<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 long-term growth of capital and current income.
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 Flag Investors Class A Shares ("Class A
Shares") and Flag Investors Class B Shares ("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.")
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, 1996 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.
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.
LOGO
The date of this Prospectus is August 1, 1996.
<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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<TABLE>
<CAPTION>
Page
<S> <C>
1. Fee Table .......................................... 2
2. Financial Highlights ............................... 3
3. Investment Program ................................. 6
4. Investment Restrictions ............................ 10
5. How to Invest in the Fund .......................... 10
6. How to Redeem Shares ............................... 18
7. Telephone Transactions ............................. 19
8. Dividends and Taxes ................................ 20
9. Management of the Fund ............................. 21
10. Investment Advisor and Sub-Advisor ................. 22
11. Distributor ........................................ 24
12. Custodian, Transfer Agent and Accounting Services .. 25
13. Performance Information ............................ 25
14. General Information ................................ 27
</TABLE>
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. Shares may be offered only to residents of those states
in which such shares are eligible for purchase.
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
Maximum Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is lower) .. 0.50* 4.00%**
- ------------------------------------------------------------------------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
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<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees ......................................... .86% .86%
12b-1 Fees .............................................. .25% .75%
Other Expenses (including a .25% shareholder servicing fee
for Class B Shares) .................................... .20% .45%***
------- ---------
Total Fund Operating Expenses ........................... 1.31% 2.06%
======= =========
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</TABLE>
* Purchases of $1 million or more of Class A Shares by persons not
otherwise eligible for sale load waivers are not subject to an initial
sales charge, however, a contingent deferred sales charge of .50% may 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.")
*** 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>
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
Class A Shares ....................... $ 58 $ 85 $ 116 $ 206
Class B Shares ....................... $ 61 $ 97 $ 137 $ 221*
- ------------------------------------------------------------------------------------------------
You would pay the following expenses
on the same investment, assuming
no redemption:* 1 year 3 years 5 years 10 years
- -------------------------------------------------------------------------------------------------
Class B Shares .................... $ 21 $ 67 $ 117 $ 221*
- -------------------------------------------------------------------------------------------------
</TABLE>
*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.
2
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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", "Investment Advisor and Sub-Advisor" and "Distributor.") The Expenses
and Example appearing in the table above are based on the Fund's expenses for
the fiscal year ended March 31, 1996 which were 1.31% of the Class A Shares'
average daily net assets and 2.06% of the Class B Shares' average daily net
assets.
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 the following tables 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, 1996
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,
1996 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)
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<TABLE>
<CAPTION>
Class A Shares
-------------------------------------------------
For the Period
For the Year Ended March 31, June 15, 1992*
------------------------------- through
1996 1995 1994 March 31, 1993
------ ----- ----- -------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of
period $12.02 $11.23 $11.25 $10.00
---------- ---------- ---------- --------------
Income from Investment
Operations:
Net investment income 0.36 0.35 0.40 0.18
Net realized and
unrealized
gain/(loss)
on investments 3.03 0.80 (0.04) 1.18
---------- ---------- ---------- --------------
Total from Investment
Operations 3.39 1.15 0.36 1.36
Less Distributions:
Dividends from net
investment income
and short-term
gains (0.41) (0.35) (0.38) (0.11)
Distributions from
net realized
long-term gains (0.32) (0.01) -- --
---------- ---------- ---------- --------------
Total Distributions (0.73) (0.36) (0.38) (0.11)
---------- ---------- ---------- --------------
Net asset value at
end of period $14.68 $12.02 $11.23 $11.25
========== ========== ========== ==============
Total Return** 28.86% 10.57% 3.14% 13.73%
Ratios to Average
Net Assets:
Expenses 1.31% 1.35%(2) 1.35%(2) 1.35%(1)(2)
Net investment income 2.72% 3.07%(3) 3.14%(3) 2.88%(1)(3)
Supplemental Data:
Net assets
at end of period
(000) $200,020 $146,986 $131,097 $83,535
Portfolio turnover
rate 15% 18% 8% 8%
</TABLE>
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* Commencement of operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.40%, 1.38% and 1.70% (annualized) for Class A
Shares for the periods ended March 31, 1995, March 31, 1994 and March 31,
1993, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 3.02%, 3.11% and 2.53%,
(annualized) for Class A Shares for the periods ended March 31, 1995,
March 31, 1994 and March 31, 1993, respectively.
4
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(For a share outstanding throughout each period)
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<TABLE>
<CAPTION>
Class B Shares
----------------------------------
For the For the Period
Year January 3, 1995*
Ended through
March 31, 1996 March 31, 1995
-------------- ----------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $12.01 $11.14
-------------- ----------------
Income from Investment Operations:
Net investment income 0.21 0.08
Net realized and unrealized gain on
investments 3.05 0.79
-------------- ----------------
Total from Investment Operations 3.26 0.87
Less Distributions:
Dividends from net investment income and
short- term gains (0.24) --
Distributions from net realized long-term
gains (0.32) --
-------------- ----------------
Total Distributions (0.56) --
-------------- ----------------
Net asset value at end of period $14.71 $12.01
============== ================
Total Return** 27.89% 7.81%
Ratios to Average Net Assets:
Expenses 2.06% 2.10%(1)(2)
Net investment income 1.97% 2.94%(1)(3)
Supplemental Data:
Net assets at end of period (000) $4,178 $341
Portfolio turnover rate 15% 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 2.17% (annualized) for Class B Shares for the
period ended March 31, 1995.
(3) 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.
5
<PAGE>
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3. INVESTMENT PROGRAM
.............................................................................
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The Fund's investment objective 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
in 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
6
<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 by S&P or Moody's, 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. Up to 10% of the Fund's assets may be invested
in lower quality debt obligations (securities rated BB or lower by S&P or Ba
or lower by Moody's). 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. In the event that any security owned by the Fund is
downgraded, the Advisors will review the situation and take appropriate
action, but will not be automatically required to sell any such security. 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.
(See "Investments in Non-Investment Grade Securities" below.)
The Fund may also purchase obligations issued or guaranteed by the U.S.
Government, 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 or A-1+ by S&P or P-1 by Moody's.
- -------------------------------------------------------------------------------
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES
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. In addition, C or D rated
securities may be regarded as having extremely poor prospects of ever
attaining investment standing. 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 eco-
7
<PAGE>
nomic 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
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, 1996, 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.
<TABLE>
<CAPTION>
S&P
Rating Average
----------- -----------
<S> <C>
AAA ....... 4.73%
AA ........ .52%
A ......... 4.08%
BBB ....... 9.34%
BB ........ 6.31%
B ......... 3.10%
Unrated ... 0%
</TABLE>
.............................................................................
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
8
<PAGE>
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.
..............................................................................
INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS
From time to time, the Advisors may invest up to 10% of the Fund's total
assets in American Depositary Receipts, which are 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 notes or
bonds issued by the U.S. Treasury Department or by other agencies of the U.S.
Government.
