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LOGO
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
(Class A and Class B Shares)
This mutual fund (the "Fund") is designed to seek long-term growth of
capital and, secondarily, current income. The Fund seeks to achieve this
objective primarily through a policy of diversified investments in equity
securities, including common stocks and convertible securities.
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated October 1, 1995 has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by calling the Fund at (800) 767-FLAG.
Shares of the Fund are available through Alex. Brown & Sons Incorporated
("Alex. Brown") as well as Participating Dealers and Shareholder Servicing
Agents. This Prospectus relates to Class A and Class B Shares of the Fund.
The separate classes provide investors with alternatives as to sales load and
fund expenses. (See "How to Invest in the Fund.")
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 1, 1995
PROSPECTUS
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
(CLASS A AND CLASS B SHARES)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
1. Fee Table ....................................... 2
2. Financial Highlights ............................ 3
3. Investment Program .............................. 4
Investment Objective, Policies
and Risk Considerations .......................... 4
4. Investment Restrictions ......................... 7
5. How to Invest in the Fund ....................... 8
6. How to Redeem Shares ............................ 15
7. Telephone Transactions .......................... 16
8. Dividends and Taxes ............................. 17
9. Management of the Fund .......................... 18
10. Investment Advisor and Sub-Advisor .............. 19
11. Distributor ..................................... 21
12. Custodian, Transfer Agent, Accounting Services .. 22
13. Performance Information ......................... 23
14. General Information ............................. 24
</TABLE>
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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the Fund
or by its distributor in any jurisdiction in which such offering may not
lawfully be made.
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1
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1. Fee Table
...............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
INITIAL SALES DEFERRED
CHARGE SALES CHARGE
ALTERNATIVE ALTERNATIVE
-------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ............................................. 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ........... None* 4.00%**
</TABLE>
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ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average daily net assets)
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<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees (net of fee waivers)................... .65%*** .65%***
12b-1 Fees ........................................... .25% .75%
Other Expenses (including a .25% shareholder servicing
fee for Class B Shares) ............................. .45% .70%****
---------- ----------
Total Fund Operating Expenses (net of fee waivers) .... 1.35%*** 2.10%***
========== ==========
</TABLE>
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* Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge. However, a contingent deferred sales charge of
.50% will be imposed on such purchases in the event of redemption within
24 months following such purchase. (See "How to Invest in the Fund --
Offering Price.")
** A declining contingent deferred sales charge will be imposed on
redemptions of Class B Shares made within six years of purchase. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Invest in the Fund -- Class B Shares.")
*** The Fund's investment advisor intends, but is not obligated, to waive
its fee to the extent required for at least the current fiscal year so that
Total Fund Operating Expenses do not exceed 1.35% of the Class A Shares'
average daily net assets and 2.10% of the Class B Shares' average daily net
assets. Absent fee waivers, Management Fees would be 1.00% of the Fund's
average daily net assets and Total Fund Operating Expenses would be 1.70%
of the Class A Shares' average daily net assets and 2.45% of the Class B
Shares' average daily net assets.
**** A portion of the shareholder servicing fee is allocated to member firms
of the National Association of Securities Dealers, Inc. and qualified
banks for continued personal service by such members to investors in
Class B Shares, such as responding to shareholder inquiries, quoting net
asset values, providing current marketing materials and attending to
other shareholder matters.
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EXAMPLE:
<TABLE>
<CAPTION>
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:* 1 Year 3 Years
---------- -----------
Class A Shares ............................................ $58 $87
Class B Shares ............................................ $62 $97
---------- -----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
You would pay the following expenses on the same investment,
assuming no redemption:* 1 Year 3 Years
---------- -----------
Class B Shares .......................................... $22 $68
---------- -----------
</TABLE>
* The Example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
THE EXPENSES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases shares of either class through a financial institution
may be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
Fund -- Offering Price", "Investment Advisor and Sub-Advisor" and
"Distributor.") The Other Expenses appearing in the table above are based on
the Fund's estimated amounts for the current fiscal year ending May 31, 1996.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund -- Class A
Shares.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules").
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2. Financial Highlights
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements
and financial highlights for the period ended May 31, 1995 and the report
thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information is contained in
the Fund's Annual Report for the fiscal period ended May 31, 1995 which can
be obtained at no charge by calling the Fund at (800) 767-FLAG.
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(Based on average shares outstanding during the period)
<TABLE>
<CAPTION>
For the Period
February 13, 1995*
through May 31, 1995
----------------------
Class A Class B
------------------------------------------------ --------- ---------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 10.00 $ 10.00
--------- ---------
Income from Investment Operations:
Net investment income ......................... 0.12 0.07
Net realized and unrealized gain on investments. 0.65 0.68
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Total from Investment Operations .............. 0.77 0.75
Less Distributions:
Dividends from net investment income .......... -- --
--------- ---------
Net asset value at end of period .............. $ 10.77 $ 10.75
========= =========
Total Return** ................................. 7.70% 7.50%
Ratios to Average Net Assets:
Expenses(2) ................................... 1.35%(1) 2.10%(1)
Net investment income(3) ...................... 3.74%(1) 1.97%(1)
Supplemental Data:
Net assets at end of period (000) ............. $38,612 $2,159
Portfolio turnover rate ....................... -- --
- ------------------------........................ --------- ---------
</TABLE>
* Commencement of Operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 3.76% (annualized) for Class A Shares and 4.22%
(annualized) for Class B Shares.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 1.33% (annualized) for Class A
Shares and (0.15)% (annualized) for Class B Shares.
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3. Investment Program
................................................................................
Investment Objective, Policies
and Risk Considerations
The investment objective of the Fund is to seek long-term growth of
capital and, secondarily, high current income. The Fund seeks to achieve this
objective primarily through a policy of diversified investments in equity
securities, including common stocks and convertible securities. The Fund's
investment objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. There can be no assurance, however,
that the Fund will achieve its investment objective.
Investment Company Capital Corp. ("ICC"), the Fund's investment advisor,
and the Fund's sub-advisor, Alex. Brown Investment Management ("ABIM")
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(collectively, the "Advisors"), are responsible for managing the Fund's
investments. (See "Investment Advisor and Sub-Advisor.") The Advisors consider
both the opportunity for gain and the risk of loss in making investments.
Under normal market conditions, the Fund will invest as fully as feasible
in common stocks and other equity investments (including preferred stocks,
convertible debt, warrants and other securities convertible into or
exchangeable for common stocks). At least 65% of the Fund's total assets will
be so invested. Convertible securities are securities that may be converted
either at a stated price or rate within a specified period of time into a
specified number of shares of common stock. Preferred stock is a class of
capital stock that pays dividends at a specified rate and that has preference
over common stock in the payment of dividends and the liquidation of assets.
Warrants are instruments giving holders the right, but not the obligation, to
buy shares of a company at a given price during a specified period. In
selecting securities for the Fund's portfolio, the Advisors expect to apply a
"flexible value" approach to the selection of equity investments. Under this
approach, the Advisors will attempt to identify securities that are
undervalued in the marketplace but will also consider such factors as current
and expected earnings, dividends, cash flows and asset values in their
evaluation of a security's investment potential.
The Fund may invest up to 10% of its total assets in non-convertible debt
securities. Up to all of any such investments may be in securities that are
rated below investment grade. (See "Investments in Non-Investment Grade
Securities" below.) Any remaining assets of the Fund not invested as
described above may be invested in high quality money market instruments. For
temporary, defensive purposes, the Fund may invest up to 100% of its assets
in high quality short-term money market instruments, including repurchase
agreements, and in bills, notes or bonds issued by the U.S. Treasury
Department or by agencies of the U.S. Government.
The Fund may invest up to 10% of its net assets in illiquid securities,
including illiquid restricted securities. In addition, the Fund may invest up
to 15% of its net assets, in the aggregate, in illiquid securities and in
restricted securities that are determined to be liquid under standards approved
by the Fund's Board of Directors.
..............................................................................
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES
Where deemed appropriate by the Advisors, the Fund may invest up to 10% of
its total assets (measured at the time of the investment ) in lower quality
non-convertible debt securities (securities rated BB or lower by Standard &
Poor's Ratings Group ("S&P") or Ba or lower by Moody's Investors Service,
Inc. ("Moody's") and unrated securities of comparable quality). Lower rated
debt securities, also known as "junk bonds," are considered to be speculative
and involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. Securities in the lowest rating category that the
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Fund may purchase (securities rated C by either S&P or Moody's) may present a
particular risk of default, or may be in default and in arrears in payment of
principal and interest. Yields and market values of these bonds will fluctuate
over time, reflecting changing interest rates and the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated bonds may decline in value, regardless
of prevailing interest rates. Accordingly, adverse economic developments,
including a recession or a substantial period of rising interest rates, may
disrupt the high yield bond market, affecting both the value and liquidity of
such bonds. An economic downturn could adversely affect the ability of issuers
of such bonds to make payments of principal and interest to a greater extent
than issuers of higher rated bonds might be affected. The ratings categories of
S&P and Moody's are described more fully in the Appendix to the Statement of
Additional Information. During the fiscal period ended May 31, 1995 the Fund
held no below investment grade bonds.
.............................................................................
INVESTMENTS IN REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed creditworthy under guidelines approved by the
Directors. A repurchase agreement is a short-term investment in which the
purchaser (i.e., 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 purchaser's holding period. The value of the
underlying securities will be at least equal at all times to the total amount
of the repurchase agreement obligation, including the interest factor. If the
seller were to default on its obligation to repurchase the underlying
instrument, the Fund could experience loss due to delay in liquidating the
collateral and to adverse market action.
.............................................................................
INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS
In addition, from time to time, the Advisors may invest up to 10% of the
Fund's total assets in American Depository Receipts, which are U.S. exchange
listed interests in securities of foreign companies, and debt and equity
securities issued by foreign corporate and government issuers when the
Advisors believe that such investments provide good opportunities for
achieving income and capital gains without undue risk. Foreign investments
involve different risks from investments in the United States. In general,
less information is publicly available about foreign companies than is
available about companies in the United States. Most foreign companies are
not subject to uniform audit and financial reporting standards, practices and
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requirements comparable to those in the United States. In most foreign
markets volume and liquidity are less than in the United States and, at
times, volatility of price can be greater than in the United States. Fixed
commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges. There is generally less
government supervision and regulation of foreign stock exchanges, brokers,
and companies than in the United States. The settlement period for foreign
securities, which is often longer than that for securities of U.S. issuers,
may affect portfolio liquidity. Portfolio securities held by the Fund which
are listed on foreign exchanges may be traded on days that the Fund does not
value its securities, such as Saturdays and the customary U.S. business
holidays on which the New York Stock Exchange is closed. As a result, the net
asset value of Fund shares may be significantly affected on days when
shareholders do not have access to the Fund. The Advisors intend, therefore,
to invest in securities of companes in, and governments of, developed, stable
nations, but there exists the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation which
could adversely affect the investments of the Fund in such foreign country.
When considering whether to invest in foreign equity or debt securities, the
Advisors will consider the risk of investment in addition to the criteria
they apply to all investments in equity or debt securities, as described above.
