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STATEMENT OF ADDITIONAL INFORMATION
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FLAG INVESTORS EQUITY PARTNERS FUND, INC.
One South Street
Baltimore, Maryland 21202
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS WHICH MAY BE
OBTAINED FROM YOUR SECURITIES DEALER OR SHAREHOLDER SERVICING
AGENT OR BY WRITING OR CALLING THE FUND, ONE SOUTH STREET,
BALTIMORE, MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated
October 1, 1999 as supplemented through November 19,1999
relating to Prospectuses Dated
October 1, 1999 as supplemented through October 11, 1999
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TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY................................................1
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS.........................1
VALUATION OF SHARES AND REDEMPTION.............................................6
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS...........................7
MANAGEMENT OF THE FUND.........................................................9
INVESTMENT ADVISORY AND OTHER SERVICES........................................14
DISTRIBUTION OF FUND SHARES...................................................15
BROKERAGE.....................................................................19
CAPITAL STOCK.................................................................21
SEMI-ANNUAL REPORTS...........................................................21
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.............................22
INDEPENDENT ACCOUNTANTS.......................................................22
LEGAL MATTERS.................................................................22
PERFORMANCE INFORMATION.......................................................23
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................24
FINANCIAL STATEMENTS..........................................................25
APPENDIX A...................................................................A-1
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GENERAL INFORMATION AND HISTORY
Flag Investors Equity Partners Fund, Inc. (the "Fund") is an open-end
diversified 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 four classes of shares: Flag Investors Equity Partners Fund
Class A Shares (the "Class A Shares"), Flag Investors Equity Partners Fund Class
B Shares (the "Class B Shares"), Flag Investors Equity Partners Fund Class C
Shares ("Class C Shares") and Flag Investors Equity Partners Fund Institutional
Shares (the "Institutional Shares") (collectively, the "Shares"). As used
herein, the "Fund" refers to Flag Investors Equity Partners Fund, Inc. and
specific references to any class of the Fund's Shares will be made using the
name of such class.
Important information concerning the Fund is included in the Fund's
Prospectuses, which may be obtained without charge from the Fund's distributor
(the "Distributor") or from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement respecting the Fund and its Shares filed
with the SEC. Copies of the Registration Statement as filed, including such
omitted items, may be obtained from the SEC by paying the charges prescribed
under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
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. The Fund has
offered the Institutional Shares since February 12, 1996 and the Class C Shares
since October 28, 1998.
Under a license agreement dated January 31, 1995 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to Deutsche Banc Alex. Brown
Incorporated), Alex. Brown & Sons 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.
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 common
stocks. The Fund may make other equity investments (including preferred stocks,
convertible securities, warrants and other securities convertible into or
exchangeable for common stocks). 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. There can be no assurance that the Fund's
investment objective will be achieved.
In addition, 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 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
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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.
Additional information about certain of the Fund's investment policies
and practices are described below.
Equity Securities
Equity securities include common stocks, preferred stocks, warrants,
and other securities that may be converted into or exchanged for common stocks.
Common stocks are equity securities that represent an ownership interest in a
corporation, entitling the shareholder to voting rights and receipt of dividends
based on proportionate ownership. 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. 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.
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 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 S&P or Ba or lower by 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. 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.
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 Fund's investment
advisor (the "Advisor") and the Fund's sub-advisor (the "Sub-Advisor")
(collectively, 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
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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
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 the Advisors. A repurchase agreement
is a short-term investment in which the Fund acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, usually not more than seven days from the date of purchase, thereby
determining the yield during the Fund's holding period. The value of underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The 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.
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Foreign Investment Risk Considerations
The Advisors may invest the Fund's assets in American Depositary
Receipts and other securities, which are traded in the United States and
represent interests in foreign issuers. The Advisors may also invest up to 10%
of the Fund's assets in securities of foreign companies, and in debt and equity
securities issued by foreign corporate and government issuers and which are not
traded in the United States 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. Such investments are usually
not denominated in dollars so changes in the relative values of the dollar and
other currencies will affect the value of foreign investments. 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 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
periods for foreign securities, which are often longer than those 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 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 that 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.
When the Fund invests directly in foreign securities, 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.
Temporary Investments
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.
Rule 144A Securities
The Fund may purchase Rule 144A Securities. Rule 144A Securities are
restricted securities in that they have not been registered under the Securities
Act, but they may be traded between certain
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qualified institutional investors, including investment companies. The presence
or absence of a secondary market may affect the value of the Rule 144A
Securities. The Fund's Board of Directors has established guidelines and
procedures to be utilized to determine the liquidity of such securities.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as 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. 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;
3. Borrow money except as a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 10% of the value of the total
assets of the Fund at the time of such borrowing;
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts provided that
the Fund may invest in financial futures and options on such futures;
6. 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;
7. Issue senior securities; or
8. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies and may
loan portfolio securities and enter into repurchase agreements.
The following investment restriction may be changed by a vote of the
majority of the Board of Directors. The Fund will not:
1. Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal or state securities laws).
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VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) each
day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays (or the days on which they are observed): New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem shares by check or by
wire transfer of funds, as described in the Prospectuses. 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.
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FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's Prospectuses. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here and in the Fund's Prospectuses is not intended as a
substitute for careful tax planning. Shareholders are urged to consult with
their tax advisors with specific reference to their own tax situation, including
their state and local tax liabilities.
The following general discussion of certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated as a "regulated
investment company" ("RIC") as defined under Subchapter M of the Code. By
following such a policy, the Fund expects to eliminate or reduce to a nominal
amount the federal taxes to which it may be subject.
In order to qualify as a RIC, the Fund must distribute at least 90% of
its net investment income (that generally includes dividends, taxable interest,
and the excess of net short-term capital gains over net long-term capital losses
less operating expenses) and at least 90% of its net tax exempt interest income,
for each tax year, if any, to its shareholders and also must meet several
additional requirements. Included among these requirements are the following:
(i) at least 90% of the Fund's gross income each taxable year must be derived
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock or securities, or certain other
income; (ii) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
such other securities limited, in respect to any one issuer, to an amount that
does not exceed 5% of the value of the Fund's assets and that does not represent
more than 10% of the outstanding voting securities of such issuer; and (iii) at
the close of each quarter of the Fund's taxable year, not more than 25% of the
value of its assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
If the Fund fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
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Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders who are individuals at a maximum rate of 20%, regardless
of the length of time the shareholder has held the shares. If any such gains are
retained, the Fund will pay federal income tax thereon.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
a Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, distributions from the Fund generally will qualify for
the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the
year of payment. However, dividends declared payable to shareholders of record
in October, November, or December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Fund in the year in which the dividends were
declared.
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.
Sale or Exchange of Fund Shares
Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution
with respect to the Share (or any undistributed net capital gains of a Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of a Fund that have been included in determining
such shareholder's long-term capital gains). In addition, any loss realized on a
sale or other disposition of Shares will be disallowed to the extent an investor
repurchases (or enters into a contract or option to repurchase) Shares within a
period of 61 days (beginning 30 days before and ending 30 days after the
disposition of the Shares). This loss disallowance rule will apply to Shares
received through the reinvestment of dividends during the 61-day period.