The Fund may write covered call options on common stock which it owns or
has the immediate right to acquire through conversion or exchange of other
securities, provided that any such option is traded on a national securities
exchange. The Fund may also enter into closing transactions with respect to
such options.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities including (i) repurchase agreements with remaining maturities in
excess of seven days and (ii) no more than 5% of its total assets in
restricted securities. Not included within this limitation are securities
that are not registered under the Securities Act of 1933, as amended (the
"1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined
to be liquid. The Board of Directors has adopted guidelines and delegated to
the Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers
are not interested in acquiring the securities.
9
<PAGE>
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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.
- ------------------------------------------------------------------------------
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 by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price (including any applicable front-end sales
charge), to 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.
10
<PAGE>
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.
The Fund reserves the right to suspend the sale of shares at any time at
the discretion of Alex. Brown and the Advisor. Orders for purchases of shares
are accepted on any day on which the New York Stock Exchange is open for
business (a "Business Day"). Purchase orders 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 by mail 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 its share of the Fund's assets, deducting liabilities attributable to
the class, and dividing the resulting amount by the number of then
outstanding shares of the class. For this purpose, portfolio securities are
11
<PAGE>
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/service fees, the net asset value per share of the classes
differs 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:
<TABLE>
<CAPTION>
Sales Charge
as % of Dealer
------------------------------ Retention
Offering Net Amount as % of
Amount of Purchase Price Invested 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 1.00% 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 Class A shares of Flag Investors Intermediate-
12
<PAGE>
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 Class A 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 at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A 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 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 Class A 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 Class A 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 pur-
13
<PAGE>
chase 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 Class A Shares not subject to such charge are the first redeemed
followed by other Class A Shares held for the longest period of time.
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 Class A 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.
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, a Participating Dealer or Shareholder Servicing Agent.
.............................................................................
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
14
<PAGE>
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
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.
15
<PAGE>
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 with
the same sales load structure. Shares issued pursuant to this offer will not
be subject to the sales charges described above or any other charge. In
addition, shareholders of Class A shares 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 thereafter to any applicable
contingent deferred sales charge.
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) or the close of the New York Stock Exchange, whichever is earlier.
Exchange requests received after 4:00 p.m. (Eastern Time) will be effected on
the next Business Day.
16
<PAGE>
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. Class A
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.
............................................................................
PURCHASES THROUGH DIVIDEND REINVESTMENT
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. Unless the shareholder elects otherwise, all income and capital
gains distributions will be reinvested in additional Fund shares at net asset
value, without a sales charge. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Fund's transfer agent (the
"Transfer Agent"), (see "Custodian, Transfer Agent and 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.
17
<PAGE>
Alternately, shareholders may have their distributions invested in shares
of other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call (800) 553-8080 for additional
information.
- ----------------------------------------------------------------------------
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 any
amount 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.
18
<PAGE>
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' written notice.
.............................................................................
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 Class A 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 Class A 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 enroll 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 and 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.
19
<PAGE>
These procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, 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.
..............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, it will be relieved of federal income tax on amounts distributed
20
<PAGE>
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 executive officers, to the Fund's investment advisor, ICC, to its
sub-advisor, ABIM, and to the Fund's distributor, Alex. Brown. Three
Directors and all of the officers of the Fund are officers or employees of
ICC, ABIM or Alex. Brown. The other Directors of the Fund have no affiliation
with ICC, ABIM or Alex. Brown.
21
<PAGE>
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Truman T. Semans Chairman Hobart C. Buppert, II Executive Vice President
*W. James Price Director Lee S. Owen Executive Vice President
*Richard T. Hale Director Bruce E. Behrens Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Brian C. Nelson Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Harry Woolf Director Edward J. Stoken Secretary
J. Dorsey Brown, III President 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 $4.9 billion of net
assets as of May 31, 1996. ABIM is a registered investment advisor with
approximately $4.9 billion under management as of May 31, 1996.
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
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.
22
<PAGE>
As compensation for its services for the fiscal year ended March 31, 1996,
ICC received from the Fund a fee equal to .86% of the Fund's average daily net
assets and, for the same period, ICC paid ABIM a fee equal to .64% of the
Fund's average daily net assets. The fee paid to ICC is higher than that paid
by most mutual funds.
ICC is an indirect subsidiary of Alex. Brown Incorporated (described below).
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 and
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 it commenced
operations.
J. Dorsey Brown, III -- 29 Years Investment Experience
Dorsey Brown is the Chief Executive Officer of ABIM, which he founded in
1974. From 1967 to 1974, he was a member of the Research and Investment
Advisory Department of the Baltimore-based investment firm, Robert Garrett &
Sons. Mr. Brown received his B.A. from Trinity College in Hartford,
Connecticut, in 1962 and studied at New York University Business School in
1966. He is a member of the Baltimore Security Analysts Society and the
Financial Analysts Federation.
Hobart C. Buppert, II -- 24 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.
23
<PAGE>
Lee S. Owen -- 23 Years Investment Experience
Lee Owen joined ABIM as a Vice President in 1983. From 1972 to 1983, Mr.
Owen was a Vice President and Portfolio Manager for T. Rowe Price Associates.
Mr. Owen is a 1970 graduate of Williams College and received his M.B.A. from
the University of Virginia in 1972. He is a member of the Baltimore Security
Analysts Society and the Financial Analysts Federation.
- ------------------------------------------------------------------------------
11. DISTRIBUTOR
Alex. Brown acts as distributor of each class of the Fund's shares. Alex.
Brown is an investment banking firm which offers a broad range of investment
services to individual, institutional, corporate and municipal clients. It is
a wholly-owned subsidiary of Alex. Brown Incorporated which has engaged
directly and through subsidiaries and affiliates in the investment business
since 1800. Alex. Brown is a member of the New York Stock Exchange and other
leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has 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
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 entities.
As compensation for providing distribution services for the Class A Shares
for the fiscal year ended March 31, 1996, Alex. Brown received a fee equal to
.25% of the average daily net assets of the Class A Shares.
As compensation for providing distribution and shareholder service for the
Class B Shares for the fiscal year ended March 31, 1996, Alex. Brown received
a distribution fee equal to .75% of the Class B Shares' average daily
24
<PAGE>
net assets and a shareholder servicing fee equal to .25% of the Class B
Shares' average daily net assets. The distribution fee is used to compensate
Alex. Brown for its services and expenses in distributing the Class B Shares.
The shareholder servicing fee is 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 Class A Shares' average daily net assets for any period
or in connection with the sale of the Class B Shares is less than .75% of the
Class B Shares' average daily net assets 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 AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services to the Fund for the fiscal year ended March 31,
1996, ICC received a fee equal to .04% of the Fund's average daily net assets.
(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
25
<PAGE>
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., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90 day U.S.
Treasury bills, long-term U.S. Treasury bonds, bank certificates of deposit,
the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average.
The Fund may also use total return performance data as reported in the
following national financial and industry publications that monitor the
performance of mutual funds: Money Magazine, Forbes, Business Week, Barron's,
Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which shares may be purchased, although not included in
calculations of performance, will reduce performance results.
26
<PAGE>
- -----------------------------------------------------------------------------
14. GENERAL INFORMATION
.............................................................................
