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(LOGO)
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(Institutional Shares)
This mutual fund (the "Fund") is designed to maximize total return through
a combination of a long-term growth of capital and current income.
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
Participating Dealers and may be purchased only by eligible institutions or by
clients of investment advisory affiliates of Alex. Brown. (See "How to Invest in
Institutional Shares.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated August 1, 1995 as
amended through November 1, 1995 has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference. It is
available upon request and without charge by calling the Fund at (800)
767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is November 1, 1995.
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FLAG INVESTORS
VALUE BUILDER FUND, INC.
(INSTITUTIONAL SHARES)
135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
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Page
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1. Fee Table ................................................ 2
2. Financial Highlights ..................................... 3
3. Investment Program ....................................... 5
4. Investment Restrictions .................................. 9
5. How to Invest in Institutional Shares .................... 10
6. How to Redeem Institutional Shares ....................... 12
7. Telephone Transactions.................................... 12
8. Dividends and Taxes ...................................... 13
9. Management of the Fund ................................... 15
10. Investment Advisor and Sub-Advisor ....................... 15
11. Distributor .............................................. 17
12. Custodian, Transfer Agent, Accounting Services ........... 18
13. Performance Information .................................. 18
14. General Information ...................................... 19
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH ANY
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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1. FEE TABLE
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SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
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Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None
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ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average daily net assets)
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Management Fees (net of fee waivers) .................. .88%*
12b-1 Fees ............................................ None
Other Expenses ........................................ .22%
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Total Fund Operating Expenses (net of fee waivers) .... 1.10%*
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* The Fund's investment advisor intends, but is not obligated, to waive its
fee to the extent required so that Total Fund Operating Expenses do not
exceed 1.10% of the Institutional Shares' average daily net assets. Absent
fee waivers, Management Fees would be .93% and Total Fund Operating
Expenses would be 1.15% of the Institutional Shares' average daily net
assets.
EXAMPLE:
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You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption
at the end of each time period:* 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
$11 $36 $62 $142
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* The example is based on Total Fund Operating Expenses net of fee waivers.
Absent fee waivers, expenses would be higher.
THE EXPENSES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may be
charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor and Sub-Advisor" and "Distributor.")
The Expenses and Example appearing in the table above are based on the Fund's
expenses (net of fee waivers) for the Class A Shares, another class of shares
offered by the Fund, for the fiscal year ended March 31, 1995, less 12b-1 fees
of .25%.
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2. FINANCIAL HIGHLIGHTS
The Fund has not offered the Institutional Shares prior to the date of
this Prospectus. However, the Fund has offered another class of shares since
1992. Historical financial information about the Fund is not fully applicable
to the Institutional Shares because the expenses paid by the Fund in the past
differ from those the Institutional Shares will incur. (See "Fee Table.")
Nevertheless, historical information about the Fund may be useful to
investors if they take into account the differences in expenses. Accordingly,
the financial highlights included in this table are a part of the Fund's
financial statements for the Class A Shares for the periods indicated and
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
financial statements and financial highlights for the Class A Shares for the
fiscal year ended March 31, 1995 and the report thereon of Coopers & Lybrand
L.L.P. are included in the Statement of Additional Information. Additional
performance information for the Class A Shares is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1995 which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.
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(For a share outstanding throughout each period)
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Class A Shares
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For the Period
For the Year Ended March 31, June 15, 1992*
---------------------------- through
1995 1994 March 31, 1993
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<S> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of
period $ 11.23 $ 11.25 $ 10.00
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Income from Investment
Operations:
Net investment income 0.35 0.40 0.18
Net realized and
unrealized
gain/(loss)
on investments 0.80 (0.04) 1.18
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Total from Investment
Operations 1.15 0.36 1.36
Less Distributions:
Dividends from net
investment income
and short-term
gains (0.35) (0.38) (0.11)
Distributions from
net realized
long-term gains (0.01) -- --
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Total Distributions (0.36) (0.38) (0.11)
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Net asset value at
end of period $ 12.02 $ 11.23 $ 11.25
========== ========== ==============
Total Return** 10.57% 3.14% 13.73%
Ratios to Average
Net Assets:
Expenses 1.35%(2) 1.35%(2) 1.35%(1)(2)
Net investment income 3.07%(3) 3.14%(3) 2.88%(1)(3)
Supplemental Data:
Net assets
at end of period
(000) $146,986 $131,097 $83,535
Portfolio turnover
rate 18% 8% 8%
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* Commencement of operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.40%, 1.38% and 1.70% (annualized) for Class A
Shares for the periods ended March 31, 1995, March 31, 1994, and March
31, 1993, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 3.02%, 3.11% and 2.53%,
(annualized) for Class A Shares for the periods ended March 31, 1995,
March 31, 1994 and March 31, 1993, respectively.
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3. INVESTMENT PROGRAM
.............................................................................
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The investment objective of the Fund is to maximize total return through a
combination of long-term growth of capital and current income. The Fund seeks
to achieve this objective through a policy of diversified investments in
equity and debt securities, including common stocks, convertible securities
and government and corporate fixed-income obligations. The Fund's investment
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. There can be no assurance, however, that the Fund will
achieve its investment objective.
Investment Company Capital Corp. ("ICC"), the Fund's investment advisor,
and the Fund's sub-advisor, Alex. Brown Investment Management ("ABIM")
(collectively, the "Advisors"), are responsible for managing the Fund's
investments. (See "Investment Advisor and Sub-Advisor.") The Advisors
consider both the opportunity for gain and the risk of loss in making
investments, and may alter the relative percentages of assets invested in
equity and fixed income securities from time to time, depending on the
judgment of the Advisors as to general market and economic conditions, trends
and yields and interest rates and changes in fiscal and monetary policies.
Under normal market conditions, between 40%-75% of the Fund's total assets
will be invested in common stock and other equity investments (including
preferred stocks, convertible debt, warrants and other securities convertible
into or exchangeable for common stocks). In selecting securities for the
Fund's portfolio, the Advisors expect to apply a "flexible value" approach to
the selection of equity investments. Under this approach, the Advisors will
attempt to identify securities that are undervalued in the marketplace but
will also consider such factors as current and expected earnings, dividends,
cash flows and asset values in their evaluation of a security's investment
potential.
In addition, at least 25% of the Fund's total assets will be invested in
fixed-income securities, defined for this purpose to include non-convertible
corporate debt securities and non-convertible preferred stock, and government
obligations. The average maturity of these investments will vary from time to
time depending on the Advisors' assessment of the relative yields available
on securities of different maturities. It is currently anticipated that
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the average maturity of the fixed income securities in the Fund's portfolio
will be between two and ten years under normal market conditions. In general,
non-convertible corporate debt obligations held in the Fund's portfolio will
be rated, at the time of purchase, BBB or higher by Standard & Poor's Ratings
Group ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's")
or, if unrated, determined to be of comparable quality by the Advisors under
criteria approved by the Board of Directors. Investment grade securities
(securities rated BBB or higher by S&P or Baa or higher by Moody's) are
generally thought to provide the highest credit quality and the smallest risk
of default. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics. In the event any security owned by the Fund is downgraded
below these rating categories, the Advisors will review and take appropriate
action with regard to the security.
.............................................................................
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES
Where deemed appropriate by the Advisors, the Fund may invest up to 10% of
its total assets (measured at the time of the investment) in lower quality
debt securities (securities rated BB or lower by S&P or Ba or lower by
Moody's and unrated securities of comparable quality). Securities that were
investment grade at the time of purchase but are subsequently downgraded to
BB, Ba or lower will be included in the 10% category. If such a downgrade
causes the 10% limit to be exceeded, the Fund will be precluded from
investing further in below investment grade debt securities but will not be
automatically required to sell any such securities. The Advisors will review
the situation and take appropriate action. Lower rated debt securities, also
known as "junk bonds," are considered to be speculative and involve greater
risk of default or price changes due to changes in the issuer's
creditworthiness. Securities in the lowest rating category that the Fund may
purchase (securities rated D by S&P or C by Moody's) may present a particular
risk of default, or may be in default and in arrears in payment of principal
and interest. Yields and market values of these bonds will fluctuate over
time, reflecting changing interest rates and the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated bonds may decline in value,
regardless of prevailing interest rates. Accordingly, adverse economic
developments, including a recession or a substantial period of rising
interest rates, may disrupt the high yield bond market, affecting both the
value and liquidity of such bonds. The market prices of these securities may
fluctuate more than those of higher rated securities and may decline
significantly in periods of general economic difficulty, which may follow
6
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period of rising interest rates. An economic downturn could adversely affect the
ability of issuers of such bonds to make payments of principal and interest
to a greater extent than issuers of higher rated bonds might be affected. The
ratings categories of S&P and Moody's are described more fully in the
Appendix to the Statement of Additional Information.
The table below provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended March
31, 1995, presented as a percentage of total investments. These percentages
are historical and are not necessarily indicative of the quality of current
or future portfolio holdings, which may vary.
S&P
Rating Average
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AAA ....... 0.8%
AA ........ 0.6%
A ......... 5.8%
BBB ....... 8.8%
BB ........ 5.3%
B ......... 4.4%
Unrated ... 0.0%
The Fund may also purchase obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (except that the Fund does
not currently anticipate that it will purchase mortgage-related debt
securities), and may invest in high quality short-term debt securities such
as commercial paper rated A-1 by S&P or P-1 by Moody's.
.............................................................................
INVESTMENTS IN REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed creditworthy under guidelines approved by the
Directors. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security, and the
seller agrees to repurchase the obligation at a future time and set price,
usually not more than seven days from the date of purchase, thereby
determining the yield during the purchaser's holding period. The value of the
underlying securities will be at least equal at all times to the total amount
of the repurchase agreement obligation, including the interest factor. If the
seller were to default on its obligation to repurchase the underlying
instrument, the Fund could experience loss due to delay in liquidating the
collateral and to adverse market action.
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.............................................................................
INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS
In addition, from time to time, the Advisors may invest up to 10% of the
Fund's total assets in American Depository Receipts, which are U.S. exchange
listed interests in securities of foreign companies, and in debt and equity
securities issued by foreign corporate and government issuers when the
Advisors believe that such investments provide good opportunities for
achieving income and capital gains without undue risk. Foreign investments
involve different risks from investments in the United States. Accordingly,
the Advisors intend to invest in securities of companies in, and governments
of, developed, stable nations, but there exists the possibility of adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation which could adversely affect the investments of the
Fund in such foreign country.
.............................................................................
OTHER INVESTMENTS
For temporary, defensive purposes the Fund may invest up to 100% of its
assets in high quality short-term money market instruments, and in bills,
notes or bonds issued by the U.S. Treasury Department or by other agencies of
the U.S. Government.
The Fund may write covered call options on common stock which it owns or
has the immediate right to acquire through conversion or exchange of other
securities, provided that any such option is traded on a national securities
exchange. The Fund may also enter into closing transactions with respect to
such options.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities including (i) repurchase agreements with remaining maturities in
excess of seven days and (ii) no more than 5% of its total assets in
restricted securities. Not included within this limitation are securities
that are not registered under the Securities Act of 1933, as amended (the
"1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined
to be liquid. The Board of Directors has adopted guidelines and delegated to
the Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers
are not interested in acquiring the securities.
8
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4. INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. Accordingly, 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) Invest in the securities of any single issuer if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of such
issuer;
3) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for these purposes the U.S.
Government and its agencies and instrumentalities are not considered an
issuer); or
4) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equalling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase
securities.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. HOW TO INVEST IN INSTITUTIONAL SHARES
Institutions (e.g. banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of Alex.
Brown may purchase Institutional Shares through Alex. Brown, 135 East Baltimore
Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers"), or by completing the Application Form attached to
this Prospectus and returning it, together with payment of the purchase price,
as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000. There is
no minimum for clients of investment advisory affiliates of Alex. Brown or for
subsequent investments. The Fund reserves the right to suspend the sale of
Institutional Shares at any time at the discretion of Alex. Brown and the
Advisors.
Orders for purchases of Institutional Shares are accepted on any day on which
the New York Stock Exchange is open for business ("Business Day"). Purchase
orders for Institutional Shares will be executed at a per share purchase price
equal to the net asset value next determined after receipt of the purchase
order. Purchases made through Alex. Brown or a Participating Dealer must be in
acordance with such entity's payment procedures. Alex. Brown may, in its sole
discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting liabilities including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities are given their market value where feasible. If
a portfolio security is traded on a national exchange or on an automated
dealer quotation system, such as NASDAQ, on the valuation date, the last
quoted sale price is generally used. Options are valued at the last reported
sale price, or if no sales are reported, at the average of the last reported
bid and asked prices. Securities or other assets for which market quotations
are not readily available are valued at their fair value as determined in
good faith under procedures established from time to time and monitored by
the Fund's Board of Directors. Debt obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Fund's Board of Directors.
Institutional Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
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PURCHASES BY EXCHANGE
Shareholders of other Flag Investors Funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined on
the same day, provided that the exchange request is received prior to 4:00 p.m.