In certain cases, the Fund will be required to withhold, and remit to
the United States Treasury, 31% of any distributions paid to a shareholder who
(1) has failed to provide a correct taxpayer identification number, (2) is
subject to backup withholding by the Internal Revenue Service, or (3) has failed
to certify to the Fund that such shareholder is not subject to backup
withholding.
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Federal Excise Tax
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon.
State and Local Taxes
The Fund is not liable for any income or franchise tax in Massachusetts
if it qualifies as a RIC for federal income tax purposes. Depending upon state
and local law, distributions by the Fund to shareholders and the ownership of
shares may be subject to state and local taxes. Shareholders are urged to
consult their tax advisors as to the consequences of these and other state and
local tax rules affecting an investment in the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent.
The Directors and executive officers of the Fund, their respective dates
of birth and their principal occupations during the last five years are set
forth below. Unless otherwise indicated, the address of each Director and
executive officer is One South Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust
Company (formerly, Alex. Brown Capital Advisory & Trust Company);
Director, Investment Company Capital Corp. (registered investment
advisor) and Virginia Hot Springs Inc. (property management). Formerly,
Managing Director and Vice Chairman, Alex. Brown Incorporated (now BT
Alex. Brown Incorporated) and Director, ISI Family of Funds (registered
investment companies).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company (agribusiness operations), Hollinger International,
Inc. (publishing), Homestake Mining (mining and exploration), HCL
Technologies (information technology) and Anchor Technologies (gaming
software and equipment); Director, Mitchell Hutchins family of funds
and Deutsche Funds, Inc., and Trustee, Deutsche Portfolios (registered
investment companies); and Member, Textron Corporation International
Advisory Council. Formerly, partner, McKinsey & Company (consulting),
1991-1994; U.S. Chief Negotiator in Strategic Arms Reduction Talks
(START) with former Soviet Union and U.S. Ambassador to the Federal
Republic of Germany, 1985-1991.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management Americas; Managing
Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor).
Formerly, Director, ISI Family of Funds (registered investment
companies). Chartered Financial Analyst.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI
Family of Funds (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments), President and Chief Executive
Officer, The National Association of Securities Dealers, Inc. and The
NASDAQ Stock Market, Inc., 1987-1997; Chief Operating Officer of Alex.
Brown & Sons Incorporated (now BT Alex. Brown Incorporated), 1985-1987;
General Partner, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated), 1976-1985.
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LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and ISI Family of Funds (registered
investment companies). Formerly, Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants,
Trustee, Merrill Lynch Funds for Institutions, 1991-1993; Adjunct
Professor, Columbia University-Graduate School of Business, 1991-1992;
and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director AMBAC
Treasurers Trust (registered investment company), DP Mann Holdings
(insurance) and ISI Family of Funds (registered investment companies).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts (charitable foundation);
Director and Executive Vice President, The Glenmede Trust Company
(investment trust and wealth management). Formerly, Executive Director,
The Pew Charitable Trusts and Director, ISI Family of Funds (registered
investment companies).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, The Wadsworth Group (registered investment advisor), First
Fund Distributors, Inc. (registered broker-dealer) and Guinness Flight
Investments Funds, Inc.; Director, The Germany Fund, Inc., The Central
European Equity Fund, Inc., Deutsche Funds, Inc., Trustee, Deutsche
Portfolios, and Vice President, Professionally Managed Portfolios and
Advisors Series Trust (registered investment companies).
CARL W. VOGT, Esq., President (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Interim President of Williams College; Director, Yellow Corporation
(trucking), American Science & Engineering (x-ray detection equipment),
and ISI Family of Funds (registered investment companies). Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); and Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration).
Formerly, Director of each fund in the Fund Complex.
10
<PAGE>
CHARLES A. RIZZO, Treasurer (8/5/57)
Vice President and Department Head, Deutsche Asset Management Americas,
since 1999; and Vice President and Department Head, BT Alex. Brown
Incorporated, 1998-1999. Formerly, Senior Manager,
PricewaterhouseCoopers LLP, 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, Deutsche Asset Management Americas, since 1999; and
Vice President, BT Alex. Brown Incorporated, 1997-1999. Formerly,
Senior Manager, PricewaterhouseCoopers LLP, 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas, since 1999. Principal, BT
Alex. Brown Incorporated, 1998-1999. Formerly, Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
- ---------------------
* Messrs. Semans and Hale are directors who are "interested persons," as defined
in the 1940 Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently eight funds in the Flag Investors Funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of three other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of four
funds in the Fund Complex. Ms. Rimel serves as Director of seven funds in the
Fund Complex. Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth serve as
Directors of each of the funds in the Fund Complex. Mr. Vogt serves as President
of seven of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms.
Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, for
each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Deutsche Banc 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.
With the exception of the Fund's President, officers of the Fund
receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of Deutsche Asset Management
Americas or its affiliates may be considered to have received remuneration
indirectly. As compensation for his or her services, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (an
"Independent Director") and Mr. Vogt, the Fund's President, receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his or her attendance at board and committee
meetings) from each fund in the Fund Complex for which he or she serves. In
addition, the Chairmen of the Fund Complex's Audit Committee and Executive
Committee receive an aggregate annual fee from the Fund Complex. Payment of such
fees and expenses is allocated among all such funds in direct proportion to
their relative net assets. For the fiscal year ended May 31, 1999, Independent
Directors' fees (including fees paid to the Fund's President) attributable to
the assets of the Fund totaled approximately $14,458.
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
May 31, 1999.
11
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable to Benefits Accrued as from the Fund
Directors for the Fiscal Year Part of Fund Expenses and Fund Complex
Ended May 31, 1999 Payable to Directors
in the Fiscal Year
Ended May 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans, Chairman(1) $ 0 $ 0 $ 0
Richard T. Hale, Director(1) $ 0 $ 0 $ 0
James J. Cunnane, Director(8) $1,589(2) (3) $39,000 for service on 13(4) Boards
in the Fund Complex
Joseph R. Hardiman, Director(5) $1,239 (3) $ 29,250 for service on 11(6) Boards
in the Fund Complex
John F. Kroeger, Director(7) $1,492 (3) $ 36,750 for service on 13(4) Boards
in the Fund Complex
Louis E. Levy, Director $1,892 (3) $ 46,500 for service on 13(4) Boards
in the Fund Complex
Eugene J. McDonald, Director $1,790(2) (3) $ 44,000 for service on 13(4) Boards
in the Fund Complex
Rebecca W. Rimel, Director $1,614(2) (3) $ 39,000 for service on 12(4,6) Boards
in the Fund Complex
Carl W. Vogt, Esq., Director $1,624(2) (3) $ 39,000 for service on 13(4,6) Boards
Richard R. Burt, Director(9) N/A N/A N/A
Robert H. Wadsworth, Director(9) N/A N/A N/A
</TABLE>
- -----------------
(1) Denotes an individual who is an "interested person" as defined in the 1940
Act.
