Flag Investors
Mutual Funds
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate
Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares FLAG
INVESTORS
EQUITY
P.O. Box 515 PARTNERS
Baltimore, Maryland 21203 FUND
800-767-FLAG
Distributed by: Annual Report
ALEX. BROWN & SONS May 31, 1996
INCORPORATED
<PAGE>
Directors and Officers
Truman T. Semans Lee S. Owen
Chairman President
Charles W. Cole, Jr. J. Dorsey Brown, III
Director Executive Vice President
James J. Cunnane Bruce E. Behrens
Director Vice President
Richard T. Hale Hobart C. Buppert, II
Director Vice President
John F. Kroeger Gary V. Fearnow
Director Vice President
Louis E. Levy Edward J. Veilleux
Director Vice President
Eugene J. McDonald Brian C. Nelson
Director Vice President
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Carl W. Vogt, Esq. Edward J. Stoken
Director Secretary
Harry Woolf Laurie D. DePrine
Director Assistant Secretary
Investment Objective
A mutual fund designed to seek long-term growth of capital as well as the
secondary objective of current income primarily through a policy of diversified
investments in equity securities, including common stocks and convertible
securities.
Investment Advisor
Investment Company Capital Corp.
P.O. Box 515
Baltimore, MD 21203
(800) 553-8080
Custodian
PNC Bank, N.A.
Transfer Agent
Investment Company Capital Corp.
Legal Counsel
Morgan, Lewis &Bockius LLP
Independent Auditors
Coopers &Lybrand L.L.P.
Fund Performance
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Growth of a $10,000 Investment
in Class A Shares*
February 13, 1995--May 31, 1996
2/95 $10,000
5/95 $10,770
11/95 $11,993
5/96 $13,252
$10,000 invested in the Equity Partners
Fund Class A Shares at inception on
February 13, 1995 was worth $13,252
on May 31, 1996.
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
was reflected, the quoted performance would be lower. Since investment return
and principal value will fluctuate, an investor's shares may be worth more or
less than their original cost when redeemed. Past performance is not an
indicator of future results.
1
<PAGE>
Fellow Shareholders:
We are pleased to report on the progress of your Fund for the year ended
May 31, 1996.
Performance
The Fund's Class A Shares produced total returns of 10.5% and 23.1% for the
six-month and twelve-month periods ended May 31, 1996, respectively. Since
its inception on February 13, 1995, the Fund's Class A Shares have
produced a cumulative total return of 32.5%. These returns reflect very
favorable equity performance tempered somewhat by cash equivalents held in the
Fund.
- --------------------------------------------------------------------------------
Total Return Performance*
Class A Class B
Periods ended 5/31/96: Shares Shares
Six Months 10.5% 10.0%
Twelve Months 23.1% 22.2%
Since Inception (2/13/95)** 32.5% 31.3%
- --------------------------------------------------------------------------------
The largest positive and negative contributors to the Fund's performance
over the past year are shown in the following table.
- -----
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
was reflected, the quoted performance would be lower. The performance of the
classes differ because each maintains a distinct expense structure. For
further details on expense structures, please refer to the Fund's prospectus.
Since investment return and principal value will fluctuate, an investor's
shares may be worth more or less than their original cost when redeemed. Past
performance is not an indicator of future results. Please review the
Additional Performance Information on page 5.
**Cumulative.
Contributors to Net Asset Value Performance
(For the year ended 5/31/96)
Five Best Contributors Gain
Citicorp $0.18
Conseco Inc. 0.16
Times Mirror Co. 0.16
Xerox Corp. 0.14
Philip Morris 0.13
$0.77
- ------------------------------------------------------------------------------
Five Worst Contributors Loss
James River Corp. of Virginia $(0.04)
Reebok International Ltd. (0.03)
Leucadia National (0.02)
Bankers Life Holding (0.01)
Georgia-Pacific 0.00
$(0.10)
- ------------------------------------------------------------------------------
Investment Environment
The stock market continues to post gains this year that have been
particularly impressive in the face of rising interest rates. Contributing to
the market's rise is the continued dramatic inflow of money into equity mutual
funds. In 1995, approximately $118 billion flowed into U.S. equity funds, which
is more than the total assets of all stock funds a decade ago. Over the last
five months alone, a similar amount is estimated to have been added to these
types of funds.