(Eastern Time), or the close of the New York Stock Exchange, whichever is
earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone
Transactions" below) or by regular or express mail at its address listed under
"Custodian, Transfer Agent, Accounting Services." The exchange privilege may be
exercised only in those states where the Institutional shares of such other
funds may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate this offer of exchange at any time on 60 days' prior written notice to
shareholders.
.............................................................................
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such shares
will not be issued. All purchases of Institutional Shares are confirmed and
credited to the shareholder's account on the Fund's books maintained by ICC or
its agents. Shareholders will have the same rights and ownership with respect to
such shares as if certificates had been issued.
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6. HOW TO REDEEM INSTITUTIONAL SHARES
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at its
address listed under "Custodian, Transfer Agent, Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up to
$500,000). (See "Telephone Transactions" below.)
A redemption request is effected at the net asset value per share next
determined after receipt of the order in proper form. Redemption orders received
after 4:00 p.m. (Eastern Time) will be effected at the net asset value next
determined on the following Business Day. Payment for redeemed Institutional
Shares will be made by wire transfer of funds to the shareholder's bank or to a
Participating Dealer, as appropriate, upon receipt of a duly authorized
redemption request as promptly as feasible and, under most circumstances, within
two Business Days.
Dividends payable up to the date of redemption of Institutional Shares will
be paid on the next dividend payable date. If all of the Institutional Shares in
an account have been redeemed on a dividend payable date, the dividend will be
remitted by wire to the shareholder's bank or to a Participating Dealer, as
appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' notice.
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7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or
express mail at its address listed under "Custodian, Transfer Agent, Accounting
Services." Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted for
their accounts. This election may be made on the Application Form or at any time
thereafter by completing and returning appropriate documentation supplied by the
Transfer Agent.
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A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. Neither the
Fund nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or market
changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by express mail or
facsimile. (See "How to Invest in Institutional Shares -- Purchases by Exchange"
and "How to Redeem Institutional Shares.")
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8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of quarterly dividends. The
Fund may distribute to shareholders any taxable net capital gains on an
annual basis or, alternatively, may elect to retain net capital gains and pay
tax thereon.
Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Institutional Shares at net asset
value. Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent, Accounting
Services"), either directly or through Alex. Brown or a Participating Dealer, at
least five days before the next date on which dividends or distributions will be
paid.
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.............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, the Fund will be relieved of federal income tax on that part of
its net investment income which is distributed to shareholders. Shareholders,
unless otherwise exempt, generally will be subject to income tax on the
amounts so distributed regardless of whether such distributions are paid in
cash or reinvested in additional Institutional Shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time the shareholder has held the Institutional Shares. All other income
distributions will be taxed to shareholders as ordinary income. Corporate
shareholders may be entitled to the dividends received deduction on a portion of
dividends received from the Fund. Shareholders will be advised annually as to
the tax status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of Institutional Shares is a taxable event
for the shareholder.
14
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Shareholders are encouraged to consult with their tax advisors concerning
the application of the rules described above to their particular
circumstances and the application of state and local taxes to an investment
in the Fund.
=============================================================================
9. MANAGEMENT OF THE FUND
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to
the Fund's officers, to the Fund's investment advisor, ICC, to its
sub-advisor, ABIM, and to the Fund's distributor, Alex. Brown. Three
Directors and all of the officers of the Fund are officers or employees of
ICC, ABIM or Alex. Brown. The other Directors of the Fund have no affiliation
with ICC, ABIM or Alex. Brown.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Truman T. Semans Chairman J. Dorsey Brown, III President
*W. James Price Director Hobart C. Buppert, II Executive Vice President
*Richard T. Hale Director Lee S. Owen Executive Vice President
James J. Cunnane Director Bruce E. Behrens Vice President
N. Bruce Hannay Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Brian C. Nelson Vice President and Secretary
Eugene J. McDonald Director Diana M. Ellis Treasurer
Harry Woolf Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Semans, Price and Hale are Directors who are "interested persons"
of the Fund within the meaning of Section 2(a)(19) under the Investment
Company Act.
=============================================================================
10. INVESTMENT ADVISOR AND SUB-ADVISOR
ICC is the Fund's investment advisor and ABIM is the Fund's sub- advisor. ICC
is also the investment advisor to, and Alex. Brown acts as distributor for other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash Reserve
Fund, Inc., which funds had approximately $3.9 billion of net assets as of
September 30, 1995. ABIM is a registered investment advisor with approximately
$3.1 billion under management as of September 30, 1995.
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment
15
<PAGE>
Advisory and Sub-Advisory Agreements, ICC delegates to ABIM certain of its
duties, provided that ICC continues to supervise the performance of ABIM and
report thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. The Board has established procedures under which ABIM may
allocate transactions to Alex. Brown, provided that compensation to Alex.
Brown on each transaction is reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other broker-dealers
in connection with comparable transactions involving similar securities
during a comparable period of time. In addition, consistent with NASD Rules,
and subject to seeking the most favorable price and execution available and
such other policies as the Board may determine, ABIM may consider services in
connection with the sale of shares as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
As compensation for its services for the fiscal year ended March 31, 1995,
ICC received from the Fund a fee (net of fee waivers) equal to .88% of the
Fund's average daily net assets and, for the same period, ICC paid ABIM a fee
(net of fee waivers) equal to .65% of the Fund's average daily net assets.
The fee paid to ICC is higher than that paid by most mutual funds, but ICC
has voluntarily agreed to waive a portion of the fee so that the Fund's total
operating expenses do not exceed 1.10% of the Institutional Shares' average
daily net assets. (See "Fee Table.") ABIM has also agreed to waive, on a
voluntary basis, that portion of its fee payable from ICC in excess of the
amount equal to .65% of the Fund's average daily net assets.
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ABIM is a limited partnership affiliated with Alex. Brown. Buppert, Behrens &
Owen, Inc., a company organized and owned by three employees of ABIM, owns a
49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex.
Brown Incorporated owns the remaining 49% limited partnership interest. The
address of both ICC and ABIM is 135 East Baltimore Street, Baltimore,
Maryland 21202.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
16
<PAGE>
.............................................................................
PORTFOLIO MANAGERS
Messrs. J. Dorsey Brown, III, the Fund's President, and Hobart C. Buppert,
II and Lee S. Owen, Executive Vice Presidents of the Fund, have shared
primary responsibility for managing the Fund's assets since inception.
J. Dorsey Brown, III -- 28 Years Investment Experience
Dorsey Brown is the Chief Executive Officer of ABIM, which he founded in
1974. From 1967 to 1974, he was a member of the Research and Investment
Advisory Department of the Baltimore-based investment firm, Robert Garrett &
Sons. Mr. Brown received his B.A. from Trinity College in Hartford,
Connecticut, in 1962 and studied at New York University Business School in
1966. He is a member of the Baltimore Security Analysts Society and the
Financial Analysts Federation.
Hobart C. Buppert, II -- 23 Years Investment Experience
Mr. Buppert has been a Vice President of ABIM since 1980. Prior to joining
ABIM, Mr. Buppert worked as a Portfolio Manager for T. Rowe Price Associates
from 1976 to 1980 and as a Portfolio Manager and Research Analyst for the
Equitable Trust Company from 1972 to 1976. Mr. Buppert received his B.A and
M.B.A. degrees from Loyola College in 1970 and 1974. He is a member of the
Baltimore Security Analysts Society and the Financial Analysts Federation.
Lee S. Owen -- 23 Years Investment Experience
Lee Owen joined ABIM as a Vice President in 1983. From 1972 to 1983, Mr.
Owen was a Vice President and Portfolio Manager for T. Rowe Price Associates.
Mr. Owen is a 1970 graduate of Williams College and received his M.B.A. from
the University of Virginia in 1972. He is a member of the Baltimore Security
Analysts Society and the Financial Analysts Federation.
=============================================================================
11. DISTRIBUTOR
Alex. Brown acts as distributor of each class of the Fund's shares. Alex.
Brown is an investment banking firm which offers a broad range of investment
services to individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated which has engaged directly
and through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland Alex. Brown has
17
<PAGE>
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
==============================================================================
12. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services, ICC receives from the Fund an annual fee equal
to $13,000, plus a percentage of the Fund's average daily net assets in
excess of $10 million at a maximum rate of .10% of net assets, and declining
at various asset levels to a minimum rate of .001% on assets of $1 billion or
more. (See the Statement of Additional Information.) ICC also serves as the
Fund's investment advisor.
==============================================================================
13. PERFORMANCE INFORMATION
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return over one, five and ten year periods or, if such
periods have not yet elapsed, shorter periods corresponding to the life of
the Fund. Such total return quotations will be computed by finding average
annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value and other
fees, according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability
in investment company advertising and is not equivalent to a yield
calculation. If the Fund compares its performance to other funds or to
relevant indices, the Fund's performance will be stated in the same terms in
which such comparative data and indices are stated, which is normally total
return rather than yield.
18
<PAGE>
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc. and CDA Investment Technologies, Inc., independent
services which monitor the performance of mutual funds. The performance of
the Fund may also be compared to the Lehman Government Corporate Bond Index,
the Consumer Price Index, the return on 90 day U.S. Treasury bills, long-term
U.S. Treasury bonds, bank certificates of deposit, the Standard & Poor's 500
Stock Index and the Dow Jones Industrial Average. The Fund may also use total
return performance data as reported in the following national financial and
industry publications that monitor the performance of mutual funds: Money
Magazine, Forbes, Business Week, Barron's, Investor's Daily, IBC/Donoghue's
Money Fund Report and The Wall Street Journal.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which shares may be purchased, although not included in
calculations of performance, will reduce performance results.
==============================================================================
14. GENERAL INFORMATION
..............................................................................
CAPITAL SHARES
The Fund is a Maryland corporation, authorized to issue thirty-five
million shares of capital stock, with a par value of $.001 per share. Shares
of the Fund have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the
Fund, each share would be entitled to its portion of the Fund's assets after
all debts and expenses have been paid.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The Shares offered by this Prospectus have been designated: Flag
Investors Value Builder Fund Institutional Shares. The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have three other classes of shares in addition to the shares offered hereby:
Flag Investors Value Builder Fund Class A Shares, which are subject to a
maximum front-end sales charge of 4.5% and a .25%
19
<PAGE>
12b-1 fee; Flag Investors Value Builder Fund Class B Shares, which are
subject to a declining contingent deferred sales charge with a maximum charge of
4.0%, a .75% 12b-1 fee and a .25% shareholder servicing fee; and Flag Investors
Value Builder Fund Class D Shares, which are not currently being offered.
Different classes of the Fund may be offered to certain investors and holders of
such shares may be entitled to certain exchange privileges not offered to
Institutional Shares. All classes of the Fund share a common investment
objective, portfolio of investments and advisory fee, but the classes may have
different distribution/service fees or sales load structures and the net asset
value per share of the classes may differ at times.
..............................................................................
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders, but
special meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.
..............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
..............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
..............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact Alex. Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080 or a
Participating Dealer, as appropriate.
20
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
==============================================================================
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Value Builder Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080
8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
If you are paying by check, make check payable to "Flag Investors Value Builder
Fund, Inc." and mail with this Application. If you are paying by wire, see
instructions below.
==============================================================================
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Name on Account
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ------------------------------------------------------------------------------
Tax ID Number
[ ] Corporation [ ] Partnership [ ] Trust
[ ] Non-Profit or Charitable Organization [ ] Other -------------------------
If a Trust, please provide the following:
- -----------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
Mailing Address
- -----------------------------------------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
=============================================================================
INITIAL INVESTMENT
The initial minimum purchase for the Institutional Shares of the Fund is
$500,000. There is no minimum for clients of investment advisory affiliates
of Alex. Brown or for subsequent investments.
Indicate the amount to be invested and the method of payment:
___A. By Mail: Enclosed is a check in the amount of $________ payable to Flag
Investors Value Builder Fund, Inc.
___B. By Wire: A bank wire in the amount of $_______has been sent from
_____________________ ___________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for initial
investment:
o Send completed Application by overnight carrier to Alex. Brown & Sons
Incorporated/Flag Investors Funds at the address listed above.
o Call 1-800-553-8080 to obtain investor's new investor's Fund account
number.
o Wire payment of the purchase price to Investors Fiduciary Trust Company
("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7528167
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Value Builder Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to ______________________________________."
(Investor's Fund Account Number)
<PAGE>
==============================================================================
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in cash
==============================================================================
TELEPHONE TRANSACTIONS
I understand that the investor will automatically have telephone redemption
privileges (for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both of
the boxes below:
No, the investor does not want:
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account designated
below.
==============================================================================
BANK ACCOUNT DESIGNATION
(This Section Must Be Completed)
Please attach a blank, voided check to provide account and bank routing
information.
_____________________________________________________________________________
Name of Bank Branch
_____________________________________________________________________________
Bank Address City/State/Zip
_____________________________________________________________________________
Name(s) on Account
_____________________________________________________________________________
Account Number A.B.A. Number
<PAGE>
=============================================================================
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE
I have received a copy of the Fund's prospectus dated November 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is the investor's correct taxpayer identification
number and (2) that the investor is not subject to backup withholding as a
result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified the investor that it is no longer subject to
backup withholding. [ ] Check here if the investor is subject to backup
withholding.
