A Shares over the next 13 months, you may combine the value of your
current purchase with the value of your anticipated purchases to determine
whether you qualify for a reduced sales charge. You will be required to sign a
letter of intent specifying the total value of your anticipated purchases and to
initially purchase at least 5% of the total. Each time you make a purchase
during the period, you will pay the sales charge applicable to their combined
value. If, at the end of the 13-month period, the total value of your purchases
is less than the amount you indicated, you will be required to pay the
difference between the sales charges you paid and the sales charges applicable
to the amount you actually did purchase. Some of the shares you own will be
redeemed to pay this difference.
9
<PAGE>
Purchases at Net Asset Value. You may buy Class A Shares without paying
a sales charge under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of Class A
Shares made within the last 90 days.
2) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a description of the
conditions).
3) If you are a current or retired Board Member of this or any affiliated Fund,
a Board Member, an employee or a member of the immediate family of an employee
of any of the following (or their respective affiliates): the Fund's
distributor, the Advisors or a broker-dealer authorized to sell shares of the
Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A Flag Investors fund payroll savings plan program;
(iii) 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. Your securities dealer or servicing
agent may charge you an additional fee if you buy shares in this
manner.
Purchases by Exchange
You may exchange Class A, B, or C shares of any other Flag Investors
fund for an equal dollar amount of Class A, B, or C Shares, respectively,
without payment of the sales charges described above or any other charge, up to
four times a year. You may not exchange shares of a Flag Investors money market
fund unless you acquired those shares through a prior exchange from shares of
another Flag Investors fund. 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. The Fund may modify or terminate these offers of exchange upon 60
days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
10
<PAGE>
Redemption Price
The amount of any sales charge deducted from your redemption price will
be determined according to the following schedule.
<TABLE>
<CAPTION>
Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge (as % of Cost or Value)
-----------------------------------------
Year Since Purchase Class A Sales Charge Class B Sales Charge Class C Sales Charge
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First...................... 1.00%* 5.00% 1.00%
Second..................... 0.50%* 4.00% None
Third...................... None 3.00% None
Fourth..................... None 3.00% None
Fifth...................... None 2.00% None
Sixth...................... None 1.00% None
Seventh and Thereafter None None None
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your shares
were purchased at net asset value because they were part of an investment of $1
million or more.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
2) If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
3) If you acquired your shares through an exchange of shares of another Flag
Investors fund, the period of time you held the original shares will be
combined with the period of time you held the shares being redeemed to
determine the years since purchase. If you bought your shares prior to
January 18, 2000, you will pay the sales charge that was in effect at the
time of your original purchase.
4) The sales charge is applied to the lesser of the cost of the shares or their
value at the time of your redemption.
Waiver of Sales Charge. You may redeem shares without paying a sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Flag Investors fund
of the same class.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
11
<PAGE>
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent or the Transfer Agent that such circumstances exist.
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000 and your securities dealer has agreed to return to the Fund's
distributor any payments received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted six years after your purchase. This conversion will be made on the
basis of the relative net asset values of the classes and will not be a taxable
event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
-------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy
your shares, but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares and,
except in the case of investments of $1,000,000 or more, no sales charge if you
redeem them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
12
<PAGE>
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual
fee as long as you hold your shares. For Class A and B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, the Fund's
Advisor may provide significant compensation to securities dealers and servicing
agents for distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels
of compensation depending upon which class of shares you buy.
Distribution Plans
The Fund has adopted plans under Rule 12b-1 that allow it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and Class C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
and an annual shareholder servicing fee equal to 0.25% of average daily net
assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.
DIVIDENDS AND TAXES
-------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of annual dividends and to distribute net
capital gains on an annual basis.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net income and
capital gains. The dividends and distributions you receive are subject to
federal, state and local taxation, depending upon your tax situation. The tax
treatment of dividends and distributions is the same whether or not you reinvest
them. Each sale or exchange of the Fund's shares is generally a taxable event.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state, and local income taxes.
13
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
-------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICCC" or the "Advisor") is the
Fund's investment advisor and Brown Investment Advisory & Trust Company
(formerly, Alex. Brown Capital Advisory & Trust Company) ("Brown Trust" or the
"Sub-Advisor") is the Fund's sub-advisor. ICCC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and Deutsche Banc Alex.
Brown Cash Reserve Fund, Inc. These funds, together with the Fund, had
approximately $____ billion of net assets as of June 30, 2000. Brown Trust is a
Maryland trust company with approximately $_____ billion under management as of
June 30, 2000.
ICCC is responsible for supervising and managing all of the Fund's
operations, including overseeing the performance of Brown Trust. Brown Trust is
responsible for decisions to buy and sell securities for the Fund, for
broker-dealer selection and for negotiation of commission rates.
As compensation for its advisory services for the fiscal year ended
October 31, 1999, ICCC received from the Fund a fee equal to 0.85% of the Fund's
average daily net assets. ICCC compensates Brown Trust out of its advisory fee.
The Advisor is an indirect, wholly owned subsidiary of Deutsche Bank,
AG. Deutsche Bank is a major global banking institution that is engaged in a
wide range of financial services, including investment management, mutual funds,
retail and commercial banking, investment banking and insurance. The Advisor was
formerly an indirect subsidiary of Bankers Trust Corporation.
On March 11, 1999, Bankers Trust Company ("Bankers Trust"), a separate
subsidiary of Bankers Trust Corporation, announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. ICCC became a subsidiary of Bankers Trust Corporation in a
merger that occurred after these events took place. Bankers Trust plead guilty
to misstating entries in the bank's books and records and agreed to pay a $63.5
million fine to state and federal authorities. On July 26, 1999, the federal
criminal proceedings were concluded with Bankers Trust's formal sentencing. The
events leading up to the guilty pleas did not arise out of the investment
advisory or mutual fund management activities of Bankers Trust or its
affiliates.
As a result of the plea, absent an order from the SEC, ICCC may not be
able to continue to provide investment advisory services to the Fund. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
Portfolio Manager
Frederick L. Meserve, Jr. has been responsible for managing the Fund's
assets since November 1993. Mr. Meserve is a Managing Director at Brown Trust
where he has served as the Fund's portfolio manager since July 1998. Prior to
joining Brown Trust, he served as the Fund's portfolio manager while employed at
BT Alex. Brown Incorporated. Mr. Meserve has published a number of investment
strategy reports on growth stocks. He received a B.S.&E. from Princeton
University in 1960 and an M.B.A. from the Columbia School of Business in 1962.
14
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information (except for the six-month period ended April 30, 2000) has been
audited by _________________________, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request. Class C Shares were not offered prior to the date of
this prospectus.