CAPITAL SHARES
The Fund was incorporated under the laws of the State of Maryland on March
5, 1992 and is authorized to issue thirty-five million shares of capital
stock, with a par value of $.001 per share. Shares of the Fund have equal
rights with respect to voting. Voting rights are not cumulative, so the
holders of more than 50% of the outstanding shares voting together for the
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
is entitled to its pro rata portion of the Fund's assets after all debts and
expenses have been paid.
The Board of Directors 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 other classes of shares in addition
to the shares offered hereby, Flag Investors Value Builder Fund Class D
Shares, which are not currently being offered and Flag Investors Value
Builder Fund Institutional Shares which are not subject to a sales charge or
12b-1 fee and are offered only to eligible institutions and clients of
investment advisory affiliates of Alex. Brown. Additional information
concerning the Fund's Institutional Shares may be obtained by calling Alex.
Brown at (800) 767-FLAG. 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 and, accordingly, the net asset value per share of
classes may differ at times.
.............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, 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.
27
<PAGE>
.............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
.............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their 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.
28
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
NEW ACCOUNT APPLICATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Make check payable to "Flag Investors Value Builder For assistance in completing this application please call: 1-800-553-8080,
Fund, Inc." and mail with this application to: Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
Alex. Brown & Sons Incorporated/Flag
Investors Funds
P.O. Box 419663 To open an IRA account, please call 1-800-767-3524 for an
Kansas City, MO 64141-6663 IRA information kit.
Attn: Flag Investors Value Builder Fund, Inc.
I wish to purchase the following class of shares of the Fund, in the amount indicated below. (Please check the
applicable box and indicate the amount of purchase.)
/ / Class A Shares (4.5% maximum initial sales charge) in the amount of $------
/ / Class B 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.
</TABLE>
- ------------------------------------------------------------------------------
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
<PAGE>
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
LETTER OF INTENT (CLASS A SHARES ONLY) (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Arrangement 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 of Flag Investors Value
Builder Fund, Inc., 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
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
DISTRIBUTION OPTIONS
Please check the appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the same class 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
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
- ------------------------------------------------------------------------------
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 per class
Subsequent Investments (check one):
[ ] Monthly ($100 minimum per class) Please attach a voided check.
[ ] Quarterly ($250 minimum per class)
- ---------------------------------- ---------------------------------------
Bank Name Depositor's Signature Date
- ---------------------------------- ----------------------------------------
Existing Flag Investors Fund Depositor's Signature Date Date
Account No., if any (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)
- ------------------------------------------------------------------------------
<PAGE>
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 pre-designated bank account, please
provide the following information:
Bank:______________________________ Bank Account No.:______________________
Address:___________________________ Bank Account Name:_____________________
___________________________________
- ------------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated August 1, 1996. 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._____________________
<PAGE>
LOGO
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(Institutional SHARES)
This mutual fund (the "Fund") is designed to maximize total return through
a combination of long-term growth of capital and current income.
Flag Investors Institutional Shares of the Fund ("Institutional Shares")
are available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
Participating Dealers and may be purchased only by eligible institutions or
by clients of investment advisory affiliates of Alex. Brown. (See "How to
Invest in Institutional Shares.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated August 1, 1996 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.
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.
LOGO
The date of this Prospectus is August 1, 1996.
<PAGE>
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(INSTITUTIONAL SHARES)
135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
------
<TABLE>
<CAPTION>
Page
<S> <C>
1. Fee Table .......................................... 2
2. Financial Highlights ............................... 3
3. Investment Program ................................. 5
4. Investment Restrictions ............................ 8
5. How to Invest in Institutional Shares .............. 9
6. How to Redeem Institutional Shares ................. 11
7. Telephone Transactions ............................. 11
8. Dividends and Taxes ................................ 12
9. Management of the Fund ............................. 13
10. Investment Advisor and Sub-Advisor ................. 14
11. Distributor ........................................ 16
12. Custodian, Transfer Agent and Accounting Services .. 16
13. Performance Information ............................ 17
14. General Information ................................ 18
</TABLE>
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. Institutional Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
1
<PAGE>
- -----------------------------------------------------------------------------
1. FEE TABLE
.............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases ............... None
Maximum Sales Charge Imposed on Reinvested Dividends .... None
Maximum Deferred Sales Charge ........................... None
- -------------------------------------------------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Management Fees ................ .86%
12b-1 Fees ..................... None
Other Expenses ................. .20%
--------
Total Fund Operating Expenses .. 1.06%
========
- -------------------------------------------------------------------------------
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
$ 11 $ 34 $ 60 $ 137
- -------------------------------------------------------------------------------
</TABLE>
THE EXPENSES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENATION OF
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares," "Investment Advisor and Sub-Advisor" and
"Distributor.") The Expenses and Example appearing in the table above are
based on the expenses for the Fund's Class A Shares, another class of shares
offered by the Fund, for the fiscal year ended March 31, 1996, less 12b-1
fees of .25%.
2
<PAGE>
- -----------------------------------------------------------------------------
2. Financial Highlights
The Fund has offered the Institutional Shares since November 2, 1995.
However, the Fund has offered another class of shares since 1992. Historical
financial information about the Fund is not fully applicable to the
Institutional Shares because the expenses paid by the Fund in the past differ
from those the Institutional Shares will incur. (See "Fee Table.") Nevertheless,
historical information about the Fund may be useful to investors if they take
into account the differences in expenses. Accordingly, the financial highlights
included in this table are a part of the Fund's financial statements for the
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, 1996 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, 1996 which can be obtained at no charge by calling the Fund at (800)
767-FLAG.
3
<PAGE>
(For a share outstanding throughout each period)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Class A Shares
Shares -------------------------------------------------------
------------------
For the Period For the Period
November 2, 1995* For the Year Ended March 31, June 15, 1992*
through ------------------------------------- through
March 31, 1996 1996 1995 1994 March 31, 1993
------------------ ----------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of
period $13.89 $12.02 $11.23 $11.25 $10.00
------------------- ---------- ---------- ---------- --------------
Income from Investment
Operations:
Net investment income 0.13 0.36 0.35 0.40 0.18
Net realized and
unrealized
gain/(loss)
on investments 1.17 3.03 0.80 (0.04) 1.18
------------------- ---------- ---------- ---------- --------------
Total from Investment
Operations 1.30 3.39 1.15 0.36 1.36
Less Distributions:
Dividends from net
investment income
and short-term
gains (0.10) (0.41) (0.35) (0.38) (0.11)
Distributions from
net realized
long-term gains (0.32) (0.32) (0.01) -- --
------------------- ---------- ---------- ---------- --------------
Total Distributions (0.42) (0.73) (0.36) (0.38) (0.11)
------------------- ---------- ---------- ---------- --------------
Net asset value at
end of period $14.77 $14.68 $12.02 $11.23 $11.25
=================== ========== ========== ========== ==============
Total Return** 21.12(1) 28.86% 10.57% 3.14% 13.73%
Ratios to Average
Net Assets:
Expenses 1.03%(1) 1.31% 1.35%(2) 1.35%(2) 1.35%(1)(2)
Net investment income 2.89%(1) 2.72% 3.07%(3) 3.14%(3) 2.88%(1)(3)
Supplemental Data:
Net assets
at end of period
(000) $11,768 $200,020 $146,986 $131,097 $83,535
Portfolio turnover
rate 15% 15% 18% 8% 8%
</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
<PAGE>
- -----------------------------------------------------------------------------
3. INVESTMENT PROGRAM
.............................................................................
