<PAGE>
LOGO
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(CLASS A AND CLASS B 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.
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 has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by calling the Fund at (800) 767-FLAG.
Shares of the Fund are available through Alex. Brown & Sons Incorporated
("Alex. Brown") as well as Participating Dealers and Shareholder Servicing
Agents. This Prospectus relates to Class A and Class B Shares of the Fund.
The separate classes provide investors with alternatives as to sales load and
fund expenses. (See "How to Invest in the Fund.")
____________________________________________________________________________
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 August 1, 1995
<PAGE>
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(CLASS A AND CLASS B 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 the Fund ........................ 10
6. How to Redeem Shares ............................. 17
7. Telephone Transactions ........................... 18
8. Dividends and Taxes .............................. 19
9. Management of the Fund ........................... 20
10. Investment Advisor and Sub-Advisor ............... 21
11. Distributor ...................................... 23
12. Custodian, Transfer Agent, Accounting Services ... 24
13. Performance Information .......................... 25
14. General Information .............................. 26
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH ANY
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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1
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1. FEE TABLE
............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ......................... 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ........... None * 4.00%**
- -----------------------------------------------------------------------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Management Fees (net of fee waivers) ........................ .88%*** .88%***
12b-1 Fees .................................................. .25% .75%
Other Expenses (including a .25% shareholder servicing
fee for Class B Shares) .................................... .22% .47%****
---------- ----------
Total Fund Operating Expenses (net of fee waivers) .......... 1.35%*** 2.10%***
========== ==========
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</TABLE>
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* Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge. However, a contingent deferred sales charge of
.50% will be imposed on such purchases in the event of redemption within
24 months following such purchase. (See "How to Invest in the Fund--
Offering Price.")
** A declining contingent deferred sales charge will be imposed on
redemptions of Class B Shares made within six years of purchase. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Invest in the Fund -- Class B Shares.")
*** The Fund's investment advisor intends, but is not obligated, to waive its
fee to the extent required so that Total Fund Operating Expenses do not
exceed 1.35% of the Class A Shares' average daily net assets and 2.10% of
the Class B Shares' average daily net assets. Absent fee waivers,
Management Fees would be .93% of the Fund's average daily net assets and
Total Fund Operating Expenses would be 1.40% of the Class A Shares' average
daily net assets and 2.15% of the Class B Shares' average daily net assets.
**** A portion of the shareholder servicing fee is allocated to member firms
of the National Association of Securities Dealers, Inc. and qualified
banks for continued personal service by such members to investors in
Class B Shares, such as responding to shareholder inquiries, quoting net
asset values, providing current marketing materials and attending to
other shareholder matters.
EXAMPLE:
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares .................. $58 $87 $118 $211
Class B Shares .................. $62 $98 $139 $191**
- -------------------------------------------------------------------------------------
</TABLE>
2
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<TABLE>
<CAPTION>
You would pay the following expenses
on the same investment, assuming
no redemption:* 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Class B Shares ..................... $22 $68 $119 $191**
- ---------------------------------------------------------------------------------------
</TABLE>
* The example is based on Total Fund Operating Expenses net of fee waivers.
Absent fee waivers, expenses would be higher.
**Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of Class
B expenses and four years of Class A expenses.
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 shares of either class through a financial institution
may be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
Fund--Offering Price", "Investment Advisor and Sub-Advisor" and
"Distributor.") The Expenses and Example for the Class A Shares appearing in
the table above are based on the Fund's expenses for the Class A Shares for
the fiscal year ended March 31, 1995 which, net of fee waivers, were 1.35% of
the Class A Shares' average daily net assets. The Expenses and Example for
the Class B Shares, which have been offered only since January 3, 1995, are
based on those for the Class A Shares plus the incremental 12b-1 and service
fee costs.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund -- Class A
Shares.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules").
- ------------------------------------------------------------------------------
2. FINANCIAL HIGHLIGHTS
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements
and financial highlights for the 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 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.
3
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(For a share outstanding throughout each period)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------------------- ----------------
For the Period For the Period
June 15, 1992* January 3, 1995*
For the Year Ended March 31, through through
1995 1994 March 31, 1993 March 31, 1995
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of
period $ 11.23 $ 11.25 $ 10.00 $ 11.14
--------------- -------------- -------------- ----------------
Income from Investment
Operations:
Net investment income 0.35 0.40 0.18 0.08
Net realized and
unrealized
gain/(loss)
on investments 0.80 (0.04) 1.18 0.79
--------------- -------------- -------------- ----------------
Total from Investment
Operations 1.15 0.36 1.36 0.87
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) -- --
--------------- -------------- -------------- ----------------
Total Distributions (0.36) (0.38) (0.11)
--------------- -------------- -------------- ----------------
Net asset value at
end of period $ 12.02 $ 11.23 $ 11.25 $ 12.01
=============== ============== ============== ================
Total Return** 10.57% 3.14% 13.73% 7.81%
Ratios to Average
Net Assets:
Expenses 1.35%(2) 1.35%(2) 1.35%(1)(2) 2.10%(1)(4)
Net investment income 3.07%(3) 3.14%(3) 2.88%(1)(3) 2.94%(1)(5)
Supplemental Data:
Net assets
at end of period
(000) $146,986 $131,097 $83,535 $ 341
Portfolio turnover
rate 18% 8% 8% 18%
- -------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 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.