(For a share outstanding throughout each period)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
-------------------------------------------------------------------------------------------------------------------------------
For period
Nov 1, 1999
to April 30,
2000 For the Year Ended October 31,
----------------------------------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ $19.08 $23.17 $19.14 $17.09 $12.90
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Expenses in excess of investment
income............................... (0.28) (0.22)(2) (0.18) (0.15) (0.09)
Net realized and unrealized
gain/(loss) on investments........... 5.56 (2.82) 4.95 3.10 4.32
------ ------ ------ ------ ------ ------
Total from Investment Operations........ 5.28 (3.04) 4.77 2.95 4.23
------ ------ ------ ------ ------ ------
Less Distributions:
Distributions from net realized
short-term gains...................... -- (0.21) (0.21) (0.30) --
Distributions from net realized
long-term gains...................... -- (0.84) (0.53) (0.60) (0.04)
------ ------ ------ ------ ------ ------
Total Distributions..................... -- (1.05) (0.74) (0.90) (0.04)
------ ------ ------ ------ ------ ------
Net asset value at end of period........ $24.36 $19.08 $23.17 $19.14 $17.09
====== ====== ====== ====== ====== ======
Total Return(1)............................. 27.67% (13.48)% 25.93% 18.19% 32.92%
Ratios to Average Daily Net Assets:
Expenses................................ 1.40% 1.41% 1.44% 1.50% 1.50%
Expenses in excess of investment
income............................... (1.19)% (1.03)% (0.97)% (0.83)% (0.64)%
Supplemental Data:
Net assets at end of year/period (000) ..... $70,236 $65,247 $71,123 $45,325 $38,127
Portfolio turnover rate..................... 38% 23% 42% 24% 39%
</TABLE>
------------
(1) Total return excludes the effect of sales charge.
(2) Calculations based on average shares.
15
<PAGE>
(For a share outstanding throughout each period)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares
-------------------------------------------------------------------------------
For the
For the Period
Period June 20,
November 1, 1996(1)
1999 through Through
April 30, For the Year Ended October 31, October 31,
2000 ------------------------------ -----------
(Unaudited) 1999 1998 1997 1996
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $18.69 $22.88 $19.10 $19.22
---------- ------ ------ ------ ------
Income from Investment Operations:
Expenses in excess of investment
income............................... (0.55) (0.37)(2) (0.18) (0.12)
Net realized and unrealized gain/(loss)
on investments....................... 5.53 (2.77) 4.70 --
---------- ------ ------ ------ ------
Total from Investment Operations 4.98 (3.14) 4.52 (0.12)
---------- ------ ------ ------ ------
Less Distributions:
Distributions from net realized short-
term gains........................... -- (0.21) (0.21) --
Distributions from net realized long-
term gains........................... -- (0.84) (0.53) --
---------- ------ ------ ------ ------
Total distributions...................... -- (1.05) (0.74) --
---------- ------ ------ ------ ------
Net asset value at end of period......... $23.67 $18.69 $22.88 $19.10
========== ====== ====== ====== ======
Total Return(3).......................... 26.65% (14.11)% 24.69% (0.62)%
Ratios to Average Daily Net Assets:
Expenses................................. 2.15% 2.16% 2.19% 2.25%(4)
Expenses in excess of investment
income............................... (1.94)% (1.77)% (1.73)% (1.67)%(4)
Supplemental Data:
Net assets at end of period (000)........ $3,662 $5,155 $5,719 $ 772
Portfolio turnover rate.................. 38% 23% 42% 24%
</TABLE>
Investment Advisor
----------------------------
(1) Commencement of operations.
(2) Calculations based on average shares.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
16
<PAGE>
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor
BROWN INVESTMENT ADVISORY & TRUST COMPANY
Furness House, Nineteen South Street
Baltimore, Maryland 21202
Distributor
ICC DISTRIBUTORS, INC.
One South Street
Baltimore, Maryland 21202
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants
-----------------------
250 West Pratt Street
Baltimore, Maryland 21201
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
[FLAG INVESTORS LOGO]
Flag Investors
P.O. Box 515
17
<PAGE>
Baltimore, Maryland 21203
(800) 767-FLAG
www.flaginvestors.com
-------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-5320
-------------------------------------------------------------------------------
EGPRS (7/00)
<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. THE AUDITED
FINANCIAL STATEMENTS FOR THE FUND ARE INCLUDED
IN THE FUND'S ANNUAL REPORT, AND ADDITIONAL
FINANCIAL INFORMATION IS INCLUDED IN THE FUND'S
SEMI-ANNUAL REPORT WHICH HAS BEEN
FILED ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. A COPY OF
EACH PROSPECTUS AND THE ANNUAL REPORT MAY BE OBTAINED
WITHOUT CHARGE FROM YOUR SECURITIES 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: July, 31, 2000,
Relating to Prospectus Dated July 31, 2000, for:
Flag Investors Class A Shares, Flag Investors Class B Shares,
Flag Investors Class C Shares
and
Prospectuses Dated March 1, 1999 for:
Flag Investors Institutional Shares
and
Brown Investment Advisory & Trust Emerging Growth Shares
<PAGE>
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION AND HISTORY................................................3
INVESTMENT OBJECTIVE AND POLICIES..............................................3
VALUATION OF SHARES AND REDEMPTION.............................................6
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS...........................7
MANAGEMENT OF THE FUND.........................................................9
INVESTMENT ADVISORY AND OTHER SERVICES........................................15
DISTRIBUTION OF FUND SHARES...................................................16
BROKERAGE.....................................................................19
CAPITAL STOCK.................................................................20
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.............................21
LEGAL MATTERS.................................................................22
INDEPENDENT ACCOUNTANTS.......................................................22
PERFORMANCE INFORMATION.......................................................22
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................24
FINANCIAL STATEMENTS..........................................................24
2
<PAGE>
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 five classes
of shares: Flag Investors Emerging Growth Fund Class A Shares (the "Class A
Shares"), Flag Investors Emerging Growth Fund Class B Shares (the "Class B
Shares"), Flag Investors Emerging Growth Fund Class C Shares (the "Class C
Shares"), Flag Investors Emerging Growth Fund Institutional Shares (the
"Institutional Shares") and Brown Investment Advisory & Trust Emerging Growth
Shares (formerly Alex. Brown Capital Advisory & Trust Emerging Growth Shares)
(the "BIAT Shares") (collectively, the "Shares").
Important information concerning the Fund is included in the Fund's
Prospectuses which may be obtained without charge from the Fund's distributor
(the "Distributor") or, with respect to each class except the BIAT Shares class,
from Participating Dealers that offer such Shares to prospective investors. 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 "1940 Act") and its Shares under
the Securities Act of 1933, as amended (the "1933 Act"). The Fund's registration
statement was declared effective by the SEC on June 15, 1988 and the Fund began
operations as an open-end diversified management investment company. The Fund
has offered the Class A Shares since its inception on December 30, 1987, the
Institutional Shares since November 2, 1995, the Class B Shares since June 20,
1996, the BIAT Shares since May 9, 1997 and the Class C Shares since July 31,
2000.
Under a license agreement dated December 29, 1987 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to DB Alex. Brown LLC ("DB Alex.
Brown")). DB Alex Brown, licenses the "Flag Investors" name and logo to the
Fund, but retains the rights to the 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
$500 million, the Fund will discontinue sales of Shares with the exception of
purchases made by pre-existing IRA accounts.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective and Policies of the Fund
The Fund has the investment objective of long-term capital
appreciation. Realization of income is not a significant investment
consideration and any income realized on the Fund's investments will be
incidental to the Fund's objective. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund seeks to achieve its objective through investments in small
and mid-sized emerging growth companies. In general, an emerging growth company
with $250 million or less in annual sales would be considered to be a small
3
<PAGE>
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.")
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.
In addition, the Fund may invest up to 20% of its net assets in
securities convertible into the common stock of high-quality growth companies.
Convertible securities are fixed-income securities that 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 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.
In addition, 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.
Additional information about certain of the Fund's investment policies
and practices are described below.