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The Fund's investment objective 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
in 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
5
<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 by S&P or Moody's, 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. Up to 10% of the Fund's assets may be invested
in lower quality debt obligations (securities rated BB or lower by S&P or Ba
or lower by Moody's). 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. In the event that any security owned by the Fund is
downgraded, the Advisors will review the situation and take appropriate
action, but will not be automatically required to sell any such security. 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.
(See "Investments in Non-Investment Grade Securities" below.)
The Fund may also purchase obligations issued or guaranteed by the U.S.
Government, 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 or A-1+ by S&P or P-1 by Moody's.
............................................................................
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES
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. In addition, C or D rated
securities may be regarded as having extremely poor prospects of ever
attaining investment standing. 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 eco-
6
<PAGE>
nomic 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
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, 1996, 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.
<TABLE>
<CAPTION>
S&P
Rating Average
----------- -----------
<S> <C>
AAA ....... 4.73%
AA ........ .52%
A ......... 4.08%
BBB ....... 9.34%
BB ........ 6.31%
B ......... 3.10%
Unrated ... 0%
</TABLE>
...........................................................................
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
From time to time, the Advisors may invest up to 10% of the
Fund's total assets in American Depositary Receipts, which are interests in
securities of foreign companies, and in debt and equity securities issued by
foreign corporate and government issuers when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Foreign investments involve different risks from
investments in the United States. Accordingly, the Advisors intend to invest
in securities of companies in, and governments of, developed, stable nations,
but there exists the possibility of adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation which could
adversely affect the investments of the Fund in such foreign country.
............................................................................
OTHER INVESTMENTS
For temporary, defensive purposes the Fund may invest up to 100% of its
assets in high quality short-term money market instruments, and in bills,
notes or bonds issued by the U.S. Treasury Department or by other agencies of
the U.S. Government.
The Fund may write covered call options on common stock which it owns or
has the immediate right to acquire through conversion or exchange of other
securities, provided that any such option is traded on a national securities
exchange. The Fund may also enter into closing transactions with respect to
such options.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities including (i) repurchase agreements with remaining maturities in
excess of seven days and (ii) no more than 5% of its total assets in
restricted securities. Not included within this limitation are securities
that are not registered under the Securities Act of 1933, as amended (the
"1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined
to be liquid. The Board of Directors has adopted guidelines and delegated to
the Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers
are not interested in acquiring the securities.
8
<PAGE>
- ----------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------
5. HOW TO INVEST IN INSTITUTIONAL SHARES
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of
Alex. Brown may purchase Institutional Shares through Alex. Brown, 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080),
through any securities dealer which has entered into a dealer agreement with
Alex. Brown ("Participating Dealers"), or by completing the Application Form
attached to this Prospectus and returning it, together with payment of the
purchase price, as instructed in the Application.
9
<PAGE>
The minimum initial investment in Institutional Shares is $500,000, except
that the minimum initial investment is $1,000,000 for qualified retirement
plans. There is no minimum for clients of investment advisory affiliates of
Alex. Brown or for subsequent investments. The Fund reserves the right to
suspend the sale of Institutional Shares at any time at the discretion of
Alex. Brown and the Advisors.
Orders for purchases of Institutional Shares are accepted on any day on
which the New York Stock Exchange is open for business (a "Business Day").
Purchase orders for Institutional Shares will be executed at a per share
purchase price equal to the net asset value next determined after receipt of
the purchase order. Purchases made through Alex. Brown or a Participating
Dealer must be in 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 its share of the Fund's assets, deducting liabilities attributable to
that 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.
............................................................................
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are
confirmed and credited to the shareholder's account on the Fund's books
maintained by ICC or its agents. Shareholders will have the same rights and
ownership with respect to such shares as if certificates had been issued.
10
<PAGE>
- ------------------------------------------------------------------------------
6. HOW TO REDEEM INSTITUTIONAL SHARES
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Fund's transfer
agent (the "Transfer Agent") at its address listed under "Custodian, Transfer
Agent and Accounting Services." Shareholders may also redeem Institutional
Shares by telephone (in amounts up to $500,000). (See "Telephone
Transactions" below.) A redemption request is effected at the net asset value
per share next determined after receipt of the order in proper form.
Redemption orders received after 4:00 p.m. (Eastern Time) or the close of the
New York Stock Exchange, whichever is earlier, will be effected at the net
asset value next determined on the following Business Day. Payment for redeemed
Institutional Shares will be made by wire transfer of funds to the shareholder's
bank, or to a Participating Dealer, as appropriate, upon receipt of a duly
authorized redemption request as promptly as feasible and, under most
circumstances, within three Business Days.
Dividends payable up to the date of redemption of Institutional Shares
will be paid on the next dividend payable date. If all of the Institutional
Shares in an account have been redeemed on a dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
- -----------------------------------------------------------------------------
7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Institutional Shares in amounts up to
$500,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent and 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 as next determined on the following Business
Day.
11
<PAGE>
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by express mail or
facsimile. (See "How to Invest in Institutional Shares -- Purchases by
Exchange" and "How to Redeem Institutional Shares.")
- -----------------------------------------------------------------------------
8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of quarterly dividends. The
Fund may distribute to shareholders any taxable net capital gains on an
annual basis or, alternatively, may elect to retain net capital gains and pay
tax thereon.
Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Institutional Shares at net
asset value. Shareholders may elect to terminate automatic reinvestment by
giving written notice to the Transfer Agent (see "Custodian, Transfer Agent
and Accounting Services"), either directly or through Alex. Brown or a
Participating Dealer, at least five days before the next date on which
dividends or distributions will be paid.
............................................................................
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.
12
<PAGE>
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, it will be relieved of federal income tax on that part of its net
investment income which is distributed to shareholders. Shareholders, unless
otherwise exempt, generally will be subject to income tax on the amounts so
distributed regardless of whether such distributions are paid in cash or
reinvested in additional shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time the shareholder has held the Institutional Shares. All other income
distributions will be taxed to shareholders as ordinary income. Corporate
shareholders may be entitled to the dividends received deduction on a portion
of dividends received from the Fund. Shareholders will be advised annually as
to the tax status of all distributions.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Institutional Shares is a taxable
event for the shareholder.
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
13
<PAGE>
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 executive officers, to the Fund's investment advisor,
ICC, to its sub-advisor, ABIM, and to the Fund's distributor, Alex. Brown.