We would like to comment on two additional forces that have played
important roles in this bull market. First, it is hard to overestimate the
importance of the current low, stable inflation rate. The trend toward lower
inflation has been at work, with some vacillation, for the past fifteen years
and has created one of the best periods ever for stocks and bonds. It has also
coincided with reduced returns on traditional inflation hedges,
2
<PAGE>
such as real estate and other non-financial assets. Not since the early 1960s
have we seen a period like today, in which inflation has remained in a narrow 2%
to 3% band for over five years. The success in controlling inflation has been a
major factor behind the ongoing bull market.
A second positive force at work is the increasing tendency of corporate
management and directors to run companies primarily for the benefit of
shareholders. In our research, it once was a refreshing exception to find a
management clearly focused on shareholder interests. It is now commonplace for
management to espouse shareholder value in their communications. We, of course,
must look beyond communication to study management actions. We are pleased to
observe that many in management are backing their words with actions that
benefit shareholders. These include increased focus on profitability, corporate
purchases of company stock, broadened stock ownership within companies, and
compensation plans with incentives tied to profitability and stock price. These
actions are having a positive cumulative impact on stock prices.
Given the gains that have occurred, experienced investors cannot help but
feel a sense of anxiety about the potential for some sort of market correction.
Our greatest concerns are simply that things have been too good for too long and
that everyone wants to own stocks. The recent popularity of small companies and
initial public offerings is indicative of greater risk-taking on the part of
investors. This has historically been a warning sign. Having said that, we are
hard pressed to know what will cause a decline or when it may occur. We view
market corrections like we view taxes--as something we would like to avoid but
must generally endure in order to enjoy the long-term benefits of owning stocks.
Portfolio Strategy
Our strategy over the past year has been to gradually and selectively move
the Fund toward a fully invested position without sacrificing our investment
disciplines. We have accomplished that, with equities now accounting for 90% of
total assets. One year ago, equities were 28% of the Fund, as $32 million of
fresh cash had just been added from the Flag Investors Quality Growth Fund
reorganization.
Going forward, we anticipate that equities will continue to be close to or
more than 90% of total assets. We view the Fund, as its name implies, as an
equity vehicle. Its purpose is to provide long-term growth of capital through
ownership of well-managed, growing companies, not through market timing.
Over the next year, our focus will be on stock selection and continuous
improvement of the Fund's holdings. This ongoing process will involve weeding
out names in which our confidence has waned, and adding to investments where our
conviction is high. As always, we will place as much of the Fund's money as
possible in the hands of management who are focused on increasing shareholder
value. The following quotes from the Chairmen of two of our holdings, which
appeared in their companies' 1995 Annual Reports, illustrate the type of
management we like.
"Steve Bollenbach's career has been spent focusing on a single
objective: maximizing value for shareholders. Having an executive of
his caliber join us at Hilton is a clear signal of our intention to
achieve our growth plans for the benefit of our shareholders."
Barron Hilton
Hilton Hotels Corp.
3
<PAGE>
"We have often said how important we believe it is for our people
to think and act like owners of their businesses, and, in fact, to be
owners . . . ; more than 34,000 of our employees own over 40 million
shares . . . . Clearly, the interests of our management, employees and
Directors are aligned with yours as investors and with the continued
enhancement of shareholder value."
Sanford I. Weill
Travelers Group Inc.
Most of the Fund's investments are in companies run by shareholder-oriented
management, including our five largest holdings shown below.
- -------------------------------------------------------------------------------
Largest Equity Holdings
(as of May 31, 1996)
- -------------------------------------------------------------------------------
Percent
of Net
Security Cost Market Value Assets
IBM $2,776,956 $2,989,000 4.0%
Philip Morris 2,061,390 2,683,125 3.6
Wells Fargo 2,469,336 2,651,000 3.6
Citicorp 1,674,047 2,570,400 3.5
Xerox Corp. 1,813,873 2,439,313 3.3
- -------------------------------------------------------------------------------
Closing
We would like to close with the following new "definitions" of old
investment terms, which we found amusing and hope you will enjoy. They were
created by the Leuthold Group, a market research firm in Minneapolis, in
response to the stock market's recent exceptional performance.
Bear Market: A market that is down for as much as a week.
Major Correction: A market that is down for the day.
"Old Timer": A person who actually knows someone who lost money in
the stock market.