Restricted Securities
The Fund may invest in securities eligible for resale pursuant to Rule
144A under the 1933 Act ("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" below.) Rule 144A Securities may become
illiquid if qualified institutional buyers are not interested in acquiring the
securities.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed to be creditworthy by the Advisor and the Sub-Advisor
(collectively, the "Advisors"). A repurchase agreement is a short-term
investment in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
usually not more than seven days from the date of purchase, thereby determining
the yield during the Fund's holding period. The value of underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. The collateral for these repurchase
agreements will be held by the Fund's custodian or by a duly appointed
sub-custodian. The Fund makes payment for such securities only upon physical
4
<PAGE>
delivery or evidence of book-entry transfer to the account of a custodian or
bank acting as agent. The underlying securities, which in the case of the Fund
are securities of the U.S. Government only, may have maturity dates exceeding
one year. The Fund does not bear the risk of a decline in value of the
underlying securities unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including (a) possible decline in the value of
the underlying security while the Fund seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income during this
period and (c) expenses of enforcing its rights.
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 1940 Act or the Rules and Regulations or interpretations of the SEC
thereunder, which currently require that (a) the borrowers 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 borrowers 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 loans
are made subject to an ability of the Fund to terminate at any time, and (d) the
Fund receives 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 the recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans will be made only to borrowers deemed by the Advisors to be of
good standing and when, in the judgment of the Advisors, the consideration that
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. The Fund's
custodian or another affiliate may act as securities lending agent.
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 would occur
affecting an investment on loan, the loan must be called and the securities
voted.
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. Many of the Fund's investments are small
capitalization or "small cap" 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 Fund 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 Fund's investments 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
5
<PAGE>
regional market conditions. Moreover, small companies may have insignificant
market share in their industries and may have difficulty maintaining or
increasing their market share in competition with larger companies. Due to these
and other factors, small companies may suffer significant losses.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the Fund's outstanding Shares. The Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers
in any one industry (for these purposes the U.S. Government and its
agencies and instrumentalities are not considered an industry);
2) With respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any single issuer (for these
purposes the U.S. Government and its agencies and instrumentalities
are not considered an issuer);
3) Borrow money except as a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 10% of the value of
the total assets of the Fund at the time of such borrowing;
4) 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;
5) 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;
6) Purchase or sell commodities or commodities contracts provided that
the Fund may invest in financial futures and options on such
futures;
7) Act as an underwriter of securities within the meaning of the U.S.
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;
8) Issue senior securities; or
9) Make loans, except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements in accordance with
its investment objective and policies and may lend portfolio
securities and enter into repurchase agreements as described in the
Registration Statement.
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 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.
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) 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
6
<PAGE>
for the following holidays (or the days on which they are observed): New Year's
Day, Martin Luther King, Jr. Day, 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 third parties 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 Shares by check, or by
wire transfer of funds. However, the Board of Directors may determine that it
would be in the best interests of the remaining shareholders to make payment of
the redemption price in whole or in part by a distribution of securities from
the portfolio of the Fund in lieu of cash, in conformity with applicable rules
of the SEC. If Shares are redeemed in kind, the redeeming shareholder will incur
brokerage costs in later converting the assets into cash. The method of valuing
portfolio securities is described under "Valuation of Shares", and such
valuation will be made as of the same time the redemption price is determined.
The Fund has elected to be governed by Rule 18f-1 under the 1940 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.
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's Prospectuses. 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 Prospectuses is not intended as a
substitute for careful tax planning. For example, under certain specified
circumstances, state income tax laws may exempt from taxation distributions of a
regulated investment company to the extent that such distributions are derived
from interest on federal obligations. Investors are urged to consult with their
tax advisor regarding whether such exemption is available.
The following general discussion of certain 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.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
7
<PAGE>
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that the Fund
controls and which are engaged in the same, similar, or related trades or
business. For purposes of the 90% gross income requirement described above,
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) may be excluded from income that qualifies under the 90%
requirement.
In addition to the requirements described previously, in order to
qualify as a RIC, the Fund must distribute at least 90% of its investment
company taxable income (that generally includes dividends, taxable interest, and
the excess of net short-term capital gains over net long-term capital losses
less operating expenses, but determined without regard to the deduction for
dividends paid) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If the Fund meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
If the Fund fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders, and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. In this event, such
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
Fund Distributions
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, to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, distributions from the Fund will qualify for the
corporate dividends-received deduction.
Ordinarily, investors 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 the shareholder and paid by the
Fund in the year in which the dividends were declared.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxable on the
entire amount of the dividend or distribution received, even though some or all
of the amount distributed may have been realized by the Fund prior to the
investor's purchase.
8
<PAGE>
The Fund will provide an annual statement to shareholders describing
the federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
Sale or Exchange of Fund Shares
The sale or exchange of a Share is generally a taxable event for the
shareholder. Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a rate of 20% and short-term capital gains
are currently taxed at ordinary income tax rates. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of the Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such 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 during the
61-day period.
In certain cases, the Fund will be required to withhold and remit to
the United States Treasury 31% of distributions payable to any shareholder who
(1) has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending on October 31 of that year (and any retained
amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. The Fund
intends to make sufficient distributions to avoid imposition of this tax, or to
retain, at most, its net capital gains and pay tax thereon.
State and Local Tax Considerations
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The Fund's Board of Directors manages its overall business and affairs.
The Board approves all significant agreements between the Fund and persons or
companies furnishing services to the Fund, including the Fund's agreements with
its investment advisor, sub-advisor, distributor, custodian and Transfer Agent.
The Directors and executive officers of the Fund, their respective
dates of birth and their principal occupations during 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.
9
<PAGE>
*TRUMAN T. SEMANS, Chairman (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust
Company (formerly, Alex. Brown Capital Advisory & Trust Company);
Director, Investment Company Capital Corp. (registered investment
advisor) and Director and President, Virginia Hot Springs Inc.
(property management). Formerly, Managing Director, BT Alex. Brown
Incorporated (now DB Alex. Brown LLC); Vice Chairman, Alex. Brown and
Sons Incorporated (now DB Alex. Brown LLC) and Director, ISI Family of
Funds (registered investment companies).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company (agribusiness operations), Hollinger International,
Inc. (publishing), Homestake Mining (mining and exploration), HCL
Technologies (information technology) and Anchor Gaming (gaming
software and equipment); Director, Mitchell Hutchins family of funds
(registered investment companies); and Member, Textron Corporation
International Advisory Council. Formerly, Partner, McKinsey & Company
(consulting), 1991-1994; U.S. Chief Negotiator in Strategic Arms
Reduction Talks (START) with former Soviet Union and U.S. Ambassador to
the Federal Republic of Germany, 1985-1991.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management and DB Alex. Brown LLC
(formerly BT Alex. Brown Incorporated); Director and President,
Investment Company Capital Corp. (registered investment advisor);
Director or President, Deutsche Asset Management Mutual Funds
(registered investment companies); Chartered Financial Analyst.
Formerly, Director, ISI Family of Funds (registered investment
companies).
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund and ISI Family of Funds (registered
investment companies). Formerly, Director, Circon Corp. (medical
instruments), President and Chief Executive Officer, The National
Association of Securities Dealers, Inc. and The NASDAQ Stock Market,
Inc., 1987-1997; Chief Operating Officer of Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC), 1985-1987; General Partner,
Alex. Brown & Sons Incorporated (now DB Alex. Brown LLC), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and ISI Family of Funds (registered
investment companies). Formerly, Chairman of the Quality Control
Inquiry Committee and American Institute of Certified Public
Accountants; 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 health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director AMBAC
Treasurers Trust (registered investment company), DP Mann Holdings
(insurance) and ISI Family of Funds (registered investment companies).