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4. Investment Restrictions
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. The vote of a majority of the
outstanding shares of the Fund means the lesser of: (i) 67% or more of the
shares present at a shareholder meeting at which the holders of more than 50%
of the shares are present or represented or (ii) more than 50% of the
outstanding shares of the Fund. 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 the value
of its total assets in the securities of any single issuer or purchase
more than 10% of the outstanding voting securities of any one issuer,
except the U.S. Government, its agencies and instrumentalities; or
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3) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equalling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase
securities.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. How to Invest in the Fund
Class A and Class B Shares may be purchased from Alex. Brown, 135 East
Baltimore Street, Baltimore, Maryland 21202, through any securities dealer
which has entered into a dealer agreement with Alex. Brown ("Participating
Dealers") or through any financial institution which has entered into a
Shareholder Servicing Agreement with the Fund ("Shareholder Servicing
Agents"). Shares of either class may also be purchased directly from the Fund
by completing the Application Form attached to this Prospectus and returning
it, together with payment of the purchase price including any applicable
front-end sales charge, to the Fund at the address shown on the Application
Form. Participating Dealers or Shareholder Servicing Agents and their
investment representatives may receive different levels of compensation
depending on which class of shares they sell.
The Class A and Class B alternatives permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the combination of sales
charge and distribution fee on Class A Shares is more favorable than the
combination of distribution/service fees and contingent deferred sales charge
on Class B Shares. In almost all cases, investors planning to purchase
$100,000 or more of Fund shares will pay lower aggregate charges and expenses
by purchasing Class A Shares. Accordingly, the Fund will not accept purchases
for Class B Shares in excess of $100,000 per account. (See "Fee Table.")
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for
participants in the Fund's Automatic Investing Plan is $250. Each subsequent
investment must be at least $100 per class, except that the minimum
subsequent investment in the Fund's Automatic Investing Plan is $250 for
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quarterly investments and $100 for monthly investments. (See "Purchases
Through Automatic Investing Plan" below.) There is no minimum investment
requirement for qualified retirement plans (i.e., 401(k) plans or pension and
profit sharing plans). IRA accounts are, however, subject to the $2,000
minimum initial investment requirement. There is no minimum investment
requirement for spousal IRA accounts. Orders for purchases of shares are
accepted on any day on which the New York Stock Exchange is open for business
("Business Day"). The Fund reserves the right to suspend the sale of shares
at any time at the discretion of Alex. Brown and ICC. Purchase orders for
shares will be executed at a per share purchase price equal to the net asset
value next determined after receipt of the purchase order plus any applicable
front-end sales charge (the "Offering Price") on the date such net asset
value is determined (the "Purchase Date"). Purchases made directly from the
Fund must be accompanied by payment of the Offering Price. Purchases made
through Alex. Brown or a Participating Dealer or Shareholder Servicing Agent
must be in accordance with such entity's payment procedures. Alex. Brown may,
in its sole discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting liabilities attributable to
all shares and any liabilities attributable to the specific class, and
dividing the resulting amount by the number of then outstanding shares of the
class. For this purpose, portfolio securities are given their market value
where feasible. If a portfolio security is traded on a national exchange or
on an automated dealer quotation system, such as NASDAQ, on the valuation
date, the last quoted sale price is generally used. Securities or other
assets for which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established
from time to time and monitored by the Fund's Board of Directors. Debt
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Fund's Board of Directors.
Because of differences between the classes of shares in distribution fees,
the net asset value per share of the classes differs at times.
.............................................................................
OFFERING PRICE
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price which for Class A Shares
includes a sales charge which is calculated as a percentage of the Offering
Price and for Class B Shares is net asset value.
9
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.............................................................................
CLASS A SHARES
The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown below:
<TABLE>
<CAPTION>
Sales Charge
as % of Dealer
------------------------------ Retention
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
-------------------------- ------------ -------------- ----------------
<S> <C> <C> <C>
Less than $ 50,000 ...... 4.50% 4.71% 4.00%
$50,000 - $ 99,999 ...... 3.50% 3.63% 3.00%
$100,000 - $249,999 ...... 2.50% 2.56% 2.00%
$250,000 - $499,999 ...... 2.00% 2.04% 1.50%
$500,000 - $999,999 ...... 1.50% 1.52% 1.25%
$1,000,000 and over ...... None* None* None*
</TABLE>
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In addition, an investor may obtain reduced sales charges as
set forth above through a right of accumulation of purchases of Class A
Shares and purchases of shares of other Flag Investors funds with the same
sales charge, and purchases of shares of Flag Investors Intermediate-Term
Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. (the "Intermediate Funds"). The applicable sales charge will be
determined based on the total of (a) the shareholder's current purchase plus
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of all Class A Shares and of all Flag Investors shares described
above and any Flag Investors Class D Shares held by the shareholder. To
obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a
Participating Dealer or Shareholder Servicing Agent, as applicable, with
sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.
The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest not less than $50,000 within a 13-month period in Class A Shares. Each
purchase of shares under a Letter of Intent will be made at the Offering Price
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applicable at the time of such purchase to the full amount indicated on the
Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Letter of Intent is 5% of the full amount. Shares purchased with the
first 5% of the full amount will be held in escrow (while remaining registered
in the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
invested. Such escrowed shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has been
purchased, the escrowed shares will be released. An investor who wishes to enter
into a Letter of Intent in conjunction with an investment in Class A Shares may
do so by completing the appropriate section of the Application Form attached to
this Prospectus.
No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge will be imposed on such investments in the event of a redemption
within 24 months following the purchase, at the rate of .50% on the lesser of
the value of the shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
shares not subject to such charge are the first redeemed followed by other
shares held for the longest period of time.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing shares
on behalf of their fiduciary and advisory clients, provided such clients have
paid an account management fee for these services (investors may be charged a
fee if they effect transactions in Fund shares through a broker or agent);
(ii) qualified retirement plans; (iii) participants in a Flag Investors fund
payroll savings plan program; (iv) investors who have redeemed Class A Shares
or shares of any other mutual fund in the Flag Investors family of funds with
the same sales charges, or who have redeemed shares of the Intermediate Funds
which they had held for at least 24 months prior to redemption, in an amount
that is not more than the total redemption proceeds, provided that the
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purchase is within 90 days after the redemption; and (v) current or retired
Directors of the Fund, and directors and employees (and their immediate
families) of Alex. Brown, Participating Dealers and their respective affiliates.
...............................................................................
CLASS B SHARES
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class
B Shares redeemed within six years of purchase. The charge is assessed on an
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. Accordingly, the contingent
deferred sales charge will not be applied to dollar amounts representing an
increase in the net asset values above the initial purchase price of the
shares being redeemed. In addition, no charge is assessed on redemptions of
Class B Shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether the contingent deferred sales charge is applicable
to a redemption, the calculation is made in the manner that results in the
lowest possible rate. Therefore, it is assumed that the redemption is first
of any Class B Shares in the shareholder's account that represent reinvested
dividends and distributions and second of Class B Shares held the longest
during the six year period. The amount of the contingent deferred sales
charge, if any, will vary depending on the number of years from the time of
payment for the purchase of Class B Shares until the redemption of such
shares (the "holding period"). For purposes of determining this holding
period, all payments during a month are aggregated and deemed to have been
made on the first day of the month. The following table sets forth the rates
of the contingent deferred sales charge.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
----------------------- ----------------------------------------
<S> <C>
First ................. 4.0%
Second ................ 4.0%
Third ................. 3.0%
Fourth ................ 3.0%
Fifth ................. 2.0%
Sixth ................. 1.0%
Thereafter ............ None*
</TABLE>
* As described more fully below, Class B Shares automatically convert to
Class A Shares six years after the beginning of the calendar month in which
the purchase order was accepted.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
12
<PAGE>
death or initial determination of disability (as defined in the Internal Revenue
Code of 1986, as amended) of a shareholder; or (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2. The waiver with respect to (i) above is only applicable in
cases where the shareholder account is registered (a) in the name of an
individual person, (b) as a joint tenancy with rights of survivorship, (c) as
community property or (d) in the name of a minor child under the Uniform Gifts
or Uniform Transfers to Minors Act. A shareholder, or his or her representative,
must notify the Fund's transfer agent (the "Transfer Agent") prior to the time
of redemption if such circumstances exist and the shareholder is eligible for
this waiver. For information on the imposition and waiver of the contingent
deferred sales charge, contact the Transfer Agent at (800) 553-8080.
Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month in which the purchase order for Class B Shares is
accepted, such Class B Shares will automatically convert to Class A Shares
and will no longer be subject to the higher distribution and service fees.
Such conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other charge.
The conversion is not a taxable event to the shareholder.
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account
will be considered to be held in a separate sub-account. Each time any Class
B Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
..............................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class.
Except as provided below, shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of the Intermediate Funds may exchange into Class A Shares upon
payment of the difference in sales charges, as applicable, except that the
exchange will be made at net asset value if the shares of such funds have
13
<PAGE>
been held for more than 24 months. Shareholders of Flag Investors Cash
Reserve Prime Class A Shares may exchange into Class A Shares upon payment of
the difference in sales charges, as applicable, or into Class B Shares at net
asset value, subject to any applicable contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from shares of
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares.
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund, who have
paid a sales charge, may exchange shares of such fund for an equal dollar
amount of Class A Shares by submitting to Alex. Brown or a Participating
Dealer the proceeds of the redemption of such shares, together with evidence
of the payment of a sales charge and the source of such proceeds. Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange. The Fund may
modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to shareholders.
...............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase either Class A Shares or Class B Shares
regularly by means of an Automatic Investing Plan with a pre-authorized check
drawn on their checking accounts. Under this plan, the shareholder may elect
to have a specified amount invested monthly or quarterly in either Class A
Shares or Class B Shares. The amount specified by the shareholder will be
withdrawn from the shareholder's checking account using the pre-authorized
check. This amount will be invested in the class of shares selected by
14
<PAGE>
the shareholder at the applicable Offering Price determined on the date the
amount is available for investment. Participation in the Automatic Investing
Plan may be discontinued either by the Fund or the shareholder upon 30 days'
prior written notice to the other party. A shareholder who wishes to enroll in
the Automatic Investing Plan or who wishes to obtain additional purchase
information may do so by completing the appropriate section of the Application
Form attached to this Prospectus.
- -------------------------------------------------------------------------------
6. How to Redeem Shares
Shareholders may redeem all or part of their investments on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Transfer Agent. Shareholders may also redeem shares of either class by
telephone (in amounts up to $50,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per share (reduced by any
applicable contingent deferred sales charge) next determined after receipt of
the order (or, if stock certificates have been issued for the shares to be
redeemed, after the tender of the stock certificate for redemption).
Redemption orders received after 4:00 p.m. (Eastern Time) will be effected at
the net asset value next determined on the following Business Day. Payment
for redeemed shares will be made by check and will be mailed within seven
days after receipt of a duly authorized telephone redemption request or of a
redemption order fully completed and, as applicable, accompanied by the
documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact
names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency or savings
association;
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
15
<PAGE>
Dividends payable up to the date of redemption of shares will be paid on
the next dividend payable date. If all of the shares in a shareholder's
account have been redeemed on a dividend payable date, the dividend will be
remitted by check to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
.............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed
monthly or quarterly under the Fund's Systematic Withdrawal Plan. Such
payments are drawn from income dividends, and to the extent necessary, from
share redemptions (which would be a return of principal and, if reflecting a
gain, would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of shares. In addition, Class B Shares may be subject to a
contingent deferred sales charge upon redemption. (See "How to Invest in the
Fund -- Class B Shares.") A shareholder who wishes to participate in the
Fund's Systematic Withdrawal Plan may do so by completing the appropriate
section of the Application Form attached to this Prospectus.
- ------------------------------------------------------------------------------
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent, Accounting Services." Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as next determined on the following Business
Day.