(2) All of the amounts payable to Ms. Rimel and Messrs. Cunnane, McDonald and
Vogt were deferred pursuant to the Fund Complex's Deferred Compensation
Plan.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors and
the Fund's President, as described below. The actuarially computed pension
expense for the Fund for the fiscal year ended May 31, 1999 was $1,675.
(4) One of these Funds ceased operations on July 28, 1998.
(5) Appointed to the Board on September 27, 1998.
(6) Ms. Rimel receives and Messrs. Vogt and Hardiman received (prior to their
appointment or election as Director to all of the funds in the Fund Complex)
proportionately higher compensation from each fund for which they serve as a
Director.
(7) Retired, effective September 27, 1998. Deceased, November 26, 1998.
(8) Retired, effective October 7, 1999.
(9) Elected to the Fund's Board effective October 7, 1999.
The Fund Complex has adopted a retirement plan (the "Retirement Plan")
for the Fund's President and Directors who are not employees of the Fund, the
Advisor or their respective affiliates (the "Participants"). After completion of
six years of service, each Participant will be entitled to receive an annual
retirement benefit equal to a percentage of the fees 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 or she 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 the he or she serves. The Retirement Plan is unfunded and unvested. The
Fund has two Participants, a Director who retired effective December 31, 1994
and another Director, who retired as a Director effective December 31, 1996, who
have qualified for the Retirement Plan by serving 13 and 14 years, respectively,
as Directors in the Fund Complex and each of whom will be paid a quarterly fee
of $4,875 by the Fund Complex for the rest of his life. Such fees are allocated
to each fund in the Fund Complex based upon the relative net assets of such fund
to the Fund Complex. Mr. McDonald has qualified for, but has not received,
benefits.
12
<PAGE>
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 are as follows: for Mr. Levy, 4 years; for Mr. McDonald,
6 years; for Ms. Rimel, 3 years; for Mr. Vogt, 3 years; and for Mssrs. Hardiman
Burt and Wadsworth, 0 years.
Estimated Annual Benefits Payable By Fund Complex Upon Retirement
Years of Service Chairmen of Audit and Other Participants
Executive Committees
6 years $ 4,900 $ 3,900
7 years $ 9,800 $ 7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
Any Director who receives fees from the Fund is permitted to defer 50%
to 100% of his or her annual compensation pursuant to a Deferred Compensation
Plan. Messrs. Levy, McDonald, and Vogt and Ms. Rimel have each executed a
Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors Funds, Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc. and BT International Equity Fund in which all or part of their
deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in generally equal
quarterly installments over a period of 10 years.
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
applies to the personal investing activities of all of the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisors and the Distributor. As described below, the Code of Ethics
imposes additional restrictions on the Advisors' 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 any officer, director, or employee of
the Fund or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. 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 special 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. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity (including trades of
both clients and covered persons) do not
13
<PAGE>
exceed ten percent of the daily average trading volume of the security for the
prior 15 days. Officers, directors and employees of the Advisors and the
Distributor may comply with codes instituted by those entities so long as they
contain similar requirements and restrictions.
INVESTMENT ADVISORY AND OTHER SERVICES
On March 30, 1999, the Board of Directors of the Fund, including a
majority of the Independent Directors, approved a new investment advisory
agreement between the Fund and Investment Company Capital Corp ("ICC" or the
"Advisor") and a new sub-advisory agreement among the Fund, ICC and Alex. Brown
Investment Management ("ABIM" or the "Sub-Advisor"). The Investment Advisory
Agreement and Sub-Advisory Agreement were approved by a vote of shareholders of
the Fund on October 7, 1999. ICC is an indirect subsidiary of Deutsche Bank AG
("Deutsche Bank"). Deutsche Bank is a major global banking institution that is
engaged in a wide range of financial services, including investment management,
mutual funds, retail and commercial banking, investment banking and insurance.
Deutsche Asset Management Americas is an operating unit of Deutsche Bank
consisting of ICC and other asset management affiliates of Deutsche Bank. ABIM
is a limited partnership affiliated with the Advisor. 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.
Deutsche Banc Alex. Brown owns a 1% general partnership interest in ABIM and BT
Alex. Brown Holdings, Inc. owns the remaining limited partnership interest. ICC
also serves as advisor and ABIM serves as sub-advisor to other funds in the Flag
Investors family of funds.
Under the Investment Advisory Agreement, ICC is responsible for
obtaining and evaluating 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, the Fund pays ICC an annual fee based
on the Fund's average daily net assets. This fee 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 in
excess of $200 million. As compensation for its services, ABIM is entitled to
receive a fee from ICC, payable from its advisory fee, based on the Fund's
average daily net assets. This fee is calculated daily and payable monthly, at
the annual rate of 0.75% of the first $50 million, 0.60% of the next $150
million and 0.50% of the amount in excess of $200 million.
14
<PAGE>
The Investment Advisory Agreement and the Sub-Advisory Agreement will
continue for an initial term of two years, and thereafter, from year to year if
such continuance is specifically approved at least annually by the Fund's Board
of Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such agreements, by votes cast in
person at a meeting called for such purpose, 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). The
Sub-Advisory Agreement has similar termination provisions.
Advisory fees paid by the Fund to ICC and sub-advisory fees paid by ICC
to ABIM for the last three fiscal years were as follows:
- --------------------------------------------------------------------------------
Year Ended
- --------------------------------------------------------------------------------
Fees Paid To: May 31, 1999 May 31, 1998 May 31, 1997
- --------------------------------------------------------------------------------
ICC $2,864,847 $2,090,159 $853,103(1)
- --------------------------------------------------------------------------------
ABIM $2,089,053 $1,535,410 $680,636(2)
- --------------------------------------------------------------------------------
- -------------
(1) Net of fee waivers of $141,648.
(2) Net of fee waivers of $49,796.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the exclusive distributor of the Fund's Shares pursuant to a Distribution
Agreement ("Distribution Agreement") effective August 31, 1997 which provides
for distribution of each class of shares.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained in
the Distribution Agreement and the Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful
misfeasance, or gross negligence in the performance of its duties or obligations
under the Distribution Agreement or by reason of the reckless disregard of its
duties and obligations under the Distribution Agreement. The Distribution
Agreement further provides that the Fund and ICC Distributors will mutually
indemnify each other for losses relating to disclosures in the Fund's
registration statement.
15
<PAGE>
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on September 28, 1999.
ICC Distributors and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which such Participating
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. Any Sub-Distribution Agreement may be terminated
upon 10 days' notice by either party and shall automatically terminate in the
event of an assignment.
In addition, with respect to the Class A, Class B and Class C Shares,
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, such as Deutsche Banc Alex. Brown and certain banks, to act as
Shareholder Servicing Agents, pursuant to which ICC Distributors will allocate a
portion of its distribution fee as compensation for such financial institutions'
ongoing shareholder services. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor or its affiliates will provide
compensation out of its own resources for 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, 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 Prospectuses and
this Statement of Additional Information in conjunction with any such
institution's fee schedule.
