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FLAG
INVESTORS
EQUITY
PARTNERS
FUND
ANNUAL REPORT
MAY 31, 1998
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
o Your Fund received Morningstar's highest rating of 5-stars for its three-year
performance through May 31, 1998.
o Two of the largest contributors to the Fund's return, America Online and Ford,
illustrate the flexibility of our investment philosophy. Though very different
companies, at the time of purchase both were out of favor and selling at a low
enough price to offer good value for the long-term.
o Shareholders purchased $49 million in Fund shares over the past six months. We
invested $55 million in securities but sold only $8 million reflecting our
below average turnover.
o Asian problems have introduced uncertainty and volatility into an otherwise
positive market environment. Shareholders are encouraged to look beyond the
current uncertainty and view their Fund holdings as a long-term investment.
<PAGE>
FUND PERFORMANCE
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES*
FEBRUARY 13, 1995-MAY 31, 1998
$10,000 invested in the Equity Partners Fund
Class A Shares at inception on February 13, 1995
was worth $22,208 on May 31, 1998.
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
2/95 10,000
5/95 10,770
11,421
11/95 11,993
12,756
5/96 13,252
13,329
11/96 15,576
16,192
5/97 17,383
18,811
11/97 19,213
21,029
5/98 22,208
TOTAL RETURN PERFORMANCE*
<TABLE>
<CAPTION>
Class A Class B Institutional
Periods ended 5/31/98 Shares Shares Shares
- --------------------------------------------------------------------------------------
<S><C>
6 Months 15.59% 15.18% 15.75%
......................................................................................
12 Months 27.76% 26.81% 28.14%
......................................................................................
Since Inception 2/13/95 2/13/95 2/12/96
------- ------- -------
(Cumulative) 122.08% 116.98% 74.06%
......................................................................................
</TABLE>
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
were reflected, the quoted performance would be lower. Performance figures for
the classes differ because each class 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 6.
1
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Fellow Shareholders:
We are pleased to report on the progress of your Fund for the periods ended
May 31, 1998.
PERFORMANCE
The Fund's Class A Shares produced a total return of 15.6% and 27.8% for
the six- and twelve-month periods ended May 31, 1998, respectively. The Class A
Shares have had a cumulative return of 122.1% since the Fund's inception on
February 13, 1995. The Equity Partners Fund received a 5-star rating from
Morningstar for its three-year performance as of May 31, 1998. This is
Morningstar's highest rating, which is reserved for the top 10% of funds in each
investment category, based on risk and return.*
Over the past year, the Class A Shares net asset value grew by $4.58, which
includes income and capital gains distributions. The largest positive and
negative contributors to this growth are shown in the following table.
CONTRIBUTORS TO NET ASSET VALUE PERFORMANCE
<TABLE>
<CAPTION>
(For the 12 months ended 5/31/98)
- --------------------------------------------------------------------------------------
Five Best Contributors Gain Per Share Five Worst Contributors Loss Per Share
......................................................................................
<S><C>
The Learning Company $0.69 Sunbeam Corp. $(0.26)
......................................................................................
America Online $0.68 Callaway Golf $(0.12)
......................................................................................
Ford Motor $0.61 Philip Morris $(0.10)
......................................................................................
Mid Ocean $0.22 Millipore $(0.07)
......................................................................................
Champion Enterprises $0.21 Newmont Mining $(0.07)
......................................................................................
</TABLE>
The Learning Company, America Online and Ford Motor were particularly
significant contributors to the Fund's return over the past year. The Learning
Company, the leading educational software company, has been in the process of
greatly improving its once deteriorating fundamental market position and
financial condition over the past year. Such turnaround investments often prove
to be protracted and disappointing. The Learning Company has been a pleasant
exception, having more than doubled since our original investment just ten
months ago.
*The Fund received from Morningstar a 5-star rating for its three-year and a
5-star rating for its overall performance as of 5/31/98. This rating is based
upon 2495 domestic equity funds for the three-year period ended 5/31/98.