16
<PAGE>
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. Neither the Fund nor the Transfer Agent will be responsible for
any loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. During
periods of extreme economic or market changes, shareholders may experience
difficulty in effecting telephone transactions. In such event, requests
should be made by regular or express mail. Shares held in certificate form
may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")
- -----------------------------------------------------------------------------
8. Dividends and Taxes
.............................................................................
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of semi-annual dividends. The
Fund may distribute to shareholders any taxable net capital gains on an
annual basis or, alternatively, may elect to retain net capital gains and pay
tax thereon.
Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Fund shares at net asset
value. Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent,
Accounting Services"), either directly or through their Participating Dealer
or Shareholder Servicing Agent, at least five days before the next date on
which dividends or distributions will be paid.
..............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
17
<PAGE>
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund expects to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
As long as the Fund qualifies for this tax treatment, it will be relieved of
federal income tax on amounts distributed to shareholders. Shareholders,
unless otherwise exempt, generally will be subject to income tax on the
amounts so distributed regardless of whether such distributions are paid in
cash or reinvested in additional shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time the shareholder has held the shares. All other income distributions will
be taxed to shareholders as ordinary income. Corporate shareholders may be
entitled to the dividends received deduction on a portion of dividends
received from the Fund. Shareholders will be advised annually as to the tax
status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund on December 31 of the year in which the
dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
A sale, exchange, or redemption of shares is a taxable event for the
shareholder.
Shareholders are encouraged to consult with their tax advisors concerning
the application of the rules described above to their particular
circumstances and the application of state and local taxes to an investment
in the Fund.
- ------------------------------------------------------------------------------
9. Management of the Fund
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund
18
<PAGE>
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 day-to-day operations of the Fund are delegated to the
Fund's officers, to the Fund's investment advisor, ICC, to its sub-advisor,
ABIM, and to the Fund's distributor, Alex. Brown. Two Directors and all of the
officers of the Fund are officers or employees of ICC, ABIM or Alex. Brown. The
other Directors of the Fund have no affiliation with ICC, ABIM or Alex. Brown.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
* Truman T. Semans Chairman Lee S. Owen President
* Richard T. Hale Director J. Dorsey Brown, III Executive Vice President
James J. Cunnane Director Hobart C. Buppert, II Vice President
N. Bruce Hannay Director Bruce E. Behrens Vice President
John F. Kroeger Director Edward J. Veilleux Vice President
Louis E. Levy Director Gary V. Fearnow Vice President
Eugene J. McDonald Director Brian C. Nelson Vice President and Secretary
* Rebecca W. Rimel Director Diana M. Ellis Treasurer
Harry Woolf Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Semans and Hale are and Ms. Rimel may be Directors who are
"interested persons" of the Fund within the meaning of Section 2(a)(19)
under the Investment Company Act.
- ------------------------------------------------------------------------------
10. Investment Advisor and Sub-Advisor
ICC is the Fund's investment advisor and ABIM is the Fund's sub-advisor.
ICC is also the investment advisor to, and Alex. Brown acts as distributor
for, other mutual funds in the Flag Investors family of funds and Alex. Brown
Cash Reserve Fund, Inc., which funds had approximately $4.2 billion of net
assets as of August 31, 1995. ABIM is a registered investment advisor with
approximately $3.7 billion under management as of August 31, 1995.
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to ABIM certain of its duties,
provided that ICC continues to supervise the performance of ABIM and report
thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. The Board has established procedures under which ABIM may
allocate transactions to Alex. Brown, provided that compensation to Alex.
Brown on each transaction is reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other broker-dealers
19
<PAGE>
in connection with comparable transactions involving similar securities during a
comparable period of time. 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, ABIM may consider services in connection
with the sale of shares as a factor in the selection of broker-dealers to
execute portfolio transactions for the Fund.
As compensation for its services, ICC is entitled to receive a fee from
the Fund, calculated daily and payable monthly, at the annual rate of 1.00%
of the first $50 million of the Fund's average daily net assets, .85% of the
next $50 million of the Fund's average daily net assets, .80% of the next
$100 million of the Fund's average daily net assets, and .70% of the Fund's
average daily net assets in excess of $200 million. As compensation for its
services, ABIM is entitled to receive a fee from ICC payable from its
advisory fee, calculated daily and payable monthly, at the annual rate of
.75% of the first $50 million of the Fund's average daily net assets, .60% of
the next $150 million of the Fund's average daily net assets, and .50% of the
Fund's average daily net assets in excess of $200 million. The fee paid to
ICC is higher than that paid by most mutual funds, but ICC has voluntarily
agreed to waive a portion of the fee so that the total operating expenses of
the Fund do not exceed 1.35% of the Class A Shares' average daily net assets
and 2.10% of the Class B Shares' average daily net assets. (See "Fee Table.")
ABIM has also agreed to waive, on a voluntary basis, that portion of its fee
payable from ICC in excess of the amount equal to .65% of the Fund's average
daily net assets.
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ABIM is a limited partnership affiliated with Alex. Brown. Buppert, Behrens &
Owen, Inc., a company organized and owned by three employees of ABIM, owns a
49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex.
Brown Incorporated owns the remaining 49% limited partnership interest. The
address of both ICC and ABIM is 135 East Baltimore Street, Baltimore,
Maryland 21202.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
..............................................................................
PORTFOLIO MANAGERS
Messrs. Lee S. Owen, the Fund's President, and J. Dorsey Brown, III,
Executive Vice President of the Fund, have shared primary responsibility for
managing the Fund's assets since inception.
20
<PAGE>
Lee S. Owen -- 23 Years Investment Experience
Lee Owen joined ABIM as a Vice President in 1983. From 1972 to 1983, Mr.
Owen was a Vice President and Portfolio Manager for T. Rowe Price Associates.
Mr. Owen is a 1970 graduate of Williams College and received his M.B.A. from
the University of Virginia in 1972. He is a member of the Baltimore Security
Analysts Society and the Financial Analysts Federation.
J. Dorsey Brown, III -- 28 Years Investment Experience
Dorsey Brown is the Chief Executive Officer of ABIM, which he founded in
1974. From 1967 to 1974, he was a member of the Research and Investment
Advisory Department of the Baltimore-based investment firm, Robert Garrett &
Sons. Mr. Brown received his B.A. from Trinity College in Hartford,
Connecticut, in 1962 and studied at New York University Business School in
1966. He is a member of the Baltimore Security Analysts Society and the
Financial Analysts Federation.
- -----------------------------------------------------------------------------
11. Distributor
Alex. Brown acts as distributor of the Class A Shares and the Class B
Shares. Alex. Brown is an investment banking firm which offers a broad range
of investment services to individual, institutional, corporate and municipal
clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated which
has engaged directly and through subsidiaries and affiliates in the
investment business since 1800. Alex. Brown is a member of the New York Stock
Exchange and other leading securities exchanges. Headquartered in Baltimore,
Maryland, Alex. Brown has offices throughout the United States and, through
subsidiaries, maintains offices in London, England, Geneva, Switzerland and
Tokyo, Japan.
The Fund has adopted two separate Distribution Agreements and related
Plans of Distribution, one with respect to the Class A Shares and one with
respect to the Class B Shares (the "Plans"), pursuant to Rule 12b-1 under the
Investment Company Act. In addition, the Fund may enter into Shareholder
Servicing Agreements with certain financial institutions, such as banks, to
act as Shareholder Servicing Agents, pursuant to which Alex. Brown will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
impose separate fees in connection with these services and investors should
review this Prospectus in conjunction with any such institution's fee
schedule. In addition, financial institutions may be required to register as
dealers pursuant to state securities laws. Amounts allocated to any
21
<PAGE>
Participating Dealer or Shareholder Servicing Agent may not exceed amounts
payable to Alex. Brown under the Plans with respect to shares held by or on
behalf of customers of such entity.
Under the Class A Plan, Alex. Brown will receive an annual distribution
fee, paid monthly, equal to .25% of the average daily net assets of the Class
A Shares.
Under the Class B Plan, Alex. Brown will receive an annual distribution
fee, paid monthly, equal to .75% of the Class B Shares' average daily net
assets. In addition, Alex. Brown will receive a shareholder servicing fee at
an annual rate of .25% of the Class B Shares' average daily net assets. The
distribution fee will be used to compensate Alex. Brown for its services and
expenses in distributing the Class B Shares. The shareholder servicing fee
will be used to compensate Alex. Brown, Participating Dealers and Shareholder
Servicing Agents for services provided and expenses incurred in maintaining
shareholder accounts, responding to shareholder inquiries and providing
information on their investments.
Payments under the Plans are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares or
in connection with the sale of the Class B Shares is less than .75% of the
average daily net assets invested in Class B Shares for any period, the
unexpended portion of the distribution fees may be retained as profit by
Alex. Brown. Alex. Brown will from time to time and from its own resources
pay or allow additional discounts or promotional incentives in the form of
cash or other compensation (including merchandise or travel) to Participating
Dealers.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
- ------------------------------------------------------------------------------
12. Custodian, Transfer Agent, Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
22
<PAGE>
providing accounting services, ICC receives from the Fund an annual fee equal to
$13,000, plus a percentage of the Fund's average daily net assets in excess of
$10 million at a maximum rate of .10% of net assets, and declining at various
asset levels to a minimum rate of .001% on assets of $1 billion or more. (See
the Statement of Additional Information.)
- -------------------------------------------------------------------------------
13. Performance Information
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return, net of the Fund's maximum sales charge imposed
on Class A Shares or including the contingent deferred sales charge imposed
on Class B Shares redeemed at the end of the specified period covered by the
total return figure, over one, five and ten year periods or, if such periods
have not yet elapsed, shorter periods corresponding to the life of the Fund.
Such total return quotations will be computed by finding average annual
compounded rates of return over such periods that would equate an assumed
initial investment of $1,000 to the ending redeemable value, net of the
maximum sales charge and other fees, according to the required standardized
calculation. The standardized calculation is required by the SEC to provide
consistency and comparability in investment company advertising and is not
equivalent to a yield calculation. If the Fund compares its performance to
other funds or to relevant indices, the Fund's performance will be stated in
the same terms in which such comparative data and indices are stated, which
is normally total return rather than yield. For these purposes, the
performance of the Fund, as well as the performance of such investment
companies or indices, may not reflect sales charges, which, if reflected,
would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar
Inc. and SEI Corporation, independent services which monitor the performance
of mutual funds. The performance of the Fund may also be compared to the
Consumer Price Index, the Standard & Poor's 500 Stock Index and other market
indices such as NASDAQ and the Wilshire 500. The Fund may also use total
return performance data as reported in the following national financial and
industry publications that monitor the performance of mutual funds: Money
Magazine, Forbes, Business Week, Barron's, Investor's Daily, IBC/Donoghue's
Money Fund Report and The Wall Street Journal.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
23
<PAGE>
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which shares may be purchased, although not included in
calculations of performance, will reduce performance results.
Although expenses for Class B Shares may be higher than those for Class A
Shares, the performance of Class B Shares may be higher than the performance
of Class A Shares after giving effect to the impact of the sales charges and
12b-1 fees applicable to each class of shares.
- ------------------------------------------------------------------------------
14. General Information
..............................................................................
CAPITAL SHARES
The Fund is a Maryland corporation, authorized to issue thirty million
shares of capital stock, with a par value of $.001 per share. Shares of the
Fund have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the
Fund, each share would be entitled to its portion of the Fund's assets after
all debts and expenses have been paid.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The shares offered by this Prospectus have been designated: Flag
Investors Equity Partners Fund Class A Shares and Flag Investors Equity
Partners Fund Class B Shares. The Board has no present intention of
establishing any additional series of the Fund. Different classes of the Fund
may be offered to certain investors and holders of such shares may be
entitled to certain exchange privileges not offered to Class A or Class B
Shares. All classes of the Fund share a common investment objective,
portfolio of investments and advisory fee, but the classes may have different
distribution expenses or sales load structures.