As compensation for providing distribution services as described above
for the Class A Shares, ICC Distributors receives an annual fee, paid monthly,
equal to 0.25% of the average daily net assets of the Class A Shares. With
respect to the Class A Shares, ICC Distributors expects to allocate up to all of
its fee to Participating Dealers and Shareholder Servicing Agents. As
compensation for providing distribution services as described above for the
Class B Shares, ICC Distributors receives an annual fee, paid monthly, equal to
0.75% of the average daily net assets of the Class B Shares. As compensation for
providing distribution services as described above for Class C Shares, ICC
Distributors receives an annual fee, paid monthly, equal to 0.75% of the average
daily net assets of the Class C Shares. In addition, with respect to the Class B
and Class C Shares, ICC Distributors receives a shareholder servicing fee at an
annual rate of 0.25% of the respective average daily net assets of the Class B
and the Class C Shares. ICC receives no compensation for distributing the
Institutional Shares.
16
<PAGE>
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received
aggregate fees in the following amounts:
- --------------------------------------------------------------------------------
Fiscal Year Ended May 31,
-------------------------------------------------
Fee 1999 1998 1997
- --------------------------------------------------------------------------------
12b-1 Fee $871,064 $447,239(1) $206,936(3)
- --------------------------------------------------------------------------------
Shareholder Servicing Fee $101,631 $51,052(2) $65,473(3)
(Class B Shares)
- --------------------------------------------------------------------------------
Shareholder Servicing Fee $1,324 N/A N/A
(Class C Shares)
- --------------------------------------------------------------------------------
- ----------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $110,677 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $336,562.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $11,761 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $39,291.
(3) Fees received by Alex. Brown, the Fund's distributor for the fiscal year
ended May 31, 1997.
Pursuant to Rule 12b-1 under the Investment Company Act, 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 plans of distribution for each of its
classes of Shares (except the Institutional Shares). Under each plan, the Fund
pays a fee to ICC Distributors for distribution and other shareholder servicing
assistance as set forth in the Distribution Agreement, and ICC Distributors is
authorized to make payments out of its fee to Participating Dealers and
Shareholder Servicing Agents. The Plans will remain in effect from year to year
thereafter as specifically approved (a) at least annually by the Fund's Board of
Directors and (b) by the affirmative vote of a majority of the Independent
Directors, by votes cast in person at a meeting called for such purpose. The
Plans were most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors, on September 28, 1999.
In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreement without the approval of the shareholders of the Fund.
The Plans may be terminated at any time by the vote of a majority of the Fund's
Independent Directors or by a vote of a majority of the Fund's outstanding
Shares of the related class (as defined under "Capital Stock").
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plans to ICC Distributors pursuant to the
Distribution Agreement and to Participating Dealers pursuant to any
Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
17
<PAGE>
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under the Plans. Payments under the Plans are made as described above regardless
of ICC Distributors' actual cost of providing distribution services and may be
used to pay ICC Distributors' overhead expenses. If the cost of providing
distribution services to the Class A Shares is less than 0.25% of the Class A
Shares' average daily net assets for any period or if the cost of providing
distribution services to the Class B Shares and the Class C Shares is less than
0.75% of the classes' respective average daily net assets for any period, the
unexpended portion of the distribution fees may be retained by ICC Distributors.
The Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if any of the Plans is terminated in accordance with
its terms, the obligation of the Fund to make payments to ICC Distributors
pursuant to such Plan will cease and the Fund will not be required to make any
payments past the date the Distribution Agreement terminates with respect to
that class. In return for payments received pursuant to the Plans, ICC
Distributors pays the distribution-related expenses of the Fund including one or
more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges.
General Information
The Fund's distributor received commissions on the sale of Class A
Shares and contingent deferred sales charges on Class B and Class C Shares and
retained from such commissions and sales charges the following amounts.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended May 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Class Received Retained Received Retained Received Retained
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $431,662 $0 $571,016(1) $536,314(3) $404,583(5) $383,114(5)
- ------------------------------------------------------------------------------------------------------------------------
Class B Contingent
Deferred Sales
Charge $420,883 $0 $648,704(2) $632,376(4) $318,224(5) $313,208(5)
- ------------------------------------------------------------------------------------------------------------------------
Class C Contingent $29,085 $0 N/A N/A N/A N/A
Deferred Sales
Charge
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $111,345 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $459,671.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $188,711 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $459,993.
(3) Of commissions received, Alex. Brown retained $106,124 and ICC Distributors
retained $431,090, respectively.
(4) Of sales charges retained, Alex. Brown retained $183,389 and ICC
Distributors retained $448,987, respectively.
(5) By Alex. Brown, the Fund's distributor for the fiscal year ended May 31,
1997.
The Fund will pay all costs associated with its organization and
registration under the Securities Act 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
18
<PAGE>
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 Independent Directors, and of independent auditors, in
connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund 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 ICC Distributors, ICC or ABIM.
The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.
BROKERAGE
ABIM is responsible for decisions to buy and sell securities for the
Fund, for 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
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, its affiliates, and ICC Distributors.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked 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
affiliates of the Advisors in any transaction in which they act as a principal.
If affiliates of the Advisors are participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
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 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
19
<PAGE>
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
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 affiliates of the Advisors higher commissions than another broker
might have charged on brokerage transactions for the Fund for brokerage or
research services. The allocation of orders among broker-dealers and the
commission rates paid by the Fund will be reviewed periodically by the Board.
The foregoing policy under which the Fund may pay higher commissions to certain
broker-dealers in the case of agency transactions, does not apply to
transactions effected on a principal basis.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through affiliates of the
Advisors. 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 affiliates of the Advisors
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.
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.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended May 31,
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transactions Directed $168,139,103 $127,658,887 $84,859,723
- ----------------------------------------------------------------------------------------------------------------
Commissions Paid $305,094 $249,526 $ 168,045
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The increasing amounts of commissions reflects the growth of the Fund.
20
<PAGE>
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, 1999, the
Fund held a 4.50% repurchase agreement issued by Goldman Sachs & Co. valued at
$50,191,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
CAPITAL STOCK
The Fund is authorized to issue 90 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 four classes of Shares: Flag Investors Equity Partners Fund Class
A Shares, Flag Investors Equity Partners Fund Class B Shares, Flag Investors
Equity Partners Fund Class C Shares and Flag Investors Equity Partners Fund
Institutional Shares. The Flag Investors Equity Partners Fund Institutional
Shares are offered only to certain eligible institutions and to clients of
investment advisory affiliates of Deutsche Banc Alex. Brown. 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,
the 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 and any applicable service fees) are
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively will be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. 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.
As used in this Statement of Additional Information the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
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.
21
<PAGE>
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company, 130 Liberty Street, New York, New York 10006,
serves as custodian of the Fund's investments. Bankers Trust Company receives
such compensation from the Fund for its services as custodian as may be agreed
to from time to time by Bankers Trust Company and the Fund. For the fiscal year
ended May 31, 1999, Bankers Trust Company was paid $55,913 as compensation for
providing custody services to the Fund. Investment Company Capital Corp., One
South Street, Baltimore, Maryland 21202, has been retained to act as transfer
and dividend disbursing agent. As compensation for providing these services, the
Fund pays ICC up to $16.07 per account per year, plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended May 31, 1999, such fees totaled $145,421.