10
<PAGE>
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 (charitable foundation);
Director and Executive Vice President, The Glenmede Trust Company
(investment trust and wealth management). Formerly, Executive Director,
The Pew Charitable Trusts and Director, ISI Family of Funds (registered
investment companies).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, Director, Investment Company Administration, LLC and
President, Director, First Fund Distributors, Inc. (registered
broker-dealer) Formerly Director, Guinness Flight Investments Funds,
Inc. (registered broker-dealer), Director, The Germany Fund, Inc., The
New Germany Fund, Inc., The Central European Equity Fund, Inc., and
Vice President, Professionally Managed Portfolios and Advisors Series
Trust (registered investment companies) and President, The Wadsworth
Group (registered investment advisor).
CARL W. VOGT, Esq., President (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);
President (Interim) of Williams College; Director, Yellow Corporation
(trucking), American Science & Engineering (x-ray detection equipment)
and ISI Family of Funds (registered investment companies); Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); and Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration);
and Director of Flag Investors family of funds (registered investment
companies).
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management. Certified Public Accountant and
Certified Management Accountant. Formerly, Vice President, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1998-1999 and Senior
Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP),
1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management. Certified Public Accountant.
Formerly, Vice President, BT Alex. Brown Incorporated (now DB Alex.
Brown LLC), 1997-1999 and Senior Manager, Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), 1992-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management. Formerly, Principal, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1998-1999 and Assistant
General Counsel, United States Securities and Exchange Commission,
1993-1998.
-----------
* Messrs. Semans and Hale are directors who are "interested persons," as
defined in the 1940 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 Investment Company Capital Corporation ("ICCC") or its affiliates. There are
currently 23 funds in the Flag Investors funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of 19 other funds in the Fund Complex.
Mr. Hale serves as Chairman of three funds and as a Director of 21 funds in the
Fund Complex. Ms. Rimel and Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth
serve as Directors of each of the funds in the Fund Complex. Mr. Vogt serves as
President of seven of the funds in the Fund Complex. Mr. Rizzo serves as
Treasurer, Ms. Olmert serves as Secretary, and Mr. Hirsch serves as Assistant
Secretary, for each of the funds in the Fund Complex.
11
<PAGE>
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, DB Alex. Brown LLC 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 Deutsche Asset Management
or the Advisor may be considered to have received remuneration indirectly. As
compensation for his or her services, each Director who is not an "interested
person" of the Fund (as defined in the 1940 Act) (an "Independent Director") and
Mr. Vogt, the Fund's President since October 7, 1999, 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 each
fund in the Fund Complex for which he or she serves. In addition, the Chairmen
of the Fund Complex's Audit Committee and Executive Committee receive an 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, 1999, Independent Directors' fees
attributable to the assets of the Fund totaled $5,847.
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, 1999.
12
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation From the Fund
From the Fund for the Benefits Accrued as and Fund Complex payable to
Fiscal Year Ended October Part of Fund Expenses Directors for the Fiscal Year Ended
31, 1999 (1) October 31, 1999 (8)
----------------------------- --------------------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Truman T. Semans (2) $0 $0 $0
Chairman
Richard R. Burt (3) N/A N/A N/A
Director
Richard T. Hale (2) $0 $0 $0
Director
James J. Cunnane (4) $555 (5) (1) $39,000 for service on 12 Boards in
Director the Fund Complex
Joseph R. Hardiman $253 (1) $39,000 for service on 12 Boards in
Director the Fund Complex
Louis E. Levy $697 (1) $49,000 for service on 12 Boards in
Director the Fund Complex
Eugene J. McDonald $697 (5) (1) $49,000 for service on 12 Boards in
Director the Fund Complex
Carl W. Vogt, Esq. (6) $561 (5) (1) $39,000 for service on 12 Boards in
Director the Fund Complex
Rebecca W. Rimel (7) $559 (5) (1) $39,000 for service on 11 Boards in
Director the Fund Complex
Robert H. Wadsworth (3) N/A N/A N/A
Director
</TABLE>
The Fund Complex has adopted a Retirement Plan for Directors who are
not employees of the Fund, the Fund's administrator or its respective affiliates
(the "Directors Retirement Plan") and a Retirement Plan for a former Director
serving as the Fund's President (collectively, the "Retirement Plans"). After
completion of six years of service, each participant in the Retirement Plans
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 Plans are unfunded and unvested. The Fund
currently has two participants in the Directors' Retirement Plan, a Director who
retired effective December 31, 1994 and another Director who retired effective
December 31, 1996, each of whom qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who 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. Mr.
McDonald has qualified for, but has not received, benefits.
------------------------------
(1) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended October 31, 1999 was approximately $1,739.
(2) A Director who is an "interested person" as defined in the 1940 Act.
(3) Elected to the Fund's Board effective October 7, 1999.
(4) Retired effective October 7, 1999.
(5) Of the amounts payable to Messrs. Cunnane, McDonald, Vogt and Ms. Rimel,
$555, $697, $561 and $559, respectively, was deferred pursuant to a deferred
compensation plan.
(6) Retired as a Director effective October 7, 1999. Currently serves as the
Fund's President.
(7) Ms. Rimel received proportionately higher compensation from each fund for
which she served.
(8) For the fiscal year ended October 31, 1999, the Fund Complex consisted of 12
funds and included the four funds in the ISI Family of Funds.
13
<PAGE>
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, 1999, are as follows: for Mr. Levy, 5 years; for Mr.
McDonald, 7 years; for Ms. Rimel, 4 years; for Mr. Vogt, 4 years; for Mr.
Hardiman, 1 year; and for Mr. Burt and Mr. Wadsworth, 0 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
---------------- --------------------------------------------------------------------
Chairmen of Audit and Executive Committees 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, and the Fund's President
are permitted to defer 50% to 100% of his or her annual compensation pursuant to
a Deferred Compensation Plan. Messrs. Burt, Levy, McDonald, Vogt and Wadsworth
and Ms. Rimel have each executed a Deferred Compensation Agreement. Currently,
the deferring Directors and the President may select from among various Flag
Investors funds and Deutsche Banc 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 1940 Act. The Fund's Code of Ethics permits access
persons to trade securities that may be purchased or held by the Fund for their
own accounts, subject to compliance with the Code's pre-clearance requirements.
In addition, the Fund's Code provides for trading "blackout periods" that
prohibit trading by personnel within periods of trading by the Fund in the same
security, subject to certain exceptions. The Fund's Code also prohibits short
term trading profits and personal investment in initial public offerings. The
Fund's Code requires prior approval with respect to purchases of securities in
private placements.
Access persons of the Fund's advisor, Investment Company Capital
Corporation ("ICCC" or the "Advisor"), and ICC Distributors, Inc. (the
distributor) are subject to the same Code of Ethics. The sub-advisor, Brown
Investment Advisory & Trust Company, has a separate but similar Code of Ethics.
These Codes permit access persons to trade securities that may be purchased or
held by the Fund for their own accounts, subject to compliance with
pre-clearance requirements. In addition, these Codes also provide for trading
"blackout periods" that prohibit trading by access persons within periods of
trading by the Fund in the same security, subject to certain exceptions. The
Codes also prohibit short-term trading profits and personal investment in
initial public offerings. The Codes require prior approval with respect to
purchases of securities in private placements.
These Codes of Ethics are on public file with, and are available from,
the SEC.
14
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The investment Advisor is an indirect subsidiary Deutsche Bank, AG.