(4) Without the waiver of advisory fees 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, 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.
4
<PAGE>
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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<PAGE>
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
periods of rising interest rates. An economic downturn could adversely affect
6
<PAGE>
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
----------- -----------
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.
7
<PAGE>
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
8
<PAGE>
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.
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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.
9
<PAGE>
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5. HOW TO INVEST IN THE FUND
Class A and Class B Shares may be purchased from Alex. Brown, 135 East
Baltimore Street, Baltimore, Maryland 21202, through any securities dealer
which has entered into a dealer agreement with Alex. Brown ("Participating
Dealers") or through any financial institution which has entered into a
Shareholder Servicing Agreement with the Fund ("Shareholder Servicing
Agents"). Shares of either class may also be purchased directly from the Fund
by completing the Application Form attached to this Prospectus and returning
it, together with payment of the purchase price plus any applicable front-end
sales charge, to the Fund at the address shown on the Application Form.
Participating Dealers or Shareholder Servicing Agents and their investment
representatives may receive different levels of compensation depending on
which class of shares they sell.
The Class A and Class B alternatives permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the combination of sales
charge and distribution fee on Class A Shares is more favorable than the
combination of distribution/service fees and contingent deferred sales charge
on Class B Shares. In almost all cases, investors planning to purchase
$100,000 or more of Fund shares will pay lower aggregate charges and expenses
by purchasing Class A Shares. Accordingly, the Fund will not accept purchases
for Class B Shares in excess of $100,000 per account. (See "Fee Table.").
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for
participants in the Fund's Automatic Investing Plan is $250. Each subsequent
investment must be at least $100 per class, except that the minimum
subsequent investment under the Fund's Automatic Investing Plan is $250 for
quarterly investments and $100 for monthly investments. (See "Purchases
Through Automatic Investing Plan" below.) There is no minimum investment
requirement for qualified retirement plans (i.e., 401(k) plans or pension and
profit sharing plans). IRA accounts are, however, subject to the $2,000
minimum initial investment requirement. There is no minimum investment
requirement for spousal IRA accounts. Orders for purchases of shares are
accepted on any day on which the New York Stock Exchange is open for business
("Business Day"). The Fund reserves the right to suspend the sale of shares
at any time at the discretion of Alex. Brown and the Advisors. Purchase orders
10
<PAGE>
for shares will be executed at a per share purchase price equal to the net asset
value next determined after receipt of the purchase order plus any applicable
front-end sales charge (the "Offering Price") on the date such net asset value
is determined (the "Purchase Date"). Purchases made directly from the Fund must
be accompanied by payment of the Offering Price. Purchases made through Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent must be in
accordance with such entity's payment procedures. Alex. Brown may, in its sole
discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting liabilities attributable to
all shares and any liabilities attributable to the specific class, and
dividing the resulting amount by the number of then outstanding shares of the
class. For this purpose, portfolio securities are given their market value
where feasible. If a portfolio security is traded on a national exchange or
on an automated dealer quotation system, such as NASDAQ, on the valuation
date, the last quoted sale price is generally used. 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. Because of differences
between the classes of shares in distribution fees, the net asset value per
share of the classes is different at times.
.............................................................................
OFFERING PRICE
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price which for Class A Shares
includes a sales charge which is calculated as a percentage of the Offering
Price and for Class B Shares is net asset value.
.............................................................................
CLASS A SHARES
The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown below:
11
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
as % of Dealer
------------------------------ Retention
Offering Net Amount as % of
Amount of Purchase Price Invesed Offering Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ..... 4.50% 4.71% 4.00%
$50,000 - $99,999 ..... 3.50% 3.63% 3.00%
$100,000 - $249,999 .... 2.50% 2.56% 2.00%
$250,000 - $499,999 .... 2.00% 2.04% 1.50%
$500,000 - $999,999 .... 1.50% 1.52% 1.25%
$1,000,000 and over .... None* None* None*
</TABLE>
- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) Alex. Brown may make payments to dealers in the
amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In addition, an investor may obtain reduced sales charges as
set forth above through a right of accumulation of purchases of Class A
Shares and purchases of shares of other Flag Investors funds with the same
sales charge and purchases of shares of Flag Investors Intermediate-Term
Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc., (the "Intermediate Funds"). The applicable sales charge will be
determined based on the total of (a) the shareholder's current purchase plus
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of all Class A Shares and of all Flag Investors shares described
above and any Flag Investors Class D shares held by the shareholder. To
obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a
Participating Dealer or Shareholder Servicing Agent, as applicable, with
sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.
The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest not less than $50,000 within a 13-month period in Class A Shares. Each
purchase of shares under a Letter of Intent will be made at the Offering
Price applicable at the time of such purchase to the full amount indicated on
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
12
<PAGE>
investment under a Letter of Intent is 5% of the full amount. Shares purchased
with the first 5% of the full amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full amount indicated
is not invested. Such escrowed shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has been
purchased, the escrowed shares will be released. An investor who wishes to enter
into a Letter of Intent in conjunction with an investment in Class A Shares may
do so by completing the appropriate section of the Application Form attached to
this Prospectus.