..............................................................................
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders, but
special meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
24
<PAGE>
the removal of a Director from office, and if such a request is made, the Fund
will assist with shareholder communications in connection with the meeting.
..............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
..............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
..............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact Alex.
Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
25
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Equity Partners
Fund, Inc." and mail with this application to:
Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
Attn: Flag Investors Equity Partners Fund, Inc.
For assistance in completing this application please call: 1-800-553-8080 8:30
a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
To open an IRA account, call 1-800-767-3524 to request an IRA application.
I wish to purchase the following class of shares of the Fund, in the amount
indicated below: Please check the applicable box and indicate amount of
purchase.
[ ] Class A Shares (4.5% maximum initial sales charge) in the amount
of $_____________________
[ ] Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $______________________
The minimum initial purchase for each class of shares is $2,000, except that the
minimum initial purchase for shareholders of any other Flag Investors Fund or
class is $500 and the minimum initial purchase for participants in the Fund's
Automatic Investing Plan is $250. Each subsequent purchase requires a $100
minimum per class, except that the minimum subsequent purchase under the Fund's
Automatic Investing Plan is $250 for quarterly purchases and $100 for monthly
purchases. The maximum investment in Class B Shares is $100,000 per account. The
Fund reserves the right not to accept checks for more than $50,000 that are not
certified or bank checks.
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: ____________________
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the______________________Uniform Gifts to Minors Act
State of Residence
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ------------------------------------- ---------------------------------
Tax ID Number Date of Trust
- -----------------------------------------------------------------------------
Name of Trustees (if to be included in the Registration)
- -----------------------------------------------------------------------------
For the Benefit of
MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
26
<PAGE>
LETTER OF INTENT -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares as shown below, in an
aggregate amount at least equal to:
Class A Shares: [ ] $50,000 [ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
27
<PAGE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the same class of
the Fund at no sales charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
==============================================================================
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $_______ in Class A Shares or $_______in Class B Shares
for me, on a monthly or quarterly basis, on or about the 20th of each month
or if quarterly, the 20th of January, April, July and October, and to draw a
bank draft in payment of the investment against my checking account. (Bank
drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250 per class
Subsequent Investments (check one):
[ ] Monthly ($100 minimum per class)
[ ] Quarterly ($250 minimum per class)
- -----------------------------------------------------------------------------
Bank Name
- -----------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
- -----------------------------------------------------------------------------
Depositor's Signature Date
- -----------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
=============================================================================
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of _______, 19____ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $______ from Class A Shares and/or $______ from Class B Shares
that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
28
<PAGE>
=============================================================================
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a predesignated bank account, please
provide the following information:
Bank:______________________________________________________________________
Address:______________________________________________________________________
Bank Account No:____________________________________________________________
Bank Account Name:____________________________________________________________
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated October 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:________________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
______________________________________________________________________________
Signature Date
______________________________________________________________________________
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name:_______________________________________ Dealer Code:____________
Dealer's Address:____________________________________ Branch Code:____________
____________________________________
Representative:______________________________________ Rep. No. ____________
29
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
------------
FLAG INVESTORS EQUITY PARTNERS FUND, INC.
(Class A and Class B Shares)
135 E. Baltimore Street
Baltimore, Maryland 21202
------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, 135 EAST BALTIMORE STREET, BALTIMORE,
MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated: October 1, 1995
Relating to the Prospectus Dated: October 1, 1995
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History ......................... 1
2. Investment Objectives, Policies and Risk Considerations . 1
3. Valuation of Shares and Redemption ...................... 7
4. Federal Tax Treatment of Dividends and
Distributions ......................................... 7
5. Management of the Fund .................................. 10
6. Investment Advisory and Other Services .................. 15
7. Distribution of Fund Shares ............................. 17
8. Brokerage ............................................... 19
9. Capital Stock ........................................... 21
10. Semi-Annual Reports ..................................... 22
11. Custodian, Transfer Agent and Accounting Services ....... 22
12. Independent Accountants ................................. 23
13. Performance Information ................................. 23
14. Control Persons and Principal Holders of
Securities ............................................ 24
15. Financial Statements .................................... 25
Appendix A .............................................. A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Equity Partners 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 two classes
of shares: Flag Investors Equity Partners Fund Class A Shares and Flag Investors
Equity Partners Fund Class B Shares. Important information concerning the Fund
is included in the Fund's Prospectus which may be obtained without charge from
Alex. Brown & Sons Incorporated ("Alex. Brown"), 135 East Baltimore Street,
Baltimore, Maryland 21202 (telephone: (800) 767-FLAG) or from Participating
Dealers that offer shares of the respective classes of the Fund ("Shares") to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. As used herein, the "Fund" refers to Flag Investors Equity
Partners Fund, Inc. and specific references to either class of the Fund's Shares
will be made using the name of such class. Some of the information required to
be in this Statement of Additional Information is also included in the Fund's
current Prospectus. To avoid unnecessary repetition, references are made to
related sections of the Prospectus. In addition, the Prospectus 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
November 29, 1994. The Fund filed a registration statement with the SEC
registering itself as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and commenced operations on February 13, 1995.
Under a license agreement dated January 31, 1995 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund has the investment objective of seeking long-term growth of
capital and, secondarily, current income. The Fund seeks to achieve this
objective primarily through a policy of diversified investments in equity
securities, including common stocks and convertible securities. Under normal
market conditions, the Fund will invest as fully as feasible in equity
securities and at least 65% of the Fund's total assets will be so invested, all
as more fully described in the Prospectus. There can be no assurance that the
Fund's investment objective will be achieved.
In addition, the Fund may purchase a limited amount, up to 10% of its
total assets in non-convertible debt securities. Up to all of any such
investments may be in securities that are rated below investment grade by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") or are unrated and of similar quality. A description of the rating
categories of S&P and Moody's is set forth in Appendix A to this Statement of
Additional Information. Any remaining assets of the Fund not invested as
described above may be invested in high quality money market instruments. For
temporary, defensive purposes, the Fund may invest up to 100% of its assets in
high quality short-term money market instruments, including repurchase
agreements, and in bills, notes or bonds issued by the U.S. Treasury Department
or by other agencies of the U.S. Government.
1
<PAGE>
Additional information about certain of the Fund's investment policies
and practices are described below.
Convertible Securities
As described in the Prospectus, the Fund may invest in convertible
securities. 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 common 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
investment in common stock of the same issuer.
Below Investment Grade Corporate Bonds
The Fund may purchase corporate bonds, including convertible
securities, that carry ratings lower than those assigned to investment grade
bonds by Moody's or S&P, or that are unrated if such bonds, in the Advisors'
judgment, meet the quality criteria established by the Board of Directors. These
bonds are generally known as "junk bonds." These securities may trade at
substantial discounts from their face values. Accordingly, if the Fund is
successful in meeting its objectives, investors may receive a total return
consisting not only of income dividends but, to a lesser extent, capital gain
distributions. Appendix A to this Statement of Additional Information sets forth
a description of the S&P and Moody's rating categories, which indicate the
rating agency's opinion as to the probability of timely payment of interest and
principal. These ratings range in descending order of quality from AAA to D, in
the case of S&P, and from Aaa to C, in the case of Moody's. Generally,
securities which are rated lower than BBB by S&P or Baa by Moody's are described
as below investment grade. Securities rated lower than investment grade may be
of a predominantly speculative character and their future cannot be considered
well-assured. The issuer's ability to make timely payments of principal and
interest may be subject to material contingencies. Securities in the lowest
rating categories may be unable to make timely interest or principal payments
and may be in default and in arrears in interest and principal payments.
The following summarizes the Moody's and S&P definitions for
speculative grade debt obligations in which the Fund may invest. Bonds which are
rated Ba by Moody's are judged to have speculative elements; their future cannot
be considered well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times. Uncertainty of position characterizes bonds in this class. Bonds
rated B generally lack characteristics of a desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa rated bonds are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. Bonds rated C are the lowest rated class of bonds and can
be regarded as having extremely poor prospects of ever attaining any real
2
<PAGE>
investment standing. In the case of S&P, BB rated bonds have less near-term
vulnerability to default than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating. B rated bonds
have a greater vulnerability to default but currently have the capacity to meet
interest payments and principal repayments. Adverse business, financial or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating. CCC rated
bonds have a currently identifiable vulnerability to default and, without
favorable business, financial and economic conditions, will be unable to repay
interest and principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B- rating. The rating CC
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating. The rating C typically is applied to debt
subordinated to senior debt which is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating CI
is reserved for income bonds on which no interest is being paid. Debt rated D is
in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, these ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, the Advisors do not rely
exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities but supplement such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high yield securities will be significantly affected not only by credit
quality but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisors of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.
Investing in higher yield, lower rated bonds entails substantially
greater risk than investing in investment grade bonds, including not only credit
risk, but potentially greater market volatility and lower liquidity. Yields and
market values of high yield bonds will fluctuate over time, reflecting not only
changing interest rates but also the bond market's perception of credit quality
and the outlook for economic growth. When economic conditions appear to be
deteriorating, lower rated bonds may decline in value due to heightened concern
over credit quality, regardless of prevailing interest rates. In addition, in
adverse economic conditions, the liquidity of the secondary market for junk
bonds may be significantly reduced. In addition, adverse economic developments
3
<PAGE>
could disrupt the high yield market, affecting both price and liquidity, and
could also affect the ability of issuers to repay principal and interest,
thereby leading to a default rate higher than has been the case historically.
Even under normal conditions, the market for high yield bonds may be less liquid
than the market for investment grade corporate bonds. There are fewer securities
dealers in the high yield market and purchasers of high yield bonds are
concentrated among a smaller group of securities dealers and institutional
investors. In periods of reduced market liquidity, the market for high yield
bonds may become more volatile and there may be significant disparities in the
prices quoted for high yield securities by various dealers. Under conditions of
increased volatility and reduced liquidity, it would become more difficult for
the Fund to value its portfolio securities accurately because there might be
less reliable, objective data available.
Finally, prices for high yield bonds may be affected by legislative and
regulatory developments. For example, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructurings such as takeovers, mergers or
leveraged buyouts. Such legislation may significantly depress the prices of
outstanding high yield bonds.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed to be creditworthy by ICC, and the Fund's sub-advisor,
ABIM under guidelines approved by the Board of Directors. A repurchase agreement
is a short-term investment in which the purchaser (i.e., 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 purchaser'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 Fund makes payment for such securities only upon physical 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.
Foreign Investment Risk Considerations
From time to time, the Advisors may invest up to 10% of the Fund's
assets in American Depository Receipts, which are U.S. exchange listed interests
in securities of foreign companies, and in debt and equity securities issued by
foreign corporate and government issuers when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Foreign investments involve substantial and different risks
which should be carefully considered by any potential investor. In general, less
information is publicly available about foreign companies than is available
about companies in the United States. Most foreign companies are not subject to
uniform audit and financial reporting standards, practices and requirements
comparable to those in the United States. In most foreign markets volume and
liquidity are less than in the United States and, at times, volatility of price
can be greater than in the United States. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on United States
exchanges. There is generally less government supervision and regulation of
foreign stock exchanges, brokers, and companies than in the United States. The
settlement period for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. Portfolio securities
4
<PAGE>
held by the Fund which are listed on foreign exchanges may be traded on days
that the Fund does not value its securities, such as Saturdays and the customary
United States business holidays on which the New York Stock Exchange is closed.