Brown Trust is a trust company chartered under the laws of the State of
Maryland. Brown Trust is a wholly-owned subsidiary of Brown Capital Holdings
Incorporated ("Brown Capital Holdings"), a Maryland corporation whose principal
executive officer is Michael D. Hankin. Brown Capital Holdings is owned by
management and employees of Brown Trust and outside investors. ICCC also serves
as investment advisor and Brown Trust serves as sub-advisor to other funds in
the Flag Investors funds.
Under the Investment Advisory Agreement, ICCC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. ICCC has delegated this responsibility to
Brown Trust provided that ICCC continues to supervise the performance of Brown
Trust and report thereon to the Fund's Board of Directors. Any investment
program undertaken by ICCC or Brown Trust will at all times be subject to
policies and control of the Fund's Board of Directors. ICCC will provide the
Fund with office space for managing its affairs, with the services of required
executive personnel and with certain clerical and bookkeeping services and
facilities. These services are provided by ICCC without reimbursement by the
Fund for any costs. Neither ICCC nor Brown Trust shall be liable to the Fund or
its shareholders for any act or omission by ICCC or Brown Trust 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. The
services of ICCC and Brown Trust to the Fund are not exclusive and ICCC and
Brown Trust are free to render similar services to others.
As compensation for its services, ICCC receives an annual fee, payable
monthly, representing 0.85% of the Fund's average daily net assets. As
compensation for providing sub-advisory services, Brown Trust is entitled to
receive a fee from ICCC, calculated daily and payable monthly, at the annual
rate of 0.55% of the Fund's average daily net assets.
Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, and by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICCC may terminate the Investment Advisory Agreement on
sixty days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the 1940
Act). The Sub-Advisory Agreement has similar termination provisions.
Advisory fees paid by the Fund to ICCC for the last three fiscal years
were as follows:
Fiscal Year Ended October 31,
-----------------------------
1999 1998 1997
---- ---- ----
$ 1,169,346 $ 1,103,023 $ 782,095
For the period from November 1, 1998 through October 31, 1999, Brown
Trust received $756,636 as compensation for sub-advisory services.
ICCC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICCC serves as the
Fund's custodian. See "Custodian, Transfer Agent and Accounting Services."
15
<PAGE>
DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the exclusive distributor of each class of the Fund's Shares pursuant to a
Distribution Agreement (the "Distribution Agreement").
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 Prospectuses; (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 outstanding
Shares of the Fund (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 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, so long as the Fund's 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.
With respect to the Class A, Class B, Class C and Institutional Shares,
ICC Distributors and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker 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 BIAT 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 Class A, Class B and Class C Shares,
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, including DB Alex. Brown LLC 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 services. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor, the Distributor, or their respective
affiliates will provide compensation out of their own resources. Currently,
banking laws and regulations do not prohibit a financial holding company
affiliate from acting as distributor or Shareholder Servicing Agent or in other
capacities for investment companies. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Distributor or
Shareholder Servicing Agents in connection with their respective Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
those agents. Such financial institutions may impose separate fees in connection
with Shareholder Servicing and investors should review the applicable Prospectus
and this Statement of Additional Information in conjunction with any such
institution's fee schedule. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions may be required to register as dealers pursuant to state
law.
16
<PAGE>
As compensation for providing distribution services as described above
for the Class A Shares, ICC Distributors receives an annual fee, paid monthly,
equal to 0.25% of the average daily net assets of the Class A Shares, 0.75% of
the average daily net assets of the Class B Shares and 0.75% of the average
daily net assets of the Class C Shares. With respect to the Class A Shares, ICC
Distributors expects to allocate up to all of its fee to Participating Dealers.
With respect to the Class B Shares and the Class C 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 Class B
Shares and the Class C Shares, the Fund pays ICC Distributors a shareholder
servicing fee at an annual rate equal to 0.25% of the average daily net assets
of the respective class. 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
Institutional Shares or the BIAT Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received
aggregate fees in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
-----------------------------
Fee 1999 1998 1997
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fees $ 202,972(1) $ 223,094(1) $ 161,564(2)
Class B Shareholder Servicing Fee $ 11,026(1) $ 14,536(1) $ 6,398(3)
Class C Shareholder Servicing Fee(4) N/A N/A N/A
</TABLE>
--------
(1) Received by ICC Distributors
(2) Of this amount, Alex. Brown & Sons Incorporated, 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.
(3) Of this amount, Alex. Brown & Sons Incorporated, 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.
(4) Class C Shares were not offered prior to July 31, 2000.
Pursuant to Rule 12b-1 under the 1940 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 a Plan of Distribution for
each class of shares ( the "Plans"). Under the Plans, the Fund pays fees as
described above to ICC Distributors for distribution and other shareholder
servicing assistance as set forth in the Distribution Agreement, and ICC
Distributors is authorized to make payments out of its fee to Participating
Dealers and Shareholder Servicing Agents. The Plans will remain in effect from
year to year thereafter as specifically approved (a) at least annually by the
Fund's Board of Directors and (b) 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 Fund's Board of Directors,
including a majority of the Independent Directors, on March 22, 2000.
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 Fund.
The Plans may be terminated at any time, by the vote of a majority of the Fund's
Independent Directors or by a vote of a majority of the outstanding Shares of
the related class (as defined under "Capital Stock").
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plans to ICC Distributors pursuant to the
Distribution Agreement, to broker-dealers pursuant to any 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.
17
<PAGE>
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under such Plans. 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 Class A Shares is less than 0.25% of the
average daily net assets invested in that Class or Class B or Class C Shares is
less than 0.75% of the average daily net assets invested in those Classes for
any period, the unexpended portion of the distribution fees 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 any of the Plans 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 such Plan.
The Fund's distributor received commissions on the sale of the Class A
Shares and contingent deferred sales charges on the Class B Shares and retained
such commissions or sales charges in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
-----------------------------
Class 1999 1998 1997
----- ---- ---- ----
Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $ 260,441(1) $0 $ 278,417(1) $0 $ 293,651(2) $ 213,280(4)
Class B Contingent $ 21,293(1) $0 $ 35,662(1) $0 $ 180,270(3) $ 78,625(5)
Deferred Sales Charge
Class C Contingent N/A N/A N/A N/A N/A N/A
Deferred Sales Charge(6)
</TABLE>
--------
(1) Received by ICC Distributors.
(2) Of this amount, Alex. Brown & Sons Incorporated, 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.
(3) Of this amount, Alex. Brown & Sons Incorporated, 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.
(4) Of commissions received, Alex. Brown & Sons Incorporated retained $213,280
and ICC Distributors retained $0.
(5) Of sales charges received, Alex. Brown & Sons Incorporated retained $78,625
and ICC Distributors retained $0.
(6) Class C Shares were not offered prior to July 31, 2000.
The Fund will pay all costs associated with its organization and
registration under the 1933 Act and the 1940 Act. 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 depository 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 to which the Fund is a party; all taxes, including
securities issuance and transfer taxes, and 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 registration and maintenance 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 Directors and 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 of independent accountants,
in connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund that
inure to its benefit; extraordinary expenses (including, but not limited to,
18
<PAGE>
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by ICCC or ICC Distributors.
The address of ICC Distributors is One South Street, Baltimore,
Maryland 21202.
BROKERAGE
Purchases and sales of securities on a securities exchange are effected
through broker-dealers who charge a commission for their services. Brokerage
commissions are subject to negotiation between ICCC and the broker-dealers. ICCC
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 prices
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 acts as a principal.
If the Advisor or its affiliates are 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. The Fund believes that the
limitation will not affect its ability to carry out its present investment
objective.