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 Daily Net Assets Incremental Fee
- ------------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 0.100%
$20,000,000 - $30,000,000 0.080%
$30,000,000 - $40,000,000 0.060%
$40,000,000 - $50,000,000 0.050%
$50,000,000 - $60,000,000 0.040%
$60,000,000 - $70,000,000 0.030%
$70,000,000 - $100,000,000 0.020%
$100,000,000 - $500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%
For the fiscal years ended May 31, 1999, 1998, and 1997 ICC received
accounting fees of $94,427, $77,864 and $55,940, respectively.
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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
22
<PAGE>
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:
P(1 + T)n = 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 use or 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
the later commencement of operations of a series or class) commenced operations.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 payment for the periods
ended May 31, 1999 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
One-Year Period Since Inception*
Ended May 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Class Ending Average Annual Ending Average Annual
Redeemable Total Return Redeemable Total Return
Value Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $1,223 16.81% $2,716 24.86%
- -----------------------------------------------------------------------------------------------------------------
Class B $1,174 17.39% $2,614 25.08%
- -----------------------------------------------------------------------------------------------------------------
Institutional $1,226 22.57% $2,707 25.90%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------
Since Inception*
- ------------------------------------------------------------------
Class Ending Total Return
Redeemable
Value
- ------------------------------------------------------------------
Class C $1,331 33.06%
- ------------------------------------------------------------------
- -------------------
*February 13, 1995 for Class A and B Shares; February 12, 1996 for Institutional
Shares; and October 28, 1998 for Class C Shares.
23
<PAGE>
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Inc., 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. The Fund will, however, disclose the maximum sales charges and will
also disclose that the performance data do not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted. Such alternative
total return information will be given no greater prominence in such advertising
than the information prescribed under SEC rules, and all advertisements
containing performance data will include a legend disclosing that such
performance data represent past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. In the fiscal year ended
May 31, 1999 the Fund's portfolio turnover rate was 21.21% and in the fiscal
year ended May 31, 1998, the Fund's portfolio turnover rate was 7.94%.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons held beneficially
or of record 5% or more of the outstanding shares of a class of the Fund, as of
September 2, 1999*:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Owned of Beneficially
Name and Address Record Owned Percentage of Ownership
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bankers Trust Corp & Affil 401K X 12.37% of Class A Shares
Savings Plan
The Partnershare Plan of
Bankers Trust NY Corp & Affil
100 Plaza One
Jersey City, NJ 07311-3999
- ---------------------------------------------------------------------------------------------------------
BT Alex. Brown Incorporated X 5.64% of Class A Shares
FBO 223-05575-10
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BT Alex. Brown Inc X 6.98% of Institutional Shares
FBO 259-11251-13
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------
BT Alex. Brown Inc X 6.95% of Institutional Shares
FBO 210-90710-15
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------
BT Alex. Brown Inc X 5.84% of Institutional Shares
FBO 210-23281-15
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
*As of such date, Deutsche Banc Alex. Brown Incorporated owned less than 5% of
the Fund's total outstanding Shares.
As of September 2, 1999, Directors and officers as a group beneficially
owned an aggregate of less than 1% of the Fund's total outstanding shares.
FINANCIAL STATEMENTS
See next page.
25
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets May 31, 1999
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK: 90.3%
Banking: 1.7%
195,000 Wells Fargo Company ....................... $ 7,800,000
-----------
Basic Industry: 1.0%
216,000 Georgia Gulf Corporation .................. 3,226,500
100,000 Olin Corporation .......................... 1,325,000
-----------
4,551,500
-----------
Business Services: 0.9%
90,000 First Data Corporation .................... 4,044,375
-----------
Consumer Durables/Non - Durables: 11.7%
959,100 Blyth Industries, Inc.(1) ................. 26,854,803
240,500 Callaway Golf ............................. 3,953,219
250,000 Ford Motor Company ........................ 14,265,625
207,500 Philip Morris Companies, Inc. ............. 8,001,719
115,000 Richfood Holdings, Inc. ................... 1,473,437
-----------
54,548,803
-----------
Consumer Services: 19.5%
338,000 America Online, Inc.(1) ................... 40,348,754
853,950 Cendant Corporation(1) .................... 15,744,703
50,000 Gannett Company, Inc. ..................... 3,612,500
917,520 Mattel, Inc. .............................. 24,256,935
322,500 Sinclair Broadcasting -- Group A(1) ....... 4,474,688
36,000 Times Mirror Co. -- Class A ............... 2,121,750
-----------
90,559,330
-----------
Defense/Aerospace: 1.0%
117,400 Lockheed Martin Corporation ............... 4,747,362
-----------
Energy: 0.9%
120,000 Midamerican Energy Hldgs.(1) .............. 4,050,000
-----------
-26 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) May 31, 1999
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (continued)
Financial Services: 7.8%
60,200 American Express Company ..................... $ 7,295,487
131,042 Associates First Capital Corp. -- Class A .... 5,372,722
181,500 Citigroup, Inc. .............................. 12,024,375
108,000 Freddie Mac .................................. 6,297,750
72,000 Transamerica Corp. ........................... 5,283,000
-----------
36,273,334
-----------
Health Care Services: 8.3%
254,000 Amgen, Inc.(1) ............................... 16,065,500
80,000 Cardinal Health, Inc. ........................ 4,830,000
220,000 Columbia/HCA Healthcare Corporation .......... 5,183,750
41,000 Johnson & Johnson ............................ 3,797,625
110,000 Wellpoint Health Networks, Inc.(1) ........... 9,068,125
-----------
38,945,000
-----------
Hotels/Gaming: 2.4%
530,000 Harrah's Entertainment, Inc.(1) .............. 11,461,250
-----------
Housing: 4.1%
516,900 Champion Enterprises, Inc.(1) ................ 10,564,150
148,300 USG Corporation .............................. 8,397,487
-----------
18,961,637
-----------
Insurance: 6.9%
670,387 Conseco, Inc. ................................ 20,488,707
188,908 XL Limited-- Class A ......................... 11,487,968
-----------
31,976,675
-----------
Multi-Industry: 5.1%
164,000 American Standard Companies, Inc.(1) ......... 7,585,000
4,000 Berkshire Hathaway-- Class B(1) .............. 9,272,000
57,000 Loews Corp. .................................. 4,634,812
35,600 United Technologies Corporation .............. 2,209,425
-----------
23,701,237
-----------
- 27 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets May 31, 1999
Shares/Par (000) Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (concluded)
Retail: 1.4%
425,000 Kmart Corporation(1) ......................... $ 6,534,375
------------
Technology: 9.7%
257,500 Cognex Corporation1 .......................... 6,920,312
172,000 International Business Machines Corporation .. 20,005,750
490,300 Novell Inc.(1) ............................... 11,522,050
119,000 Xerox Corporation ............................ 6,686,312
------------
45,134,424
------------
Telecommunications: 3.2%
174,146 MCI Worldcom, Inc.(1) ........................ 15,041,861
------------
Transportation: 4.7%
339,800 Canadian National Rail Co. ................... 21,747,204
------------
Total Common Stock
(Cost $260,122,176) ......................... 420,078,367
------------
REPURCHASE AGREEMENT: 10.8%
$50,191 Goldman Sachs & Co., 4.50%
Dated 5/28/99, to be repurchased
on 6/1/99 at $50,216,096,
collateralized by U.S. Treasury Note
with a market value of $24,276,904 and
U.S. Treasury Note with a market value
of $26,918,460.