Morningstar's proprietary ratings reflect historical risk-adjusted performance
as of 5/31/98 and are subject to change every month. Morningstar's star rating
system of one (lowest) to five (highest) stars is based on risk and return
ratios for 3-, 5-, and 10-year average annual returns (if applicable) in excess
of 90-day T-bill returns with appropriate fee adjustments, and a risk factor
that reflects fund performance below 90-day T-bill returns and considers all
sales charges and fees.The top 10% of funds in a investment category receive
five stars, the next 22.5% receive four stars, and the middle 35% receive three
stars. Ratings are for the Class A shares only; other classes may vary. Past
performance is not an indicator of future results.
2
<PAGE>
- --------------------------------------------------------------------------------
America Online and Ford were highlighted in our report one year ago, in
which these two very different companies were used to illustrate the flexibility
of our investment philosophy. Ford, a mature, cyclical company, was purchased
because of the strong value characteristics of its stock, which particularly
understated the value of its financial subsidiaries. The catalyst for purchasing
it was management's expressed intention to realize that value for shareholders,
by selling or spinning off those businesses, which they have now accomplished.
America Online, a young, rapidly growing company was purchased for its long-term
growth prospects at a time when it was experiencing short-term problems. Though
very different companies, they had one thing in common--both were temporarily
out of favor with investors and were selling at a low enough price to offer good
long-term value.
In past shareholder reports, the negative contribution from the Fund's
worst performers have been modest, reflecting both a rising market and an
absence of serious fundamental mistakes. That happy circumstance is
unfortunately no longer true, as Sunbeam now qualifies as a full-blown
fundamental mistake. We purchased Sunbeam two years ago with the belief that its
new CEO, Al Dunlap, could fix and then sell the troubled company. As he worked
his initial cost cutting magic, the value of our investment more than doubled.
He then attempted to sell the company and was unable to find a buyer. Rather
than selling the stock at that point, as we should have, we allowed ourselves to
believe that he could successfully run and grow the company on a longer-term
basis. Operating problems followed, and we compounded our mistake by buying more
as the stock weakened. Bottom line, we became too enamored with Al Dunlap, as he
had also become with himself. The company's problems worsened, the stock fell
back below our original cost basis, and Al was fired. Our lessons from this
round trip ride are not to become overly enamored with successful CEOs, and not
to compound a fundamental mistake by buying more just because the stock price
has dropped.
INVESTMENT ENVIRONMENT
Until very recently, the stock market could be characterized by the title
of the movie that won Jack Nicholson his Academy Award, "As Good As It Gets".
Inflation is tame, unemployment is low, interest rates are low, personal income
is rising at a good pace, corporate profits are at a high level and the federal
budget is now in a surplus condition. Investors, aware of these favorable trends
and encouraged by their market success, continue to pour money into the equity
market.
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
No one really knows how long these conditions can continue. Beyond our
conviction that the stock market is not subject to reliable forecasts, the only
conclusion we have felt comfortable reaching is that expectations for future
returns should clearly be more moderate than those of recent experience.
Several months ago problems in certain Asian currencies, economies and
markets began to appear and created a fundamental concern that threatened to
impact U.S. companies and markets. Though certain companies and industries were
clearly impacted, the overall market continued to march higher with the
favorable performance of the broader economy. Recently, particular weakness in
the Yen and the Japanese economy has heightened concerns about the Asian
economies and their impact on U.S. companies. More companies are in fact showing
symptoms of the Asian Flu as it is being called, indicating weakness in their
businesses.
The current environment can thus be categorized as uncertain, and therefore
volatile. This volatility may continue until we have greater visibility on the
impact of the Asian troubles on the U.S. economy.
A silver lining to the Asian cloud has been the fact that the related
weakness in import prices and commodity prices has been more good news for
inflation and therefore interest rates. The yield on long-term government bonds
is now at the lowest level since the early 1970s.
PORTFOLIO STRATEGY
Our strategy, as always, is to invest for the long-term in undervalued
companies with strong financial characteristics and shareholder-oriented
managements. We focus on individual stock selection as opposed to sector
strategies or market timing. Our goal is to be 90-100% invested, as long as we
can find good values which meet our criteria.
Over the past six months we invested $55 million, $49 million of which was
net new money which flowed into the fund. Sales totaled only $8 million,
reflecting the fact that we are long-term investors with well below average
turnover. The cash percentage was 6.4% at the beginning of the six-month period
and 4.5% at the period's end.
The five largest holdings are shown in the following table. All five of
these businesses are performing well fundamentally. Each has been highlighted in
recent shareholder reports as successful examples of what we try to accomplish.