Cynic: Anyone who reminds you that stocks can go down.
Diversified Portfolio: Any equity portfolio with less than 50% in technology.
Risk: How much you can lose by being out of the market.
Inflation: Historical phenomenon that at one time adversely
affected stocks.
Dividend Yield: Outdated concept once used in valuation analysis.
Rest assured that your Fund's portfolio managers fall comfortably in the
category of "old timers" and, as such, have not totally forgotten the risk side
of the investment equation.
Sincerely,
/s/ Lee S. Owen /s/ J. Dorsey Brown, III
Lee S. Owen J. Dorsey Brown, III
President Executive Vice President
June 21, 1996
4
<PAGE>
Additional Performance Information
The shareholder letter included in this report contains statistics
designed to help you evaluate the performance of your Fund's management. To
further assist in this evaluation, the Securities andExchange Commission
(SEC)requires that we include, on an annual basis, a line graph comparing the
Fund's performance to that of an appropriate market index. This graph must
measure the growth of a $10,000 hypothetical investment from the Fund's initial
public offering through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its currently effective 4.50% maximum
sales charge for the Fund's Class A Shares and 4.00% maximum contingent deferred
sales charge for the Fund's Class B Shares.
While the following tables are required by SEC rules, such comparisons are
of limited utility since the indices shown are not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of these indices
would have had to own the securities that they represent. Acquiring these
securities would require a considerable amount of money and would incur expenses
that are not reflected in the index results.
The SEC also requires that we report the Fund's total returns, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales
charges. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN--CLASS A*
% Return With
Periods ended 3/31/96: Sales Charge(1)
- -------------------------------------------------------------------------------
One Year 18.51%
- -------------------------------------------------------------------------------
Since Inception (2/13/95) 19.53%
- -------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT*
CLASS A SHARES
February 13, 1995--May 31, 1996
Flag Investors Equity Partners--Fund
2/95 $ 9,550
5/95 $10,285
11/95 $11,453
5/96 $12,656
91-Day U.S. Treasury Bill
2/95 $10,000
5/95 $10,150
11/95 $10,443
5/96 $10,722
S&P 500 Composite
2/95 $10,000
5/95 $11,016
11/95 $12,649
5/96 $14,116
(1) Assumes maximum sales charge of 4.50%.
*These figures assume the reinvestment of dividends and capital gains
distributions. The indices listed above are unmanaged. The S&P 500 Composite is
an indicator of general market performance and the 91-Day U.S. Treasury Bill is
a measure of short-term bond market performance. Past performance is not an
indicator of future results.
5
<PAGE>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN--CLASS B*
% Return With
Periods ended 3/31/96: CDSC(1)
- -------------------------------------------------------------------------------
One Year 19.38%
- -------------------------------------------------------------------------------
Since Inception (2/13/95) 20.30%
- -------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT*
CLASS B SHARES
February 13, 1995--May 31, 1996
Flag Investors Equity Partners--Fund
2/95 $10,000
5/95 $10,750
11/95 $11,943
5/96 $12,734
91-Day U.S. Treasury Bill
2/95 $10,000
5/95 $10,150
11/95 $10,443
5/96 $10,722
S&P 500 Composite
2/95 $10,000
5/95 $11,016
11/95 $12,649
5/96 $14,116
(1)Assumes maximum contingent deferred sales charge of 4.00%.