(Cost $50,191,000) ........................... 50,191,000
------------
Total Investments
(Cost $310,313,176)(2) ................................. 101.1% $470,269,367
Liabilities in Excess of Other Assets ................... (1.1)% (4,886,906)
------ ------------
Net Assets--100.0% ...................................... 100.0% $465,382,461
====== ============
- 28 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) May 31, 1999
Shares Market Value
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Class A Share
($283,950,179 divided by 11,059,354 shares) ............. $25.68
======
Class B Share
($52,602,990 divided by 2,080,403 shares) ............... $25.29(3)
======
Class C Share
($3,440,816 divided by 136,145 shares) .................. $25.27(4)
======
Institutional Share
($125,388,476 divided by 4,868,511 shares) .............. $25.75
======
Maximum Offering Price Per:
Class A Share
($25.68 divided by .955) ................................ $26.89
======
Class B Share ............................................. $25.29
======
Class C Share ............................................. $25.27
======
Institutional Share ....................................... $25.75
======
(1) Non-income producing security.
(2) Also aggregate cost for federal tax purposes.
(3) Redemption value is $24.28 following a 4% maximum contingent deferred sales
charge.
(4) Redemption value is $25.02 following a 1% maximum contingent deferred sales
charge.
See Accompanying Notes to Financial Statements.
- 29 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
May 31,
- --------------------------------------------------------------------------------
1999
Investment Income:
Dividends ................................................ $ 3,116,912
Interest ................................................. 1,187,579
Less: Foreign taxes withhold ............................. (22,551)
-----------
Total income ........................................ 4,281,940
-----------
Expenses:
Investment advisory fee .................................. 2,864,847
Distribution fees ........................................ 974,019
Transfer agent fee ....................................... 145,421
Professional fees ........................................ 138,444
Accounting fee ........................................... 94,427
Registration fees ........................................ 79,325
Custodian fee ............................................ 55,913
Directors' fees .......................................... 14,458
Miscellaneous ............................................ 63,527
-----------
Total expenses ...................................... 4,430,381
-----------
Expenses in excess of income ............................. (148,441)
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions ............. 14,945,270
Change in unrealized appreciation/depreciation
of investments ......................................... 66,359,649
-----------
Net gain on investments ............................. 81,304,919
-----------
Net increase in net assets resulting from operations ........ $81,156,478
===========
See Accompanying Notes to Financial Statements.
- 30 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Years Ended May 31,
- --------------------------------------------------------------------------------
1999 1998
Increase in Net Assets:
Operations:
Net investment income/(expenses
in excess of income) ....................... $ (148,441) $ 713,905
Net realized gain from security transactions . 14,945,270 5,232,557
Change in unrealized appreciation/
depreciation of investments ................ 66,359,649 54,454,890
------------ ------------
Net increase in net assets resulting
from operations ............................ 81,156,478 60,401,352
------------ ------------
Distributions to Shareholders from:
Net investment income and net realized
short-term gains:
Class A Shares ............................. (93,263) (752,668)
Class B Shares ............................. -- (42,361)
Class C Shares ............................. -- --
Institutional Shares ....................... (58,366) (517,867)
Net realized long-term gains:
Class A Shares ............................. (2,930,694) (1,489,329)
Class B Shares ............................. (498,363) (268,284)
Class C Shares ............................. (394) --
Institutional Shares ....................... (1,271,314) (755,157)
------------ ------------
Total distributions ...................... (4,852,394) (3,825,666)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares ................. 116,694,761 123,536,819
Value of shares issued in
reinvestment of dividends .................. 4,540,061 3,468,071
Cost of shares repurchased ................... (61,943,145) (24,608,945)
------------ ------------
Increase in net assets derived from capital
share transactions ......................... 59,291,677 102,395,945
------------ ------------
Total increase in net assets ................. 135,595,761 158,971,631
Net Assets:
Beginning of year ............................ 329,786,700 170,815,069
------------ ------------
End of year (including distributions in excess
of net investment income of $(17,473) and
undistributed net investment income of
$55,727, respectively) ..................... $465,382,461 $329,786,700
============ ============
See Accompanying Notes to Financial Statements.
- 31 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each period)
For the Period
Feb. 13, 1995(1)
For the Years Ended May 31, through May 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............... $ 21.29 $ 16.93 $ 13.09 $ 10.77 $ 10.00
--------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income/(expenses in excess of income) . (0.01) 0.05 0.08 0.17 0.12
Net realized and unrealized gain on investments ...... 4.70 4.60 3.96 2.29 0.65
--------- -------- -------- -------- --------
Total from Investment Operations ..................... 4.69 4.65 4.04 2.46 0.77
Less Distributions:
Net investment income and net realized short-term
gains ............................................... (0.03) (0.10) (0.13) (0.14) --
Net realized long-term gains ......................... (0.27) (0.19) (0.07) -- --
--------- -------- -------- -------- --------
Total distributions .................................. (0.30) (0.29) (0.20) (0.14) --
--------- -------- -------- -------- --------
Net asset value at end of period ..................... $ 25.68 $ 21.29 $ 16.93 $ 13.09 $ 10.77
========= ======== ======== ======== ========
Total Return(2) ......................................... 22.31% 27.76% 31.17% 23.05% 7.70%
Ratios to Average Daily Net Assets:
Expenses(3) .......................................... 1.20% 1.24% 1.35% 1.35% 1.35%(5)
Net investment income/(expenses in excess
of income)(4) ....................................... (0.02)% 0.29% 0.61% 1.52% 3.74%(5)
Supplemental Data:
Net assets at end of period (000) .................... $283,950 $198,387 $113,030 $64,230 $38,612
Portfolio turnover rate .............................. 21.21% 7.94% 17.60% 0.73% --
</TABLE>
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees, 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 and 1996 and for the period ended May 31, 1995,
respectively.
(4) Without the waiver of advisory fees, 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 and 1996 and for the period ended May 31,
1995, respectively.
(5) Annualized.
See Accompanying Notes to Financial Statements.