ICCC's primary consideration in effecting securities transactions is to
obtain the best price and execution of orders on an overall basis. As described
below, however, ICCC may, in its discretion, effect agency transactions with
broker-dealers that furnish statistical, research or other information or
services that are deemed by ICCC to be beneficial to the Fund's investment
program. ICCC 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 ICCC with clients other than the Fund.
Similarly, any research services received by ICCC through placement of portfolio
transactions of other clients may be of value to ICCC in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to ICCC by a broker-dealer. ICCC 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 ICCC's research and analysis. Therefore, it may tend to benefit
the Fund by improving ICCC's investment advice. In over-the-counter
transactions, ICCC will not pay any commission or other remuneration for
research services. ICCC'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 ICCC's opinion, this policy furthers the overall
objective of obtaining best price and execution. Subject to periodic review by
the Fund's Board of Directors, ICCC is also authorized to pay broker-dealers
other than affiliates of the Advisor higher commissions than another broker may
have charged on brokerage transactions for the Fund for brokerage or research
services. The allocation of orders among broker-dealers and the commission rates
paid by the Fund will be reviewed periodically by the Board. The foregoing
policy under which the Fund may pay higher commissions to certain broker-dealers
in the case of agency transactions, does not apply to transactions effected on a
principal basis. In addition, consistent with NASD Rules, and subject to seeking
the most favorable price and execution available and such other policies as the
Board may determine.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through affiliates of the
Advisor. At the time of such authorization, the Board adopted certain policies
19
<PAGE>
and procedures incorporating the standards of Rule 17e-1 under the 1940 Act,
which requires that the commissions paid affiliates of the Advisor 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 ICCC to furnish reports and to maintain records
in connection with such reviews. In the fiscal year ended October 31, 1999, the
Fund paid no brokerage commissions to affiliates of the Advisor.
ICCC manages other investment accounts. 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 ICCC. ICCC 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 that it seeks to purchase or sell.
ICCC directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
Fiscal Year Ended October 31,
-----------------------------
1999 1998 1997
---- ---- ----
Transactions Directed $ 8,783,000 $ 4,112,107 $ 98,445,406
Commissions Paid $ 18,318 $ 13,081 $ 13,853
--------
The increasing amounts of commissions reflect the growth of the Fund.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the 1940 Act) that the Fund has acquired
during its most recent fiscal year. As of October 31, 1999, the Fund held a
5.10% repurchase agreement issued by Goldman Sachs & Co. valued at $1,342,000.
Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
CAPITAL STOCK
The Fund is authorized to issue 35 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 five classes of shares: Flag Investors Emerging Growth Fund Class
A Shares, Flag Investors Emerging Growth Fund Class B Shares, Flag Investors
Emerging Growth Fund Class C Shares, Flag Investors Emerging Growth Fund
Institutional Shares and Brown Investment Advisory & Trust Emerging Growth
Shares (formerly known as Alex. Brown Capital Advisory & Trust Shares). The Flag
Investors Institutional Shares are offered only to certain eligible institutions
and to clients of investment advisory affiliates of DB Alex. Brown LLC. The
Brown Investment Advisory & Trust Emerging Growth Shares are offered only to
clients of Brown Investment Advisory & Trust Company and its affiliates. The
Flag Investors Emerging Growth Fund Class C Shares were not offered prior to
July 31, 2000. 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
20
<PAGE>
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. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its pro rata portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
CUSTODIAN, TRANSFER AGENT, ACCOUNTING AND DISTRIBUTOR SERVICES
Bankers Trust Company ("Bankers Trust") 130 Liberty Street, New York,
New York 10006, 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 fiscal year ended October 31, 1999, Bankers Trust was paid $47,252.
Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202,
has been retained to act as transfer and dividend disbursing agent. As
compensation for providing these services, the Fund pays ICCC up to $15.67 per
account per year, plus reimbursement for out-of-pocket expenses. For the fiscal
year ended October 31, 1999, ICCC received transfer agency fees of $81,307. ICC
Distributors, Inc. ("ICCD") One South Street, Baltimore, Maryland 21202, has
been retained to act as distributor of the Fund. As compensation for its
services, ICCD received the compensation indicated above in the section entitled
"Distribution Of Fund Shares."
21
<PAGE>
ICCC also provides certain accounting services to the Fund. As
compensation for these services, ICCC receives an annual fee, calculated daily
and paid monthly as shown below.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000 (fixed fee)
$ 10,000,000 - $ 20,000,000 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
Over $1,000,000,000 0.001%
For the fiscal years ended October 31, 1999, 1998 and 1997 ICCC
received accounting fees of $60,637, $59,460 and $53,054, respectively.
In addition, the Fund will reimburse ICCC for the following
out-of-pocket expenses incurred in connection with ICCC's provision of
accounting services under the Master Services Agreement: express delivery
service, independent pricing and storage.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
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.
22
<PAGE>
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 date the Fund (or a
class or series) began operations (or the later commencement of operations of
the series or class).
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, 1999 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended
October 31, 1999 October 31, 1999 October 31, 1999
----------------------------------------------------------------------------------------
Average Average
Ending Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A, 12/30/87* $1,207 20.65% $2,065 15.61% $2,404 9.17%
One-Year Period Ended Since Inception
October 31, 1999
--------------------------------------------------------------------------
Ending Ending Average
Redeemable Total Redeemable Annual
Class Value Return Value Total Return
------------------------------------------------------------------------------------------------------
Class B, 6/20/96* $1,203 20.31% $1,307 7.33%
Class C, 7/31/00* N/A N/A N/A N/A
Institutional, 11/2/95* $1,497 49.65% $1,223 22.27%
BIAT Shares, 5/9/97* $1,497 49.65% $1,289 28.93%
</TABLE>
-----------
* Inception Date
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, 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 (as distinguished from the computation required by the SEC where
the $1,000 payment is reduced by sales charges before being invested in Shares).
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 U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. For the fiscal years
ended October 31, 1999 and October 31, 1998, the Fund's portfolio turnover rate
was 38% and 23%, respectively.
23
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the Directors and Officers of the Fund
as a group (12 persons) beneficially owned less than 1% of the Fund's total
outstanding shares, as of May 3, 2000. To Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the outstanding
Shares of a class of the Fund, as of May 3, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Owned of Beneficially
Name and Address Record Owned Percentage Owned
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bankers Trust Corp & Affil 401K Savings Plan, The
Partnershare Plan of Bankers Trust NY Corp & Affil,
100 Plaza One, Jersey City, NJ 07311 X 20.32% (A Shares)
--------------------------------------------------------------------------------------------------------------------
DB Alex Brown LLC, FBO 255-17950-12, POB 1346,
Baltimore, MD 21203 X 7.77% (B Shares)
--------------------------------------------------------------------------------------------------------------------
DB Alex Brown LLC, FBO 601-20603-12, POB 1346,
Baltimore, MD 21203 X 38.09% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities Corp Inc., POB
2052, Jersey City, NJ 07303 X 13.80% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
Mercantile Safe Deposit & Tr. Co Cus. U/A 4/28/93,
Physicians Mem. Hospital Pens Plan, 2 Hopkins Plaza,
Baltimore, MD 21201 X 9.64% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
Frank Nominees Ltd, POB 919, 10 Fenchurch St, London
EC3M 3LB UK X 8.88% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
Allfirst Trust Co NA FBO Maryland Hospital Assoc.