As a result, the net asset value of Shares may be significantly affected on days
when shareholders do not have access to the Fund.
Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries. The dividends and interest payable on certain of the
Fund's foreign portfolio securities may be subject to foreign withholding taxes,
thus reducing the net amount available for distribution to the Fund's
shareholders. Investors should understand that the expense ratio of the Fund can
be expected to be higher than those of investment companies investing in
domestic securities due to the additional cost of custody of foreign securities.
When considering whether to invest in foreign equity or debt securities, the
Advisor will consider the risk of foreign investment in addition to the criteria
it applies to all investments in equity or debt securities, as described above.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are in
addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. The vote of a majority of the outstanding
Shares of the Fund means the lesser of: (i) 67% or more of the Shares present at
a shareholder meeting at which the holders of more than 50% of the Shares are
present or represented or (ii) more than 50% of the outstanding Shares of the
Fund. The Fund will not:
1. Invest in real estate or mortgages on real estate;
2. Purchase or sell commodities or commodities contracts, including
financial futures contracts;
3. 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;
4. Issue senior securities;
5. 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;
6. Effect short sales of securities;
7. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
8. Purchase participations or other direct interests in oil, gas or
other mineral leases or exploration or development programs; or
5
<PAGE>
9. Invest more than 10% of its net assets in illiquid securities
(defined as securities that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the Fund is carrying the
securities), including securities that the Fund is restricted from selling to
the public without registration under the Securities Act (excluding restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
("Rule 144A Securities") that have been determined to be liquid by the Fund's
Board of Directors based upon the trading markets for such securities). In
addition, as long as necessary to comply with certain state requirements, the
Fund will not invest more than 15% of its net assets in restricted securities
that include (i) illiquid securities subject to the 10% limitation as described
above and (ii) Rule 144A Securities whether or not such securities have been
deemed to be liquid.
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;
2. Invest in shares of any other investment company other than in
connection with a merger, consolidation, reorganization or acquisition of
assets;
3. Purchase or retain the securities of any issuer if any officer or
Director of the Fund or its investment advisor owns beneficially more than .5%
of the outstanding securities of such issuer and together they own beneficially
more than 5% of the securities of such issuer;
4. Invest in companies for the purpose of exercising management or
control;
5. Invest in puts, calls or any combination thereof;
6. Purchase warrants, if by reason of such purchase more than 5% of the
Fund's net assets (taken at market value) will be invested in warrants, valued
at the lower of cost or market. Included within this amount, but not to exceed
2% of the value of the Fund's net assets, may be warrants that are not listed on
the New York or American Stock Exchange. For the purpose of the foregoing
calculations, warrants acquired by the Fund in units or attached to securities
will be deemed to be without value and therefore not included within the
preceding limitations; or
7. Invest in real estate limited partnerships.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
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. The Fund anticipates that
its portfolio turnover rate is not expected to exceed 100% in the fiscal year
ending May 31, 1996.
6
<PAGE>
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business on
all weekdays except for the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Net asset value per share of a class is calculated by valuing all
assets held by the Fund, deducting liabilities attributable to all shares and
any liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this purpose,
portfolio securities will be given their market value where feasible. If a
portfolio security is traded on a national exchange or on an automated dealer
quotation system, such as NASDAQ, on the valuation date, the last quoted sale
price will generally be used. Securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established from time to time and
monitored by the Fund's Board of Directors. Debt obligations with maturities of
60 days or less are valued at amortized cost which constitutes fair value as
determined by the Fund's Board of Directors.
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 as
described in the Prospectus. However, if the Board of Directors determines 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 in kind of readily
marketable securities from the portfolio of the Fund in lieu of cash, in
conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. 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
Investment Company Act pursuant to which the Fund is obligated to redeem Shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
7
<PAGE>
The summary of federal income tax consequences is based on the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations issued
thereunder as in effect on the date of this Statement of Additional Information.
Subsequent 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 expects to be taxed as a regulated investment company under
Subchapter M of the Code. However, in order to qualify as a regulated investment
company for any taxable year, the Fund generally must (1) derive at least 90% of
its gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures or forward contracts) derived with respect to its business
of investing in stocks, securities or currencies (the "Income Requirement"), and
(2) derive less than 30% of its gross income (exclusive of certain gains from
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from gains on the sale or other disposition of any of
the following investments if such investments are held for less than three
months (the "Short-Short Gain Test"): (a) stock or securities (as defined in
Section 2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies), and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities).
In addition, at the close of each quarter of the Fund's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Fund has not invested more than
5% of the value of its total assets in securities of such issuer and as to which
the Fund does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. government
securities and securities of other regulated investment companies), or in two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses (the "Asset
Diversification Test"). Generally, the Fund will not lose its status as a
regulated investment company if it fails to meet the Asset Diversification Test
solely as a result of a fluctuation in value of portfolio assets not
attributable to a purchase.
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and capital gains which it distributes to shareholders,
provided that it distributes at least 90% of its investment company taxable
income (net investment income and the excess of net short term capital gains
over net long-term capital losses) for the year (the "Distribution Requirement")
and complies with the other requirements of the Code described above.
Distributions of investment company taxable income made during the taxable year
or, under certain specified circumstances, within twelve months after the close
of the taxable year will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if a regulated investment company
establishes to the satisfaction of the Internal Revenue Service that it is
unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for Federal excise tax.
8
<PAGE>
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 for any taxable year, the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax rates without any deduction for distributions to
shareholders, and all such distributions generally will be taxable to
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the 70% 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 invested in additional Shares. 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 as long-term capital gains, regardless of the length of
time the shareholder has held Shares. Conversely, if the Fund elects to retain
its net capital gains, it will be taxed thereon (except to the extent of any
available capital loss carryovers) at the applicable corporate capital gains tax
rate. In this event, it is expected that the Fund also will elect to have
shareholders treated as having received a distribution of such gains, with the
result that shareholders will be required to report such gains on their returns
as long-term capital gains, will receive a tax credit for their allocable share
of capital gains tax paid by the Fund on the gains, and will increase the tax
basis for their Shares by an amount equal to 65 percent of such gains.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the 70% 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. For purposes of the alternative minimum tax and the environmental
tax, corporate shareholders generally will be required to take the full amount
of any dividend received from the Fund into account in determining their
adjusted current earnings for purposes of computing "alternative minimum taxable
income."
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 purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.
Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss which will be long-term if the Share has been held for more
than one year and otherwise will be short-term. 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
9
<PAGE>
undistributed net capital gains of the Fund which 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). Investors should
particularly note that this loss disallowance rule will apply to Shares received
through the reinvestment of dividends during the 61-day period.
The Fund will provide a statement annually to shareholders as to 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.
The Fund will be required in certain cases to withhold and remit tax to
the United States Treasury on distributions payable to any shareholder who (1)
has provided either an incorrect taxpayer identification number or no number at
all, (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 the shareholder is not subject to backup
withholding.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% excise tax on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the calendar year plus 98% of their capital gain net
income for the one-year period ending on October 31 of such calendar year. The
excise tax is imposed on the undistributed part of this required distribution.
In addition, the balance of such income must be distributed during the next
calendar year to avoid liability for the excise tax in that year. For the
foregoing purposes, an investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year. For this purpose, in determining its capital gain net income for
the one-year period ending on October 31 of such calendar year, the Fund must
reduce its capital gain net income by the amount of any net ordinary loss for
the calendar year (but not below the net capital gain for the one-year period
ending on October 31). Because the Fund intends to distribute all of its income
currently (or to retain, at most its net capital gains and pay tax thereon), the
Fund does not anticipate incurring any liability for this excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments in order to make sufficient distributions to
avoid excise tax liability and, in addition, that the liquidation of such
investments in such circumstances may affect the ability of the Fund to satisfy
the Short-Short Gain Test.
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 advisers as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund 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 135 East
Baltimore Street, Baltimore, Maryland 21202.
10
<PAGE>
*TRUMAN T. SEMANS,
Chairman Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.
*RICHARD T. HALE, Director
Managing Director, Alex. Brown & Sons Incorporated.
JAMES J. CUNNANE, Director
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (a merchant banking firm), 1993-Present; Formerly,
Senior Vice President and Chief Financial Officer, General Dynamics
Corporation (defense), 1989-1993, and Director, The Arch Fund (mutual
fund).
N. BRUCE HANNAY, Director
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice President,
Research and Patents, AT&T Bell Laboratories; Formerly, Director, Rohm &
Haas Company (diversified chemicals), General Signal Corp. (control
equipment & systems) and Plenum Publishing Corp.
JOHN F. KROEGER, Director
P.O. Box 464, Swan Road-Martingham, St. Michaels, Maryland 21663.
Director/Trustee, AIM Funds (registered investment companies); Formerly,
Consultant, Wendell & Stockel Associates, Inc. (consulting firm); and
General Manager, Shell Oil Company.
LOUIS E. LEVY, Director
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-Clark
Corporation (personal consumer products) and Household International
(banking and finance); Chairman of the Quality Control Inquiry Committee,
American Institute of Certified Public Accountants; Formerly, Trustee,
Merrill Lynch Funds for Institutions, 1991-1993; Adjunct Professor,
Columbia University-Graduate School of Business, 1991-1992; Partner, KPMG
Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director
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).
* REBECCA W. RIMEL, Director
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite
1700, Philadelphia, PA 19103. President and Chief Executive Officer, The
Pew Charitable Trusts; Director and Executive Vice President, The Glenmede
Trust Company; Formerly, Executive Director, The Pew Charitable Trusts.
HARRY WOOLF, Director
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study; Director,
Merrill Lynch Cluster C Funds (registered investment companies) and ATL and
Spacelabs Medical Corp. (medical equipment); Family Health International
(nonprofit research and education).
11
<PAGE>
LEE S. OWEN, President
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Secretary, Buppert,
Behrens & Owen, Inc.
J. DORSEY BROWN, III, Executive Vice President
Managing Director, Alex. Brown & Sons Incorporated; Chief Executive Officer
and Formerly, General Partner, Alex. Brown Investment Management.
HOBART C. BUPPERT, Vice President
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor), 1984-Present; President, Buppert, Behrens
& Owen, Inc. 1987-Present.
BRUCE E. BEHRENS, Vice President
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Treasurer, Buppert,
Behrens & Owen, Inc.
EDWARD J. VEILLEUX, Vice President
Principal, Alex. Brown & Sons Incorporated; President, Investment Company
Capital Corp. (registered investment advisor); Vice President, Armata
Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary
Vice President, Alex. Brown & Sons Incorporated, Investment Company Capital
Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
DIANA M. ELLIS, Treasurer
Manager, Portfolio Accounting Department, Investment Company Capital Corp.
(registered investment advisor); Mutual Fund Accounting Department, Alex.
Brown & Sons Incorporated, 1991-Present; Formerly, Accounting Manager,
Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary
Asset Management Department, Alex. Brown & Sons Incorporated, 1991-
Present; Formerly, Student 1989-1991.
_____________________
* Messrs. Semans and Hale are, and Ms. Rimel may be, directors who are
"interested persons", as defined in the Investment Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates. There are currently 12 funds in
the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund
complex (the "Fund Complex"). Mr. Semans serves as a Director of seven funds in
the Fund Complex. Mr. Hale serves as President and Director of one fund, Vice
President of one fund and Director of the ten other funds in the Fund Complex.
Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and Woolf serve as Directors of
each fund in the Fund Complex. Ms. Rimel serves as a director of four funds in
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<PAGE>
the Fund Complex. Mr. Owen serves as President of one fund, Executive Vice
President of one fund, and Vice President of one fund in the Fund Complex. Mr.
Brown serves as President of one fund and Executive Vice President of two funds
in the Fund Complex. Mr. Buppert serves as Executive Vice President of one fund
and Vice President of two funds in the Fund Complex. Mr. Behrens serves as
President of one fund and Vice President of two funds in the Fund Complex. Mr.
Fearnow serves as Vice President of ten funds in the Fund Complex. Mr. Veilleux
serves as Executive Vice President of one fund and Vice President of eleven
funds in the Fund Complex. Mr. Nelson, Ms. Ellis and Ms. DePrine serve as Vice
President and Secretary, Treasurer, and Assistant Secretary, respectively, of
each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business. All
such transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons. Additional
transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of Alex. Brown may be considered to have received remuneration indirectly. As
compensation from the Fund, each Director who is not an "interested person" of
the Fund (as defined in the Investment Company Act) (a "Non-Interested
Director") and Ms. Rimel receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his or her
attendance at board and committee meetings) from all Flag Investors/ISI Funds
and Alex. Brown Cash Reserve Fund, Inc. for which he or she serves. Payment of
such fees and expenses are allocated among all such funds described above in
proportion to their relative net assets. For the fiscal period ended May 31,
1995, Non-Interested Directors' fees attributable to the assets of the Fund
totalled $316. The following table shows aggregate compensation paid to each of
the Fund's Directors by the Fund and the Fund Complex, respectively, in the
fiscal year ended May 31, 1995.
13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________
Name of Person, Position Aggregate Compensation Total Compensation
From the Fund in the From the Fund
Fiscal Year Ended and Fund Complex
May 31, 1995 Paid to Directors
in the Fiscal Year
Ended May 31, 1995
_____________________________________________________________________________________________________________________________
<S> <C> <C>
*Truman T. Semans, Chairman and Director $0 $0
*Richard T. Hale, Director $0 $0
**James J. Cunnane, Director $9(1) ** $9,750 for service on 13(2)
Boards in the Fund Complex**
N. Bruce Hannay, Director $9(1) $39,000 for service on 13(2)
Boards in the Fund Complex
John F. Kroeger, Director $10(1) $42,900 for service on 13(2)
Boards in the Fund Complex
***Louis E. Levy, Director $9(1) *** $29,250 for service on 13(2)
Boards in the Fund Complex ***
Eugene J. McDonald, Director $9(1) $39,000 for service on 13(2)
Boards in the Fund Complex
*/****Rebecca W. Rimel, Director N/A **** N/A ****
Harry Woolf, Director $9(1) $39,000 for service on 13(2)
Boards in the Fund Complex
</TABLE>
- ----------
* A Director who is or may be an "interested person" as defined in the
Investment Company Act.
** Commenced service in Fund Complex on December 14, 1994.
*** Commenced service in Fund Complex on June 17, 1994.
**** Elected to the Board on June 1, 1995.
(1) $0 of this amount has been deferred pursuant to a deferred compensation
plan.
(2) One fund ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of five years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned in his or her last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned in his or her last year of
service. The fee will be paid quarterly, for life, by each Fund for which he or
she serves. The Retirement Plan is unfunded and unvested. Messrs. Hannay,
Kroeger and Woolf have qualified but have not received benefits, and no such
benefits are being accrued for them since they have not yet retired. The Fund
has one Participant, a Director who retired effective December 31, 1994, who has
qualified for the Retirement Plan and who will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
14
<PAGE>
Beginning in December, 1994, any Director who receives fees from the
Fund is permitted to defer a minimum of 50%, or up to all, of his or her annual
compensation pursuant to a Deferred Compensation Plan.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
significantly restricts the personal investing activities of all employees of
ICC and the directors and officers of Alex. Brown. As described below, the Code
of Ethics imposes additional, more onerous, restrictions on the Fund's
investment personnel, including the portfolio managers and employees who execute
or help execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of ICC, any director or
officer of Alex. Brown, and all Non-Interested Directors, preclear any personal
securities investments (with limited exceptions, such as non-volitional
purchases or purchases which are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and preclearance
of the acquisition of securities in private placements. Furthermore, the Code of
Ethics provides for trading "blackout periods" that prohibit trading by
investment personnel and certain other employees within periods of trading by
the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On December 14, 1994, the Board of Directors of the Fund, including a
majority of the Non-Interested Directors, approved an Investment Advisory
Agreement between the Fund and ICC and a Sub-Advisory Agreement among the Fund,
ICC and ABIM, both of which contracts are described in greater detail below. The
Investment Advisory Agreement and the Sub-Advisory Agreement were approved by
the sole shareholder of the Fund on January 30, 1995. ICC, the investment
advisor, is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ICC is also the investment advisor to Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Telephone Income Fund, Inc., Flag Investors International Fund, Inc.,
Flag Investors Emerging Growth Fund, Inc., Flag Investors Intermediate-Term
Income Fund, Inc., Flag Investors Value Builder Fund, Inc. and Flag Investors
Maryland Intermediate Tax Free Income Fund, Inc. and Flag Investors Real Estate
Securities Fund, Inc., which are also distributed by Alex. Brown.
ABIM is a limited partnership affiliated with Alex. Brown. Buppert,
Behrens & Owens, Inc., a company organized and owned by three employees of ABIM,
owns a 49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex. Brown
Incorporated owns the remaining 49% limited partnership interest. ABIM, also the
sub-advisor to Flag Investors Telephone Income Fund, Inc. and Flag Investors
Value Builder Fund, Inc., is a registered investment advisor.
15
<PAGE>
Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. ICC has delegated this responsibility to ABIM,
provided that ICC continues to supervise the performance of ABIM and report
thereon to the Fund's Board of Directors. Any investment program undertaken by
ICC or ABIM will at all times be subject to policies and control of the Fund's
Board of Directors. ICC 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
ICC without reimbursement by the Fund for any costs. Neither ICC nor ABIM shall
be liable to the Fund or its shareholders for any act or omission by ICC or ABIM
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 ICC and ABIM to the Fund are not exclusive and ICC and ABIM are
free to render similar services to others.
As compensation for its services, ICC is entitled to receive an annual
fee from the Fund, calculated daily and payable monthly, at the annual rate of
1.00% of the first $50 million of the Fund's average daily net assets, .85% of
the next $50 million of the Fund's average daily net assets, .80% of the next
$100 million of the Fund's average daily net assets and .70% of the Fund's
average daily net assets in excess of $200 million. As compensation for its
services, ABIM is entitled to a fee from ICC, calculated daily and payable
monthly, at the annual rate of .75% of the first $50 million of the Fund's
average daily net assets, .60% of the next $150 million of the Fund's average
daily net assets, and .50% of the Fund's average daily net assets in excess of
$200 million.
This fee is higher than that paid by most mutual funds, but ICC has
voluntarily agreed to waive a portion of its fee from time to time so that the
total operating expenses of the Fund do not exceed 1.35% of the Class A Shares'
average daily net assets and 2.10% of the Class B Shares' average daily net
assets. ABIM has also agreed to waive, on a voluntary basis, that portion of its
fee payable from ICC for sub-advisory services in excess of the amount equal to
.65% of the Fund's average daily net assets. For the period from February 13,
1995 (commencement of operations) through May 31, 1995, ICC waived all advisory
fees and reimbursed expenses aggregating $30,753. Absent such fee waivers and
reimbursements, the Fund's total operating expenses would have been 3.76%
(annualized) for Class A Shares and 4.22% (annualized) for Class B Shares.
During this period, ICC paid ABIM fees of $11,870 and ABIM waived fees of
$1,826.
In addition, ICC has agreed to reduce its aggregate fees on a monthly
basis for any fiscal year to the extent required so that the amount of the
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the Shares
are registered or qualified for sale, as such limitations may be raised or
lowered from time to time. Currently, the most restrictive of such expense
limitations requires ICC to reduce its fees to the extent required so that
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes,
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) do not exceed 2.5% of the first $30 million
of the Fund's average daily net assets, 2.0% of the next $70 million of the
Fund's average daily net assets and 1.5% of the Fund's average daily net assets
in excess of $100 million. In addition, if required to do so by any applicable
state securities laws or regulations, ICC will reimburse the Fund to the extent
required to prevent the expense limitations of any state law or regulation from
being exceeded.
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
16
<PAGE>
annually by the Fund's Board of Directors, including a majority of the Non-
Interested Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, or by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICC 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
Investment Company Act).
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
The Distribution Agreements provide that Alex. Brown has the exclusive
right to distribute the related class of Flag Investors Equity Partners Fund
Shares either directly or through other broker-dealers and further provide that
Alex. Brown will: (a) solicit and receive orders for the purchase of Shares; (b)
accept or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective prospectus and transmit such orders as are accepted to the
Fund's transfer agent as promptly as possible; (c) receive requests for
redemptions and transmit such redemption requests to the Fund's transfer agent
as promptly as possible; and (d) respond to inquiries from shareholders
concerning the status of their accounts and the operations of the Fund. Alex.
Brown has not undertaken to sell any specific number of Shares. The Distribution
Agreements further provide that, in connection with the distribution of Shares,
Alex. Brown will be responsible for all of the promotional expenses. The
services provided by Alex. Brown to the Fund are not exclusive, and Alex. Brown
is free to provide similar services to others. Alex. Brown shall not be liable
to the Fund or its shareholders for any act or omission by Alex. Brown or any
losses sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Alex. Brown 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.
As compensation for providing distribution services as described above
for the Class A Shares, Alex. Brown will receive an annual fee, paid monthly,
equal to .25% of the average daily net assets of the Class A Shares. As
compensation for providing distribution services as described above for the Flag
Investors Class B Shares, Alex. Brown will receive an annual fee, paid monthly,
equal to .75% of the average daily net assets of the Class B Shares. Alex. Brown
expects to allocate most of its annual distribution fee to its investment
representatives and up to all of its fee to broker-dealers who enter into
Sub-Distribution Agreements with Alex. Brown.
In addition, with respect to the Class B Shares, the Fund will pay
Alex. Brown a shareholder servicing fee at an annual rate of .25% of the average
daily net assets of the Class B Shares. (See the Prospectus.)
For the fiscal period from February 13, 1995 (commencement of
operations) through May 31, 1995, Alex. Brown received from the Fund aggregate
commissions and fees in the amount of $10,196, of which $5,976 were attributable
to the Class A Shares and $4,220 were attributable to the Class B Shares. From
17
<PAGE>
such amounts received for the Class A Shares, Alex. Brown paid $873 to its
investment representatives and $130 to outside broker-dealers. From amounts
received for the Class B Shares, Alex. Brown paid $0 to its investment
representatives and $0 to outside broker-dealers.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for each of its classes of shares (the "Plans"). Under the Plans, the Fund pays
a fee to Alex. Brown for distribution and other shareholder servicing assistance
as set forth in the Distribution Agreements, and Alex. Brown is authorized to
make payments out of its fee to its investment representatives and to
participating broker-dealers. Each Distribution Agreement has an initial term of
two years. The Distribution Agreements and the Plans encompassed therein will
remain in effect from year to year as specifically approved at least annually by
the Fund's Board of Directors and by the affirmative vote of a majority of the
Non-Interested Directors by votes cast in person at a meeting called for such
purpose. The Distribution Agreements including the Plans and forms of
Sub-Distribution Agreements, were approved by the Fund's Board of Directors,
including a majority of the Non-Interested Directors, on December 14, 1994 and
by the sole shareholder of the respective classes on January 30, 1995. The Plans
were most recently approved for continuance in the foregoing manner on September
25, 1995.