No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge will be imposed on such investments in the event of a redemption
within 24 months following the purchase, at the rate of .50% on the lesser of
the value of the shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
shares not subject to such charge are the first redeemed followed by other
shares held for the longest period of time.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing shares
on behalf of their fiduciary and advisory clients, provided such clients have
paid an account management fee for these services (investors may be charged a
fee if they effect transactions in Fund shares through a broker or agent);
(ii) qualified retirement plans; (iii) participants in a Flag Investors fund
payroll savings plan program; (iv) investors who have redeemed Class A
Shares, or shares of any other mutual fund in the Flag Investors family of
funds with the same sales charges, or who have redeemed shares of the
Intermediate Funds which they had held for at least 24 months prior to
redemption, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within 90 days after the redemption; and (v)
current or retired Directors of the Fund and directors and employees (and
their immediate families) of Alex. Brown, Participating Dealers and their
respective affiliates.
13
<PAGE>
............................................................................
CLASS B SHARES
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class
B Shares redeemed within six years of purchase. The charge is assessed on an
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. Accordingly, the contingent
deferred sales charge will not be applied to dollar amounts representing an
increase in the net asset values above the initial purchase price of the
shares being redeemed. In addition, no charge is assessed on redemptions of
Class B Shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether the contingent deferred sales charge is applicable
to a redemption, the calculation is made in the manner that results in the
lowest possible rate. Therefore, it is assumed that the redemption is first
of any Class B Shares in the shareholder's account that represent reinvested
dividends and distributions and second of Class B Shares held the longest
during the six year period. The amount of the contingent deferred sales
charge, if any, will vary depending on the number of years from the time of
payment for the purchase of Class B Shares until the redemption of such
shares (the "holding period"). For purposes of determining this holding
period, all payments during a month are aggregated and deemed to have been
made on the first day of the month. The following table sets forth the rates
of the contingent deferred sales charge.
<TABLE>
<CAPTION>
Year Since Purchase Contingent Deferred Sales Charge
Payment was Made (as a percentage of the dollar amount
subject to charge)
- ------------------------------------------------------------------------
<S> <C>
First ................. 4.0%
Second ................ 4.0%
Third ................. 3.0%
Fourth ................ 3.0%
Fifth ................. 2.0%
Sixth ................. 1.0%
Thereafter ............ None*
- ------------------------------------------------------------------------
</TABLE>
* As described more fully below, Class B Shares automatically convert to
Class A Shares six years after the beginning of the calendar month in which
the purchase order is accepted.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
death or initial determination of disability (as defined in the Internal
Revenue Code of 1986, as amended) of a shareholder; or (ii) to the extent
that the redemption represents a minimum required distribution from an
14
<PAGE>
individual retirement account or other retirement plan to a shareholder who has
attained the age of 70 1/2 . The waiver with respect to (i) above is only
applicable in cases where the shareholder account is registered (a) in the name
of an individual person, (b) as a joint tenancy with rights of survivorship, (c)
as community property or (d) in the name of a minor child under the Uniform
Gifts or Uniform Transfers to Minors Act. A shareholder, or his or her
representative, must notify the Fund's transfer agent (the "Transfer Agent")
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. For information on the imposition and waiver of the
contingent deferred sales charge, contact the Transfer Agent at (800) 553-8080.
Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month in which the purchase order for Class B Shares is
accepted, such Class B Shares will automatically convert to Class A Shares
and will no longer be subject to the higher distribution and service fees.
Such conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other charge.
The conversion is not a taxable event to the shareholder.
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account
will be considered to be held in a separate sub-account. Each time any Class
B Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
- -----------------------------------------------------------------------------
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class.
Except as provided below, shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of the Intermediate Funds, may exchange into Class A Shares upon
payment of the difference in sales charges, as applicable, except that the
exchange will be made at net asset value if the shares of such funds have
been held for more than 24 months. Shareholders of Flag Investors Cash
Reserve Prime Class A Shares may exchange into Class A Shares upon payment of
the difference in sales charges, as applicable, or into Class B Shares at net
asset value, subject to any applicable contingent deferred sales charge.
15
<PAGE>
When a shareholder acquires Fund shares through an exchange from another
fund in the Flag Investors family of funds, the Fund will combine the period
for which the original shares were held prior to the exchange with the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares.
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund, who have
paid a sales charge may exchange shares of such fund for an equal dollar
amount of Class A Shares by submitting to Alex. Brown or a Participating
Dealer the proceeds of the redemption of such shares, together with evidence
of the payment of a sales charge and the source of such proceeds. Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.)
The exchange privilege may be exercised only in those states where the
class of shares of such other funds may legally be sold. Investors should
receive and read the applicable prospectus prior to tendering shares for
exchange. The Fund may modify or terminate this offer of exchange at any time
on 60 days' prior written notice to shareholders.
- -----------------------------------------------------------------------------
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase either Class A Shares or Class B Shares
regularly by means of an Automatic Investing Plan with a pre-authorized check
drawn on their checking accounts. Under this plan, the shareholder may elect
to have a specified amount invested monthly or quarterly in either Class A
Shares or Class B Shares. The amount specified by the shareholder will be
withdrawn from the shareholder's checking account using the pre-authorized
check. This amount will be invested in the class of shares selected by the
shareholder at the applicable Offering Price determined on the date the
amount is available for investment. Participation in the Automatic Investing
Plan may be discontinued either by the Fund or the shareholder upon 30 days'
prior written notice to the other party. A shareholder who wishes to enroll
in the Automatic Investing Plan or who wishes to obtain additional purchase
information may do so by completing the appropriate section of the
Application Form attached to this Prospectus.