4
<PAGE>
- --------------------------------------------------------------------------------
FIVE LARGEST EQUITY HOLDINGS
<TABLE>
<CAPTION>
(As of 5/31/98)
- -------------------------------------------------------------------------------------------
Security Total Cost Market Value Percent of Net Assets
...........................................................................................
<S><C>
The Learning Company $ 8,455,062 $17,436,300 5.3%
...........................................................................................
America Online $ 2,303,420 $13,330,000 4.0%
...........................................................................................
Ford Motor $ 5,945,721 $12,968,750 3.9%
...........................................................................................
Blyth Industries $10,251,438 $12,428,437 3.8%
...........................................................................................
Conseco $ 5,535,320 $10,117,625 3.1%
.................................-----------........-----------...........----.............
Total $32,490,961 $66,281,112 20.1%
...........................................................................................
</TABLE>
CLOSING
As always, we would like to thank you for your ongoing interest and support
and particularly welcome new shareholders who have invested over the past six
months.
The market is certainly topical and interesting today to an increasingly
wide body of followers, many of whom are focused on "what is the market going to
do?" We encourage you to free yourself from this common preoccupation, and view
your Fund holdings as a long-term investment. Wealth has generally been created
by long-term ownership of good companies, not by trading or market timing. As a
reminder, we have significant personal investments in the Fund and are therefore
long-term partners with you.
Sincerely,
/s/ Lee S. Owen
_______________
Lee S. Owen
Portfolio Manager
5
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, line graphs comparing the Fund's
performance to that of an appropriate market index. These graphs must measure
the growth of a $10,000 hypothetical investment from the Fund's inception
through the most recent fiscal year-end. They reflect the impact of the Fund's
total expenses and the currently effective 4.50% maximum sales charge for the
Fund's Class A Shares and a 3.00% contingent deferred sales charge for the
Fund's Class B Shares, which is the applicable sales charge for the represented
time period.
While the following charts 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 return, 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 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. 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. Past performance is not an
indicator of future results.
6
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT IN CLASS A SHARES*
FEBRUARY 13, 1995-MAY 31, 1998
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
Flag Investors S&P 500 91-Day
Equity Partners Fund Composite U.S. Treasury Bill
$21,209 $23,941 $11,899
2/95 9,550 10,000 10,000
5/95 10,285 11,022 10,150
10,907 11,682 10,302
11/95 11,453 12,663 10,442
12,182 13,470 10,589
5/96 12,656 14,156 10,721
12,729 13,867 10,863
11/96 14,875 16,191 11,007
15,463 16,994 11,150
5/97 16,601 18,320 11,308
17,965 19,507 11,449
11/97 18,348 20,808 11,596
20,083 22,943 11,742
5/98 21,209 23,941 11,899
AVERAGE ANNUAL TOTAL RETURN*
Periods Ended 5/31/98 1 Year 5 Years Since Inception**
- ----------------------------------------------------------------------------
Class A Shares 22.01% N/A 25.65%
............................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results. The
indices listed above are unmanaged and are widely recognized as indicators
of the performance in their respective sectors. 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.
**February 13, 1995.
7
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION (CONCLUDED)