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 Agreements without the approval of the shareholders of the
Fund. The Plans may be terminated at any time and the Distribution Agreements
may be terminated at any time upon sixty days' notice, in either case without
penalty, by the vote of a majority of the Fund's Non-Interested Directors or by
a vote of a majority of the Fund's outstanding Shares (as defined under "Capital
Stock"). Any Sub-Distribution Agreement may be terminated in the same manner at
any time. The Distribution Agreement and any Sub-Distribution Agreement shall
automatically terminate in the event of assignment.
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plan to Alex. Brown pursuant to the Distribution
Agreements, 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 Non-Interested Directors shall be committed to the discretion of the
Non-Interested Directors then in office.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of its
distribution fee as compensation for such financial institutions' ongoing
shareholder services. Although banking laws and regulations prohibit banks from
distributing shares of open-end investment companies such as the Fund, according
to interpretations by various bank regulatory authorities, financial
institutions are not prohibited from acting in other capacities for investment
companies, such as the shareholder servicing capacities described above. Should
future legislative, judicial or administrative action prohibit or restrict the
activities of the Shareholder Servicing Agents in connection with the
Shareholder Servicing Agreements, the Fund may be required to alter materially
or discontinue its arrangements with the Shareholder Servicing Agents. Such
financial institutions may impose separate fees in connection with these
services and investors should review the Prospectus and this Statement of
Additional Information in conjunction with any such institution's fee schedule.
18
<PAGE>
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.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown under
such Plans. Payments under the Plans are made as described above regardless of
Alex. Brown's actual cost of providing distribution services and may be used to
pay Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Class A Shares is less than .25% of the average daily net assets
invested in that Class or Class B Shares is less than .75% of the average daily
net assets invested in that Class for any period, the unexpended portion of the
distribution fees may be retained by Alex. Brown. The Plans do not provide for
any charges to the Fund for excess amounts expended by Alex. Brown and, if
either of the Plans is terminated in accordance with its terms, the obligation
of the Fund to make payments to Alex. Brown pursuant to such Plan will cease and
the Fund will not be required to make any payments past the date the
Distribution Agreement terminates with respect to such Plan.
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company 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 registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of 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
Non-Interested Directors, and of independent auditors, in connection with any
matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by Alex. Brown, ICC or ABIM.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission rates,
subject to the supervision of ICC. 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
19
<PAGE>
ABIM and the broker-dealers. ABIM may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown acts as a principal; that is, an
order will not be placed with Alex. Brown if execution of the trade involves
Alex. Brown serving as a principal with respect to any part of the Fund's order,
nor will the Fund buy or sell over-the-counter securities with Alex. Brown
acting as market maker.
If Alex. Brown is participating in an underwriting or selling group,
the Fund may not buy portfolio securities from the group except in accordance
with rules of the SEC. The Fund believes that the limitation will not affect its
ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ABIM may, in its discretion, effect agency transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ABIM to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ABIM with clients other than the Fund. Similarly, any research services received
by ABIM through placement of portfolio transactions of other clients may be of
value to ABIM in fulfilling its obligations to the Fund. No specific value can
be determined for research and statistical services furnished without cost to
ABIM by a broker-dealer. ABIM 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 ABIM's research and analysis.
Therefore, it may tend to benefit the Fund by improving ABIM's investment
advice. In over-the-counter transactions, ABIM will not pay any commission or
other remuneration for research services. ABIM's policy is to pay a
broker-dealer higher commissions effected on an agency (but not on a principal)
basis for particular transactions than might be charged if a different
broker-dealer had been chosen when, in ABIM'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, ABIM is also authorized to pay
broker-dealers other than Alex. Brown higher commissions on brokerage
transactions for the Fund in order to secure research and investment services
described above. 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.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization, the Board adopted
certain policies and procedures incorporating the standards of Rule 17e-1 under
the Investment Company Act which requires that the commissions paid Alex. Brown
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABIM to furnish
reports and to maintain records in connection with such reviews. The
Distribution Agreement between Alex. Brown and the Fund does not provide for any
reduction in the distribution fee to be received by Alex. Brown from the Fund as
20
<PAGE>
a result of profits from brokerage commissions on transactions of the Fund
effected through Alex. Brown. In the fiscal period ended May 31, 1995, the Fund
paid no brokerage commissions to Alex. Brown.
ABIM 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 ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
During the fiscal period ended May 31, 1995, ABIM directed $382,478,184
principal amount of transactions to broker-dealers and paid $17,724 in related
commissions because of research services provided.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of May 31, 1995, the
Fund held a 6.0% repurchase agreement issued by Goldman Sachs & Co. valued at
$6,397,000.
9. CAPITAL STOCK
The Fund is authorized to issue thirty million Shares of common stock,
par value $.001 per share. 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 two classes of Shares: Flag Investors Equity Partners Fund Class
A Shares and Flag Investors Equity Partners Fund Class B Shares. In the event
separate series or classes are established, all Shares of the Fund, regardless
of series or class, would have equal rights with respect to voting, except that
with respect to any matter affecting the rights of the holders of a particular
series or class, the holders of each series or class would vote separately. Each
such 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,
each series would be treated as separate entities. Generally, each class of
Shares issued by a particular series would be identical to every other class and
expenses of the Fund (other than 12b-1 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 would 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.
21
<PAGE>
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The issued and outstanding Shares are fully paid and non-
assessable. In the event of liquidation or dissolution of the Fund, each Share
is entitled to its 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.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport Business Park, 200
Stevens Drive, Lester, Pennsylvania 19113, has been retained to act as custodian
of the Fund's investments. PNC Bank receives such compensation from the Fund for
its services as Custodian as may be agreed to from time to time by PNC Bank and
the Fund. Investment Company Capital Corp., 135 East Baltimore Street,
Baltimore, Maryland 21202, has been retained to act as transfer and dividend
disbursing agent. As compensation for providing these services, the Fund pays
ICC up to $15.00 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal period from February
13, 1995 (commencement of operations) through May 31, 1995, ICC received
transfer agency fees of $1,670.
ICC also provides certain accounting services to the Fund. As
compensation for these services, ICC receives an annual fee, calculated daily
and paid monthly as shown below.
Average Net Assets Incremental Fee
------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 .100%
$20,000,000 - $30,000,000 .080%
$30,000,000 - $40,000,000 .060%
$40,000,000 - $50,000,000 .050%
$50,000,000 - $60,000,000 .040%
$60,000,000 - $70,000,000 .030%
$70,000,000 - $100,000,000 .020%
$100,000,000 - $500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
For the period from February 13, 1995 (commencement of operations)
through May 31, 1995, ICC received accounting fees of $4,570.
In addition, the Fund will reimburse ICC for the following out-of-
pocket expenses incurred in connection with ICC's performance of its services
under the Master Services Agreement: express delivery service, independent
pricing and storage.
22
<PAGE>
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P., whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10
year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of
the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date the Fund (or a
class or series) commenced operations (provided such date is subsequent to the
date the registration statement became effective). During its first year of
operation the Fund may, in lieu of annualizing its total return, use an
aggregate total return calculated in the same manner. In calculating the ending
redeemable value, the maximum sales load (for the Flag Investors Equity Partners
Class A Shares: 4.5%, and for the Flag Investors Equity Partners Class B Shares:
4.0% for the one year period, 2.0% for the five year period and no sales charge
thereafter) is deducted from the initial $1,000 payment and all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period. "T"
in the formula above is calculated by finding the average annual compounded rate
of return over the period that would equate an assumed initial payment of $1,000
to the ending redeemable value. Any sales loads that might in the future be made
applicable at the time to reinvestments would be included as would any recurring
account charges that might be imposed by the Fund.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
23
<PAGE>
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies Inc.,
Morningstar Inc., or SEI Corporation or with the performance of the Consumer
Price Index, the Standard and Poor's 500 Stock Index and other market indices
such as NASDAQ and the Wilshire 5000. 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.
Calculated according to SEC rules for the period from February 13, 1995
(commencement of operations) through May 31, 1995, the ending redeemable value
of a hypothetical $1,000 payment for Class A Shares was $1,028, resulting in an
aggregate total return equal to 2.81%.
Calculated according to SEC rules for the period from February 13, 1995
(commencement of operations) through May 31, 1995, the ending redeemable value
of a hypothetical $1,000 payment for Class B Shares was $1,075, resulting in an
aggregate total return equal to 7.50%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from
February 13, 1995 (commencement of operations) through May 31, 1995, the ending
redeemable value of a hypothetical $10,000 investment in Class A Shares was
$10,770, resulting in an aggregate total return equal to 7.70%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from
February 13, 1995 (commencement of operations) through May 31, 1995, the ending
redeemable value of a hypothetical $10,000 investment in Class B Shares was
$10,750, resulting in an aggregate total return equal to 7.50%.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 23, 1995, to Fund management's knowledge, the following
persons held beneficially or of record 5% or more of the Fund's outstanding
shares of either class:
24
<PAGE>
Class A
T. Rowe Price, Trustee for Alex. Brown & Sons Incorporated, Plan
100460, Attn: Asset Recon, P.O. Box 17215, Baltimore, MD 21203-7215, owned of
record 10.98% of the Fund's outstanding Class A Shares.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202, owned of record 78.29% of the Fund's outstanding Class A Shares.
Class B
Alex. Brown & Sons Incorporated, FBO 201-14669-15, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 8.14% of the Fund's outstanding Class
B Shares.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202, owned of record 98.69% of the Fund's outstanding Class B Shares.
As of such date, Directors and officers as a group owned less than 1%
of the Fund's total outstanding Shares of either class.
15. FINANCIAL STATEMENTS
See next page.
25
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Net Assets May 31,1995
<TABLE>
<CAPTION>
PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<S> <C> <C> <C>
COMMON STOCK-28.2%
BANKING-1.2%
16,000 KeyCorp. $ 490,000 1.2%
CAPITAL GOODS-3.1%
17,900 Briggs & Stratton 635,450 1.6
2,900 Caterpillar,Inc. 174,725 0.4
7,100 Eaton Corp. 433,987 1.1
1,244,162 3.1
CONSUMER DURABLES/
NON-DURABLES-7.4%
15,000 Eckerd Corp.* 485,625 1.2
11,700 Gannett Co. 625,950 1.6
13,800 J.C.Penney Company,Inc. 650,325 1.6
5,000 Philip Morris Cos.,Inc. 364,375 0.9
18,500 Reebok International Ltd. 619,750 1.5
11,000 Times Mirror 255,750 0.6
3,001,775 7.4
DEFENSE/AEROSPACE-0.3%
2,200 Lockheed Martin Corp. 130,900 0.3
ENERGY-0.4%
3,400 MAPCO, Inc. 200,175 0.4
FINANCIAL SERVICES-4.2%
11,200 American Express Co. 399,000 1.0
10,600 Citicorp 567,100 1.4
5,800 Federal Home Loan
Mortgage Corp. 395,125 1.0
8,000 Travelers Inc. 338,000 0.8
1,699,225 4.2
HOUSING-1.7%
7,000 Ryland Group Inc. $ 111,125 0.3%
24,300 USG Corp.* 586,238 1.4
697,363 1.7
INSURANCE-3.4%
15,800 Bankers Life
Holding Corp. 308,100 0.8
12,000 Conseco Inc. 510,000 1.2
20,300 Mid Ocean Ltd.* 576,012 1.4
1,394,112 3.4
MULTI-INDUSTRY-2.6%
4,500 ITT Corp. 503,438 1.2
8,200 Tenneco Inc. 393,600 1.0
1,900 United Technologies 144,163 0.4
1,041,201 2.6
TECHNOLOGY-2.8%
5,000 International Business
Machines Corp. 466,250 1.1
6,000 Xerox Corp. 680,250 1.7
1,146,500 2.8
TRANSPORTATION-1.1%
8,400 Conrail Inc. 453,600 1.1
TOTAL COMMON
STOCKS
(Cost $11,002,096) 11,499,013 28.2
U.S. GOVERNMENT SECURITIES-61.3%
$25,000 U.S.Treasury Bills
5.61%, 6/1/95
(Cost $25,000,000) 25,000,000 61.3
</TABLE>
26
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Net Assets (CONCLUDED) May 31,1995
<TABLE>
<CAPTION>
PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<S> <C> <C> <C>
REPURCHASE AGREEMENT-15.7%
$6,397 Goldman Sachs & Co., 6.00%
Dated 5/31/95,to be
repurchased on 6/1/95,
collateralized by U.S.