16
<PAGE>
- ----------------------------------------------------------------------------
6. HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investments on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Transfer Agent. Shareholders may also redeem shares of either class by
telephone (in amounts up to $50,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per share (reduced by any
applicable contingent deferred sales charge) next determined after receipt of
the order (or, if stock certificates have been issued for the shares to be
redeemed, after the tender of the stock certificates for redemption).
Redemption orders received after 4:00 p.m. (Eastern Time) will be effected at
the net asset value next determined on the following Business Day. Payment
for redeemed shares will be made by check and will be mailed within seven
days after receipt of a duly authorized telephone redemption request or of a
redemption order fully completed and, as applicable, accompanied by the
documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact
names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency or savings
association;
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of shares will be paid on
the next dividend payable date. If all of the shares in a shareholder's
account have been redeemed on a dividend payable date, the dividend will be
remitted by check to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' notice.
17
<PAGE>
............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed
monthly or quarterly under the Fund's Systematic Withdrawal Plan. Such
payments are drawn from income dividends, and to the extent necessary, from
share redemptions (which would be a return of principal and, if reflecting a
gain, would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of shares. In addition, Class B Shares may be subject to a
contingent deferred sales charge upon redemption. (See "How to Invest in the
Fund -- Class B Shares.") A shareholder who wishes to participate in the
Fund's Systematic Withdrawal Plan may do so by completing the appropriate
section of the Application Form attached to this Prospectus.
- -----------------------------------------------------------------------------
7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent, Accounting Services." Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as next determined on the following Business
Day.
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
18
<PAGE>
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. Neither the Fund nor the Transfer Agent will be responsible for
any loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. During
periods of extreme economic or market changes, shareholders may experience
difficulty in effecting telephone transactions. In such event, requests
should be made by regular or express mail. Shares held in certificate form
may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")
- -----------------------------------------------------------------------------
8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of 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 Fund shares at net asset
value. Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent,
Accounting Services"), either directly or through their Participating Dealer
or Shareholder Servicing Agent, at least five days before the next date on
which dividends or distributions will be paid.
.............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
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.
19
<PAGE>
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 amounts
distributed to shareholders. Shareholders, unless otherwise exempt, generally
will be subject to income tax on the amounts so distributed regardless of
whether such distributions are paid in cash or reinvested in additional
shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time the shareholder has held the shares. All other income distributions will
be taxed to shareholders as ordinary income. Corporate shareholders may be
entitled to the dividends received deduction on a portion of dividends
received from the Fund. Shareholders will be advised annually as to the tax
status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund 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.
A sale, exchange, or redemption of shares is a taxable event for the
shareholder.
Shareholders are encouraged to consult with their tax advisors concerning
the application of the rules described above to their particular
circumstances and the application of state and local taxes to an investment
in the Fund.
- -----------------------------------------------------------------------------
9. MANAGEMENT OF THE FUND
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund 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,
20
<PAGE>
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 $3.6 billion of net
assets as of June 30, 1995. ABIM is a registered investment advisor with
approximately $3.5 billion under management as of June 30, 1995.
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to ABIM certain of its duties,
provided that ICC continues to supervise the performance of ABIM and report
thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. The Board has established procedures under which ABIM may
allocate transactions to Alex. Brown, provided that compensation to Alex.
Brown on each transaction is reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other broker-dealers
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
21
<PAGE>
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 total
operating expenses of the Fund do not exceed 1.35% of the Class A Shares'
average daily net assets and 2.10% of the Class B Shares' average daily net
assets. (See "Fee Table.") ABIM has also agreed to waive, on a voluntary
basis, that portion of its fee payable from ICC in excess of the amount equal
to .65% of the Fund's average daily net assets.
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ABIM is a limited partnership affiliated with Alex. Brown. Buppert, Behrens &
Owen, Inc., a company organized and owned by three employees of ABIM, owns a
49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex.
Brown Incorporated owns the remaining 49% limited partnership interest. The
address of both ICC and ABIM is 135 East Baltimore Street, Baltimore,
Maryland 21202.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
.............................................................................
PORTFOLIO MANAGERS
Messrs. 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.
22
<PAGE>
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 the Class A Shares and the Class B
Shares. Alex. Brown is an investment banking firm which offers a broad range
of investment services to individual, institutional, corporate and municipal
clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated which
has engaged directly and through subsidiaries and affiliates in the
investment business since 1800. Alex. Brown is a member of the New York Stock
Exchange and other leading securities exchanges. Headquartered in Baltimore,
Maryland, Alex. Brown has offices throughout the United States and, through
subsidiaries, maintains offices in London, England, Geneva, Switzerland and
Tokyo, Japan.
The Fund has adopted two separate Distribution Agreements and related
Plans of Distribution, one with respect to the Class A Shares and one with
respect to the Class B Shares (the "Plans"), pursuant to Rule 12b-1 under the
Investment Company Act. In addition, the Fund may enter into Shareholder
Servicing Agreements with certain financial institutions, such as banks, to
act as Shareholder Servicing Agents, pursuant to which Alex. Brown will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
impose separate fees in connection with these services and investors should
review this Prospectus in conjunction with any such institution's fee
schedule. In addition, financial institutions may be required to register as
dealers pursuant to state securities laws. Amounts allocated to any
23
<PAGE>
Participating Dealer or Shareholder Servicing Agent may not exceed amounts
payable to Alex. Brown under the Plans with respect to shares held by or on
behalf of customers of such entity.