If a non-resident alien, please indicate country of residence:_______________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that the investor may bear
the risk of loss in the event of fraudulent use of such privileges. If the
investor does not want telephone redemption or exchange privileges, I have so
indicated on this Application.
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
==============================================================================
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
________* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
__________________________________ _________________________________________
Name/Title Signature Date
_________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
<PAGE>
==============================================================================
CERTIFICATE OF AUTHORITY
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATION (With a Board of
Directors or Board of Trustees.
I ________________________, Secretary of the above-named investor, do hereby
certify that a meeting on ________________, at which a quorum was present
throughout, the Board of Directors (Board of Trustees) of the investor duly
adopted a resolution which is in full force and effect and in accordance with
the investor's charter and by-laws, which resolution did the following: (1)
empowered the officers/trustees executing this Application (or amendment) to do
so on behalf of the investor; (2) empowered the above-named Authorized Person(s)
to effect securities transactions for the investor on the terms described above;
(3) authorized the Secretary to certify, from time to time, the names and titles
of the officers of the investor and to notify ICC when changes in officers
occur; and (4) authorized the Secretary to certify that such a resolution has
been duly adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ___ day of ________, 199_ Secretary ________________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
_____________________________________________________________________________
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of Certificate B and attach it
to the Application).
______________________________________________________________________________
Signature and title Date
______________________________________________________________________________
Signature and title Date
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
------------------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
135 E. Baltimore Street
Baltimore, Maryland 21202
------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS WHICH MAY BE
OBTAINED FROM YOUR PARTICIPATING DEALER OR SHAREHOLDER
SERVICING AGENT OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, 135 EAST BALTIMORE STREET, BALTIMORE, MARYLAND
21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1995 as amended through November 1, 1995
Relating to the Prospectuses Dated:
August 1, 1995, relating to the Class A and Class B Shares
and
November 1, 1995, relating to the Institutional Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. General Information and History............................................... 1
2. Investment Objective, Policies and Risk Considerations........................ 1
3. Valuation of Shares and Redemption............................................ 8
4. Federal Tax Treatment of Dividends and
Distributions............................................................... 9
5. Management of the Fund........................................................ 12
6. Investment Advisory and Other Services........................................ 16
7. Distribution of Fund Shares................................................... 18
8. Brokerage..................................................................... 22
9. Capital Stock................................................................. 23
10. Semi-Annual Reports........................................................... 24
11. Custodian, Transfer Agent and Accounting Services............................. 24
12. Independent Accountants....................................................... 25
13. Performance Information....................................................... 25
14. Control Persons and Principal Holders of
Securities.................................................................. 27
15. Financial Statements.......................................................... 28
APPENDIX - Moody's Investors Service and Standard & Poor's Ratings Definitions.
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required to
furnish prospective investors with certain information concerning the activities
of the company being considered for investment. The Fund currently offers
three classes of shares: Flag Investors Value Builder Fund Class A Shares (the
"Class A Shares"), Flag Investors Value Builder Fund Class B Shares (the "Class
B Shares") and Flag Investors Value Builder Fund Institutional Shares (the
"Institutional Shares") (collectively, the "Shares"). As used herein, the "Fund"
refers to Flag Investors Value Builder 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 Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG) or, from Participating Dealers that offer
Shares to prospective investors. Prospectuses for the Class A Shares and the
Class B Shares 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 March 5, 1992. 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, and commenced
operations on June 15, 1992. The Fund commenced offering the Flag Investors
Value Builder Fund Class B Shares on January 3, 1995. The Institutional Shares
which were not offered prior to the date of this Statement of Additional
Information are offered only to certain eligible institutions and to clients of
investment advisory affiliates of Alex. Brown.
For the period from November 9, 1992 through November 18, 1994,
the Fund offered another class of shares: Flag Investors Value Builder Fund
Class D Shares, which were known at the time as Flag Investors Value Builder
Fund Class B Shares and reclassified as Flag Investors Value Builder Fund Class
D Shares on November 18, 1994. Shares of that class are not currently being
offered although some Class D Shares remain outstanding.
Under a license agreement dated June 15, 1992 between the Fund
and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund has the investment objective of maximizing total return
through a combination of long-term capital appreciation and current income. The
Fund seeks to achieve this objective through a policy of diversified investments
1
<PAGE>
in equity and debt securities (including common stocks, convertible securities
and government and corporate fixed-income obligations). Under normal market
conditions, between 40%-75% of the Fund's total assets will be invested in
equity securities and at least 25% of the Fund's total assets will be invested
in fixed-income securities, all as more fully described in the Prospectus. In
addition, the Fund may invest in other types of securities, which are also
described in the Prospectus. There can be no assurance that the Fund's
investment objective will be achieved.
In addition to the Fund's investments in corporate and government
fixed-income obligations rated, at the time of purchase, BBB or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's"), the Fund may purchase a limited amount, up to 10% of
its total assets, of non-convertible corporate debt obligations that are rated
below investment grade by Moody's or 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 the
Appendix to this Statement of Additional Information. The Fund may also invest
up to 5% of its net assets in covered call options, an additional 10% of its
total assets in the aggregate in American Depositary Receipts and in equity and
debt securities issued by foreign governments or corporations.
Additional information about certain of the Fund's investment
policies and practices are described below.
Covered Call Options
As a means of protecting the Fund's assets against market
declines, the Fund may, to a limited extent, write covered call option contracts
on certain of its securities which it owns or has the immediate right to acquire
provided that the aggregate value of such options does not exceed 5% of the
value of the Fund's net assets as of the time such options are entered into by
the Fund. If, however, the securities on which the calls have been written
appreciate, more than 5% of the Fund's assets may be subject to the call. The
Fund may also purchase call options for the purpose of terminating its
outstanding obligations with respect to securities upon which call option
contracts have been written.
When the Fund writes a call option on securities which it owns,
it gives the purchaser of the option the right, but not the obligation, to buy
the securities at the price specified in the option (the "Exercise Price") at
any time prior to the expiration of the option. In call options written by the
Fund, the Exercise Price, plus the option premium paid by the purchaser, will
almost always be greater than the market price of the underlying security at the
time a call option is written. If any option is exercised, the Fund will realize
the long-term or short-term gain or loss from the sale of the underlying
security and the proceeds of the sale will be increased by the net premium
originally received. By writing a covered option, the Fund may forego, in
exchange for the net premium, the opportunity to profit from an increase in
value of the underlying security above the Exercise Price. Thus, options will be
written when the Fund's investment advisor, Investment Company Capital Corp.
("ICC"), or the Fund's sub-advisor, Alex. Brown Investment Management ("ABIM")
(ICC and ABIM are sometimes collectively referred to as the "Advisors"), as
appropriate, believes the security should be held for the long-term but expects
no appreciation or only moderate appreciation within the option period. The Fund
also may write covered options on securities that have a current value above the
original purchase price but which, if then sold, would not normally qualify for
a long-term capital gains treatment. Such activities will normally take place
during periods when market volatility is expected to be high.
2
<PAGE>
Only call options which are traded on a national securities
exchange will be written. Currently, call options may be traded on the Chicago
Board Options Exchange and the American, Pacific, Philadelphia and New York
Stock Exchanges. Call options are issued by The Options Clearing Corporation,
which also serves as the clearing house for transactions with respect to
options. The price of a call option is paid to the writer without refund on
expiration or exercise, and no portion of the price is retained by The Options
Clearing Corporation or the exchanges listed above. Writers and purchasers of
options pay the transaction costs, which may include commissions charged or
incurred in connection with such option transactions.
Call options may be purchased by the Fund, but only to terminate
an obligation as a writer of a call option. This is accomplished by making a
closing purchase transaction, that is, the purchase of a call option on the same
security with the same Exercise Price and expiration date as specified in the
call option which had been written previously. A closing purchase transaction
with respect to calls traded on a national securities exchange has the effect of
extinguishing the obligation of a writer. Although the cost to the Fund of such
a transaction may be greater than the net premium received by the Fund upon
writing the original option, the Directors believe that it is appropriate for
the Fund to have the ability to make closing purchase transactions in order to
prevent its portfolio securities from being purchased pursuant to the exercise
of a call. ICC may also permit the call option to be exercised. A profit or loss
from a closing purchase transaction or exercise of a call option will be
realized depending on whether the amount paid to purchase a call to close a
position, or the price at which the option is exercised, is less or more than
the amount received from writing the call. In the event that the Advisors are
incorrect in their forecasts regarding market values, interest rates and other
applicable factors, the Fund would be in a worse position than if the call
option had not been written.
Positions in options on stocks may be closed before expiration
only by a closing transaction, which may be made only on an exchange which
provides a liquid secondary market for such options. Although the Fund will
write options only when ICC believes a liquid secondary market will exist on an
exchange for options of the same series, there can be no assurance that a liquid
secondary market will exist for any particular stock option. Possible reasons
for the absence of a liquid secondary market on an exchange for an option
include the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) inadequacy of the facilities of
an exchange or The Options Clearing Corporation to handle trading volume; or (e)
a decision by one or more exchanges to discontinue the trading of options or to
impose restrictions on types of orders. Although The Options Clearing
Corporation has stated that it believes (based on forecasts provided by the
exchanges on which options are traded) that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and although
each exchange has advised The Options Clearing Corporation that it believes that
its facilities will also be adequate to handle reasonably anticipated volume,
there can be no assurance that higher than anticipated trading activity or order
flow or other unforeseen events might not at times render certain of these
facilities inadequate and thereby result in the institution of special trading
procedures or restrictions.
Certain provisions of Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), will restrict the use of covered call options.
(See "Federal Tax Treatment of Dividends and Distributions" below.)
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Convertible Securities
As described in the Prospectus, the Fund may invest in
convertible securities. In general, the market value of a convertible security
is at least the higher of its "investment value" (i.e., its value as a
fixed-income security) or its "conversion value" (i.e., the value of the
underlying shares of common stock if the security is converted). A convertible
security tends to increase in market value when interest rates decline and tends
to decrease in value when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security tends to
increase as the market value of the underlying common stock increases, whereas
it tends to decrease as the market value of the underlying stock declines.
Investments in convertible securities generally entail less risk than investment
in common stock of the same issuer.
Below Investment Grade Corporate Bonds
The Fund may purchase non-convertible corporate bonds that carry
ratings lower than those assigned to investment grade bonds by Moody's or S&P,
or that are unrated if such bonds, in the Advisors' judgment, meet the quality
criteria established by the Board of Directors. These bonds are generally known
as "junk bonds." These securities may trade at substantial discounts from their
face values. Accordingly, if the Fund is successful in meeting its objectives,
investors may receive a total return consisting not only of income dividends
but, to a lesser extent, capital gain distributions. Appendix A to this
Statement of Additional Information sets forth a description of the S&P and
Moody's rating categories, which indicate the rating agency's opinion as to the
probability of timely payment of interest and principal. These ratings range in
descending order of quality from AAA to D, in the case of S&P, and from Aaa to
C, in the case of Moody's. Generally, securities which are rated lower than BBB
by S&P or Baa by Moody's are described as below investment grade. Securities
rated lower than investment grade may be of a predominately speculative
character and their future cannot be considered well-assured. The issuer's
ability to make timely payments of principal and interest may be subject to
material contingencies. Securities in the lowest rating categories may be unable
to make timely interest or principal payments and may be in default and in
arrears in interest and principal payments.
The following summarizes the Moody's and S&P definitions for
speculative grade debt obligations. Bonds which are rated Ba by Moody's are
judged to have speculative elements; their future cannot be considered
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. Caa rated bonds are of
poor standing. Such issues may be in default or may have elements of danger with
respect to principal or interest. Ca rated bonds represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing. In the case of S&P, BB rated bonds
have less near-term vulnerability to default than other speculative issues but
face major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which may lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB- rating. B
rated bonds have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating. CCC rated bonds have a currently identifiable vulnerability to
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default and, without favorable business, financial, and economic conditions,
will be unable to repay interest and principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The CC rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The C rating is
typically applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The CI rating is reserved for income bonds on which no interest
is being paid. Bonds which are rated D are in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Ratings of S&P and Moody's represent their opinions of the
quality of bonds and other debt securities they undertake to rate at the time of
issuance, however, ratings are not absolute standards of quality and may not
reflect changes in an issuer's creditworthiness. Accordingly, the Advisors do
not rely exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities but supplement such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high yield securities will be significantly affected not only by credit
quality but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisors of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.
Investing in higher yield, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high yield bonds will fluctuate over
time, reflecting not only changing interest rates but also the bond market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing interest
rates. In addition, in adverse economic conditions, the liquidity of the
secondary market for junk bonds may be significantly reduced. In addition,
adverse economic developments 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 lower rated
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 lower rated 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
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tax deduction for interest payments or to regulate corporate restructurings such
as takeovers, mergers or leveraged buyouts. Such legislation may significantly
depress the prices of outstanding high yield bonds.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks
or broker-dealers deemed to be creditworthy by ICC, and the Fund's sub-advisor,
ABIM under guidelines approved by the Board of Directors. A repurchase agreement
is a short-term investment in which the purchaser (i.e., the Fund) acquires
ownership of a debt security and the seller agrees to repurchase the obligation
at a future time and set price, usually not more than seven days from the date
of purchase, thereby determining the yield during the purchaser's holding
period. The value of underlying securities will be at least equal at all times
to the total amount of the repurchase obligation, including the interest factor.