Master Inv SEC Proc 109-911, POB 1596, Baltimore, MD
21203 X 8.23% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
Light & Co, c/o Allfirst Trust Co NA, Attn: Trust
Operations #101-610, POB 1596, Baltimore, MD 21203 X 5.18% (Instl Shares)
--------------------------------------------------------------------------------------------------------------------
DB Alex Brown LLC, FBO 01-01-170-7140019, POB 1346,
Baltimore, MD 21203 X 5.46% (BIAT Shares)
--------------------------------------------------------------------------------------------------------------------
DB Alex Brown LLC, FBO 01-01-170-7200019, POB 1346,
Baltimore, MD 21203 X 7.39% (BIAT Shares)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
------------
As of such date, to Fund management's knowledge, DB Alex. Brown LLC (formerly,
BT Alex. Brown Incorporated) owned beneficially less than 1% of such shares. [TA
is looking into this further as well as the designation as beneficial owner for
the DB Alex. Brown accounts]
FINANCIAL STATEMENTS
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 financial statements for the Fund for the periods ended October 31,
1999, and April 30, 2000 are incorporated herein by reference to the Fund's
Annual Report dated October 31, 1999 and Semi-Annual Report dated April 30,
2000, respectively. Copies of the Fund's Annual and Semi-Annual Reports must
accompany this Statement of Additional Information. The annual financial
statements are audited by the Fund's independent accountants,
PricewaterhouseCoopers LLP.
24
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a)(1) Articles of Incorporation incorporated by reference to Exhibit
1(a) to Post-Effective No. 10 to Registrant's Registration Statement on
Form N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-95-000392) on August 18,
1995.
(2) Articles of Amendment incorporated by reference to Exhibit 1(b) to
Post-Effective No. 10 to Registrant's Registration Statement on Form
N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-95-000392) on August 18,
1995.
(3) Articles Supplementary incorporated by reference to Exhibit 1(c) to
Post-Effective No. 10 to Registrant's Registration Statement on Form
N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-95-000392) on August 18,
1995.
(4) Articles Supplementary incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 11 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-06-000107) on
February 28, 1996.
(5) Articles Supplementary with respect to the creation of the ABCAT
Shares Class incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 14 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-97-000363) on
February 26, 1997.
(6) Articles Supplementary dated October 23, 1998, incorporated by
reference to Post-Effective Amendment No. 16 to Registrant's
Registration Statement on Form N-1A (File No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR on December 30, 1998.
(7) Articles of Amendment dated February 16, 1999, incorporated by
reference to Post-Effective Amendment No. 17 to Registrant's
Registration Statement on Form N-1A (File No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR on January 18, 2000.
(b)(1) By-Laws as amended through July 28, 1999, incorporated by
reference to Post-Effective Amendment No. 17 to Registrant's
Registration Statement on Form N-1A (File No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR on January 18, 2000.
(c) Instruments Defining Rights of Securities Holders incorporated by
reference to Exhibit 1(Articles of Incorporation) of Post-Effective
Amendments Nos. 10, 11 and 14 to Registrant's Registration Statement on
Form N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR on August 18, 1995, February 28, 1996 and February
26, 1997, respectively, and Exhibit 2 (By-Laws) of Post-Effective
Amendment No. 14 to such Registration Statement filed with the
Securities and Exchange Commission via EDGAR on February 26, 1997.
(d)(1) Investment Advisory Agreement dated June 4, 1999, between
Registrant and Investment Company Capital Corp., incorporated by
reference to Post-Effective Amendment No. 17
<PAGE>
to Registrant's Registration Statement on Form N-1A (File No.
33-21119), filed with the Securities and Exchange Commission via EDGAR
on January 18, 2000.
(2) Investment Sub-Advisory Agreement dated June 4, 1999, between
Registrant, Investment Company Capital Corp. and Alex. Brown Capital
Advisory & Trust Company, incorporated by reference to Post-Effective
Amendment No. 17 to Registrant's Registration Statement on Form N-1A
(File No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on January 18, 2000.
(e) (1) Distribution Agreement dated as of August 31, 1997 between
Registrant and ICC Distributors, Inc. incorporated by reference to
Exhibit (6)(a) to Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A (File No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR (Accession No.
950116-98-000482) on February 26, 1998.
(2) Form of Sub-Distribution Agreement between ICC Distributors, Inc. and
Participating Dealers incorporated by reference to Exhibit (6)(b) to
Post-Effective Amendment No. 15 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-98-000482) on
February 26, 1998.
(3) Shareholder Servicing Agreement between Registrant and Shareholder
Servicing Agents incorporated by reference to Exhibit (6)(c) to
Post-Effective Amendment No. 15 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116- 98-000482) on
February 26, 1998.
(f) None.
(g) Custodian Agreement dated June 5, 1998, between Registrant and
Bankers Trust Company, incorporated by reference to Post-Effective
Amendment No. 16 to Registrant's Registration Statement on Form N-1A
(File No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on December 30, 1998.
(h) Master Services Agreement between Registrant and Investment Company
Capital Corp. with Appendices for the provision of Transfer Agency and
Accounting Services incorporated by reference to Exhibit 9(a) to
Post-Effective No. 10 to Registrant's Registration Statement on Form
N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-95-000392) on August 18,
1995.
(i) Opinion of Counsel, filed herewith.
(j) Consent of PricewaterhouseCoopers LLP, to be filed by amendment.
(k) None.
(l) Subscription Agreements between Registrant and Investors incorporated
by reference to Exhibit 13 to Post-Effective No. 10 to Registrant's
Registration Statement on Form N-1A (File No. 33-21119), filed with the
Securities and Exchange Commission via EDGAR (Accession No.
950116-95-000392) on August 18, 1995.
(m)(1) Distribution Plan with respect to Flag Investors Emerging Growth
Fund Class A Shares incorporated by reference to Exhibit (15)(a) to
Post-Effective No. 10 to Registrant's Registration Statement on Form
N-1A (File No. 33-21119), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-95-000392) on August 18,
1995.
<PAGE>
(2) Distribution Plan with respect to Flag Investors Emerging Growth Fund
Class B Shares incorporated by reference to Exhibit (15)(b) to
Post-Effective Amendment No. 12 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-96-000161) on March
25, 1996.
(3) Amended Distribution Plan with respect to Flag Investors Emerging
Growth Fund Class A Shares incorporated by reference to Exhibit (15)(c)
to Post-Effective Amendment No. 15 to Registrant's Registration
Statement on Form N-1A (File No. 33-21119), filed with the Securities
and Exchange Commission via EDGAR (Accession No. 950116-98-000482) on
February 26, 1998.
(4) Amended Distribution Plan with respect to Flag Investors Emerging
Growth Fund Class B Shares incorporated by reference to Exhibit (15)(d)
to Post-Effective Amendment No. 15 to Registrant's Registration
Statement on Form N-1A (File No. 33-21119), filed with the Securities
and Exchange Commission via EDGAR (Accession No. 950116-98-000482) on
February 26, 1998.
(5) Distribution Plan with respect to Flag Investors Emerging Growth Fund
Class C Shares, to be filed by amendment.
(n) Financial Data Schedule, not applicable.
(o)(1) Rule 18f-3 Plan incorporated by reference to Exhibit (18)(a) to
Post-Effective Amendment No. 13 to Registrant's Registration Statement
on Form N-1A (File No. 33-21119), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-96-001119) on
October 18, 1996.
(2) Rule 18f-3 Plan, as amended through March 26, 1997, incorporated by
reference to Exhibit (18)(b) to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A (File No. 33-21119),
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 950116-97-000363) on February 26, 1997.