As compensation for providing distribution services for the Class A Shares
for the fiscal year ended March 31, 1995, Alex. Brown received a fee equal to
.25% of the average daily net assets of the Class A Shares.
Under the Class B Plan, Alex. Brown will receive an annual distribution
fee, paid monthly, equal to .75% of the Class B Shares' average daily net
assets. In addition, Alex. Brown will receive an annual shareholder servicing
fee, paid monthly, equal to .25% of the Class B Shares' average daily net
assets. The distribution fee will be used to compensate Alex. Brown for its
services and expenses in distributing the Class B Shares. The shareholder
servicing fee will be used to compensate Alex. Brown, Participating Dealers
and Shareholder Servicing Agents for services provided and expenses incurred
in maintaining shareholder accounts, responding to shareholder inquiries and
providing information on their investments.
Payments under the Plans are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares or
in connection with the sale of the Class B Shares is less than .75% of the
average daily net assets invested in Class B Shares for any period, the
unexpended portion of the distribution fees may be retained as profit by
Alex. Brown. Alex. Brown will from time to time and from its own resources
pay or allow additional discounts or promotional incentives in the form of
cash or other compensation (including merchandise or travel) to Participating
Dealers.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
- -----------------------------------------------------------------------------
12. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
24
<PAGE>
providing accounting services, ICC receives from the Fund an annual fee equal to
$13,000, plus a percentage of the Fund's average daily net assets in excess of
$10 million at a maximum rate of .10% of net assets, and declining at various
asset levels to a minimum rate of .001% on assets of $1 billion or more. (See
the Statement of Additional Information.) 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, net of the Fund's maximum sales charge imposed
on Class A Shares or including the contingent deferred sales charge imposed
on Class B Shares redeemed at the end of the specified period covered by the
total return figure, over one, five and ten year periods or, if such periods
have not yet elapsed, shorter periods corresponding to the life of the Fund.
Such total return quotations will be computed by finding average annual
compounded rates of return over such periods that would equate an assumed
initial investment of $1,000 to the ending redeemable value, net of the
maximum sales charge and other fees, according to the required standardized
calculation. The standardized calculation is required by the SEC to provide
consistency and comparability in investment company advertising and is not
equivalent to a yield calculation. If the Fund compares its performance to
other funds or to relevant indices, the Fund's performance will be stated in
the same terms in which such comparative data and indices are stated, which
is normally total return rather than yield. For these purposes, the
performance of the Fund, as well as the performance of such investment
companies or indices, may not reflect sales charges, which, if reflected,
would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc. 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.
25
<PAGE>
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.
Although expenses for Class B Shares may be higher than those for Class A
Shares, the performance of Class B Shares may be higher than the performance
of Class A Shares after giving effect to the impact of the sales charges and
distribution/service fees applicable to each class of shares.
- ----------------------------------------------------------------------------
14. GENERAL INFORMATION
............................................................................
CAPITAL SHARES
The Fund is a Maryland corporation, authorized to issue thirty million
shares of capital stock, with a par value of $.001 per share. Shares of the
Fund have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the
Fund, each share would be entitled to its portion of the Fund's assets after
all debts and expenses have been paid.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The Shares offered by this Prospectus have been designated: Flag
Investors Value Builder Fund Class A Shares and Flag Investors Value Builder
Fund Class B Shares. The Board has no present intention of establishing any
additional series of the Fund but the Fund does have another class of shares
in addition to the Shares offered hereby, 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 Class A or Class B
Shares. All classes of the Fund share a common investment objective,
portfolio of investments and advisory fee, but the classes may have different
distribution/service fees or sales load structures.
.............................................................................
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders, but
special meetings of shareholders may be held under certain circumstances.
26
<PAGE>
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.
.............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact Alex.
Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius serves as counsel to the Fund.
27
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Value Builder
Fund, Inc." and mail with this application to:
Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
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
To open an IRA account, call 1-800-767-3524 to request an IRA application
I wish to purchase the following class of shares of the Fund, in the amount
indicated below: Please check the applicable box and indicate amount of
purchase.
/ / Class A Shares (4.5% maximum initial sales charge) in the amount of $_____
/ / Class A Shares (4.0% maximum contingent deferred sales charge) in the
amount of $______
The minimum initial purchase for each class of shares is $2,000, except that
the minimum initial purchase for shareholders of any other Flag Investors
Fund or class is $500 and the minimum initial purchase for participants in
the Fund's Automatic Investing Plan is $250 per class. Each subsequent
purchase requires a $100 minimum per class, except that the minimum
subsequent purchase under the Fund's Automatic Investing Plan is $250 for
quarterly purchases and $100 for monthly purchases. The maximum investment in
Class B Shares is $100,000 per account. The Fund reserves the right not to
accept checks for more than $50,000 that are not certified or bank checks.