Three Directors and all of the officers of the Fund are officers or employees
of ICC, ABIM or Alex. Brown. The other Directors of the Fund have no
affiliation with ICC, ABIM or Alex. Brown.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Truman T. Semans Chairman J. Dorsey Brown, III President
*W. James Price Director Hobart C. Buppert, II Executive Vice President
*Richard T. Hale Director Lee S. Owen Executive Vice President
James J. Cunnane Director Bruce E. Behrens Vice President
John F. Kroeger Director Edward J. Veilleux Vice President
Louis E. Levy Director Gary V. Fearnow Vice President
Eugene J. McDonald Director Brian C. Nelson Vice President
Harry Woolf Director Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
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 $4.9 billion of net
assets as of May 31, 1996. ABIM is a registered investment advisor with
approximately $4.9 billion under management as of May 31, 1996.
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
14
<PAGE>
and fair compared to the commission, fee or other remuneration received or to
be received by other broker-dealers in connection with comparable
transactions involving similar securities during a comparable period of time.
In addition, consistent with NASD Rules, and subject to seeking the most
favorable price and execution available and such other policies as the Board
may determine, ABIM may consider services in connection with the sale of
shares as a factor in the selection of broker-dealers to execute portfolio
transactions for the Fund.
As compensation for its services for the fiscal year ended March 31, 1996,
ICC received from the Fund a fee equal to .86% of the Fund's average daily
net assets and, for the same period, ICC paid ABIM a fee equal to .64% of the
Fund's average daily net assets. The fee paid to ICC is higher than that paid
by most mutual funds.
ICC is an indirect subsidiary of Alex. Brown Incorporated (described below).
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 and
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 -- 29 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.
15
<PAGE>
Hobart C. Buppert, II -- 24 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 -- 24 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, 135 East Baltimore Street, Baltimore, Maryland 21202, acts as
distributor of each class of the Fund's shares. Alex. Brown is an investment
banking firm which offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly- owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to individuals
and entities other than Fund shareholders.
- -----------------------------------------------------------------------------
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
16
<PAGE>
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services to the Fund for the fiscal year ended March 31,
1996, ICC received a fee equal to .04% of the Fund's average daily net
assets. (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 to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the
average annual total return over one, five and ten year periods or, if such
periods have not yet elapsed, shorter periods corresponding to the life of
the Fund. Such total return quotations will be computed by finding average
annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value 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.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90 day U.S.
Treasury bills, long-term U.S. Treasury bonds, bank certificates of deposit,
the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average.
The Fund may also use total return performance data as reported in the
following national financial and industry publications that monitor the
performance of mutual funds: Money Magazine, Forbes, Business Week, Barron's,
Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
17
<PAGE>
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 Institutional Shares may be purchased, although not
included in calculations of performance, will reduce performance results.
- -----------------------------------------------------------------------------
14. GENERAL INFORMATION
.............................................................................
CAPITAL SHARES
The Fund was incorporated under the laws of the State of Maryland on March
5, 1992 and is authorized to issue thirty-five million shares of capital
stock, with a par value of $.001 per share. Shares 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 the 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 is entitled
to its pro rata portion of the Fund's assets after all debts and expenses
have been paid.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors Value
Builder Fund Institutional Shares." The Board has no present intention of
establishing any additional series of the Fund but the Fund does have three
other classes of shares in addition to the shares offered hereby: "Flag
Investors Value Builder Fund Class A Shares," which are subject to a maximum
front-end sales charge of 4.5% and a .25% 12b-1 fee; "Flag Investors Value
Builder Fund Class B Shares," which are subject to a declining contingent
deferred sales charge with a maximum charge of 4.0%, a .75% 12b-1 fee and a
.25% shareholder servicing fee; and "Flag Investors Value Builder Fund Class
D Shares," which are not currently being offered. Additional information
concerning the Fund's Class A Shares and Class B Shares may be obtained by
calling Alex. Brown at (800) 767-FLAG. Different classes of the Fund may be
offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to Institutional Shares. All classes
of the Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different distribution fees or sales
load structures and the net asset value per share of the classes may differ
at times.
18
<PAGE>
.............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with
shareholder communications in connection with the meeting.
.............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
.............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact Alex. Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080
or a Participating Dealer, as appropriate.
19
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this Application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Value Builder Fund, Inc.
If you are paying by check, make check payable to "Flag Investors Value Builder Fund, Inc." and mail with this Application. If
you are paying by wire, see instructions below.
</TABLE>
- ------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Name on Account
- ----------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ----------------------------------------------------------------------------
Tax ID Number
/ / Corporation / / Partnership / / Trust
/ / Non-Profit or Charitable Organization / / Other_______________________
If a Trust, please provide the
following:
- -----------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
Mailing Address
- -----------------------------------------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
<PAGE>
INITIAL INVESTMENT
- ------------------------------------------------------------------------------
The minimum initial purchase for the Institutional Shares of the Fund is
$500,000, except that the minimum initial purchase is $1,000,000 for
qualified retirement plans. There is no minimum for clients of investment
advisory affiliates of Alex. Brown or for subsequent investments.
Indicate the amount to be invested and the method of payment:
_______ A. By Mail: Enclosed is a check in the amount of $_________ payable to
Flag Investors Value Builder Fund, Inc.
_______ B. By Wire: A bank wire in the amount of $__________
has been sent from__________________________________________________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for
initial investment:
o Send completed Application by overnight carrier to Alex. Brown &
Sons Incorporated/Flag Investors Funds at the address listed
above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7528167
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Value Builder Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to ---------------------------------."
(Investor's Fund Account Number)
<PAGE>
- -----------------------------------------------------------------------------
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in cash [ ] Paid in cash
- -----------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, I do not want:
/ / Telephone redemption privileges
/ / Telephone exchange privileges
Redemptions effected by telephone will be wired
to the bank account designated below.
- -----------------------------------------------------------------------------
BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)
Please attach a blank, voided check to provide account and bank routing
information.
_____________________________________________________________________________
Name of Bank Branch
_____________________________________________________________________________
Bank Address City/State/Zip
_____________________________________________________________________________
Name(s) on Account
____________________________________________________________________________
Account Number A.B.A. Number
<PAGE>
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE
I have received a copy of the Fund's prospectus dated August 1, 1996. 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 of Corporate Officer, General Partner, Trustee, etc. Date
______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
- -----------------------------------------------------------------------------
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
- ------* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
- ---------------------------------- -------------------------------------
Name/Title Signature Date
- ---------------------------------- -------------------------------------
Name/Title Signature Date
- ---------------------------------- -------------------------------------
Name/Title Signature Date
- ---------------------------------- -------------------------------------
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
- ------------------------------------------------------------------------------
CERTIFICATE OF AUTHORITY
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)
I ------, Secretary of the above-named investor, do hereby certify that at a
meeting on ------, at which a quorum was present throughout, the Board of
Directors (Board of Trustees) of the investor duly adopted a resolution which
is in full force and effect and in accordance with the investor's charter and
by-laws, which resolution did the following: (1) empowered the
officers/trustees executing this Application (or amendment) to do so on
behalf of the investor; (2) empowered the above-named Authorized Person(s) to
effect securities transactions for the investor on the terms described above;
(3) authorized the Secretary to certify, from time to time, the names and
<PAGE>
titles of the officers of the investor and to notify ICC when changes in
officers occur; and (4) authorized the Secretary to certify that such a
resolution has been duly adopted and will remain in full force and effect
until ICC receives a duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ------day of ------, 199------ Secretary -----------------------------
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
- ------------------------------------------------------------------------------
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of this Certificate B and attach
it to the Application).