CHANGE IN VALUE OF A $10,000 INVESTMENT IN CLASS B SHARES*
FEBRUARY 13, 1995-MAY 31, 1998
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
Flag Investors S&P 500 91-Day
Equity Partners Fund Composite U.S. Treasury Bill
$21,398 $23,941 $11,899
2/95 10,000 10,000 10,000
5/95 10,750 11,022 10,150
11,391 11,681 10,302
11/95 11,943 12,663 10,442
12,670 13,470 10,589
5/96 13,134 14,156 10,721
13,194 13,868 10,863
11/96 15,383 16,191 11,007
15,963 16,994 11,150
5/97 17,111 18,320 11,308
18,482 19,507 11,449
11/97 18,838 20,808 11,596
20,577 22,943 11,742
5/98 21,398 23,941 11,889
AVERAGE ANNUAL TOTAL RETURN*
Periods Ended 5/31/98 1 Year 5 Years Since Inception**
- ------------------------------------------------------------------------
Class B Shares 22.81% N/A 25.99%
........................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
**February 13, 1995.
8
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT IN INSTITUTIONAL SHARES*
FEBRUARY 12, 1996-MAY 31, 1998
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
Flag Investors S&P 500 91-Day
Equity Partners Fund Composite U.S. Treasury Bill
$17,406 $17,774 $11,238
2/96 10,000 10,000 10,000
5/96 10,323 10,503 10,125
8/96 10,396 10,297 10,259
11/96 12,156 12,023 10,395
2/97 12,646 12,619 10,530
5/97 13,584 13,600 10,679
8/97 14,716 14,842 10,813
11/97 15,037 15,448 10,951
2/98 16,467 17,033 11,089
5/98 17,406 17,774 11,238
AVERAGE ANNUAL TOTAL RETURN*
Periods Ended 5/31/98 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------
Institutional Shares 28.14% N/A 27.38%
..........................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
**February 12, 1996.
9
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS MAY 31, 1998
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK: 95.5%
BANKING: 3.5%
30,600 Citicorp $ 4,563,225
19,500 Wells Fargo & Company 7,049,250
-----------
11,612,475
-----------
BASIC INDUSTRY: 8.4%
399,000 Airgas, Inc.* 6,059,812
216,000 Georgia Gulf Corp. 5,413,500
144,100 Hercules, Inc. 6,349,406
138,500 Newmont Mining Corp. 3,453,844
146,000 Olin Corp. 6,314,500
-----------
27,591,062
-----------
BUSINESS SERVICES: 1.8%
180,000 First Data Corp. 5,985,000
-----------
CAPITAL GOODS: 2.1%
29,900 Briggs & Stratton Corporation 1,356,713
48,400 Caterpillar, Inc. 2,658,975
32,500 Eaton Corporation 2,918,906
-----------
6,934,594
-----------
CONSUMER DURABLES/NON-DURABLES: 14.6%
405,000 Blyth Industries, Inc.* 12,428,437
240,500 Callaway Golf 4,960,313
250,000 Ford Motor Company 12,968,750
207,500 Philip Morris Companies, Inc. 7,755,312
115,000 Richfood Holdings, Inc. 2,810,313
310,000 Sunbeam Corp. 7,110,625
-----------
48,033,750
-----------
CONSUMER SERVICES: 12.0%
160,000 America Online, Inc.* 13,330,000
150,000 Cendant Corp.* 3,253,125
50,000 Gannett Company, Inc. 3,296,875
611,800 The Learning Company, Inc.* 17,436,300
36,000 Times Mirror Company - Class A 2,304,000
-----------
39,620,300
-----------
10
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (continued)
DEFENSE/AEROSPACE: 3.0%
67,080 The Boeing Company $ 3,194,685
58,700 Lockheed Martin Corp. 6,589,075
-----------
9,783,760
-----------
ENERGY: 2.1%
100,000 CalEnergy Company, Inc.* 3,025,000
100,500 Noble Affiliates, Inc. 3,925,781
-----------
6,950,781
-----------
FINANCIAL SERVICES: 10.2%
60,200 American Express Company 6,178,025
65,521 Associates First Capital Corp., Class A 4,901,790
108,000 Freddie Mac 4,914,000
175,000 Green Tree Financial Corporation 7,032,812
36,000 Transamerica Corp. 4,140,000
105,000 Travelers Group, Inc. 6,405,000
-----------
33,571,627
-----------
HEALTH CARE: 5.0%
127,000 Amgen, Inc.* 7,683,500
100,000 Columbia/HCA Healthcare Corp. 3,268,750
82,000 Johnson & Johnson 5,663,125
-----------
16,615,375
-----------
HOTELS/GAMING: 1.6%
130,000 Harrah's Entertainment, Inc.* 3,250,000
61,600 Hilton Hotels Corporation 1,936,550
-----------
5,186,550
-----------
HOUSING: 5.1%
327,500 Champion Enterprises, Inc.* 8,822,031
148,300 USG Corporation* 7,878,438
-----------
16,700,469
-----------
INSURANCE: 5.2%
217,000 Conseco Inc. 10,117,625
93,400 Mid Ocean Limited 7,110,075
-----------
17,227,700
-----------
11
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED) MAY 31, 1998
Shares/
Par (000) Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (concluded)
MULTI-INDUSTRY: 5.8%
164,000 American Standard Co., Inc.* $ 7,913,000
57,000 Loews Corporation 5,172,750
60,000 Monsanto Co. 3,322,500
24,200 Tenneco, Inc. 1,007,325
17,800 United Technologies Corp. 1,673,200
------------
19,088,775
------------
RETAIL: 2.5%
425,000 Kmart Corporation* 8,234,375
------------
TECHNOLOGY: 8.6%
120,100 Cognex Corp.* 2,281,900
86,000 International Business Machines Corporation 10,094,250
97,500 Millipore Corporation 3,254,063
490,300 Novell, Inc.* 5,148,150
34,000 Varian Associates, Inc. 1,634,125
59,500 Xerox Corporation 6,113,625
------------
28,526,113
------------
TELECOMMUNICATIONS: 2.3%
140,000 MCI Communications Corporation 7,485,625
------------
TRANSPORTATION: 1.7%
95,800 Canadian National Railway Company 5,664,175
------------
TOTAL COMMON STOCK
(Cost $221,215,964) 314,812,506
------------
REPURCHASE AGREEMENT: 4.8%
$15,908 Goldman Sachs & Co., 5.40%
Dated 05/29/98, to be repurchased on
06/01/98, collateralized by U.S. Treasury
Bonds with a market value of $16,226,929.