The Fund makes payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of a custodian or bank acting as
agent. The underlying securities, which in the case of the Fund are securities
of the U.S. Government only, may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying securities
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including (a) possible decline in the value of the underlying security while the
Fund seeks to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period and (c) expenses of
enforcing its rights.
Foreign Investment Risk Considerations
From time to time, the Advisors may invest up to 10% of the
Fund's assets in American Depository Receipts, which are U.S. exchange listed
interests in securities of foreign companies, and in debt and equity securities
issued by foreign corporate and government issuers when the Advisors believe
that such investments provide good opportunities for achieving income and
capital gains without undue risk. Foreign investments involve substantial and
different risks which should be carefully considered by any potential investor.
In general, less information is publicly available about foreign companies than
is available about companies in the United States. Most foreign companies are
not subject to uniform audit and financial reporting standards, practices and
requirements comparable to those in the United States. In most foreign markets
volume and liquidity are less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on foreign stock exchanges are generally higher than the negotiated commissions
on United States exchanges. There is generally less government supervision and
regulation of foreign stock exchanges, brokers, and companies in the United
States. The settlement period for foreign securities, which are often longer
than those for securities of U.S. issuers, may affect portfolio liquidity.
Portfolio securities held by the Fund which are listed on foreign exchanges may
be traded on days that the Fund does not value its securities, such as Saturdays
and the customary United States business holidays on which the New York Stock
Exchange is closed. As a result, the net asset value of Shares may be
significantly affected on days when shareholders do not have access to the Fund.
Although the Fund intends to invest in securities of companies
and governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries. The dividends and interest payable on certain of the
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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. 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.
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as federal
and state regulatory limitations. The investment restrictions recited below are
in addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate;
2. Purchase or sell commodities or commodities contracts,
including financial futures contracts;
3. Act as an underwriter of securities within the meaning of the
U.S. federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
4. Issue senior securities;
5. Make loans, except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements in accordance with its
investment objectives and policies;
6. Effect short sales of securities;
7. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
8. Purchase participations or other direct interests in oil, gas
or other mineral leases or exploration or development programs; or
9. Invest more than 10% of the value of its net assets in
illiquid securities (as defined under federal or state securities laws),
including repurchase agreements with remaining maturities in excess of seven
days, provided, however, that the Fund shall not invest more than 5% of its
total assets in securities that the Fund is restricted from selling to the
public without registration under the Securities Act of 1933, as amended
(excluding restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended, that have been determined to be liquid
by the Fund's Board of Directors based upon the trading markets for such
securities).
The following are investment restrictions that may be changed by
a vote of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been
in operation directly or through predecessors for less than three years;
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2. Invest in shares of any other investment company registered
under the Investment Company Act, other than in connection with a merger,
consolidation, reorganization or acquisition of assets;
3. Purchase or retain the securities of any issuer if to the
knowledge of the Fund any officer or Director of the Fund or its investment
advisor owns beneficially more than .5% of the outstanding securities of such
issuer and together they own beneficially more than 5% of the securities of such
issuer;
4. Invest in companies for the purpose of exercising management
or control;
5. Invest in puts, calls, straddles, spreads or any combination
thereof, except that the Fund may write covered call options and may enter into
related closing transactions in accordance with its investment objectives and
policies;
6. Purchase warrants, if by reason of such purchase more than 5%
of the Fund's net assets (taken at market value) will be invested in warrants,
valued at the lower of cost or market. Included within this amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants that are not
listed on the New York or American Stock Exchange. For the purpose of the
foregoing calculations, warrants acquired by the Fund in units or attached to
securities will be deemed to be without value and therefore not included within
the preceding limitations; or
7. Invest in real estate limited partnerships.
The percentage limitations contained in these restrictions apply
at the time of purchase of securities.
The Fund's annual portfolio turnover rate (the lesser of the
value of the purchases or sales for the year divided by the average monthly
market value of the portfolio during the year, excluding U.S. Government
securities and securities with maturities of one year or less) may vary from
year to year, as well as within a year, depending on market conditions. For the
fiscal years ended March 31, 1995 and March 31, 1994, the Fund's portfolio
turnover rate was 18% and 8%, respectively.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined once daily as of 4:00
p.m. (Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business on
all weekdays except for the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Net asset value per share of a class is calculated by valuing all
assets held by the Fund, deducting liabilities attributable to all shares and
any liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this purpose,
portfolio securities will be given their market value where feasible. If a
portfolio security is traded on a national exchange or on an automated dealer
quotation system, such as NASDAQ, on the valuation date, the last quoted sale
price will generally be used. Options are valued at the last reported sale
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price, or if no sales are reported, at the average of the last reported bid and
asked prices. Securities or other assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established from time to time and monitored by the Fund's Board
of Directors. Debt obligations with maturities of 60 days or less are valued at
amortized cost which constitutes fair value as determined by the Fund's Board of
Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Class A Shares
and Class B Shares by check, and Institutional Shares by wire transfer of funds,
as described in the Prospectuses relating to such Shares. However, if the
Board of Directors determines that it would be in the best interests of the
remaining shareholders to make payment of the redemption price in whole or in
part by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash, in conformity with applicable rules of
the SEC, the Fund will make such distributions in kind. If Shares are redeemed
in kind, the redeeming shareholder will incur brokerage costs in later
converting the assets into cash. The method of valuing portfolio securities is
described under "Valuation of Shares" and such valuation will be made as of the
same time the redemption price is determined. The Fund has elected to be
governed by Rule 18f-1 under the Investment Company Act pursuant to which the
Fund is obligated to redeem Shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during any 90-day period for any one
shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
The summary of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. Subsequent legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Qualification as a Regulated Investment Company
The Fund expects to be taxed as a regulated investment company
under Subchapter M of the Code. However, in order to qualify as a regulated
investment company for any taxable year, the Fund generally must (1) derive at
least 90% of its gross income from dividends, interest, certain payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and other income (including, but not limited
to gains from options, futures or forward contracts) derived with respect to its
business of investing in stocks, securities or currencies (the "Income
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Requirement"), and (2) derive less than 30% of its gross income (exclusive of
certain gains from designated hedging transactions that are offset by realized
or unrealized losses on offsetting positions) from gains on the sale or other
disposition of any of the following investments if such investments are held for
less than three months (the "Short-Short Gain Test"): (a) stock or securities
(as defined in Section 2(a)(36) of the Investment Company Act); (b) options,
futures or forward contracts (other than options, futures, or forward contracts
on foreign currencies), and (c) foreign currencies (or options, futures, or
forward contracts on foreign currencies) but only if such currencies (or
options, futures, or forward contracts) are not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stocks or securities).
In addition, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its assets must consist of cash and cash
items, U.S. government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has not
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses (the "Asset Diversification Test"). Generally, the Fund will not lose
its status as a regulated investment company if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of portfolio
assets not attributable to a purchase.
Under Subchapter M, the Fund is exempt from federal income tax on
its net investment income and capital gains which it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (net investment income and the excess of net short term
capital gains over net long term capital losses) for the year (the "Distribution
Requirement") and complies with the other requirements of the Code described
above. Distributions of investment company taxable income made during the
taxable year or, under certain specified circumstances, within twelve months
after the close of the taxable year will satisfy the Distribution Requirement.
The Distribution Requirement for any year may be waived if a regulated
investment company establishes to the satisfaction of the Internal Revenue
Service that it is unable to satisfy the Distribution Requirement by reason of
distributions previously made for the purpose of avoiding liability for Federal
excise tax.
Although the Fund intends to distribute substantially all of its
net investment income and may distribute its capital gains for any taxable year,
the Fund will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If for any taxable year, the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax rates without any deduction for distributions to
shareholders, and all such distributions generally will be taxable to
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the 70% dividends received deduction for corporate shareholders.
Fund Distributions
Distributions of investment company taxable income will be
taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are invested in additional Shares. The Fund
anticipates that it will distribute substantially all of its investment company
taxable income for each taxable year.
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The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gains"). If such gains are distributed as a capital gains distribution,
they are taxable to shareholders as long-term capital gains, regardless of the
length of time the shareholder has held Shares. Conversely, if the Fund elects
to retain its net capital gains, it will be taxed thereon (except to the extent
of any available capital loss carryovers) at the applicable corporate capital
gains tax rate. In this event, it is expected that the Fund also will elect to
have shareholders treated as having received a distribution of such gains, with
the result that shareholders will be required to report such gains on their
returns as long-term capital gains, will receive a tax credit for their
allocable share of capital gains tax paid by the Fund on the gains, and will
increase the tax basis for their Shares by an amount equal to 65 percent of such
gains.
In the case of corporate shareholders, Fund distributions (other
than capital gains distributions) generally qualify for the 70% dividends
received deduction to the extent of the gross amount of qualifying dividends
received by the Fund for the year. Generally, and subject to certain
limitations, a dividend will be treated as a qualifying dividend if it has been
received from a domestic corporation. For purposes of the alternative minimum
tax and the environmental tax, corporate shareholders generally will be required
to take the full amount of any dividend received from the Fund into account in
determining their adjusted current earnings for purposes of computing
"alternative minimum taxable income."
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.
Generally, gain or loss on the sale or exchange of a Share will
be capital gain or loss which will be long-term if the Share has been held for
more than one year and otherwise will be short-term. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of the Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund which have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). Investors should
particularly note that this loss disallowance rule will apply to Shares received
through the reinvestment of dividends during the 61-day period.
The Fund will provide a statement annually to shareholders as to
the federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends received deduction.
The Fund will be required in certain cases to withhold and remit
to the United States Treasury 31% of distributions payable to any shareholder
who (1) has provided either an incorrect taxpayer identification number or no
number at all, (2) who is subject to backup withholding by the Internal
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Revenue Service for failure to properly report receipt of interest or dividends,
or (3) who has failed to certify to the Fund that the shareholder is not subject
to backup withholding.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% excise tax on regulated
investment companies that do not distribute in each calendar year an amount
equal to 98% of their ordinary income for the calendar year plus 98% of their
capital gain net income for the one-year period ending on October 31 of such
calendar year. The excise tax is imposed on the undistributed part of this
required distribution. In addition, the balance of such income must be
distributed during the next calendar year to avoid liability for the excise tax
in that year. For the foregoing purposes, an investment company is treated as
having distributed any amount on which it is subject to income tax for any
taxable year ending in such calendar year. Because the Fund intends to
distribute all of its income currently (or to retain, at most its net capital
gains and pay tax thereon), the Fund does not anticipate incurring any liability
for this excise tax. However, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments in order to make
sufficient distributions to avoid excise tax liability and, in addition, that
the liquidation of such investments in such circumstances may affect the ability
of the Fund to satisfy the Short-Short Gain Test.
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their
respective ages and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is 135 East Baltimore Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman (68)
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown Incorporated.
*W. JAMES PRICE, Director (71)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3343. Director, Boca Research, Inc. (computer peripherals);
Managing Director Emeritus, Alex. Brown & Sons Incorporated; Director,
CSX Corporation (transportation and natural resources company) and
PHH Corporation (business services).
*RICHARD T. HALE, Director (50)
Managing Director, Alex. Brown & Sons Incorporated.
JAMES J. CUNNANE, Director (57)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (a merchant banking firm), 1993-Present; Formerly,
Senior Vice-President and Chief Financial Officer, General Dynamics
Corporation (defense)(1989-1993) and Director, The Arch Fund (mutual
fund).
12
<PAGE>
N. BRUCE HANNAY, Director (74)
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice
President, Research and Patents, AT&T Bell Laboratories; Formerly,
Director, Rohm & Haas Company (diversified chemicals), General Signal
Corp. (control equipment & systems) and Director, Plenum Publishing
Corp.
JOHN F. KROEGER, Director (71)
P.O. Box 464, 24875 Swan Road-Martingham, St. Michaels, Maryland 21663.
Director/Trustee, AIM Funds (registered investment companies); Formerly,
Consultant, Wendell & Stockel Associates, Inc. (consulting firm);
General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (62)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (banking and finance); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director (63)
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).
HARRY WOOLF, Director (72)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at Large Emeritus, Institute for Advanced Study;
Director, Merrill Lynch Cluster C Funds (registered investment
companies); ATL and Spacelabs Medical Corp. (medical equipment); Family
Health International (nonprofit research and education).
J. DORSEY BROWN, III, President (56)
Managing Director, Alex. Brown & Sons Incorporated; Chief Executive
Officer and Formerly, General Partner, Alex. Brown Investment
Management.
HOBART C. BUPPERT, Executive Vice President (49)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor), 1984-Present; President, Buppert,
Behrens & Owen, Inc. 1987-Present.