- ------------------------------------------------------------------------------
Signature and title Date
- ------------------------------------------------------------------------------
Signature and title Date
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLAG INVESTORS VALUE BUILDER FUND, INC.
135 E. Baltimore Street
Baltimore, Maryland 21202
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS WHICH MAY BE
OBTAINED FROM YOUR PARTICIPATING DEALER OR SHAREHOLDER
SERVICING AGENT OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, 135 EAST BALTIMORE STREET, BALTIMORE, MARYLAND
21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1996
Relating to the Prospectuses Dated:
August 1, 1996, relating to the Class A, Class B and
Institutional Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
1. General Information and History............................................... 1
2. Investment Objective, Policies and Risk Considerations........................ 2
3. Valuation of Shares and Redemption............................................ 8
4. Federal Tax Treatment of Dividends and
Distributions............................................................... 8
5. Management of the Fund........................................................ 11
6. Investment Advisory and Other Services........................................ 16
7. Distribution of Fund Shares................................................... 18
8. Brokerage..................................................................... 21
9. Capital Stock................................................................. 23
10. Semi-Annual Reports........................................................... 23
11. Custodian, Transfer Agent and Accounting Services............................. 23
12. Independent Accountants....................................................... 24
13. Performance Information....................................................... 25
14. Control Persons and Principal Holders of
Securities.................................................................. 27
15. Financial Statements.......................................................... 27
Appendix...................................................................... A-1
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required to
furnish prospective investors with certain information concerning the activities
of the company being considered for investment. The Fund currently offers three
classes of shares: Flag Investors Value Builder Fund Class A Shares (the "Class
A Shares"), Flag Investors Value Builder Fund Class B Shares (the "Class B
Shares") and Flag Investors Value Builder Fund Institutional Shares (the
"Institutional Shares") (collectively, the "Shares"). As used herein, the "Fund"
refers to Flag Investors Value Builder Fund, Inc. and specific references to any
class of the Fund's Shares will be made using the name of such class.
Important information concerning the Fund is included in the
Fund's Prospectuses which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG), or from Participating Dealers that offer
Shares to prospective investors. Prospectuses for the Class A Shares and the
Class B Shares may also be obtained from Shareholder Servicing Agents. Some of
the information required to be in this Statement of Additional Information is
also included in the Fund's current Prospectuses. To avoid unnecessary
repetition, references are made to related sections of the Prospectuses. In
addition, the Prospectuses and this Statement of Additional Information omit
certain information about the Fund and its business that is contained in the
Registration Statement respecting the Fund and its Shares filed with the SEC.
Copies of the Registration Statement as filed, including such omitted items, may
be obtained from the SEC by paying the charges prescribed under its rules and
regulations.
The Fund was incorporated under the laws of the State of Maryland
on March 5, 1992. The Fund filed a registration statement with the SEC
registering itself as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, as amended, and commenced
operations on June 15, 1992. The Fund commenced offering the Class B Shares on
January 3, 1995 and the Institutional Shares on November 2, 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 some Class D Shares remain outstanding.
Under a license agreement dated June 15, 1992 between the Fund
and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
1
<PAGE>
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective is to maximize 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 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 by S&P or Moody's 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, believe 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
2
<PAGE>
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 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.)
3
<PAGE>
Convertible Securities
As described in the Prospectus, the Fund may invest in
convertible securities. In general, the market value of a convertible security
is at least the higher of its "investment value" (i.e., its value as a
fixed-income security) or its "conversion value" (i.e., the value of the
underlying shares of common stock if the security is converted). A convertible
security tends to increase in market value when interest rates decline and tends
to decrease in value when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security tends to
increase as the market value of the underlying common stock increases, whereas
it tends to decrease as the market value of the underlying stock declines.
Investments in convertible securities generally entail less risk than investment
in common stock of the same issuer.
Below Investment Grade Corporate Bonds
The Fund may purchase non-convertible corporate bonds that carry
ratings lower than those assigned to investment grade bonds by Moody's or S&P,
or that are unrated by S&P or Moody's 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.
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,
4
<PAGE>
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 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 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
5
<PAGE>
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
in addition to those described in the Fund's Prospectuses, 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);
6
<PAGE>
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;
4. Invest in companies for the purpose of exercising management
or control;
5. Invest in puts or calls 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.
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<PAGE>
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 (a
"Business Day") 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.
Redemption
The Fund may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Class A Shares
and Class B Shares by check, and Institutional Shares by wire transfer of funds,
as described in the Prospectuses relating to such Shares. However, if the Board
of Directors determines that it would be in the best interests of the remaining
shareholders of the Fund 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, however, 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 discussion 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. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
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 Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders and the
discussion here and in the Fund's Prospectuses is not intended as a substitute
for careful tax planning.
8
<PAGE>
Qualification as a Regulated Investment Company
The Fund has elected to be, and has been, taxed as a regulated
investment company ("RIC") under Subchapter M of the Code. However, in order to
qualify as a RIC 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 and 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 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 certain investments if such investments are held for less than
three months (the "Short-Short Gain Test"): (a) securities (as defined in
Section 2(a)(36) of the Investment Company Act; (b) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies); and (c) foreign currencies (or options, futures or forward
contracts on foreign currencies) but only if such currencies (or options,
futures or forward contracts) are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities).
To the extent that the Fund is able and chooses to identify and
designate offsetting positions (e.g., options that the Fund has written and the
securities covered by such options) as "hedges", increases and decreases in the
value of such positions will be netted for the purposes of determining whether
the Short-Short Gain Test has been satisfied. The Short-Short Gain Test will not
prevent the Fund from disposing of investments at a loss, since the recognition
of a loss before the expiration of the three-month holding period is
disregarded.
In addition, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must consist of cash and
cash items, U.S. government securities, securities of other RICs 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 any such issuer and as to which the
Fund does not hold more than 10% of the outstanding voting securities of any
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 RICs), 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"). The Fund
will not lose its status as a RIC 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. The Fund may curtail its investments in certain
securities where the application thereto of the Asset Diversification Test is
uncertain.
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 RIC 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.
9
<PAGE>
Although the Fund intends to distribute substantially all of its
net investment income and 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 RIC, all
of its taxable income will be subject to tax at regular corporate income tax
rates without any deduction for distributions to shareholders, and 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 reinvested 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") for each taxable year. 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,
whether or not such gains were recognized by the Fund prior to the date on which
a shareholder acquired Shares and whether or not the distribution was paid in
cash or reinvested in Shares. Conversely, if the Fund elects to retain its net
capital gains, it will be taxed thereon (except to the extent of any available
capital loss carryovers) at the applicable corporate capital gains tax rate. In
this event, it is expected that the Fund also will elect to have shareholders
treated as having received a distribution of such gains, with the result that
shareholders will be required to report such gains on their returns as long-term
capital gains, will receive a tax credit for their allocable share of capital
gains tax paid by the Fund on the gains, and will increase the tax basis for
their Shares by an amount equal to 65% 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 certain qualifying
dividends received by the Fund for the year. Generally, 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."