(Cost $15,908,000) 15,908,000
------------
12
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES: 100.3%
(Cost $237,123,964)** $330,720,506
LIABILITIES IN EXCESS OF OTHER ASSETS, NET: (0.3%) (933,806)
------------
NET ASSETS: 100.0% $329,786,700
============
NET ASSET VALUE AND REDEMPTION PRICE PER:
CLASS A SHARE
($198,387,203 / 9,317,787 shares outstanding) $21.29
======
CLASS B SHARE
($37,046,242 / 1,755,771 shares outstanding) $21.10***
======
INSTITUTIONAL SHARE
($94,353,255 / 4,426,600 shares outstanding) $21.32
======
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($21.29 / 0.955) $22.29
======
CLASS B SHARE $21.10
======
INSTITUTIONAL SHARE $21.32
======
- -------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
*** Redemption value is $20.26 following a 4% maximum contingent deferred sales
charge.
See accompanying Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
May 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Dividends $ 2,569,469
Interest 1,272,635
-----------
Total income 3,842,104
-----------
Expenses:
Investment advisory fee 2,090,159
Distribution fee 644,257
Registration fees 51,294
Accounting fee 77,864
Transfer agent fee 74,050
Custodian fee 23,692
Directors' fees 10,811
Miscellaneous 156,072
-----------
Total expenses 3,128,199
-----------
Net investment income 713,905
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 5,232,557
Change in unrealized appreciation/depreciation of investments 54,454,890
-----------
Net gain on investments 59,687,447
-----------
Net increase in net assets resulting from operations $60,401,352
===========
See accompanying Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended May 31,
- --------------------------------------------------------------------------------
1998 1997
Increase in Net Assets:
Operations:
Net investment income $ 713,905 $ 635,029
Net realized gain
from security transactions 5,232,557 2,887,321
Change in unrealized appreciation/
depreciation of investments 54,454,890 27,900,712
------------ ------------
Net increase in net assets resulting
from operations 60,401,352 31,423,062
------------ ------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares (752,668) (719,423)
Class B Shares (42,361) (23,259)
Institutional Shares (517,867) (149,154)
Net realized long-term and mid-term gains:
Class A Shares (1,489,329) (392,581)
Class B Shares (268,284) (40,703)
Institutional Shares (755,157) (85,452)
------------ ------------
Total distributions (3,825,666) (1,410,572)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares 123,536,819 73,706,538
Value of shares issued in reinvestment
of dividends 3,468,071 1,249,106
Cost of shares repurchased (24,608,945) (7,920,314)
------------ ------------
Increase in net assets derived from
capital share transactions 102,395,945 67,035,330
------------ ------------
Total increase in net assets 158,971,631 97,047,820
Net Assets:
Beginning of period 170,815,069 73,767,249
------------ ------------
End of period (including undistributed net
investment income of $55,727 and $257,965,
respectively) $329,786,700 $170,815,069
============ ============
See accompanying Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
Feb. 13, 1995(1)
through
For the Year Ended May 31, May 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 16.93 $ 13.09 $ 10.77 $ 10.00
-------- -------- ------- -------
Income from Investment Operations:
Net investment income 0.05 0.08 0.17 0.12
Net realized and unrealized gain
on investments 4.60 3.96 2.29 0.65
-------- -------- ------- -------
Total from Investment Operations 4.65 4.04 2.46 0.77
Less Distributions:
Net investment income and
short-term gains (0.10) (0.13) (0.14) --
Net realized mid-term and
long-term gains (0.19) (0.07) -- --
-------- -------- ------- -------