- 32 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
For the Period
Feb. 13, 1995(1)
For the Years Ended May 31, through May 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............. $ 21.10 $ 16.84 $ 13.03 $ 10.75 $ 10.00
--------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income/
(expenses in excess of income) ................... (0.14) (0.06) (0.04) 0.07 0.07
Net realized and unrealized gain on
investments ...................................... 4.60 4.54 3.96 2.31 0.68
--------- -------- -------- -------- --------
Total from Investment Operations ................... 4.46 4.48 3.92 2.38 0.75
Less Distributions:
Net investment income and
net realized short-term gains .................... -- (0.03) (0.04) (0.10) --
Net realized long-term gains ....................... (0.27) (0.19) (0.07) -- --
--------- -------- -------- -------- --------
Total distributions ................................ (0.27) (0.22) (0.11) (0.10) --
--------- -------- -------- -------- --------
Net asset value end of period ...................... $ 25.29 $ 21.10 $ 16.84 $ 13.03 $ 10.75
========= ======== ======== ======== ========
Total Return(2) ....................................... 21.39% 26.81% 30.28% 22.17% 7.50%
Ratios to Average Daily Net Assets:
Expenses(3) ........................................ 1.95% 1.98% 2.10% 2.10% 2.10%(5)
Net investment income/(expenses in excess of
income(4) ........................................ (0.77)% (0.47)% (0.16)% 0.71% 1.97%(5)
Supplemental Data:
Net assets at end of period (000) .................. $ 52,603 $37,046 $15,670 $5,302 $2,159
Portfolio turnover rate ............................ 21.21% 7.94% 17.60% 0.73% --
</TABLE>
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees, 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 and 1996 and for the period ended May 31, 1995,
respectively.
(4) Without the waiver of advisory fees , the ratio of net investment
income/(expenses in excess of income) to average daily net assets would have
been (0.28)%, 0.29% and (0.15%) (annualized) for the years ended May 31,
1997 and 1996, and for the period ended May 31, 1995, respectively.
(5) Annualized.
See Accompanying Notes to Financial Statements.
- 33 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class C Shares
(For a share outstanding throughout each period)
For the Period
Oct. 28, 1998(1)
through
May 31,
- --------------------------------------------------------------------------------
1999
Per Share Operating Performance:
Net asset value at beginning of period ................. $ 19.09
---------
Income from Investment Operations:
Expenses in excess of income ........................... (0.03)
Net realized and unrealized gain on investments ........ 6.48
---------
Total from Investment Operations ....................... 6.45
Less Distributions:
Net realized long-term gains ........................... (0.27)
---------
Total distributions .................................... (0.27)
---------
Net asset value at end of period ....................... $ 25.27
=========
Total Return(2) ........................................... 34.06%
Ratios to Average Daily Net Assets:
Expenses ............................................... 1.85%(3)
Expenses in excess of income ........................... (0.73)%(3)
Supplemental Data:
Net assets at end of period (000) ...................... $ 3,441
Portfolio turnover rate ................................ 21.21%
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Accompanying Notes to Financial Statements.
- 34 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)
For the Period
Feb. 12, 1996(1)
For the Years Ended May 31, through May 31,
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning
of period ........................................ $ 21.32 $ 16.94 $ 13.10 $ 12.72
--------- -------- -------- --------
Income from Investment Operations:
Net investment income .............................. 0.04 0.10 0.14 0.04
Net realized and unrealized
gain on investments .............................. 4.70 4.61 3.95 0.34
--------- -------- -------- --------
Total from Investment Operations ................... 4.74 4.71 4.09 0.38
Less Distributions:
Net investment income and net
realized short-term gains ........................ (0.04) (0.14) (0.18) --
Net realized long-term gains ....................... (0.27) (0.19) (0.07) --
--------- -------- -------- --------
Total Distributions ................................ (0.31) (0.33) (0.25) --
--------- -------- -------- --------
Net asset value at end of period ................... $ 25.75 $ 21.32 $ 16.94 $ 13.10
========= ======== ======== ========
Total Return .......................................... 22.53% 28.14% 31.58% 3.23%
Ratios to Average Daily Net Assets:
Expenses(2) ........................................ 0.95% 0.98% 1.10% 1.10%(4)
Net investment income(3) ........................... 0.23% 0.54% 0.81% 1.20%(4)
Supplemental Data:
Net assets at end of period (000) .................. $125,388 $94,354 $42,115 $ 4,235
Portfolio turnover rate ............................ 21.21% 7.94% 17.60% 0.73%
</TABLE>
- ------------
(1) Commencement of operations.
(2) Without the waiver of advisory fees, 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, 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.
- 35 -
<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 May 31, 1994 and began operations
February 13, 1995, 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 four share classes: Class A Shares and Class B
Shares, which both began operations February 13, 1995, Class C Shares which
began operations October 28, 1998 and Institutional Shares, which began
operations February 12, 1996.
The Class A, Class B, and Class C Shares are subject to different sales
charges. The Class A Shares have a 4.50% maximum front-end sales charge, the
Class B Shares have a 4.00% maximum contingent deferred sales charge and the
Class C Shares have a 1.00% maximum contingent deferred sales charge. In
addition each of the classes 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 the financial statements; 2) the contingent assets and
liabilities that we disclose at the date of the financial statements; and 3) the
revenues and expenses that we report for the period. Our estimates could be
different from the actual results. The Fund's significant accounting policies
are:
A. Security Valuation -- The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price
reported for the day. If there are no sales or the security is not
traded on a listed exchange, the Fund values the security at the
average of the last bid and asked prices in the over-the-counter
market. When a market quotation is not readily available, the
Investment Advisor determines a fair value using procedures that the
Board of Directors establishes and monitors. The Fund values
short-term obligations with maturities of 60 days or less at
amortized cost.
- 36 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
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 amortization of premiums and accretion of discounts
when appropriate. Income and common expenses are allocated to each
class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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 began investment activities.
- 37 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust
Corporation, is the Fund's investment advisor. As compensation for its advisory
services, the Fund pays ICC an annual fee based on the Fund's average daily net
assets. This fee 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.
For the year ended May 31, 1999 ICC's advisory fee was $2,864,847 of
which $304,759 was payable at the end of the period.
ICC also provides accounting services to the Fund for which the Fund
pays ICC an annual fee that is calculated daily and paid monthly based on the
Fund's average daily net assets. For the year ended May 31, 1999, ICC's fee was
$94,427 of which $9,336 was payable at the end of the period.
ICC also provides transfer agent services to the Fund for which the
Fund pays ICC a per account fee that is calculated and paid monthly. For the
year ended May 31, 1999, ICC's fee was $145,421 of which $35,747 was payable at
the end of the period.
Bankers Trust Company, an affiliate of ICC, provides custody services
to the Fund for which the Fund pays Bankers Trust an annual fee. For the year
ended May 31, 1999, Bankers Trust's fee was $55,913 of which $8,518 was payable
at the end of the period.
Certain officers and directors of the Fund are also officers or
directors of ICC.
- 38 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTE 2 -- concluded
Alex. Brown Investment Management ("ABIM") is the Fund's sub-advisor.
As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee based on the Fund's average daily net assets. This fee 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.
The Fund did not pay BT Alex. Brown any commissions for the year ended
May 31, 1999.