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 has included in income any undistributed net capital
gains of the Fund with respect to such Share), 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
with respect to such Share which have been included in the shareholder's
income). 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
10
<PAGE>
this loss disallowance rule will apply to Shares received through the
reinvestment of dividends during the 61-day period.
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 may have reflected the amount of such
forthcoming dividend or distribution.
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) 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 such shareholder is not subject to
backup withholding.
The Fund will provide a statement annually to shareholders as to
the federal income 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.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% federal excise tax on RICs
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 (the excess of long and short-term capital gain over
long and short-term capital loss) ending on October 31 of such calendar year.
The excise tax is imposed on the undistributed part of this required
distribution. In addition, the balance of such income must be distributed during
the next calendar year to avoid liability for the excise tax in that year. For
the foregoing purposes, an investment company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year. Because the Fund intends to distribute all of its income
currently (or to retain, at most its net capital gains and pay tax thereon), the
Fund does not anticipate incurring any liability for this excise tax. However,
the Fund may in certain circumstances be required to liquidate portfolio
investments in order to make sufficient distributions to avoid excise tax
liability and 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 RICs often differ from the rules for federal income taxation
described above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting an
investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 135 East Baltimore Street, Baltimore, Maryland
21202.
11
<PAGE>
*TRUMAN T. SEMANS, Chairman (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst; President, Investment Company Capital Corp. (registered
investment advisor).
*W. JAMES PRICE, Director (10/6/24)
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 PHH Corporation (business
services).
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst; President, Investment Company Capital Corp. (registered
investment advisor).
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice-President and Chief Financial Officer, General Dynamics Corporation
(defense), 1989-1993 and Director, The Arch Fund (registered investment
company).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); Formerly, Consultant, Wendell &
Stockel Associates, Inc. (consulting firm); General Manager, Shell Oil
Company.
LOUIS E. LEVY, Director (11/16/32)
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 (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at Large Emeritus, Institute for Advanced Study;
Director, (registered investment companies);] ATL and Spacelabs Medical
Corp. (medical equipment) and Family Health International (nonprofit
research and education); Trustee, Reed College (education); Director,
Research America (nonprofit medical research); Formerly, Trustee,
Rockefeller Foundation; and Director, Merrill Lynch Cluster C Funds
(registered investment companies).
J. DORSEY BROWN, III, President (8/26/39)
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Chief
Executive Officer and General Partner, Alex. Brown Investment
Management.
12
<PAGE>
HOBART C. BUPPERT, Executive Vice President (8/1/46)
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 (10/27/47)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Secretary, Buppert,
Behrens & Owen, Inc.
BRUCE E. BEHRENS, Vice President (4/20/44)
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 (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Executive Vice President,
Investment Company Capital Corp. (registered investment advisor); Vice
President, Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated; Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company, Inc., 1980-1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April 1995-Present;
Formerly, Legal Advisor, Federated Investors (registered investment
advisor), 1991-1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991 -
Present; Formerly, student 1989-1991.
- ---------------------
* A Director who is an "interested person", as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates. There are currently 12 funds in
the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund
complex (the "Fund Complex"). Mr. Price serves as a Director of seven funds in
the Fund Complex and Mr. Semans serves as a Director of eight funds in the Fund
Complex. Messrs. Cunnane, 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
13
<PAGE>
of two funds in the Fund Complex. Mr. Brown serves as President of one fund and
Vice President of two funds in the Fund Complex. Mr. Buppert serves as Vice
President of three funds in the Fund Complex and Mr. Owen serves as President of
one fund and Vice President of two funds in the Fund Complex. Mr. Fearnow serves
as Vice President of 10 funds in the Fund Complex. Mr. Veilleux serves as
Executive Vice President of one fund and as Vice President of 11 funds in the
Fund Complex. Mr. Nelson serves as Vice President, Mr. Finelli serves as
Treasurer, Mr. Stoken serves as Secretary and Ms. DePrine serves as Assistant
Secretary, respectively, of each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business. All
such transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons. Additional
transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown may be considered to have received remuneration
indirectly. As compensation for his services, 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. In addition, the Chairman of
the Fund Complex's Audit Committee receives an aggregate annual fee from the
Fund Complex. 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, 1996, Non-Interested Directors' fees attributable to the
assets of the Fund totalled approximately $10,500. The following table shows
aggregate compensation and retirement benefits paid to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, in the fiscal year
ended March 31, 1996.
14
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Retirement Estimated Total Compensation from the Fund
Position From the Fund for the Benefits Accrued as Annual Benefits and Fund Complex Paid to
Fiscal Year Ended Part of Fund Expenses Upon Retirement Directors for the Fiscal Year Ended
March 31, 1996 March 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*Truman T. Semans $0 $0 $0 $0
Chairman
*W. James Price $0 $0 $0 $0
Director
*Richard T. Hale $0 $0 $0 $0
Director
James J. Cunnane $1,577(1) $0 $19,500 $39,000 for service
Director on 13 Boards(4)
**N. Bruce Hannay $1,443(2) $+ $19,500 $35,786 for service
Director on 13 Boards(4)
John F. Kroeger $1,860(3) $+ $24,500 $45,950 for service
Director on 13 Boards(4)
Louis E. Levy $1,577(3) $+ $19,500 $39,000 for service
Director on 13 Boards(4)
Eugene J. McDonald $1,577(1) $+ $19,500 $39,000 for service
Director on 13 Boards(4)
Harry Woolf $1,577(1) $+ $19,500 $39,000 for service
Director on 13 Boards(4)
</TABLE>
- ----------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired on January 31, 1996 and is now deceased.
*** Elected to the Board on June 1, 1995.
+ The Fund Complex has adopted a retirement plan for eligible Directors, as
described below. The actuarially computed pension expense for the year
ended March 31, 1996 was approximately $7,000.
1 $1,577 of this amount has been deferred pursuant to a deferred
compensation plan.
2 $1,170 of this amount has been deferred pursuant to a deferred
compensation plan.
3 $0 of this amount has been deferred pursuant to a deferred compensation
plan.
4 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 six 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. Kroeger and Woolf
have qualified but have not received benefits. 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.
15
<PAGE>
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. Messrs. Cunnane, Kroeger,
Levy, McDonald and Woolf have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors may select various Flag and Alex. Brown Funds
in which all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors' deferral accounts will be paid in
cash, in generally quarterly installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
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 Directors, preclear any personal
securities investments (with certain 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 Financial Corporation and an
indirect subsidiary of Alex. Brown Incorporated. ICC is also the investment
advisor to Alex. Brown Cash Reserve Fund, Inc., Flag Investors Telephone Income
Fund, Inc., Flag Investors International Fund, Inc., Flag Investors Emerging
Growth Fund, Inc., Flag Investors Intermediate-Term Income Fund, Inc., Flag
Investors Maryland Intermediate Tax-Free Income Fund, Inc., Flag Investors Real
Estate Securities Fund, Inc. and Flag Investors Equity Partners Fund, Inc.,
which, are distributed by Alex. Brown, the Fund's distributor.