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: _____________
INDIVIDUAL OR JOINT TENANT
_____________________________________________________________________________
First Name Initial Last Name
_____________________________________________________________________________
Social Security Number
_____________________________________________________________________________
Joint Tenant Initial Last Name
GIFTS TO MINORS
_____________________________________________________________________________
Custodian's Name (only one allowed by law)
_____________________________________________________________________________
Minor's Name (only one)
_____________________________________________________________________________
Social Security Number of Minor
under the _______________________ Uniform Gifts to Minors Act
State of Residence
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
_____________________________________________________________________________
Name of Corporation, Trust or Partnership
_____________________________________________________________________________
Tax ID Number Date of Trust
_____________________________________________________________________________
Name of Trustees (If to be included in the Registration)
_____________________________________________________________________________
For the Benefit of
_____________________________________________________________________________
MAILING ADDRESS
_____________________________________________________________________________
Street
_____________________________________________________________________________
City State Zip
( )
_____________________________________________________________________________
Daytime Phone
_____________________________________________________________________________
28
<PAGE>
LETTER OF INTENT (CLASS A SHARES ONLY) (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares as shown below, in an
aggregate amount at least equal to:
/ / $50,000 / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
_____________________________________________________________________________
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) set forth below
(except Class B shares) to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
29
<PAGE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options are elected, all
distributions will be reinvested in additional shares of the Fund at no sales
charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
______________________________________________________________________________
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $________ in Class A Shares or $_______ in Class B Shares
for me, on a monthly or quarterly basis, on or about the 20th of each month
or if quarterly, the 20th of January, April, July and October, and to draw a
bank draft in payment of the investment against my checking account. (Bank
drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum) Please attach a voided check.
[ ] Quarterly ($250 minimum)
______________________________________________________________________________
Bank Name
______________________________________________________________________________
Existing Flag Investors Fund Account No., if any
______________________________________________________________________________
Depositor's Signature Date
______________________________________________________________________________
Depositor's Signature Date
(if joint acct., both must sign)
______________________________________________________________________________
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of ________ , 19_________ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $_______, from Class A Shares and/or $_______ from Class B Shares
that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000 per class.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
______________________________________________________________________________
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/We do not want
[ ] Telephone exchange privileges
[ ] Telephone redemption privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a predesignated bank account, please
provide the following information:
Bank:_______________________________ Bank Account No:_____________________
Address: ___________________________ Bank Account Name:___________________
30
<PAGE>
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated August 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:
_____________________________________________________________________________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
_____________________________________________________________________________
Signature Date
_____________________________________________________________________________
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name: ______________________________________ Dealer Code:__________
Dealer's Address:______________________________________ Branch Code:__________
______________________________________
Representative: ______________________________________ Rep. No. __________
31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Flag Investors Value Builder Fund, Inc.
P.O. Box 515
Baltimore, MD 21203
__________________
| |
| BULK RATE |
| U.S. POSTAGE |
| PAID |
| PERMIT NO. 2139 |
| BALTO., MD |
|__________________|
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
--------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
(Class A and Class B Shares)
135 E. Baltimore Street
Baltimore, Maryland 21202
--------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT OR
BY WRITING OR CALLING ALEX. BROWN & SONS INCORPORATED,
135 EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202,
(800) 767-FLAG.
Statement of Additional Information Dated: August 1, 1995
Relating to the Prospectus Dated: August 1, 1995
<PAGE>
TABLE OF CONTENTS
Page
----
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 ........................................................ 21
9. Capital Stock .................................................... 22
10. Semi-Annual Reports .............................................. 23
11. Custodian, Transfer Agent and Accounting Services ................ 23
12. Independent Accountants .......................................... 24
13. Performance Information .......................................... 24
14. Control Persons and Principal Holders of
Securities ..................................................... 26
15. Financial Statements ............................................. 26
APPENDIX - Moody's Investors Service and Standard & Poor's Ratings
Definitions.
<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 two classes of shares: Flag Investors Value Builder Fund
Class A Shares and Flag Investors Value Builder Fund Class B Shares.
Important information concerning the Fund is included in the Fund's
Prospectus which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG) or from Participating Dealers that offer
shares of the respective classes of the Fund ("Shares") to prospective
investors. Prospectuses may also be obtained from Shareholder Servicing
Agents. As used herein, the "Fund" refers to Flag Investors Value Builder
Fund, Inc. and specific references to either class of the Fund's Shares will
be made using the name of such class. Some of the information required to be
in this Statement of Additional Information is also included in the Fund's
current Prospectus. To avoid unnecessary repetition, references are made to
related sections of the Prospectus. In addition, the Prospectus and this
Statement of Additional Information omit certain information about the Fund
and its business that is contained in the Registration Statement respecting
the Fund and its Shares filed with the SEC. Copies of the Registration
Statement as filed, including such omitted items, may be obtained from the
SEC by paying the charges prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
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, and commenced
operations on June 15, 1992. The Fund commenced offering the Flag Investors
Value Builder Fund Class B Shares on January 3, 1995.
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 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 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
1
<PAGE>
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.
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
2
<PAGE>
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.)
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,
3
<PAGE>
the price of a convertible security also is influenced by the market value of
the security's underlying common stock. Thus, the price of a convertible
security tends to increase as the market value of the underlying common stock
increases, whereas it tends to decrease as the market value of the underlying
stock declines. Investments in convertible securities generally entail less
risk than investment in common stock of the same issuer.
Below Investment Grade Corporate Bonds
The Fund may purchase corporate bonds 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 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 wil be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
services payments are jeopardized.
4
<PAGE>
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 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
5
<PAGE>
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 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
6
<PAGE>
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;
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;
7
<PAGE>
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 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.