Total distributions (0.29) (0.20) (0.14) --
-------- -------- ------- -------
Net asset value at end of period $ 21.29 $ 16.93 $ 13.09 $ 10.77
======== ======== ======= =======
Total Return 27.76% 31.17% 23.05% 7.70%
Ratios to Average Daily Net Assets:
Expenses 1.24% 1.35%(2) 1.35%(2) 1.35%(2,4)
Net investment income 0.29% 0.61%(3) 1.52%(3) 3.74%(3,4)
Supplemental Data:
Net assets at end of period (000) $198,387 $113,030 $64,230 $38,612
Portfolio turnover rate 7.94% 17.60% 0.73% --
</TABLE>
- ---------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.48%, 1.77% and 3.76% (annualized)
for the years ended May 31, 1997, 1996 and the period ended May 31, 1995,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.48%, 1.10% and 1.33%
(annualized) for the years ended May 31, 1997, 1996 and the period ended May
31, 1995, respectively.
(4) Annualized.
See accompanying Notes to Financial Statements.
16
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
Feb. 13, 1995(1)
through
For the Year Ended May 31, May 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 16.84 $ 13.03 $10.75 $10.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income
(Expenses in excess of income) (0.06) (0.04) 0.07 0.07
Net realized and unrealized gain
on investments 4.54 3.96 2.31 0.68
------- ------- ------ ------
Total from Investment Operations 4.48 3.92 2.38 0.75
Less Distributions:
Net investment income
and short-term gains (0.03) (0.04) (0.10) --
Net realized mid-term and
long-term gains (0.19) (0.07) -- --
------- ------- ------ ------
Total distributions (0.22) (0.11) (0.10) --
------- ------- ------ ------
Net asset value at end of period $ 21.10 $ 16.84 $13.03 $10.75
======= ======= ====== ======
Total Return 26.81% 30.28% 22.17% 7.50%
Ratios to Average Daily Net Assets:
Expenses 1.98% 2.10%(2) 2.10%(2) 2.10%(2,4)
Net investment income
(Expenses in excess of income) (0.47)% (0.16)%(3) 0.71%(3) 1.97%(3,4)
Supplemental Data:
Net assets at end of period (000) $37,046 $15,670 $5,302 $2,159
Portfolio turnover rate 7.94% 17.60% 0.73% --
</TABLE>
- ---------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.23%, 2.52% and 4.22% (annualized)
for the years ended May 31, 1997, 1996 and the period ended May 31, 1995,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been (0.28)%, 0.29%, and
(0.15%) (annualized) for the years ended May 31, 1997, 1996, and the period
ended May 31, 1995, respectively.
(4) Annualized.
See accompanying Notes to Financial Statements.
17
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
Feb. 12, 1996(1)
For the Year through
Ended May 31, May 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 16.94 $ 13.10 $12.72
------- ------- ------
Income from Investment Operations:
Net investment income 0.10 0.14 0.04
Net realized and unrealized gain
on investments 4.59 3.95 0.34
------- ------- ------
Total from Investment Operations 4.69 4.09 0.38
Less Distributions:
Net investment income and short-term gains (0.14) (0.18) --
Net realized mid-term and long-term gains (0.19) (0.07) --
------- ------- ------
Total distributions (0.33) (0.25) --
------- ------- ------
Net asset value at end of period $ 21.32 $ 16.94 $13.10
======= ======= ======
Total Return 28.14% 31.58% 3.23%
Ratios to Average Daily Net Assets:
Expenses 0.98% 1.10%(2) 1.10%(2,4)
Net investment income 0.54% 0.81%(3) 1.20%(3,4)
Supplemental Data:
Net assets at end of period (000) $94,354 $42,115 $4,235
Portfolio turnover rate 7.94% 17.60% 0.73%
</TABLE>
- ---------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.23% and 1.55% (annualized) for
the year ended May 31, 1997, and the period ended May 31, 1996,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.70%, and 0.75%
(annualized) for the year ended May 31, 1997 and the period ended May 31,
1996, respectively.