*These figures assume the reinvestment of dividends and capital gains
distributions. The indices listed above are unmanaged. The S&P 500 Composite
is an indicator of general market performance and the 91-Day U.S. Treasury
Bill is a measure of short-term bond market performance. Past performance
is not an indicator of future results.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
6
<PAGE>
Statement of Net Assets May 31, 1996
Market Value
Shares (Note A)
- --------------------------------------------------------------------------------
COMMON STOCK: 89.9%
Banking: 8.9%
30,600 Citicorp $ 2,570,400
34,400 KeyCorp 1,333,000
11,000 Wells Fargo & Co. 2,651,000
6,554,400
Basic Industry: 4.4%
100,000 Arcadian Corp. 2,000,000
7,500 Georgia-Pacific Corp. 541,875
30,000 James River Corp. of Virginia 746,250
3,288,125
Capital Goods: 6.4%
29,900 Briggs & Stratton Corp. 1,285,700
24,200 Caterpillar, Inc. 1,588,125
32,500 Eaton Corp. 1,880,938
4,754,763
Consumer Durables/Non-Durables: 7.5%
48,000 Ford Motor Co. 1,752,000
27,000 Philip Morris Cos., Inc. 2,683,125
35,500 Reebok International Ltd. 1,078,312
5,513,437
Consumer Services/Retail: 10.2%
100,000 Eckerd Corp.* 2,275,000
25,000 Gannett Co., Inc. 1,743,750
70,000 Kmart Corp.* 813,750
21,800 J. C. Penney Co., Inc. 1,130,875
36,000 Times Mirror Co.-- Class A 1,570,500
7,533,875
Defense/Aerospace: 1.4%
2,200 Lockheed Martin Corp. 184,525
8,300 McDonnell Douglas Corp. 838,300
1,022,825
Energy: 4.9%
18,000 Burlington Resources Inc. 684,000
24,000 MAPCO, Inc. 1,386,000
45,500 Noble Affiliates, Inc. 1,541,313
3,611,313
7
<PAGE>
Statement of Net Assets (continued) May 31, 1996
Market Value
Shares (Note A)
- -------------------------------------------------------------------------------
COMMON STOCK (continued)
Financial Services: 9.2%
51,200 American Express Co. $ 2,342,400
27,000 Federal Home Loan Mortgage Corp. 2,230,875
52,500 Travelers Group Inc. 2,178,750
6,752,025
Health Care: 0.8%
15,000 Mallinckrodt Group, Inc. 564,375
Hotels/Lodging: 3.6%
15,400 Hilton Hotels Corp. 1,659,350
16,400 ITT Corp.* 1,008,600
2,667,950
Housing: 3.9%
37,000 Ryland Group Inc. 605,875
83,300 USG Corp.* 2,280,337
2,886,212
Insurance: 7.9%
41,000 Alexander & Alexander Services Inc. 814,875
50,000 Conseco Inc. 1,812,500
16,400 ITT Hartford Group, Inc. 848,700
32,200 Leucadia National Corp. 792,925
37,800 Mid Ocean Ltd. 1,578,150
5,847,150
Multi-Industry: 6.7%
56,400 ITT Industries, Inc. 1,543,950
14,000 Loews Corp. 1,116,500
24,200 Tenneco, Inc. 1,300,750
8,900 United Technologies Corp. 973,438
4,934,638
Technology: 11.5%
28,000 International Business Machines Corp. 2,989,000
45,500 Millipore Corp. 1,996,312
50,000 SEI Corp. 1,087,500
15,500 Xerox Corp. 2,439,313
8,512,125
Transportation: 2.6%
45,800 Canadian National Railway Co. 847,300
15,400 Conrail Inc. 1,081,850
1,929,150
Total Common Stocks (Cost $55,131,423) 66,372,363
8
<PAGE>
Statement of Net Assets (concluded) May 31, 1996
Market Value
Par (Note A)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT: 13.5%
$9,928,000 Goldman Sachs & Co., 5.15%
Dated 5/31/96, to be repurchased on 6/3/96,
collateralized by U.S. Treasury
Notes with a market value of $10,127,392.
(Cost $9,928,000) $ 9,928,000
Total Investment in Securities: 103.4%
(Cost $65,059,423)** 76,300,363
Liabilities in Excess of Other Assets, Net: (3.4)% (2,533,114)
Net Assets: 100.0% $73,767,249
Net Asset Value and Redemption Price Per:
Class A Share
($64,229,555 / 4,907,747 shares outstanding) $13.09
Class B Share
($5,302,099 / 407,054 shares outstanding) $13.03(1)
Institutional Share
($4,235,595 / 323,377 shares outstanding) $13.10
Maximum Offering Price Per:
Class A Share
($13.09 / .955) $13.71
CLASS B SHARE $13.03
Institutional Share $13.10
- --------------------------------------------------------------------------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
(1) Redemption value is $12.51 following a maximum 4.00% contingent deferred
sales charge.
See accompanying Notes to Financial Statements.