8
<PAGE>
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check as
described in the Prospectus. However, if the Board of Directors determines
that it would be in the best interests of the remaining shareholders to make
payment of the redemption price in whole or in part by a distribution in kind
of readily marketable securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming
shareholder will incur brokerage costs in later converting the assets into
cash. The method of valuing portfolio securities is described under
"Valuation of Shares" and such valuation will be made as of the same time the
redemption price is determined. The Fund has elected to be governed by Rule
18f-1 under the Investment Company Act pursuant to which the Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute
for careful tax planning.
The summary of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. Subsequent legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein,
and may have a retroactive effect with respect to the transactions
contemplated herein.
Qualification as a Regulated Investment Company
The Fund expects to be taxed as a regulated investment company under
Subchapter M of the Code. However, in order to qualify as a regulated
investment company for any taxable year, the Fund generally must (1) derive
at least 90% of its gross income from dividends, interest, certain payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, and other income (including, but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies (the
"Income Requirement"), and (2) derive less than 30% of its gross income
(exclusive of certain gains from designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from gains
on the sale or other disposition of any of the following investments if such
investments are held for less than three months (the "Short-Short Gain
Test"): (a) stock or securities (as defined in Section 2(a)(36) of the
Investment Company Act); (b) options, futures or forward contracts (other
than options, futures, or forward contracts on foreign currencies), and (c)
foreign currencies (or options, futures, or forward contracts on foreign
9
<PAGE>
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.
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
10
<PAGE>
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
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
11
<PAGE>
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 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
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown Incorporated.
*W. JAMES PRICE, Director
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
Managing Director, Alex. Brown & Sons Incorporated.
JAMES J. CUNNANE, Director
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (a merchant banking firm), 1993-Present; Formerly,
Senior Vice-President and Chief Financial Officer, General Dynamics
Corporation (defense)(1989-1993) and Director, The Arch Fund (mutual
fund).
N. BRUCE HANNAY, Director
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice
President, Research and Patents, AT&T Bell Laboratories; Formerly,
Director, Rohm & Haas Company (diversified chemicals), General Signal
Corp. (control equipment & systems) and Director, Plenum Publishing Corp.
12
<PAGE>
JOHN F. KROEGER, Director
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
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-
Clark Corporation (personal consumer products) and Household
International (banking and finance); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main Street,
Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care).
HARRY WOOLF, Director
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at Large Emeritus, Institute for Advanced Study;
Director, Merrill Lynch Cluster C Funds (registered investment
companies); ATL and Spacelabs Medical Corp. (medical equipment); Family
Health International (nonprofit research and education).
J. DORSEY BROWN, III, President
Managing Director, Alex. Brown & Sons Incorporated; Chief Executive
Officer and Formerly, General Partner, Alex. Brown Investment Management.
HOBART C. BUPPERT, Executive Vice President
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
Portfolio Manager, Alex. Brown Investment Management (registered
investment advisor); Vice President and Secretary, Buppert, Behrens &
Owen, Inc.
BRUCE E. BEHRENS, Vice President
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Treasurer, Buppert,
Behrens & Owen, Inc.
EDWARD J. VEILLEUX, Vice President
Principal, Alex. Brown & Sons Incorporated; President, Investment Company
Capital Corp. (registered investment advisor); Vice President, Armata
Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
13
<PAGE>
DIANA M. ELLIS, Treasurer
Manager, Portfolio Accounting Department, Investment Company Capital
Corp. (registered investment advisor); Mutual Fund Accounting Department,
Alex. Brown & Sons Incorporated, 1991 - Present; Formerly, Accounting
Manager, Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary
Asset Management Department, Alex. Brown & Sons Incorporated, 1991 -
Present; Formerly, student 1989-1991.
_____________________
* 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 and Mr. Semans each serve as a
Director of seven 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, Ms. Ellis, and Ms. DePrine serve as
Vice President and Secretary, Treasurer and Assistant Secretary,
respectively, of each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had
normal brokerage transactions with, Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated
persons. Additional transactions may be expected to take place in the
future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown may be considered to have received remuneration
indirectly. As compensation from the Fund, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") 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.
15
<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 Quality Growth
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 & 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. 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
16
<PAGE>
control of the Fund's Board of Directors. ICC will provide the Fund with
office space for managing its affairs, with the services of required
executive personnel and with certain clerical and bookkeeping services and
facilities. These services are provided by ICC without reimbursement by the
Fund for any costs. Neither ICC nor ABIM shall be liable to the Fund or its
shareholders for any act or omission by ICC or ABIM or any losses sustained
by the Fund or its shareholders except in the case of willful misfeasance,
bad faith, gross negligence, or reckless disregard of duty. The services of
ICC and ABIM to the Fund are not exclusive and ICC and ABIM are free to
render similar services to others.
As compensation for its services, ICC is entitled to receive an
annual fee from the Fund, calculated daily and payable monthly, at the annual
rate of 1.00% of the first $50 million of the Fund's average daily net
assets, .85% of the 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 and 2.10% of the Class B Shares' average
daily net assets. ABIM has also agreed to waive, on a voluntary basis, that
portion of its fee payable from ICC for sub-advisory services in excess of
the amount equal to .65% of the Fund's average daily net assets.
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 by the Board of Directors on
September 22, 1994. 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
17
<PAGE>
(as defined in the Investment Company Act). The Sub-Advisory Agreement has
similar 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 own 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
The 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 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 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.)
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<PAGE>
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.
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.