(4) Annualized.
See accompanying Notes to Financial Statements.
18
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- Significant Accounting Policies
Flag Investors Equity Partners Fund, Inc. (the "Fund"), which was organized
as a Maryland Corporation on November 30, 1994, commenced operations February
13, 1995. The Fund is registered under the Investment Company Act of 1940, as a
diversified, open-end Investment Management Company. Its objective is to seek
long-term growth of capital and, secondarily, current income primarily through a
policy of diversified investments in equity securities, including common stocks
and convertible securities.
The Fund consists of three share classes: Class A Shares and Class B
Shares, which both commenced February 13, 1995, and Institutional Shares, which
commenced February 12, 1996.
The Class A and Class B Shares are subject to different sales charges. The
Class A Shares have a front-end sales charge and the Class B Shares have a
contingent deferred sales charge. In addition each class has a different
distribution fee. The Institutional Shares do not have a front-end sales charge,
a contingent deferred sales charge or a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different than the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at its last bid price in
the over-the-counter market. When a market quotation is not readily
available, the Investment Advisor, under the direction of the Board of
Directors determines a fair value using policy and procedures that the
Board of Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost.
19
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- concluded
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. FEDERAL INCOME TAXES--The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND
OTHER--The Fund uses the trade date to account for security
transactions and the specific identification method for financial
reporting and income tax purposes to determine the cost of investments
sold or redeemed. Interest income is recorded on an accrual basis and
includes the pro rata scientific method for amortization of
premiums and accretion of discounts when appropriate. Expenses
are recorded as incurred. Income and common expenses are allocated to
each class based on its respective average net assets. Class
specific expenses are charged directly to each class. Dividend
income and distributions to shareholders are recorded on the
ex-dividend date. The Fund has deferred the costs incurred by its
organization and the initial public offering of shares. These costs
are being amortized on the straight-line method over a five-year
period, which began when the Fund commenced investment activities.
20
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee. This fee is based on the Fund's
average daily net assets and is calculated daily and paid monthly at the
following annual rates: 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 the amount over $200
million. At May 31, 1998, the amount owed under the advisory agreement amounted
to $226,672.
As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee. This fee is based on the Fund's average daily net assets and is
calculated daily and paid monthly at the following annual rates: 0.75% of the
first $50 million, 0.60% of the next $150 million and 0.50% of the amount over
$200 million.
ICC has agreed to reduce its aggregate fees so that ordinary Fund expenses
for any fiscal year do not exceed 1.35% of the Class A Shares' average daily net
assets, 2.10% of the Class B Shares' average daily net assets and 1.10% of the
Institutional Shares' average daily net assets. No fees were reduced for the
year ended May 31, 1998.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997 PNC Bank served as the Fund's custodian.
From September 22, 1997 to May 31, 1998, the Fund paid $11,578 in custody
expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors") an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the Class
A Shares' average daily net assets and 1.00% (including a 0.25% shareholder
servicing fee) of the Class B Shares' average daily net assets. For the year
ended May 31, 1998 distribution fees aggregated $378,730 and $265,527 for
distri-
21
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- concluded
bution services for the Class A shares and Class B shares respectively. The Fund
did not pay BT Alex. Brown any commissions for the year ended May 31, 1998.
Prior to September 1, 1997 Alex. Brown & Sons, Inc. served as the Fund's
distributor for the same rate of compensation and on substantially the same
terms as ICC Distributors and earned or were paid $77,151 for Class A Shares and
$48,223 for Class B Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
May 31, 1998 was $5,802, and accrued liability was $7,276.