(3) Amended Rule 18f-3 Plan, incorporated by reference to Post-Effective
Amendment No. 16 to Registrant's Registration Statement on Form N-1A
(File No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on December 30, 1998.
(4) Rule 18f-3 Plan, as amended through March 22, 2000, to be filed by
amendment.
(p) Codes of Ethics, filed herewith.
(q) Powers of Attorney, incorporated by reference to Post-Effective
Amendment No. 17 to Registrant's Registration Statement on Form N-1A
(File No. 33-21119), filed with the Securities and Exchange Commission
via EDGAR on January 18, 2000.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification.
Section 17(h) of the Investment Company Act of 1940, as amended (the "1940
Act"), MD Corps. & Ass'ns Code Ann. Section 2-418 (1985 repl. vol.) and Article
VIII of Registrant's Articles of Incorporation, provide that in certain
situations the Registrant may indemnify any person who was or is a director,
officer or employee of the Registrant against all liabilities and expenses,
including but not limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees reasonably incurred by
any such indemnified person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil
<PAGE>
or criminal, before any court or administrative or legislative body except with
respect to any matter as to which such person shall have been finally
adjudicated in any such action, suit or other proceeding (a) not to have acted
in good faith in the reasonable belief that such person's action was in the best
interests of the Registrant or (b) to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such person's
office. Expenses, including counsel fees so incurred by any such person, shall
be paid from time to time by the Registrant in advance of the final disposition
of any such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such person to repay amounts so paid to the Registrant if it is
ultimately determined that indemnification of such expenses is not authorized
under the Articles of Incorporation, provided, however, that either (a) such
person shall have provided appropriate security for such undertaking, (b) the
Registrant shall be insured against losses arising from any such advance
payments or (c) either a majority of the Directors who are not "interested
persons" of the Registrant as defined in Section 2(a)(19) of the 1940 Act acting
on the matter (provided that a majority of the Directors who are not "interested
persons" then in office act on the matter), or independent legal counsel in a
written opinion, shall have determined, based upon a review of readily available
facts that there is reason to believe that such person will be found entitled to
indemnification under the Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1940 Act and
is, therefore, unenforceable. In the event of a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered) the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed by
the final adjudication of such issue. In the absence of a determination by a
court of competent jurisdiction, the determinations that indemnification against
such liabilities is proper, and advances can be made, are made by a majority of
a quorum of the disinterested, non-party directors of the Fund, or an
independent legal counsel in a written opinion, based on review of readily
available facts.
Item 26. Business and Other Connections of Investment Advisor.
During the last two fiscal years, no director or officer of Investment Company
Capital Corp., the Registrant's investment advisor, has engaged in any other
business, profession, vocation or employment of a substantial nature other than
that of the business of investment management and, through affiliates,
investment banking.
Item 27. Principal Underwriters
(a) ICC Distributors, Inc., the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment
companies: BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, Cash Management Portfolio, Intermediate Tax Free Portfolio, NY
Tax Free Money Portfolio, Treasury Money Portfolio, International
<PAGE>
Equity Portfolio, Equity 500 Index Portfolio, Capital Appreciation
Portfolio, Asset Management Portfolio, BT Investment Portfolios,
Deutsche Banc Alex. Brown Cash Reserve Fund, Inc., Flag Investors
Communications Fund, Inc., Flag Investors Emerging Growth Fund, Inc.,
the Flag Investors Total Return U.S. Treasury Fund Shares of Total
Return U.S. Treasury Fund, Inc., the Flag Investors Managed Municipal
Fund Shares of Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc., Flag Investors Value Builder
Fund, Inc., Flag Investors Real Estate Securities Fund, Inc., Flag
Investors Equity Partners Fund, Inc., Flag Investors Series Funds, Inc.
(formerly, Flag Investors International Fund, Inc.), Flag Investors
Funds, Inc. (formerly, Deutsche Funds, Inc.), Flag Investors Portfolios
Trust (formerly, Deutsche Portfolios), Morgan Grenfell Investment
Trust, Glenmede Fund, Inc. and Glenmede Portfolios.
(b) Names and Principal Position and Offices Position and Offices
Business Address* with Principal Underwriter with Registrant
John Y. Keffer President None
Ronald H. Hirsch Treasurer None
Nanette K. Chern Chief Compliance Officer None
David I. Goldstein Secretary None
Benjamin L. Niles Vice President None
Frederick Skillin Assistant Treasurer None
Marc D. Keffer Assistant Secretary None
-----
* Two Portland Square
Portland, ME 04101
(c) Not Applicable.
Item 28. Location of Accounts and Records.
Investment Company Capital Corp. ("ICCC") (Registrant's investment advisor,
transfer agent, dividend disbursing agent and accounting services provider), One
South Street, Baltimore, Maryland 21202, maintains physical possession of each
such account, book or other document of the Registrant, except for those
maintained by the Registrant's sub-advisor, Brown Investment Advisory & Trust
Company ("Brown Trust"), Registrant's distributor, ICC Distributors, Inc., Two
Portland Square, Portland, Maine 04101, or by the Registrant's custodian,
Bankers Trust Company, 130 Liberty Street, New York, New York, 10006.
In particular, with respect to the records required by Rule 31a-1(b)(1), ICCC
and Brown Trust maintain physical possession of all journals containing itemized
daily records of all purchases and sales of securities, including sales and
redemptions of Fund securities, and Bankers Trust Company maintains physical
possession of all receipts and deliveries of securities (including certificate
numbers if such detail is not recorded by the custodian or transfer agent), all
receipts and disbursements of cash, and all other debts and credits.
<PAGE>
Item 29. Management Services.
Not Applicable.
Item 30. Undertakings.
Not Applicable.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereto duly authorized in the City of Baltimore, in
the State of Maryland, on the 1st day of June, 2000.
FLAG INVESTORS EMERGING GROWTH FUND, INC.
By: *
-----------------------------------------
Carl W. Vogt
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities on the date(s) indicated:
*
----------------------------
Truman T. Semans Chairman and Director
*
----------------------------
Richard R. Burt Director
*
----------------------------
Richard T. Hale Director
*
----------------------------
Joseph R. Hardiman Director
*
----------------------------
Louis E. Levy Director
*
----------------------------
Eugene J. McDonald Director
*
----------------------------
Rebecca W. Rimel Director
*
----------------------------
Robert H. Wadsworth Director
*
----------------------------
Carl W. Vogt, Esq. President
*
---------------------------- Chief Financial and Accounting
Charles A. Rizzo Officer
By:/s/ Daniel O. Hirsh
---------------
Daniel O. Hirsch, Attorney-In-Fact June 1, 2000
* By Power of Attorney.
<PAGE>
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch
are authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Communications Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Total
Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc., Flag Investors Value Builder Fund, Inc.,
North American Government Bond Fund, Inc., Flag Investors Real Estate Securities
Fund, Inc., Flag Investors Equity Partners Fund, Inc. and ISI Strategy Fund,
Inc. on behalf of each Fund's President pursuant to a properly executed power of
attorney.
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch
are authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc., Flag Investors Communications Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Total
Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc., Flag Investors Value Builder Fund, Inc.,
North American Government Bond Fund, Inc., Flag Investors Real Estate Securities
Fund, Inc., Flag Investors Equity Partners Fund, Inc. and ISI Strategy Fund,
Inc. on behalf of each Fund's Chief Financial Officer pursuant to a properly
executed power of attorney.