Treasury Notes with
a market value
of $6,525,213.
(Cost $6,397,000) 6,397,000 15.7%
TOTAL INVESTMENT IN
SECURITIES
(Cost $42,399,096)** 42,896,013 105.2
LIABILITIES IN
EXCESS OF
OTHER ASSETS, NET (2,125,333) (5.2)
NET ASSETS $40,770,680 100.0%
NET ASSET VALUE PER:
CLASS A SHARE
($38,611,880 (divided by)
3,585,698 shares
outstanding) $10.77(1)
CLASS B SHARE
($2,158,800 (divided by)
200,773 shares
outstanding) $10.75(2)
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($10.77 (divided by) .955) $ 11.28
CLASS B SHARE $ 10.75
</TABLE>
*Non-income producing security.
**Also aggregate cost for federal tax purposes.
(1) Redemption value is $10.77.
(2) Redemption value is $10.32 following a maximum 4.00% contingent deferred
sales charge.
See accompanying Notes to Financial Statements.
27
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Operations For the Period February 13,1995*
through May 31,1995
<TABLE>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest.............................................. $115,108
Dividends............................................. 23,773
Total income......................................... 138,881
EXPENSES:
Investment advisory fee (Note B)...................... 28,126
Registration fees..................................... 23,644
Audit................................................. 19,575
Distribution fees (Note B)............................ 10,196
Legal................................................. 7,890
Accounting fee (Note B)............................... 4,570
Organizational expense (Note A)....................... 3,958
Custodian fees........................................ 3,946
Printing and postage.................................. 2,499
Transfer agent fees (Note B).......................... 1,670
Miscellaneous......................................... 1,316
Directors'fees........................................ 316
Total expenses....................................... 107,706
Less: Fees waived and expenses reimbursed (Note B).... (66,571)
Net expenses......................................... 41,135
Net investment income................................. 97,746
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) from security
transactions........................................ -
Change in unrealized appreciation of
investments......................................... 496,917
Net realized and unrealized gain on investments....... 496,917
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $594,663
</TABLE>
*Commencement of Operations.
See accompanying Notes to Financial Statements.
28
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 13, 1995*
THROUGH
MAY 31, 1995
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 97,746
Net realized loss from security transactions........... -
Change in unrealized appreciation of
investments........................................... 496,917
Net increase in net assets resulting
from operations....................................... 594,663
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares........................................ -
Class B Shares........................................ -
Total distributions.................................... -
CAPITAL SHARE TRANSACTIONS (NOTE D):
Proceeds from sale of shares........................... 40,494,354
Value of shares issued in reinvestment of
dividends............................................. -
Cost of shares repurchased............................. (418,337)
Increase in net assets derived from capital share
transactions.......................................... 40,076,017
Total increase in net assets........................... 40,670,680
NET ASSETS:
Beginning of period.................................... 100,000**
End of period.......................................... $ 40,770,680
</TABLE>
* Commencement of Operations.
** On January 26,1995,the Fund sold 10,000 shares to a subsidiary of
Alex.Brown & Sons Incorporated for $100,000.
See accompanying Notes to Financial Statements.
29
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Financial Highlights
(BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 13, 1995*
THROUGH MAY 31, 1995
CLASS A CLASS B
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period............ $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.12 0.07
Net realized and unrealized gain on investments... 0.65 0.68
Total from Investment Operations.................. 0.77 0.75
LESS DISTRIBUTIONS:
Dividends from net investment income.............. - -
Net asset value at end of period.................. $10.77 $10.75
TOTAL RETURN........................................ 7.70% 7.50%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)....................................... 1.35%(1) 2.10%(1)
Net investment income(3).......................... 3.74%(1) 1.97%(1)
SUPPLEMENTAL DATA:
Net assets at end of period (000)................. $38,612 $2,159
Portfolio turnover rate........................... - -
</TABLE>
*Commencement of Operations.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B),the ratio of expenses to
average net assets would have been 3.76% (annualized) for Class
A Shares and 4.22% (annualized) for Class B Shares.
(3) Without the waiver of advisory fees (Note B),the ratio of net investment
income to average net assets would have been 1.33% (annualized) for
Class A Shares and (0.15)% (annualized) for Class B Shares.
See accompanying Notes to Financial Statements.
30
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Equity Partners
Fund,Inc.(the "Fund") was organized as a Maryland Corporation on November
30,1994 and commenced operations on February 13,1995. The Fund is registered
under the Investment Company Act of 1940 as a diversified,open-end Management
Investment Company designed to seek long-term growth of capital and current
income through diversified investments in a professionally managed balanced
portfolio of equity and debt securities.
SECURITY VALUATION - Portfolio securities are valued on the basis of their
last sale price.In the event that there are no sales or the security is not
listed,it is valued at its latest bid quotation.Short-term obligations with
maturities of 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price.The seller,under a repurchase agreement,will be required on
a daily basis to maintain the value of the securities subject to the agreement
at no less than the repurchase price.The agreement is conditional upon the
collateral being deposited under the Federal Reserve book-entry system.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to qualify as a regulated investment company and to make
requisite distributions to the shareholders which will be sufficient to relieve
it from all or substantially all federal income and excise taxes. The Fund's
policy is to distribute to shareholders substantially all of its taxable net
investment income and net realized capital gains.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax
purposes.Interest income is recorded on an accrual basis.Dividend income and
distributions to shareholders are recorded on the ex-dividend date.Costs
incurred by the Fund in connection with its organization, registration,and the
initial public offering of shares have been deferred and are being amortized on
the straight-line method over a five-year period beginning on the date on which
the Fund commenced its investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp.("ICC"),a subsidiary of Alex.Brown & Sons
Incorporated ("Alex.Brown"), is the Fund's investment advisor and Alex.Brown
Investment Management ("ABIM") is the Fund's subadvisor. As compensation for
its advisory services,ICC receives from the Fund an annual fee, calculated daily
and paid monthly,at the annual rate of 1.00% of the first $50 million of the
Fund's average daily net assets;0.85% of the next $50 million of the Fund's
average daily net assets;0.80% of the next $100 million of the Fund's average
daily net assets;and 0.70% of the Fund's average daily net assets exceeding $200
million.
As compensation for its subadvisory services, ABIM receives a fee from
ICC,payable from its advisory fee,calculated daily and paid monthly,at an annual
rate of .75% of the first $50 million of the Fund's average daily net
assets;.60% of the next $150 million of the Fund's average daily net assets;and
.50% of the Fund's average daily net assets in excess of $200 million.
ICC has agreed to reduce its aggregate fees attributable to the Fund or
make payments to the Fund, if necessary,to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder of
any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain expenses
at no more than 1.35% of the Fund's average daily net assets for Class A Shares
and 2.10% for Class B Shares.For the period ended May 31,1995,ICC waived fees
and reimbursed expenses aggregating $30,753.
ICC also serves as the Fund's accounting and transfer agent. As compensation
for its accounting services,ICC receives from the Fund an annual fee, calculated
31
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Notes to Financial Statements (CONCLUDED)
daily and paid monthly, from the Fund's average daily net assets. ICC received
$3,704 for accounting services for the period ended May 31,1995.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly.ICC received $1,670 for
transfer agent services for the period ended May 31,1995.
As compensation for providing distribution services, Alex.Brown receives
from the Fund an annual fee calculated daily and paid monthly,at an annual rate
equal to .25% of the average daily net assets for Class A Shares,and 1.00%
(including a .25% shareholder servicing fee) of the average daily net assets for
Class B Shares.For the period ended May 31,1995,distribution fees aggregated
$10,196,of which $5,976 were attributable to the Class A Shares and $4,220 were
attributable to Class B Shares.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 10
million shares of $.001 par value common stock.Transactions in shares of the
Fund were as follows:
<TABLE>
<CAPTION>
For the Period
February 13, 1995* through
May 31, 1995
Class A Shares Class B Shares
<S> <C> <C>
Shares sold 3,614,724 200,772
Shares issued to
shareholders on
reinvestment of
dividends - -
Shares redeemed (39,025) -
Net increase in shares
outstanding 3,575,699 200,772
Proceeds from sale
of shares $38,469,554 $2,038,171
Value of reinvested
dividends - -
Cost of shares redeemed (418,337) -
Net increase from capital
share transactions $38,051,217 $2,038,171
</TABLE>
*Commencement of Operations.
Sales of Class A Shares include $31,660,000 (2,950,000 shares) issued
on May 17,1995 in exchange for cash from Flag Investors Quality Growth Fund in
connection with the reorganization of that Fund.
D. INVESTMENT TRANSACTIONS - Purchases of investment securities,other than
short-term obligations,aggregated $11,002,096 for the period ended May 31,1995.
At May 31,1995,aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $544,899 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $47,982.
E. NET ASSETS - At May 31,1995,net assets consisted of:
<TABLE>
<S> <C>
Paid-in-capital:
Flag Investors Class A.... $38,137,836
Flag Investors Class B.... 2,038,181
Undistributed net investment
income.................... 97,746
Unrealized appreciation
on investments............ 496,917
$40,770,680
</TABLE>
32
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Equity Partners Fund,Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Equity Partners Fund,Inc. as of May 31,1995 and the related statements of
operations and changes in net assets and financial highlights for the period
February 13,1995 (commencement of operations) through May 31,1995.These
financial statements and financial highlights are the responsibility of the
Fund's management.Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards.Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining,on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.Our procedures included confirmation of investments owned as of May
31,1995,by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management,as well as evaluating the overall financial statement presentation.We
believe that our audit provides a reasonable basis for our opinion.
In our opinion,the financial statements and financial highlights referred
to above present fairly,in all material respects,the financial position of Flag
Investors Equity Partners Fund,Inc.as of May 31, 1995 and the results of its
operations and the changes in its net assets and its financial highlights for
the period February 13,1995 (commencement of operations) through May 31,1995 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia,Pennsylvania
June 30,1995
33
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
S & P - Commercial paper rated A-1+ or A-1 by S&P has the following
characteristics. Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed. The issuer has access to at least two channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management is unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3.
Moody's Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationship which exists with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated P-1, P-2 or P-3.
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
A-1
<PAGE>
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation and
C the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
"high-grade" bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities, or the
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
A-2
<PAGE>
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
A-3