Pursuant to Rule 12b-1 under the Investment Company Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, only pursuant to a plan adopted by the investment company's board
of directors and approved by its shareholders, the Fund has adopted a Plan of
Distribution for each of its classes of shares (the "Plans"). Under the
Plans, the Fund pays a fee to Alex. Brown for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreements,
and Alex. Brown is authorized to make payments out of its fee to its
investment representatives and to participating broker-dealers. Each
Distribution Agreement has an initial term of two years. The Distribution
Agreements and the Plans encompassed therein will remain in effect from year
to year as specifically approved at least annually by the Fund's Board of
Directors and by the affirmative vote of a majority of the Non-Interested
Directors by votes cast in person at a meeting called for such purpose. The
Distribution Agreements including the Plans and forms of Sub-Distribution
Agreements, were most recently approved by the Fund's Board of Directors,
including a majority of the Non-Interested Directors on September 22, 1994.
In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year.
The Plans may not be amended to increase materially the fee to be paid
pursuant to the Distribution Agreements without the approval of the
shareholders of the Fund. The Plans may be terminated at any time and the
Distribution Agreements may be terminated at any time upon sixty days'
notice, in either case without penalty, by the vote of a majority of the
Fund's Non-Interested Directors or by a vote of a majority of the Fund's
outstanding Shares (as defined under "Capital Stock"). Any Sub-Distribution
Agreement may be terminated in the same manner at any time. The Distribution
Agreement and any Sub-Distribution Agreement shall automatically terminate in
the event of assignment.
During the continuance of the Plans, the Fund's Board of Directors
will be provided for their review, at least quarterly, a written report
concerning the payments made under the Plan to Alex. Brown pursuant to the
Distribution Agreements, to broker-dealers pursuant to any Sub-Distribution
Agreements and to Shareholder Servicing Agents pursuant to Shareholder
Servicing Agreements. Such reports shall be made by the persons authorized
to make such payments. In addition, during the continuance of the Plans, the
selection and nomination of the Fund's Non-Interested Directors shall be
committed to the discretion of the Non-Interested Directors then in office.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of
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<PAGE>
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 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.
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<PAGE>
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission
rates, subject to the supervision of ICC. Purchases and sales of securities
on a securities exchange are effected through broker-dealers who charge a
commission for their services. Brokerage commissions are subject to
negotiation between 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
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<PAGE>
Alex. Brown must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABIM to furnish
reports and to maintain records in connection with such reviews. The
Distribution Agreement between Alex. Brown and the Fund does not provide for
any reduction in the distribution fee to be received by Alex. Brown from the
Fund as 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 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 three classes of Shares: Flag Investors Value Builder
Fund Class A Shares, Flag Investors Value Builder Fund Class B Shares and
Flag Investors Value Builder Fund Class D Shares. 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
22
<PAGE>
fees) would be prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class
exclusively would be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
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, 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.
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<PAGE>
Average Net Assets Incremental Fee
- ------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 .100%
$20,000,000 - $30,000,000 .080%
$30,000,000 - $40,000,000 .060%
$40,000,000 - $50,000,000 .050%
$50,000,000 - $60,000,000 .040%
$60,000,000 - $70,000,000 .030%
$70,000,000 - $100,000,000 .020%
$100,000,000 - $500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
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:
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n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication,
and will cover one, five, and ten year periods or a shorter period dating
from the effectiveness of the Fund's registration statement. 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 prospectus on the
reinvestment dates during the period. "T" in the formula above is calculated
by finding the average annual compounded rate of return over the period that
would equate an assumed initial payment of $1,000 to the ending redeemable
value. Any sales loads that might in the future be made applicable at the
time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth
above to compare more accurately the Fund's performance with other measures
of 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
25
<PAGE>
for the Flag Investors 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 Flag Investors 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
Flag Investors 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 Flag Investors 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 Flag Investors 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 Flag Investors Class B Shares were not offered prior to the date
of this Statement of Additional Information.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 29, 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
10.72% of the Fund's outstanding Class A Shares and Alex. Brown & Sons
Incorporated, 135 E. Baltimore Street, Baltimore, MD 21202, owned of record
75.56% of the Fund's outstanding Class A Shares*.
26
<PAGE>
Alex. Brown & Sons Incorporated, FBO 201-34186-17, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 5.69% of the Fund's outstanding
Class B Shares*.
Alex. Brown & Sons Incorporated, FBO 201-55957-19, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 5.68% of the Fund's outstanding
Class B Shares*.
Alex. Brown & Sons Incorporated, FBO 252-09175-15, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 5.61% of the Fund's outstanding
Class B Shares*.
Alex. Brown & Sons Incorporated, FBO 259-07066-16, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 6.42% of the Fund's outstanding
Class B Shares*.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore,
MD 21202, owned of record an additional 74.56% of the Fund's outstanding
Class B Shares*.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore,
MD 21020, owned of record 87.93% of the Fund's outstanding Class D Shares.
As of such date, Directors and officers as a group owned less than 1%
of the Fund's total outstanding Class A Shares.
15. FINANCIAL STATEMENTS
See next page.
____________________
* Alex. Brown owned beneficially less than 1% of such shares.
27
<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
28
<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
29
<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
30
<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
31
<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
32
<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.
33
<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.
34
<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.
35
<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.
36
<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
37
<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.
38
<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
39
<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.
A-1
<PAGE>
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. 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.
A-2
<PAGE>
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-3