NOTE 3 -- 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 For the
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------ ------------
Shares sold 3,375,853 2,175,983
Shares issued to shareholders on
reinvestment of dividends 117,061 71,468
Shares redeemed (852,542) (477,782)
------------ -----------
Net increase in shares outstanding 2,640,372 1,769,669
============ ===========
Proceeds from sale of shares $ 66,318,519 $32,665,187
Value of reinvested dividends 2,136,952 1,040,589
Cost of shares redeemed (16,794,448) (7,100,783)
------------ -----------
$ 51,661,023 $26,604,993
============ ===========
22
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTE 3 -- concluded
Class B Shares
-----------------------------
For the For the
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------ ------------
Shares sold 860,902 545,380
Shares issued to shareholders on
reinvestment of dividends 16,617 3,986
Shares redeemed (52,451) (25,717)
----------- ----------
Net increase in shares outstanding 825,068 523,649
=========== ==========
Proceeds from sale of shares $16,336,267 $8,263,270
Value of reinvested dividends 302,586 60,224
Cost of shares redeemed (1,036,796) (375,286)
----------- ----------
$15,602,057 $7,948,208
=========== ==========
Institutional Shares
-----------------------------
For the For the
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------ ------------
Shares sold 2,238,106 2,182,989
Shares issued to shareholders on
reinvestment of dividends 56,263 9,854
Shares redeemed (353,873) (30,115)
----------- -----------
Net increase in shares outstanding 1,940,496 2,162,728
=========== ===========
Proceeds from sale of shares $40,882,033 $32,778,081
Value of reinvested dividends 1,028,533 148,292
Cost of shares redeemed (6,777,701) (444,244)
----------- -----------
$35,132,865 $32,482,129
=========== ===========
At May 31, 1998, the amounts payable for fund shares redeemed amounted to
$1,189,301, of which $1,002,179 were attributable to the Class A Shares and
$187,122 were attributable to the Class B Shares.
23
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 4 -- Investment Transactions
At May 31, 1998, the amount owed for securities purchased were $635,714.
Excluding short-term obligations, purchases of investment securities aggregated
$127,606,561 and sales of investment securities aggregated $18,039,365 for the
year ended May 31, 1998.
On May 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $100,101,326 and
aggregate gross unrealized depreciation of all securities in which there is an
excess of tax cost over value was $6,504,784.
NOTE 5 -- Net Assets
On May 31, 1998, net assets consisted of:
Paid-in capital:
Class A Shares $131,887,170
Class B Shares 28,044,712
Institutional Shares 71,757,339
Accumulated net realized gain from security transactions 4,445,210
Unrealized appreciation of investments 93,596,542
Undistributed net investment income 55,727
------------
$329,786,700
============
NOTE 6 -- Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust Corporation on
September 1, 1997. Due to the change in control of Alex. Brown Incorporated, the
Flag Investors Equity Partners Fund held a special meeting for its shareholders
on August 14, 1997. During the meeting, shareholders approved a new Investment
Advisory between the Fund and ICC and a new SubAdvisory Agreement among the
Fund, ICC and ABIM. The new agreements are substantially the same as the former
agreements.
NOTE 7 -- Federal Tax Information (unaudited)
100% of the net investment income dividends paid by the Fund during the tax
year ended May 31, 1998 qualified for the Dividends Received Deduction. The Fund
paid a long-term capital gain dividend of $0.19 during the tax year ended May
31, 1998. Eighty percent of this dividend was classified as 28% capital gain and
twenty percent was classified as 20% capital gain.
24
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
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, 1998 and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Equity Partners Fund, Inc. as of May 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the respective periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
June 19, 1998
25
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
TRUMAN T. SEMANS
CHAIRMAN
JAMES J. CUNNANE CARL W. VOGT, ESQ.
DIRECTOR DIRECTOR
RICHARD T. HALE HARRY WOOLF
DIRECTOR PRESIDENT
JOHN F. KROEGER AMY M. OLMERT
DIRECTOR SECRETARY
LOUIS E. LEVY JOSEPH A. FINELLI
DIRECTOR TREASURER
EUGENE J. MCDONALD SCOTT J. LIOTTA
DIRECTOR ASSISTANT SECRETARY
REBECCA W. RIMMEL
DIRECTOR
INVESTMENT OBJECTIVE
A mutual fund designed to seek long-term growth of capital and, secondarily,
current income primarily through a policy of diversified investments in equity
securities, including common stocks and convertible securities.
26
<PAGE>
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<PAGE>
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<PAGE>
- ------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
- ------------------------------------------------------------------------------
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
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 Communications Fund
BALANCED
Flag Investors Value Builder Fund
INCOME
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
TAX-FREE INCOME
Flag Investors Managed Municipal Fund Shares
CURRENT INCOME
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