LEE S. OWEN, Executive Vice President (48)
Portfolio Manager, Alex. Brown Investment Management (registered
investment advisor); Vice President and Secretary, Buppert, Behrens &
Owen, Inc.
BRUCE E. BEHRENS, Vice President (51)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Treasurer, Buppert,
Behrens & Owen, Inc.
EDWARD J. VEILLEUX, Vice President (52)
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); Vice President,
Armata Financial Corp. (registered broker-dealer).
13
<PAGE>
GARY V. FEARNOW, Vice President (50)
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary (36)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
DIANA M. ELLIS, Treasurer (44)
Manager, Portfolio Accounting Department, Investment Company Capital
Corp. (registered investment advisor); Mutual Fund Accounting
Department, Alex. Brown & Sons Incorporated, 1991 - Present; Formerly,
Accounting Manager, Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary (29)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991 -
Present; Formerly, student 1989-1991.
- ------------
* A Director who is an "interested person", as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed, administered,
advised or distributed by Alex. Brown or its affiliates. There are currently 12
funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Price serves as a Director of seven funds
in the Fund Complex and Mr. Semans serves as a director of eight funds in the
Fund Complex. Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and Woolf serve
as Directors of each fund in the Fund Complex. Mr. Hale serves as President and
Director of one fund, Vice President of one fund and as a Director of 10 other
funds in the Fund Complex. Mr. Behrens serves as President of one fund and Vice
President of two funds in the Fund Complex. Mr. Brown serves as President of one
fund and Vice President of two funds in the Fund Complex. Mr. Buppert serves as
Vice President of three funds in the Fund Complex and Mr. Owen serves as
President of one fund and Vice President of two funds in the Fund Complex. Mr.
Fearnow serves as Vice President of 10 funds in the Fund Complex. Mr. Veilleux
serves as Executive Vice President of one fund and as Vice President of 11 funds
in the Fund Complex. Mr. Nelson serves as Vice President and Secretary, Ms.
Ellis serves as Treasurer and Ms. DePrine serves as Assistant Secretary,
respectively, of each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had
normal brokerage transactions with, Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown may be considered to have received remuneration
indirectly. As compensation from the Fund, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his attendance
at board and committee meetings) from all Flag Investors/ISI Funds and Alex.
Brown Cash Reserve Fund, Inc. for which he serves. Payment of such fees and
expenses are allocated among all such funds described above in proportion to
their relative net assets. For the fiscal year ended March 31, 1995,
Non-Interested Directors' fees attributable to the assets of the Fund totalled
approximately $9,132. The following table shows aggregate compensation paid to
each of the Fund's Directors by the Fund and the Fund Complex, respectively, in
the fiscal year ended March 31, 1995.
14
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation From the Fund Total Compensation From the Fund
for the Fiscal Year Ended March 31, and Fund Complex Paid to Directors
1995 for the Fiscal Year Ended March 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Truman T. Semans, Chairman $0 $0
*W. James Price, Director $0 $0
*Richard T. Hale, Director $0 $0
James J. Cunnane, Director $384** $9,750 for service on 13 Boards**(3)
N. Bruce Hannay, Director $1,526(1) $39,000 for service on 13 Boards(3)
John F. Kroeger, Director $1,679 $42,000 for service on 13 Boards(3)
Louis E. Levy, Director $1,157*** $29,250 for service on 13 Boards***(3)
Eugene J. McDonald, Director $1,526(2) $39,000 for service on 13 Boards(3)
Harry Woolf, Director $1,526(2) $39,000 for service on 13 Boards(3)
</TABLE>
- ---------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
1 $377 of this amount has been deferred pursuant to a deferred
compensation plan.
2 $762 of this amount has been deferred pursuant to a deferred
compensation plan.
3 One of the funds ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement
Plan") for Directors who are not employees of the Fund, the Fund's Advisor or
their respective affiliates (the "Participants"). After completion of five years
of service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned by him in his last year of
service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Messrs. Hannay, Kroeger
and Woolf have qualified but have not received benefits, and no such benefits
are being accrued for them since they have not yet retired. The Fund has one
Participant, a Director who retired effective December 31, 1994, who has
qualified for the Retirement Plan and who will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
Beginning in December, 1994, any Director who receives fees from
the Fund is permitted to defer a minimum of 50%, or up to all, of his annual
compensation pursuant to a Deferred Compensation Plan.
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<PAGE>
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
significantly restricts the personal investing activities of all employees of
ICC and the directors and officers of Alex. Brown. As described below, the Code
of Ethics imposes additional, more onerous, restrictions on the Fund's
investment personnel, including the portfolio managers and employees who execute
or help execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of ICC, any
director or officer of Alex. Brown, and all Non-Interested Directors, preclear
any personal securities investments (with limited exceptions, such as
non-volitional purchases or purchases which are part of an automatic dividend
reinvestment plan). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to investment
personnel include a ban on acquiring any securities in an initial public
offering, a prohibition from profiting on short-term trading in securities and
preclearance of the acquisition of securities in private placements.
Furthermore, the Code of Ethics provides for trading "blackout periods" that
prohibit trading by investment personnel and certain other employees within
periods of trading by the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On March 13, 1992, the Board of Directors of the Fund, including
a majority of the Non-Interested Directors, approved an Investment Advisory
Agreement between the Fund and ICC and a Sub-Advisory Agreement among the Fund,
ICC and ABIM, both of which contracts are described in greater detail below. The
Investment Advisory Agreement and the Sub-Advisory Agreement were approved by
the sole shareholder of the Fund on June 5, 1992. ICC, the investment advisor,
is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor. ICC is also
the investment advisor to Alex. Brown Cash Reserve Fund, Inc., Flag Investors
Telephone Income Fund, Inc., Flag Investors International Fund, Inc., Flag
Investors Emerging Growth Fund, Inc., Flag Investors Intermediate-Term Income
Fund, Inc., Flag Investors Maryland Intermediate Tax Free Income Fund, Inc.,
Flag Investors Real Estate Securities Fund, Inc. and Flag Investors Equity
Partners Fund, Inc., which, are also distributed by Alex. Brown.
ABIM is a limited partnership affiliated with Alex. Brown.
Buppert, Behrens & Owens, Inc., a company organized and owned by three employees
of ABIM, owns a 49% limited partnership interest and a 1% general partnership
interest in ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and
Alex. Brown Incorporated owns the remaining 49% limited partnership interest.
ABIM, also the sub-advisor to Flag Investors Telephone Income Fund, Inc. and
Flag Investors Equity Partners Fund, Inc. is a registered investment advisor
with approximately $3.5 billion under management as of June 30, 1995.
Under the Investment Advisory Agreement, ICC obtains and
evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM, provided that ICC continues to supervise the performance
of ABIM and report thereon to the Fund's Board of Directors. Any investment
program undertaken by ICC or ABIM will at all times be subject to policies and
control of the Fund's Board of Directors. ICC will provide the Fund with office
space for managing its affairs, with the services of required executive
16
<PAGE>
personnel and with certain clerical and bookkeeping services and facilities.
These services are provided by ICC without reimbursement by the Fund for any
costs. Neither ICC nor ABIM shall be liable to the Fund or its shareholders for
any act or omission by ICC or ABIM or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty. The services of ICC and ABIM to the
Fund are not exclusive and ICC and ABIM are free to render similar services to
others.
As compensation for its services, ICC is entitled to receive an
annual fee from the Fund, calculated daily and payable monthly, at the annual
rate of 1.00% of the first $50 million of the Fund's average daily net assets,
.85% of the Fund's average daily net assets in excess of $50 million but not
exceeding $100 million, .80% of the Fund's average daily net assets in excess of
$100 million but not exceeding $200 million, and .70% of the Fund's average
daily net assets in excess of $200 million. As compensation for its services,
ABIM receives a fee from ICC, calculated daily and payable monthly, at the
annual rate of .75% of the first $50 million of the Fund's average daily net
assets, .60% of the Fund's average daily net assets in excess of $50 million but
not exceeding $200 million, and .50% of the Fund's average daily net assets in
excess of $200 million.
This fee is higher than that paid by most mutual funds, but ICC
has voluntarily agreed to waive a portion of its fee from time to time so that
the Fund's total operating expenses do not exceed 1.35% of the Class A Shares'
average daily net assets, 2.10% of the Class B Shares' average daily net
assets and 1.10% of the Institutional Shares' average daily net assets. ABIM has
also agreed to waive, on a voluntary basis, that portion of its fee payable from
ICC for sub-advisory services in excess of the amount equal to .65% of the
Fund's average daily net assets.
In addition, ICC has agreed to reduce its aggregate fees on a
monthly basis for any fiscal year to the extent required so that the amount of
the ordinary expenses of the Fund (excluding brokerage commissions, interest,
taxes and extraordinary expenses such as legal claims, liabilities, litigation
costs and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the Shares
are registered or qualified for sale, as such limitations may be raised or
lowered from time to time. Currently, the most restrictive of such expense
limitations requires ICC to reduce its fees to the extent required so that
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes,
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) do not exceed 2.5% of the first $30 million
of the Fund's average daily net assets, 2.0% of the next $70 million of the
Fund's average daily net assets and 1.5% of the Fund's average daily net assets
in excess of $100 million. In addition, if required to do so by any applicable
state securities laws or regulations, ICC will reimburse the Fund to the extent
required to prevent the expense limitations of any state law or regulation from
being exceeded.
Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Non-Interested Directors who have no direct or indirect financial interest in
such agreements, by votes cast in person at a meeting called for such purpose,
or by a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Investment Advisory Agreement and the Sub-Advisory Agreement were
most recently approved for continuance by the Board of Directors on September
25, 1995. 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
17
<PAGE>
termination provisions. For the fiscal years ended March 31, 1995 and March 31,
1994 and for the fiscal period ended March 31, 1993, the Fund paid ICC fees (net
of fee waivers of $67,326, $38,495 and $138,716) of $1,248,666, $1,009,858, and
$240,367 and ICC paid ABIM from the fees it received (and, in the period ended
March 31, 1993, from its owns resources), fees (net of fee waivers) of $967,323,
$760,523 and $243,381, respectively.
ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. (See "Custodian, Transfer
Agent, Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the exclusive distributor of the Fund's
Shares pursuant to three separate Distribution Agreements, one for each class of
the Fund's Shares.
The Class A Shares and the Class B Shares
The Distribution Agreements for the Class A Shares and the Class
B Shares (collectively, the "Class A and Class B Distribution Agreements")
provide that Alex. Brown has the exclusive right to distribute the related class
of Flag Investors Value Builder Fund Shares either directly or through other
broker-dealers and further provide that Alex. Brown will: (a) solicit and
receive orders for the purchase of Shares; (b) accept or reject such orders on
behalf of the Fund in accordance with the Fund's currently effective
Prospectus and transmit such orders as are accepted to the Fund's transfer agent
as promptly as possible; (c) receive requests for redemptions and transmit such
redemption requests to the Fund's transfer agent as promptly as possible; and
(d) respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund. Alex. Brown has not undertaken to sell
any specific number of Shares. The Class A and Class B Distribution Agreements
further provide that, in connection with the distribution of Shares, Alex. Brown
will be responsible for all of the promotional expenses. The services provided
by Alex. Brown to the Fund are not exclusive, and Alex. Brown is free to provide
similar services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which such broker-dealers
have agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
As compensation for providing distribution services as described
above for the Class A Shares, Alex. Brown receives an annual fee, paid monthly
equal to .25% of the average daily net assets of the Class A Shares. As
compensation for providing distribution services as described above for the Flag
Investors Class B Shares, Alex. Brown receives an annual fee, paid monthly,
equal to .75% of the average daily net assets of the Class B Shares. As
compensation for providing distribution services for the Class A Shares for the
fiscal years ended March 31, 1995 and March 31, 1994, and for the period from
June 15, 1992 (commencement of operations) through March 31, 1993, Alex. Brown
received from the Fund aggregate commissions and fees in the amount of $342,916,
$265,840 and $94,139, respectively, and from such fees paid $333,580, $115,614
and $73,303 to its investment representatives and $9,351, $5,942 and $0 to
Participating Dealers as compensation. Alex. Brown expects to allocate most of
18
<PAGE>
its annual distribution fee to its investment representatives and up to all of
its fee to broker-dealers who enter into Sub-Distribution Agreements with
Alex. Brown.
In addition, with respect to the Class B Shares, the Fund will
pay Alex. Brown a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) For the
period from January 3, 1995 through March 31, 1995, Alex. Brown received
distribution and shareholder servicing fees of $406 for the Class B Shares.
Pursuant to Rule 12b-1 under the Investment Company Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, only pursuant to a plan adopted by the investment company's board of
directors and approved by its shareholders, the Fund has adopted a Plan of
Distribution for each of its classes of Shares (except the Institutional Shares
class) (the "Plans"). Under the Plans, the Fund pays a fee to Alex. Brown for
distribution and other shareholder servicing assistance as set forth in the
Class A and Class B Distribution Agreements, and Alex. Brown is authorized to
make payments out of its fee to its investment representatives and to
participating broker-dealers. Each of the Class A and Class B Distribution
Agreements has an initial term of two years. The Class A and Class B
Distribution Agreements and the Plans encompassed therein will remain in effect
from year to year thereafter, if specifically approved at least annually by the
Fund's Board of Directors and by the affirmative vote of a majority of the
Non-Interested Directors by votes cast in person at a meeting called for such
purpose. The Class A and Class B Distribution Agreements including the Plans and
forms of Sub-Distribution Agreements, were most recently approved by the Fund's
Board of Directors, including a majority of the Non-Interested Directors on
September 25, 1995.