ICC Distributors, Inc., a member of the Forum Group of companies,
provides distribution services to the Fund for which the Fund pays ICC
Distributors an annual fee that is calculated daily and paid monthly at the
following annual rates; 0.25% of the Class A Shares' average daily net assets
and 1.00% of the Class B and Class C Shares' average daily net assets. The fees
for the Class B and Class C Shares include a 0.25% shareholder servicing fee.
Distribution fee expenses for the year ended May 31, 1999 amounted to $562,203,
$406,522, and $5,294 for Class A, Class B, and Class C Shares, respectively, of
which $60,769, $44,523 and $2,291 was payable at the end of the period.
The Fund complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
May 31, 1999 was $1,675, and the accrued liability was $6,932.
- 39 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3 -- Capital Share Transactions
The Fund is authorized to issue up to 90 million shares of $.001 par
value capital stock (40 million Class A, 15 million Class B, 15 million Class C,
15 million Institutional and 5 million undesignated). Transactions in shares of
the Fund as follows:
Class A Share
------------------------------
For the For the
Year Ended Year Ended
May 31, 1999 May 31, 1998
------------ -------------
Shares sold .................................... 3,166,847 3,375,853
Shares issued to shareholders on
reinvestment of dividends ................... 132,532 117,061
Shares redeemed ................................ (1,557,812) (852,542)
----------- -----------
Net increase in shares outstanding ............. 1,741,567 2,640,372
=========== ===========
Proceeds from sale of shares ................... $67,677,756 $66,318,519
Value of reinvested dividends .................. 2,838,498 2,136,952
Cost of shares redeemed ........................ (33,714,414) (16,794,448)
----------- -----------
Net increase from capital share
transactions ................................ $36,801,840 $51,661,023
=========== ===========
Class B Shares
------------------------------
For the For the
Year Ended Year Ended
May 31, 1999 May 31, 1998
------------ -------------
Shares sold .................................... 563,765 860,902
Shares issued to shareholders on
reinvestment of dividends ................... 22,835 16,617
Shares redeemed ................................ (261,968) (52,451)
----------- -----------
Net increase in shares outstanding ............. 324,632 825,068
=========== ===========
Proceeds from sale of shares ................... $12,547,072 $16,336,267
Value of reinvested dividends .................. 482,952 302,586
Cost of shares redeemed ........................ (5,608,819) (1,036,796)
----------- -----------
Net increase from capital share
transactions ................................ $ 7,421,205 $15,602,057
=========== ===========
- 40 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
NOTE 3 -- continued
Class C Shares
----------------
For the Period
Oct. 28, 1998(1)
through
May 31, 1999
----------------
Shares sold ............................................... 137,892
Shares issued to shareholders on
reinvestment of dividends .............................. 16
Shares redeemed ........................................... (1,763)
----------
Net increase in shares
outstanding ............................................ 136,145
==========
Proceeds from sale of shares .............................. $3,342,768
Value of reinvested dividends ............................. 336
Cost of shares redeemed ................................... (39,485)
----------
Net increase from capital share
transactions ........................................... $3,303,619
==========
Institutional Shares
----------------------------
For the For the
Year Ended Year Ended
May 31, 1999 May 31, 1998
------------- ------------
Shares sold 1,542,660 2,238,106
Shares issued to shareholders on
reinvestment of dividends 56,796 56,263
Shares redeemed (1,157,545) (353,873)
------------ -----------
Net increase in shares outstanding 441,911 1,940,496
============ ===========
Proceeds from sale of shares $ 33,127,165 $40,882,033
Value of reinvested dividends 1,218,275 1,028,533
Cost of shares redeemed (22,580,427) (6,777,701)
------------ -----------
Net increase from capital
share transactions $ 11,765,013 $35,132,865
============ ===========
- -----------
(1) Commencement of operations.
- 41 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3 -- concluded
At May 31, 1999, the amounts payable for fund shares redeemed amounted
to $145,009, of which $75,187 were attributable to the Class A Shares and
$69,822 were attributable to the Class B Shares.
NOTE 4 -- Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $96,050,023 and sales of investment securities aggregated $72,089,080
for the year ended May 31, 1999. At May 31, 1999, the payable for securities
purchased was $7,042,157.
On May 31, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $169,352,861
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $9,396,670.
NOTE 5 -- Net Assets
On May 31, 1999, net assets consisted of:
Paid-in capital:
Class A Shares ............................................... $168,607,833
Class B Shares ............................................... 35,448,850
Class C Shares ............................................... 3,302,028
Institutional Shares ......................................... 83,482,159
Accumulated net realized gain from security transactions ....... 14,602,873
Unrealized appreciation of investments ......................... 159,956,191
Distributions in excess of net investment income ............... (17,473)
------------
$465,382,461
============
NOTE 6 -- Subsequent Event
On June 4, 1999, Bankers Trust Corporation merged with Deutsche Bank
AG. As a result, Deutsche Bank AG became the parent company to ICC, investment
advisor to the Fund, and a control person of ABIM, subadvisor to the Fund.
Deutsche Bank AG, as ICC's new parent company, controls its operations as
investment advisor. ICC believes that, under this new arrangement, the services
provided to the Fund will be maintained at their current level. Shareholders
will be asked to vote whether to approve new advisory and subadvisory contracts
at a shareholder's meeting to be held October 8, 1999.
- 42 -
<PAGE>
FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Equity Partners Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Flag Investors Equity Partners Fund, Inc. (the "Fund") at May 31, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 14, 1999
- 43 -
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE 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 that 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 10 years; (7) financial strength of a parent
company and the relationship that 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.
Moody's Investors Services, Inc.'s corporate bond ratings:
Aaa - Judged to be of the best quality. Carries the smallest
degree of investment risk and generally referred to as "gilt-edged." Interest
payments are protected by a large or by an 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 - Judged to be of high quality by all standards. Together with
the Aaa group comprise what are generally known as high-grade bonds. Rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than Aaa securities.
A - Possess many favorable investment attributes and 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 - Considered as medium-grade obligations i.e., neither highly
protected nor poorly secured. Interest payments 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
A-1
<PAGE>
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Judged to have speculative elements; 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 characterizes bonds in
this class.
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 - Of poor standing. May be in default or there may be present
elements of danger with respect to principal or interest.
Ca - Speculative in a high degree. Often in default or have other
marked shortcomings.
C - The lowest rated class of bonds. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
that generic rating category.
Standard & Poor's Corporation's corporate bond ratings:
AAA - The highest rating assigned by Standard & Poor's to a debt
obligation. Indicates an extremely strong capacity to pay principal and
interest.
AA - High-quality debt obligations. Capacity to pay principal and
interest is very strong, and in the majority of instances differs from AAA
issues only to a small degree.
A - A strong capacity to pay interest and repay principal
although somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Regarded as having an adequate capacity to pay interest and
repay principal. Normally exhibit adequate protection parameters, but adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major risk exposures to adverse conditions.
A-2
<PAGE>
The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
Debt rated D is in payment default. The D rating category is used
when payments on an obligation 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 of the taking of a similar action if payments on
a obligation are jeopardized.
A-3