9
<PAGE>
Statement of Operations For the Year Ended May 31, 1996
INVESTMENT INCOME (NOTE A):
Interest $ 818,014
Dividends 788,693
Total income 1,606,707
EXPENSES:
Investment advisory fee (Note B) 551,124
Distribution fee (Note B) 166,632
Legal 77,622
Transfer agent fee (Note B) 70,414
Accounting fee (Note B) 49,269
Printing and postage 30,927
Audit 29,922
Registration fees 18,652
Organizational expense (Note A) 10,029
Custodian fees 8,603
Directors' fees 3,904
Insurance 1,253
Total expenses 1,018,351
Less: Fees waived (Note B) (232,890)
Net expenses 785,461
Net investment income 821,246
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions (24,094)
Change in unrealized appreciation of investments 10,744,023
Net gain on investments 10,719,929
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,541,175
- -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
10
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year For the Period
Ended Feb. 13, 1995*
May 31, 1996 to May 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 821,246 $ 97,746
Net realized loss from security transactions (24,094) --
Change in unrealized appreciation of investments 10,744,023 496,917
Net increase in net assets resulting from operations 11,541,175 594,663
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares (598,906) --
Class B Shares (27,629) --
Institutional Shares -- --
Total distributions (626,535) --
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 28,046,908 40,494,354
Value of shares issued in reinvestment of dividends 560,846 --
Cost of shares repurchased (6,525,825) (418,337)
Increase in net assets derived from capital share transactions 22,081,929 40,076,017
Total increase in net assets 32,996,569 40,670,680
NET ASSETS:
Beginning of period 40,770,680 100,000**
End of period $73,767,249 $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.
11
<PAGE>
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Institutional
Class A Shares Class B Shares Shares
For the For the For the For the For the
Year Period Year Period Period
Ended Feb. 13, 1995* Ended Feb. 13, 1995* Feb. 12, 1996*
May 31, through May 31, through through
1996 May 31, 1995 1996 May 31, 1995 May 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning
of period $ 10.77 $ 10.00 $10.75 $10.00 $12.72
Income from Investment Operations:
Net investment income 0.17 0.12 0.07 0.07 0.04
Net realized and unrealized gain
on investments 2.29 0.65 2.31 0.68 0.34
Total from Investment Operations 2.46 0.77 2.38 0.75 0.38
Less Distributions:
Dividends from net investment
income (0.14) -- (0.10) -- --
Total distributions (0.14) -- (0.10) -- --
Net asset value at end of period $ 13.09 $ 10.77 $13.03 $10.75 $13.10
Total Return** 23.05% 7.70% 22.17% 7.50% 3.23%
Ratios to Average Daily Net Assets:
Expenses 1.35%(2) 1.35%(1,2) 2.10%(4) 2.10%(1,4) 1.10%(1,6)
Net investment income 1.52%(3) 3.74%(1,3) 0.71%(5) 1.97%(1,5) 1.20%(1,7)
Supplemental Data:
Net assets at end of period (000) $64,230 $38,612 $5,302 $2,159 $ 4,235
Portfolio turnover rate 0.73% -- 0.73% -- 0.73%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return excludes the effect of sales charge.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 1.77% and 3.76% (annualized) for
Class A Shares for the year ended May 31, 1996 and the period ended May 31,
1995, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 1.10% and
1.33% (annualized) for Class A Shares for the year ended May 31, 1996 and
the period ended May 31, 1995, respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 2.52% and 4.22% (annualized) for
Class B Shares for the year ended May 31, 1996 and the period ended May 31,
1995, respectively.
(5) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been
0.29% and (0.15)% (annualized) for Class B Shares for the year ended May
31, 1996 and the period ended May 31, 1995, respectively.
(6) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 1.55% (annualized) for
Institutional Shares for the period ended May 31, 1996.
(7) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 0.75%
(annualized) for Institutional Shares for the period ended May 31, 1996.
See accompanying Notes to Financial Statements.
12
<PAGE>
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, consisting of Class A Shares
and Class B Shares. 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, secondarily, current income through a
policy of diversified investments in equity securities, including common
stocks and convertible securities. On February 12, 1996, the Fund began
offering Institutional Shares, which are not subject to a front-end sales
charge or a distribution fee.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
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 enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The agreement
ensures that the market value of the collateral, including accrued interest
thereon, is sufficient in the event of default. If the counterparty defaults
and the value of the collateral declines or if the counterparty enters into
an insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.
Federal Income Tax - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to the shareholders that 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.
The Fund has a capital loss carryforward of $24,094 (which may be carried
forward to offset future taxable capital gains, if any), which begins to
expire in 2004 if not previously utilized.