In approving the Plans, the Directors concluded, in the exercise
of reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreements without the approval of the shareholders of the
Fund. The Plans may be terminated at any time and the Class A and Class B
Distribution Agreements may be terminated at any time upon sixty days' notice,
in either case without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Stock"). Any Sub-Distribution Agreement may be
terminated in the same manner at any time. The Class A and Class B Distribution
Agreements, any Sub-Distribution Agreement and any Shareholder Servicing
Agreement shall automatically terminate in the event of assignment.
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plan to Alex. Brown pursuant to
the Class A and Class B Distribution Agreements, to broker-dealers pursuant to
any Sub-Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors shall
be committed to the discretion of the Non-Interested Directors then in office.
In addition, with respect to the Class A and Class B Shares, the
Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, such as banks, to act as Shareholder Servicing Agents, pursuant to
19
<PAGE>
which Alex. Brown will allocate a portion of its distribution fee as
compensation for such financial institutions' ongoing shareholder services.
Although banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Fund, according to interpretations by
various bank regulatory authorities, financial institutions are not prohibited
from acting in other capacities for investment companies, such as the
shareholder servicing capacities described above. Should future legislative,
judicial or administrative action prohibit or restrict the activities of the
Shareholder Servicing Agents in connection with the Shareholder Servicing
Agreements, the Fund may be required to alter materially or discontinue its
arrangements with the Shareholder Servicing Agents. Such financial institutions
may impose separate fees in connection with these services and investors should
review the Prospectus and this Statement of Additional Information in
conjunction with any such institution's fee schedule. In addition, state
securities laws on this issue may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown under
such Plans. Payments under the Plans are made as described above regardless of
Alex. Brown's actual cost of providing distribution services and may be used to
pay Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Class A Shares is less than .25% of the average daily net assets
invested in that Class or Class B Shares is less than .75% of the average daily
net assets invested in that Class for any period, the unexpended portion of the
distribution fees may be retained by Alex. Brown. The Plans do not provide for
any charges to the Fund for excess amounts expended by Alex. Brown and, if
either of the Plans is terminated in accordance with its terms, the obligation
of the Fund to make payments to Alex. Brown pursuant to such Plan will cease and
the Fund will not be required to make any payments past the date the
Distribution Agreement terminates with respect to such Plan.
The Institutional Shares
The Institutional Distribution Agreement provides that Alex.
Brown has the exclusive right to distribute the Institutional Shares, either
directly or through other broker-dealers and further provides that Alex. Brown
will solicit and receive orders for the purchase of Institutional Shares, accept
or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective Prospectus for the Institutional Shares and transmit such
orders as are accepted to the Fund's transfer agent as promptly as possible,
receive requests for redemption and transmit such redemption requests to the
Fund's transfer agent as promptly as possible, respond to inquiries from the
Fund's shareholders concerning the status of their accounts with the Fund,
maintain such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors, and take all actions deemed
necessary to carry into effect the distribution of the Institutional Shares.
Alex. Brown has not undertaken to sell any specific number of Institutional
Shares. The Institutional Distribution Agreement further provides that, in
connection with the distribution of Institutional Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services provided by Alex.
Brown to the Fund are not exclusive, and Alex. Brown is free to provide similar
services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown receives no compensation for distributing the
Institutional Shares.
Alex. Brown and 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.
The Institutional Distribution Agreement was approved by the
Fund's Board of Directors on September 25, 1995 and by the sole shareholder of
the class on October 31, 1995. It has an initial term of two years and will
remain in effect from year to year thereafter, if specifically approved at least
20
<PAGE>
annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast at a meeting called for
such purpose. It may be terminated at any time upon sixty days' written
notice, without penalty, by the vote of a majority of the Fund's Non-Interested
Directors or by a vote of a majority of the outstanding Institutional Shares (as
defined under Capital Stock). The Institutional Distribution Agreement and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
General Information
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and of independent auditors, in connection with any
matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by Alex. Brown, ICC or ABIM.
The address of Alex. Brown is 135 East Baltimore Street,
Baltimore, Maryland 21202.
For the period from November 9, 1992 through November 18, 1994
the Fund offered the Flag Investors Value Builder Fund Class D Shares (which
were known at that time as the Flag Investors Value Builder Fund Class B
Shares). As compensation for providing distribution services for the Class D
Shares for the fiscal years ended March 31, 1995 and March 31, 1994, and for the
period from November 9, 1992 (commencement of operations of the Class D Shares)
through March 31, 1993, Alex. Brown received from the Fund aggregate commissions
and fees in the amount of $69,979, $55,128 and $7,575, respectively, and from
such fees paid $36,600, $0, and $0, respectively, to its investment
representatives and $2,106, $0, and $0, respectively, to Participating Dealers.
21
<PAGE>
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for
the Fund, for the broker-dealer selection and for negotiation of commission
rates, subject to the supervision of ICC. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a commission
for their services. Brokerage commissions are subject to negotiation between
ABIM and the broker-dealers. ABIM may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with
a principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown acts as a principal; that is, an
order will not be placed with Alex. Brown if execution of the trade involves
Alex. Brown serving as a principal with respect to any part of the Fund's order,
nor will the Fund buy or sell over-the-counter securities with Alex. Brown
acting as market maker.
If Alex. Brown is participating in an underwriting or selling
group, the Fund may not buy portfolio securities from the group except in
accordance with rules of the SEC. The Fund believes that the limitation will not
affect its ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities transactions
is to obtain best price and execution of orders on an overall basis. As
described below, however, ABIM may, in its discretion, effect transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ABIM to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ABIM with clients other than the Fund. Similarly, any research services received
by ABIM through placement of portfolio transactions of other clients may be of
value to ABIM in fulfilling its obligations to the Fund. No specific value can
be determined for research and statistical services furnished without cost to
ABIM by a broker-dealer. ABIM is of the opinion that because the material must
be analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing ABIM's research and analysis.
Therefore, it may tend to benefit the Fund by improving ABIM's investment
advice. In over-the-counter transactions, ABIM will not pay any commission or
other remuneration for research services. ABIM's policy is to pay a
broker-dealer higher commissions effected on an agency (but not on a principal)
basis for particular transactions than might be charged if a different
broker-dealer had been chosen when, in ABIM's opinion, this policy furthers the
overall objective of obtaining best price and execution. Subject to periodic
review by the Fund's Board of Directors, ABIM is also authorized to pay
broker-dealers other than Alex. Brown higher commissions on brokerage
transactions for the Fund in order to secure research and investment services
described above. The allocation of orders among broker-dealers and the
commission rates paid by the Fund will be reviewed periodically by the Board.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization, the Board adopted
certain policies and procedures incorporating the standards of Rule 17e-1 under
the Investment Company Act which requires that the commissions paid Alex. Brown
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABIM to furnish
reports and to maintain records in connection with such reviews. The
22
<PAGE>
Distribution Agreements between Alex. Brown and the Fund do not provide for any
reduction in the distribution fee to be received by Alex. Brown from the Fund as
a result of profits from brokerage commissions on transactions of the Fund
effected through Alex. Brown.
ABIM manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
During the fiscal year ended March 31, 1995, Alex. Brown directed
$38,044,707 of transactions to broker-dealers and paid $89,162, to
broker-dealers in related commissions because of research services provided.
Alex. Brown received no brokerage commissions from the Fund for the year ended
March 31, 1995. 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 March
31, 1995, the Fund held, a $1,000,000 note issued by The Travelers Corp. (the
parent of Smith Barney Shearson), valued at $930,000 and a 6.10% repurchase
agreement issued by Goldman Sachs & Co. valued at $3,012,000. Smith Barney
Shearson and Goldman Sachs & Co. are "regular brokers or dealers" of the Fund.
9. CAPITAL STOCK
The Fund is authorized to issue thirty-five 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 Value Builder
Fund Class A Shares, Flag Investors Value Builder Fund Class B Shares, Flag
Investors Value Builder Fund Institutional Shares and Flag Investors Value
Builder Fund Class D Shares. The Flag Investors Value Builder Fund Institutional
Shares are offered only to certain eligible institutions and to clients of
investment advisory affiliates of Alex. Brown. The Flag Investors Value Builder
Fund Class D Shares are not currently being offered. In the event separate
series or classes are established, all Shares of the Fund, regardless of series
or class would have equal rights with respect to voting, except that with
respect to any matter affecting the rights of the holders of a particular series
or class, the holders of each series or class would vote separately. Each such
series would be managed separately and shareholders of each series would have an
undivided interest in the net assets of that series. For tax purposes, each
series would be treated as separate entities. Generally, each class of Shares
issued by a particular series would be identical to every other class and
expenses of the Fund (other than 12b-1 and any applicable service fees) would be
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively would be voted on by the
holders of such class.
23
<PAGE>
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.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport Business
Park, 200 Stevens Drive, Lester, Pennsylvania 19113, has been retained to act as
custodian of the Fund's investments. PNC Bank receives such compensation from
the Fund for its services as Custodian as may be agreed to from time to time by
PNC Bank and the Fund. Investment Company Capital Corp. 135 East Baltimore
Street, Baltimore, Maryland 21202, has been retained to act as transfer and
dividend disbursing agent, effective February 28, 1994. As compensation for
providing these services, the Fund pays ICC up to $15.00 per account per year,
plus reimbursement for out-of-pocket expenses incurred in connection therewith.
For such services for the fiscal year ended March 31, 1995, ICC received fees of
$81,416.
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. These fees are the same as those paid to Alex.
Brown under the prior accounting services agreement.
24
<PAGE>
<TABLE>
<CAPTION>
Average Net Assets Incremental Fee
- ------------------ ---------------
<C> <C>
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 .100%
$20,000,000 - $30,000,000 .080%
$30,000,000 - $40,000,000 .060%
$40,000,000 - $50,000,000 .050%
$50,000,000 - $60,000,000 .040%
$60,000,000 - $70,000,000 .030%
$70,000,000 - $100,000,000 .020%
$100,000,000 - $500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
</TABLE>
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.
For the fiscal year ended March 31, 1995, ICC received accounting
fees of $62,331.
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers
& Lybrand L.L.P., whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund
to that of other open-end diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
25
<PAGE>
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the Fund's registration statement (or the later commencement of
operations of a Series or class). During its first year of operation the Fund
may, in lieu of annualizing its total return, use an aggregate total return
calculated in the same manner. In calculating the ending redeemable value, the
maximum sales load (for the Flag Investors Value Builder Class A Shares 4.5% and
for the Flag Investors Value Builder Class B Shares, 4.0% for the one year
period, 2.0% for the five year period and no sales charge thereafter) is
deducted from the initial $1,000 payment and all dividends and distributions by
the Fund are assumed to have been reinvested at net asset value as described in
the Prospectuses on the reinvestment dates during the period. "T" in the formula
above is calculated by finding the average annual compounded rate of return over
the period that would equate an assumed initial payment of $1,000 to the ending
redeemable value. Any sales loads that might in the future be made applicable at
the time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund. The Institutional Shares are sold
without a sales load.
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 Analytical Services, Inc. or CDA Investment Technologies
Inc., or with the performance of the Lehman Government Corporate Bond Index, the
Consumer Price Index, the return on 90 day U.S. Treasury bills, the Standard and
Poor's 500 Stock Index or the Dow Jones Industrial Average, the Fund calculates
its aggregate and average annual total return for the specified periods of time
by assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges before
being invested in Shares). The Fund will, however, disclose the maximum sales
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Calculated according to the SEC rules, for the one-year period
ended March 31, 1995, the ending redeemable value of a hypothetical $1,000
payment for the Class A Shares was $1,056 resulting in a total return for such
Shares equal to 5.59%. For the period from the effectiveness of the Fund's
registration statement on June 15, 1992 through its fiscal year ended March 31,
1995, the ending redeemable value of a hypothetical $1,000 payment for the Class
A Shares was $1,232 resulting in an average annual total return for such Shares
equal to 7.96%. For the period from January 3, 1995 (commencement of offering of
Class B Shares) through March 31, 1995, the ending redeemable value of a
hypothetical $1,000 payment for Class B Shares was $1,035 resulting in an
aggregate total return for such Shares equal to 3.5%. For the one-year period
ended March 31, 1995, the ending redeemable value of a hypothetical $1,000
payment for the Class D Shares was $1,074 resulting in a total return for such
Shares equal to 7.42%. For the period from November 9, 1992 (commencement of
operations of the Class D Shares) through the Fund's fiscal year ended March 31,
1995, the ending redeemable value of a hypothetical $1,000 payment for the
26
<PAGE>
Class D Shares was $1,198 resulting in an average annual total return for such
Shares equal to 7.83%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the one-year
period ended March 31, 1995, the ending redeemable value of a hypothetical
$10,000 investment in Class A Shares was $11,060 resulting in a total return
equal to 10.6% For the period from the effectiveness of the Fund's registration
statement on June 15, 1992 through its fiscal year ended March 31, 1995, the
ending redeemable value of a hypothetical $10,000 investment in Class A Shares
was $12,969, resulting in an average annual total return equal to 9.7%.
Calculated according to the alternative computation, which
assumes no sales charge and reinvestment of all distributions, for the period
from January 3, 1995 (commencement of offering of Class B Shares) through March
31, 1995, the ending redeemable value of a hypothetical $10,000 investment in
Class B Shares was $10,780 resulting in an aggregate total return equal to 7.8%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions for the one-year
period ended March 31, 1995, the ending redeemable value of a hypothetical
$10,000 investment in Class D Shares was $11,020 resulting in a total return
equal to 10.2%. For the period from November 9, 1992 (commencement of operations
of the Class D Shares) through the Fund's fiscal year ended March 31, 1995 the
ending redeemable value of a hypothetical $10,000 investment in Class D Shares
was $12,837 resulting in an average annual total return equal to 9.0%.
The Institutional Shares were not offered prior to the date of
this Statement of Additional Information.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 10, 1995 to Fund management's knowledge, the
following persons held beneficially or of record 5% or more of the Fund's
outstanding Shares of any class:
T. Rowe Price, Trustee for Alex. Brown & Sons, Inc., Plan 100460,
Attn: Asset Recon, P.O. Box 17215, Baltimore, MD 21203, owned of record 12.21%
of the Fund's outstanding Class A Shares and Alex. Brown & Sons Incorporated,
135 E. Baltimore Street, Baltimore, MD 21202, owned of record 73.96% of the
Fund's outstanding Class A Shares*.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street,
Baltimore, MD 21020, owned of record 94.98% of the Fund's outstanding Class B
Shares.*
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street,
Baltimore, MD 21020, owned of record 87.87% of the Fund's outstanding Class D
Shares.*
As of August 10, Directors and officers as a group owned less
than 1% of the Fund's total outstanding Class A Shares.
27
<PAGE>
The Institutional Shares were not offered prior to the date of
this Statement of Additional Information.
15. FINANCIAL STATEMENTS
See next page.
- ----------
* Alex. Brown owned beneficially less than 1% of such Shares.
28
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Statement of Net Assets March 31, 1995
Percent
No. of Value of Net
Shares Security (Note A) Assets
COMMON STOCK--64.7%
Banking--1.6%
90,000 KeyCorp $ 2,542,500 1.6%
Basic Industry--1.3%
35,500 FMC Corp.* 2,147,750 1.3
Capital Goods--1.2%
36,000 Eaton Corp. 1,953,000 1.2
Chemical--2.3%
30,000 Hercules, Inc. 1,398,750 0.9
28,000 Monsanto Co. 2,247,000 1.4
3,645,750 2.3
Consumer Durables/
Non-Durables--10.1%
109,100 Collins & Aikman Co.* 872,800 0.6
81,400 Consolidated Stores Corp.* 1,638,175 1.0
33,500 Eastman Kodak Co. 1,779,688 1.1
80,000 Eckerd Corp.* 2,350,000 1.5
12,000 J.C. Penney Company, Inc. 538,500 0.3
50,000 Liz Claiborne Inc. 887,500 0.6
37,200 Philip Morris Cos., Inc. 2,427,300 1.5
18,200 Ralston Purina Co. 869,050 0.5
113,000 RJR Nabisco Holdings Corp. 663,875 0.4
45,000 Tandy Corp. 2,148,750 1.4
70,000 Unifi, Inc. 1,890,000 1.2
16,065,638 10.1
Defense/Aerospace--4.1%
25,500 E-Systems Inc. 1,157,063 0.7
38,000 Lockheed Martin Corp. 2,009,250 1.3
60,000 McDonnell Douglas Corp. 3,345,000 2.1
6,511,313 4.1
Electric Utilities--1.5%
100,000 Unicom Corp. 2,375,000 1.5
Energy--2.0%
27,500 Burlington Resources Inc. 1,120,625 0.7
35,800 MAPCO Inc. 1,995,850 1.3
3,116,475 2.0
Entertainment--1.8%
20,000 Capital Cities/ABC Inc. 1,765,000 1.1
150,000 LodgeNet Entertainment
Corp.* 1,125,000 0.7
2,890,000 1.8
29
<PAGE>
Percent
No. of Value of Net
Shares Security (Note A) Assets
Financial Services--6.8%
83,500 American Express Co. $ 2,912,062 1.8%
87,500 Countrywide Credit
Industries 1,520,313 1.0
43,000 Federal Home Loan
Mortgage Corp. 2,601,500 1.6
52,500 MBNA Corp. 1,522,500 1.0
57,000 Travelers Corp. 2,201,625 1.4
10,758,000 6.8
Health Care--7.2%
20,000 Amgen, Inc.* 1,347,500 0.8
19,000 Bristol-Myers Squibb 1,197,000 0.8
41,000 Eli Lilly & Co. 2,998,125 1.9
57,000 Johnson & Johnson 3,391,500 2.1
60,000 Mallinckrodt Group 2,025,000 1.3
55,000 Novacare Inc.* 433,125 0.3
11,392,250 7.2
Housing--2.9%
60,000 Fleetwood Enterprises 1,417,500 0.9
55,000 Ryland Group Inc. 797,500 0.5
105,000 USG Corp.* 2,415,000 1.5
4,630,000 2.9
Insurance--7.1%
125,000 Alexander & Alexander
Services Inc. 2,953,125 1.8
130,500 Bankers Life Holding Co. 2,691,562 1.7
72,200 Conseco Inc. 2,878,975 1.8
40,000 EXEL Limited 1,765,000 1.1
40,000 Mid Ocean Ltd. 1,090,000 0.7
11,378,662 7.1
Multi-Industry--5.2%
22,500 ITT Corp. 2,309,063 1.5
16,700 Loews Corp. 1,649,125 1.0
43,900 Tenneco Inc. 2,068,787 1.3
32,000 United Technologies 2,212,000 1.4
8,238,975 5.2
30
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Statement of Net Assets (continued) March 31, 1995
No. of
Shares/ Percent
Par Value of Net
(000) Security (Note A) Assets
COMMON STOCK -- (concluded)
Real Estate -- 3.5%
45,200 Carr Realty Inc. $ 785,350 0.5%
60,200 General Growth Properties 1,234,100 0.8
184,136 Host Marriott Corp.* 2,186,615 1.4
25,000 Liberty Property Trust 484,375 0.3
35,000 National Health
Investors Inc. 883,750 0.5
5,574,190 3.5
Service Companies -- 1.3%
55,500 CUC International Inc.* 2,157,562 1.3
Technology -- 2.0%
38,000 International Business
Machines Corp. 3,111,250 2.0
Telecommunications -- 1.6%
69,000 MCI Communications 1,423,125 0.9
42,000 Telefonos de Mexico SA ADS 1,197,000 0.7
2,620,125 1.6
Transportation -- 1.2%
33,200 Conrail Inc. 1,863,350 1.2
Total Common Stocks
(Cost $87,005,875) 102,971,790 64.7
Convertible Preferred
Stock -- 4.5%
50,000 American Express Co.,
$2.30 DECS 2,243,750 1.4
61,000 Conseco Inc.,
$3.25 Cvt Pfd 2,440,000 1.5
23,000 Delta Air Lines Inc.,
$3.50 Cvt Pfd 1,224,750 0.8
24,200 Rouse Co., Series A
$3.25 Cvt Pfd 1,234,200 0.8
Total Convertible
Preferred Stock
(Cost $7,246,262) 7,142,700 4.5
Convertible Bonds -- 2.1%
$2,000 Richardson Electronics,
Cvt Deb, 7.25%,
12/15/06 1,500,000 1.0
31
<PAGE>
Percent
Par Value of Net
(000) Security (Note A) Assets
Convertible Bonds -- (continued)
$2,000 Sizeler Property Investors,
Cvt Deb, 8.00%,
7/15/03 $1,757,500 1.1%
Total Convertible Bonds
(Cost $3,595,714) 3,257,500 2.1
Corporate Bonds -- 25.1%
1,000 American Life Holding Co.
Sr Sub Nt, 11.25%,
9/15/04 1,011,250 0.6
2,000 Arcadian Partners LP, Nt
10.75%, 5/1/05 1,975,000 1.2
2,000 Bankers Life Holding
Corp., Nt, 13.00%,
11/1/02 2,280,000 1.4
1,000 Caesar's World
8.875%, 8/15/02 1,016,250 0.6
1,000 Chattem Inc., Sr Sub Deb,
w/warrants, 12.75%,
6/15/04 968,000 0.6
3,000 Conseco Inc., Nt,
8.125%, 2/15/03 2,550,000 1.6
700 CSX Corp., Nt,
7.00%, 9/15/02 677,250 0.4
575 Dillard Dept. Stores, Nt,
7.15%, 9/1/02 554,875 0.4
1,000 Eckerd Corp., Nt,
9.25%, 2/15/04 1,012,500 0.6
300 Exxon Capital Corp., Nt,
6.50%, 7/15/99 291,000 0.2
2,000 FMC Corp., Nt,
8.75%, 4/1/99 2,045,000 1.3
1,000 Fund American Enterprise,
Nt, 7.75%, 2/1/03 971,250 0.6
Host Marriott Corp.:
233 Nt, 10.50%, 5/1/06 234,748 0.2
2,058 Nt, 10.375%, 6/15/11 2,060,572 1.3
2,000 John Q. Hammons Hotels LP,
Nt, 8.875%, 2/15/04 1,872,500 1.2
2,000 Jordan Industries, Nt,
10.375%, 8/1/03 1,860,000 1.2
1,285 Markel Corp., Nt,
7.25%, 11/1/03 1,156,500 0.7
32
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Statement of Net Assets (concluded) March 31, 1995
Percent
Par Value of Net
(000) Security (Note A) Assets
Corporate Bonds -- (continued)
$1,100 Masco Corp. Nt,
6.625%, 9/15/99 $1,062,875 0.7%
MCI Communications:
2,000 Nt, 6.25%, 3/23/99 1,917,500 1.2
500 Nt, 7.50%, 8/20/04 491,250 0.3
500 New England Telephone &
Telegraph, Nt, 6.15%,
9/1/99 477,500 0.3
1,000 Noble Drilling Company,
Nt, 9.25%, 10/1/03 980,000 0.6
500 PepsiCo Inc., Nt,
6.25%, 9/1/99 479,375 0.3
700 Pet Incorporated, Nt,
5.75%, 7/1/98 665,000 0.4
500 Petroleum Heat & Power, Nt,
12.25%, 2/1/05 517,500 0.3
700 Riverwood International
Nt, 10.75%, 6/15/00 728,000 0.5
2,000 RJR Nabisco Holdings Corp.,
Nt, 7.625%, 9/15/03 1,852,500 1.2
1,500 Salomon Inc., Nt,
7.125%, 8/1/99 1,423,125 0.9
1,000 Tektronix Inc., Nt,
7.50%, 8/1/03 903,750 0.6
1,729 Teledyne Inc., Series C,
Deb, 10.00%, 6/1/04 1,746,290 1.1
1,000 Tenneco Inc., Nt,
7.875%, 10/1/02 997,500 0.6
1,000 Travelers Corp., Nt,
6.125%, 6/15/00 930,000 0.6
1,000 Union Pacific, Nt,
6.25%, 3/15/99 952,500 0.6
300 Virginia Electric & Power,
1st Mtg., 7.375%, 7/1/02 295,875 0.2
500 Wal-Mart Stores, Nt,
5.50%, 9/15/97 483,125 0.3
500 Xerox Corp., Nt,
7.15%, 8/1/04 475,625 0.3
Total Corporate Bonds
(Cost $40,902,095) 39,915,985 25.1
33
<PAGE>
Percent
Par Value of Net
(000) Security (Note A) Assets
U.S. GOVERNMENT SECURITIES -- 0.6%
U.S. Treasury Notes
$1,000 4.25%, 5/15/96
(Cost $1,000,701) $ 975,750 0.6%
Repurchase agreement -- 1.9%
3,012 Goldman Sachs & Co., 6.10%,
Dated 3/31/95, to be
repurchased on 4/3/95,
collateralized by U.S.
Treasury Bonds with a
market value of
$3,072,602
(Cost $3,012,000) 3,012,000 1.9
Total Investment In
Securities
(Cost $142,762,647)** 157,275,725 98.9
Other Assets in Excess
of Liabilities, Net 1,768,794 1.1
Net Assets $159,044,519 100.0%
Net Asset Value:
Class A Share
($146,986,087 (divided
by) 12,229,210
shares outstanding) $12.02(1)
Class B Share
($341,153 (divided
by) 28,411
shares outstanding) $12.01(2)
Class D Share
($11,717,279 (divided
by) 975,482
shares outstanding) $12.01(3)
Maximum Offering
Price Per:
Class A Share
($12.02 (divided
by) .955) $12.59
Class B Share $12.01
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
(1) Redemption value is $12.02.