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
Financial Corp., 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 a fee from the Fund, calculated daily and
paid monthly, at the following annual rates based upon the Fund's average
daily net assets: 1.00% of the first $50 million, 0.85% of the next $50
million, 0.80% of the next $100 million and 0.70% of that portion in excess
of $200 million.
13
<PAGE>
Notes to Financial Statements (continued)
As compensation for its subadvisory services, ABIM receives a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly, at the
following annual rates based upon the Fund's average daily net assets: .75%
of the first $50 million, .60% of the next $150 million and .50% of that
portion in excess of $200 million.
ICC has voluntarily agreed to waive a portion of its fees and reimburse
expenses so that the total operating expenses of the Fund do not exceed
1.35% of the Fund's average daily net assets for Class A Shares, 2.10% for
Class B Shares and 1.10% for Institutional Shares. For the year ended May
31, 1996, ICC waived fees of $232,890.
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 daily and paid monthly, from the Fund's average daily net assets.
ICC received $49,269 for accounting services for the year ended May 31,
1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly. ICC received $70,414
for transfer agent services for the year ended May 31, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated ("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 of Class B
Shares. For the year ended May 31, 1996, distribution fees aggregated
$166,632, of which $130,140 were attributable to Class A Shares and $36,492
were attributable to Class B Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the year ended May 31, 1996 was $565.
C. Capital Share Transactions - The Fund is authorized to issue up to 35
million shares of $.001 par value capital stock (20 million Class A, 5
million Class B, 5 million Institutional and 5 million undesignated).
Transactions in shares of the Fund were as follows:
Class A Shares
For the Year For the Period
Ended Feb. 13, 1995*
May 31, 1996 to May 31, 1995
Shares sold 1,801,793 3,614,724
Shares issued to share-
holders on reinvest-
ment of dividends 46,324 --
Shares redeemed (526,068) (39,025)
Net increase in shares
outstanding 1,322,049 3,575,699
Proceeds from sale
of shares $21,242,051 $38,469,554
Reinvested dividends 537,705 --
Net asset value of
shares redeemed (6,296,438) (418,337)
Net increase from
capital share
transactions $15,483,318 $38,051,217
Class B Shares
For the Year For the Period
Ended Feb. 13, 1995*
May 31, 1996 to May 31, 1995
Shares sold 221,303 200,772
Shares issued to share-
holders on reinvest-
ment of dividends 2,003 --
Shares redeemed (17,025) --
Net increase in shares
outstanding are- 206,281 200,772
Proceeds from sale
of shares $2,641,798 $2,038,171
Reinvested dividends 23,141 --
Net asset value of
shares redeemed (208,673) --
Net increase from
capital share
transactions $2,456,266 $2,038,171
- -------------------------------------------------------------------------------
*Commencement of operations.
14
<PAGE>
Notes to Financial Statements (concluded)
Institutional Shares
For the Period
Feb. 12, 1996* to
May 31, 1996
Shares sold 324,964
Shares issued to share-
holders on reinvest-
ment of dividends --
Shares redeemed (1,587)
Net increase in shares
outstanding 323,377
Proceeds from sale
of shares $4,163,059
Reinvested dividends --
Net asset value of
shares redeemed (20,714)
Net increase from
capital share
transactions $4,142,345
- ------------------------------------------------------------------------------
*Commencement of operations.
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term obligations, aggregated $44,457,277 and $303,618,
respectively, for the year ended May 31, 1996. At May 31, 1996, aggregate
gross unrealized appreciation for all securities in which there was an
excess of value over tax cost was $11,680,368 and aggregate gross unrealized
depreciation of all securities in which there was an excess of tax cost over
value was $439,428.
E. Net Assets - At March 31, 1996, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $53,621,154
Flag Investors Class B Shares 4,494,447
Flag Investors Institutional Shares 4,142,345
Undistributed net
investment income 292,457
Accumulated net realized loss
from security transactions (24,094)
Unrealized appreciation of
investments 11,240,940
$73,767,249
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, 1996 and the related statement of
operations for the year then ended, and the statement of changes in net assets
and the financial highlights for the year then ended and 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, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1996, the results of its
operations for the year then ended and the changes in its net assets and its
financial highlights for the year then ended and 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 28, 1996
15