(2) Redemption value is $11.53 following 4.00% contingent deferred
sales charge.
(3) Redemption value is $11.89 following 1.00% contingent deferred
sales charge.
See accompanying Notes to Financial Statements.
34
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Statement of Operations For the Year Ended March 31, 1995
Investment Income (Note a):
Interest $4,175,130
Dividends 2,405,975
Less: Foreign taxes withheld (2,158)
Total income 6,578,947
Expenses:
Investment advisory fee (Note B) 1,315,992
Distribution fees (Note B) 413,301
Transfer agent fees (Note B) 81,416
Accounting fee (Note B) 62,331
Legal 57,216
Printing and postage 46,857
Custodian fees 41,018
Registration fees 38,435
Audit 24,899
Miscellaneous 11,149
Organizational expense (Note A) 10,231
Directors' fees 9,001
Insurance 6,449
Total expenses 2,118,295
Less: Fees waived (Note B) (67,326)
Net expenses 2,050,969
Net investment income 4,527,978
Realized and Unrealized Gain On Investments:
Net realized gain from security transactions 295,501
Change in unrealized appreciation/(depreciation) of
investments 10,180,720
Net gain on investments 10,476,221
Net increase in net assets resulting from operations $15,004,199
See accompanying Notes to Financial Statements.
35
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Statement of Changes in Net Assets
For the Year For the Year
Ended Ended
March 31, 1995 March 31, 1994
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $4,527,978 $3,601,566
Net realized gain from security transactions 295,501 805,267
Change in unrealized appreciation/(depreciation)
of investments 10,180,720 (1,974,360)
Net increase in net assets resulting from
operations 15,004,199 2,432,473
Distributions to Shareholders From:
Net investment income:
Class A shares (4,153,376) (2,808,222)
Class B shares -- --
Class D shares (313,209) (209,680)
Net realized short-term gains:
Class A shares -- (478,263)
Class B shares -- --
Class D shares -- (44,852)
Net realized long-term gains:
Class A shares (183,928) --
Class B shares -- --
Class D shares (15,454) --
Total distributions (4,665,967) (3,541,017)
Capital Share Transactions (NOTE C):
Proceeds from sale of shares 24,574,387 60,869,513
Value of shares issued in reinvestment
of dividends 4,064,365 3,131,587
Cost of shares repurchased (22,079,629) (10,565,786)
Increase in net assets derived from capital
share transactions 6,559,123 53,435,314
Total increase in net assets 16,897,355 52,326,770
NET ASSETS:
Beginning of year 142,147,164 89,820,394
End of year $159,044,519 $142,147,164
See accompanying Notes to Financial Statements.
36
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class D Shares
For the For the For the
period period period
June 15, Jan. 3, Nov. 9,
1992* 1995* 1992*
For the year through through For the year through
ended March 31, March 31, March 31, ended March 31, March 31,
1995 1994 1993 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $11.23 $11.25 $10.00 $11.14 $11.22 $11.24 $10.45
Income from Investment Operations:
Net investment income 0.35 0.40 0.18 0.08 0.31 0.36 0.14
Net realized and unrealized gain
on investments 0.80 (0.04) 1.18 0.79 0.80 (0.04) 0.74
Total from Investment Operations 1.15 0.36 1.36 0.87 1.11 0.32 0.88
Less Distributions:
Dividends from net investment income
and short-term gains (0.35) (0.38) (0.11) -- (0.31) (0.34) (0.09)
Distributions from net realized
long-term gains (0.01) -- -- -- (0.01) -- --
Total distributions (0.36) (0.38) (0.11) -- (0.32) (0.34) (0.09)
Net asset value at end of period $12.02 $11.23 $11.25 $12.01 $12.01 $11.22 $11.24
Total Return 10.57% 3.14% 13.73% 7.81% 10.18% 2.78% 9.00%
Ratios to Average Net Assets:
Expenses 1.35%(2) 1.35%(2) 1.35%(1,2) 2.10%(1,4) 1.70%(6) 1.70%(6) 1.70%(1,6)
Net investment income 3.07%(3) 3.14%(3) 2.88%(1,3) 2.94%(1,5) 2.72%(7) 2.79%(7) 2.83%(1,7)
Supplemental Data:
Net assets at end of period (000) $146,986 131,097 $83,535 $341 $11,717 $11,051 $6,285
Portfolio turnover rate 18% 8% 8% 18% 18% 8% 8%
</TABLE>
*Commencement of Operations
(1) Annualized
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.40%, 1.38% and 1.70% (annualized)
for Class A Shares for the years ended March 31, 1995, 1994 and for the
period ended March 31, 1993, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average net assets would have been 3.02%, 3.11% and
2.53% (annualized) for Class A Shares for the years ended March 31,
1995, 1994, and for the period ended March 31, 1993, respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 2.17% (annualized) for Class B Shares
for the period ended March 31, 1995.
(5) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average net assets would have been 2.87%
(annualized) for Class B Shares for the period ended March 31, 1995.
(6) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.74%, 1.73% and 1.93% (annualized)
for Class D Shares for the years ended March 31, 1995, 1994 and for the
period ended March 31, 1993, respectively.
(7) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average net assets would have been 2.68%, 2.76% and
2.60% (annualized) for Class D Shares for the years ended March 31,
1995, 1994 and for the period ended March 31, 1993, respectively.
See accompanying Notes to Financial Statements.
37
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Notes to Financial Statements
A. Significant Accounting Policies - Flag Investors Value Builder Fund,
Inc. ("the Fund") was organized as a Maryland Corporation on March 5,
1992 and commenced operations June 15, 1992. The Fund is registered
under the Investment Company Act of 1940 as a diversified, open-end
Management Investment Company seeking long-term growth of capital and
current income through diversified investments in a professionally
managed balanced portfolio of equity and debt securities. On November 9,
1992, the Fund began offering Class D shares (formerly Class B shares).
The Class A and Class D Shares each have different sales loads and
distribution fees. On November 18, 1994, Class D Shares were no longer
available for sale, however, existing shareholders may reinvest their
dividends. On January 3, 1995, the Fund began offering Class B Shares.
Class B Shares have no initial sales charge but are subject to a
different distribution fee and a contingent deferred sales charge.
Significant accounting policies are as follows:
Security Valuation - Portfolio securities which are listed on a National
Securities Exchange are valued on the basis of their last price or in
the absence of recorded sales, at the average of readily available
closing bid and asked prices. Unlisted securities held by the Fund are
valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term obligations with maturities of 60
days or less are valued at amortized cost.
Repurchase Agreements - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an
agreed upon date and price. The seller, under a repurchase agreement,
will be required on a daily basis to maintain as collateral the value of
the securities subject to the agreement at not less than the repurchase
price. The agreement is conditioned upon the collateral being deposited
under the Federal Reserve book entry system.
Federal Income Taxes - No provision is made for federal income taxes as
it is the Fund's intention to continue to qualify as a regulated
investment company and to continue to make requisite distributions to
the shareholders which will be sufficient to relieve it from all or
substantially all federal income and excise taxes. The Fund's policy is
to distribute to shareholders substantially all of its taxable net
investment income and net realized capital gains.
Other - Security transactions are accounted for on the trade date and
the cost of investments sold or redeemed is determined by use of the
specific identification method for both financial reporting and income
tax purposes. Interest income is recorded on an accrual basis and
includes, when applicable, the pro rata amortization of premiums and
accretion of discounts. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Costs incurred by the
Fund in connection with its organization and the initial public offering
of shares have been deferred and are being amortized on the
straight-line method over a five-year period beginning on the date on
which the Fund commenced its investment activities.
B. Investment Advisory Fees, Transactions with Affiliates and Other
Fees - Investment Company Capital Corp. ("ICC"), a subsidiary of Alex.
Brown & Sons Incorporated ("Alex. Brown"), is the Fund's investment
advisor and Alex. Brown Investment Management ("ABIM") is the Fund's
subadvisor. As compensation for its advisory services, ICC receives from
the Fund an annual fee, calculated daily and paid monthly, at the annual
rate of 1.00% of the first $50 million of the Fund's average daily net
assets; .85% of the next $50 million of the Fund's average daily net
assets; .80% of the next $100 million of the Fund's average daily net
assets; and .70% of the Fund's average daily net assets in excess of
$200 million. As compensation for its subadvisory services, ABIM
38
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Notes to Financial Statements (continued)
receives a fee from ICC, payable from its advisory fee, calculated daily
and paid monthly, at an annual rate of .75% of the first $50 million of
the Fund's average daily net assets; .60% of the next $150 million of the
Fund's average daily net assets; and .50% of the Fund's average daily net
assets in excess of $200 million.
ICC has agreed to reduce its aggregate fees so that ordinary expenses of
the Fund for any fiscal year do not exceed 1.35% of the average daily
net assets of Class A Shares, 2.10% of the average daily net assets of
Class B Shares, and 1.70% of the average daily net assets of Class D
Shares. For the year ended March 31, 1995, ICC voluntarily waived
$67,326 in fees.
As compensation for its accounting services, ICC receives from the Fund
an annual fee, calculated daily and paid monthly, from the Fund's
average daily net assets. ICC received $62,331 for accounting services
for the year ended March 31, 1995.
As compensation for its transfer agent services, ICC receives from the
Fund a per account fee, calculated and paid monthly. ICC received
$81,416 for transfer agent services for the year ended March 31, 1995.
As compensation for providing distribution services, Alex. Brown
receives from the Fund an annual fee, calculated daily and paid monthly,
at an annual rate equal to .25% of the average daily net assets of Class
A shares, 1.00% (includes .25% shareholder servicing fee) of the average
daily net assets of Class B shares, and .60% of the average daily net
assets of Class D shares. For the year ended March 31, 1995,
distribution fees aggregated $413,301 of which $342,916, $406, and
$69,979 were attributable to Flag Investors Class A Shares, Flag
Investors Class B Shares and Flag Investors Class D Shares,
respectively. Alex. Brown received no commissions from the Fund for the
year ended March 31, 1995.
C. Capital Share Transactions - The Fund is authorized to issue up
to 30 million shares of $.001 per value capital stock. Transactions of
the Fund were as follows:
Class A Shares
For the year For the year
ended ended
March 31, March 31,
1995 1994
Shares sold 2,019,949 4,876,599
Shares issued to share-
holders on reinvest-
ment of dividends 340,078 244,101
Shares redeemed (1,802,800) (873,391)
Net increase in shares
outstanding 557,227 4,247,309
Proceeds from sale
of shares $23,014,817 $55,729,506
Reinvested dividends 3,755,243 2,793,058
Net asset value of
shares redeemed (20,417,857) (9,925,243)
Net increase from
capital share
transactions $ 6,352,203 $48,597,321
Class B Shares
For the
Period ended
January 3, 1995*
to
March 31, 1995
Shares sold 28,411
Shares issued to share-
holders on reinvest-
ment of dividends --
Shares redeemed --
Net increase in shares
outstanding 28,411
Proceeds from sale
of shares $327,879
Reinvested dividends --
Net asset value of
shares redeemed --
Net increase from
capital share
transactions $327,879
*Commencement of operations.
39
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
Notes to Financial Statements
(concluded)
Class D Shares
For the year For the year
ended ended
March 31, March 31,
1995 1994
Shares sold 110,073 451,081
Shares issued to share-
holders on reinvest-
ment of dividends 28,011 29,490
Shares redeemed (147,152) (55,252)
Net increase/
(decrease) in shares
outstanding (9,068) 425,319
Proceeds from sale
of shares $1,231,691 $5,140,007
Reinvested dividends 309,122 338,529
Net asset value of
shares redeemed (1,661,772) (640,543)
Net increase/
(decrease) from
capital share
transactions $ (120,959) $4,837,993
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term and U.S. government obligations, aggregated $40,334,923
and $26,406,450, respectively, for the year ended March 31, 1995. Sales of
U.S. government obligations aggregated $5,146,875, and there were no purchases
of U.S. government obligations for the year.
At March 31, 1995, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $20,030,135 and
aggregate gross unrealized depreciation of all securities in which there is an
excess in tax cost over value was $5,517,057.
E. Net Assets - At March 31, 1995, net assets consisted of:
Paid-in-Capital:
Flag Investors Class A Shares $131,897,117
Flag Investors Class B Shares 327,861
Flag Investors Class D Shares 10,698,030
Undistributed net
investment income 1,236,573
Accumulated net realized gain
from security transactions 371,860
Unrealized appreciation of
investments 14,513,078
$159,044,519
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Value Builder Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Value Builder Fund, Inc. as of March 31, 1995, and the related statements of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights
for each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of March 31, 1995, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Value Builder Fund, Inc. as of March 31, 1995, the results of
its operations for the year then ended, the changes in its net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P
Baltimore, Maryland
May 1, 1995
40
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
S & P - Commercial paper rated A-1+ or A-1 by S&P has the
following characteristics. Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management is unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
Moody's Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial
paper rating assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationship which exists with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
P-1, P-2 or P-3.
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, and CC and C -- Regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
A-1
<PAGE>
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
D -- In default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as "high-grade" bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or the
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