ABIM is a limited partnership affiliated with Alex. Brown.
Buppert, Behrens & Owens, Inc., a company organized and owned by three employees
of ABIM, owns a 49% limited partnership interest and a 1% general partnership
interest in ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and
Alex. Brown Incorporated owns the remaining 49% limited partnership interest.
ABIM, also the sub-advisor to Flag Investors Telephone Income Fund, Inc. and
Flag Investors Equity Partners Fund, Inc. is a registered investment advisor
with approximately $4.9 billion under management as of May 31, 1996.
Under the Investment Advisory Agreement, ICC obtains and
evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM, provided that ICC continues to supervise the performance
of ABIM and report thereon to the Fund's Board of Directors. Any investment
program undertaken by ICC or ABIM will at all times be subject to policies and
control of the
16
<PAGE>
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 a
fee from the Fund, 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 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 is
entitled to receive a fee from ICC, payable from its advisory fee, calculated
daily and payable monthly, at the annual rate of .75% of the first $50 million
of the Fund's average daily net assets, .60% of the Fund's average daily net
assets in excess of $50 million but not exceeding $200 million, and .50% of the
Fund's average daily net assets in excess of $200 million.
This fee is higher than that paid by most mutual funds, but ICC
has voluntarily agreed to waive a portion of its fee from time to time so that
the Fund's total operating expenses do not exceed 1.35% of the Class A Shares'
average daily net assets, 2.10% of the Class B Shares' average daily net assets
and 1.10% of the Institutional Shares' average daily net assets.
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 Fund's 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.
The Investment Advisory Agreement and the Sub-Advisory Agreement
will continue in effect from year to year if such continuance is specifically
approved at least annually by the Fund's Board of Directors, including a
majority of the Non-Interested Directors who have no direct or indirect
financial interest in such agreements, by votes cast in person at a meeting
called for such purpose, or by a vote of a majority of the outstanding Shares
(as defined under "Capital Stock"). The Investment Advisory Agreement and the
Sub-Advisory Agreement were most recently approved for continuance by the Board
of Directors on September 25, 1995. The Fund or ICC may terminate the Investment
Advisory Agreement on sixty days' written notice without penalty. The Investment
Advisory Agreement will terminate automatically in the event of assignment (as
defined in the Investment Company Act). The Sub-Advisory Agreement has similar
termination provisions. For the fiscal year ended March 31, 1996, the Fund paid
ICC advisory fees of $1,651,971 and from such fee ICC paid ABIM fees of
$1,225,064. For the fiscal years ended March 31, 1995 and March 31, 1994, the
Fund paid ICC fees (net of fee waivers of $67,326 and $38,495) of $1,248,666 and
$1,248,666, and ICC paid ABIM from the fees it received $967,323 and $760,523,
respectively. Absent such fee waivers, the Class A Shares' Total Operating
Expenses would have been 1.40% and 1.38%, of its average net assets for the
fiscal years ended March 31, 1995 and March 31, 1994, respectively. Absent
waivers for the fiscal period from January 3, 1995 (commencement of operations)
through March 31, 1995, the Class B Shares' Total Operating Expenses would have
been 2.17% (annualized) of its average net assets. Absent fee waivers, for the
years ended March 31, 1995 and March 31,
17
<PAGE>
1994, the Class D Shares' Total Operating Expenses would have been 1.74% and
1.73% respectively, of its average net assets.
ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. (See "Custodian, Transfer
Agent and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the exclusive distributor of the Fund's
Shares pursuant to three separate Distribution Agreements, one for each class of
the Fund's Shares.
The Class A Shares and the Class B Shares
The Distribution Agreements for the Class A Shares and the Class
B Shares (collectively, the "Class A and Class B Distribution Agreements")
provide that Alex. Brown has the exclusive right to distribute the related class
of Flag Investors Value Builder Fund Shares either directly or through other
broker-dealers and further provide that Alex. Brown will: (a) solicit and
receive orders for the purchase of Shares; (b) accept or reject such orders on
behalf of the Fund in accordance with the Fund's currently effective Prospectus
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible; (c) receive requests for redemptions and transmit such
redemption requests to the Fund's transfer agent as promptly as possible; and
(d) respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund. Alex. Brown has not undertaken to sell
any specific number of Shares. The Class A and Class B Distribution Agreements
further provide that, in connection with the distribution of Shares, Alex. Brown
will be responsible for all of the promotional expenses. The services provided
by Alex. Brown to the Fund are not exclusive, and Alex. Brown is free to provide
similar services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which such broker-dealers
have agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
As compensation for providing distribution services as described
above for the Class A Shares, Alex. Brown receives an annual fee, paid monthly
equal to .25% of the average daily net assets of the Class A Shares. As
compensation for providing distribution services as described above for the
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, 1996, March 31, 1995 and March 31, 1994, Alex. Brown received
from the Fund aggregate commissions and fees in the amount of $431,884, $342,916
and $265,840, respectively, and from such fees paid $412,988, $333,580 and
$115,614 to its investment representatives and $18,895, $9,351 and $5,942 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.) For the
fiscal year ended March 31, 1996 and for the period from January 3, 1995 through
March 31, 1995, Alex. Brown received distribution and shareholder servicing fees
of $19,580 and $406, respectively, for the Class B Shares.
18
<PAGE>
Pursuant to Rule 12b-1 under the Investment Company Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, only pursuant to a plan adopted by the investment company's board of
directors and approved by its shareholders, the Fund has adopted a Plan of
Distribution for each of its classes of Shares (except the Institutional Shares
class) (the "Plans"). Under the Plans, the Fund pays a fee to Alex. Brown for
distribution and other shareholder servicing assistance as set forth in the
Class A and Class B Distribution Agreements, and Alex. Brown is authorized to
make payments out of its fee to its investment representatives and to
participating broker-dealers. Each of the Class A and Class B Distribution
Agreements has an initial term of two years. The Class A and Class B
Distribution Agreements and the Plans encompassed therein will remain in effect
from year to year thereafter, as specifically approved (a) at least annually by
the Fund's Board of Directors and (b) by the affirmative vote of a majority of
the Non-Interested Directors, by votes cast in person at a meeting called for
such purpose. The Class A and Class B Distribution Agreements including the
Plans and forms of Sub-Distribution Agreements, were most recently approved by
the Fund's Board of Directors, including a majority of the Non-Interested
Directors on September 25, 1995.
In approving the Plans, the Directors concluded, in the exercise
of reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreements without the approval of the shareholders of the
Fund. The Plans may be terminated at any time and the Class A and Class B
Distribution Agreements may be terminated at any time upon sixty days' notice,
in either case without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Stock"). Any Sub-Distribution Agreement may be
terminated in the same manner at any time. The Class A and Class B Distribution
Agreements, any Sub-Distribution Agreement shall automatically terminate in the
event of assignment.
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plan to Alex. Brown pursuant to
the Class A and Class B Distribution Agreements and to broker-dealers pursuant
to any Sub-Distribution Agreements Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors shall
be committed to the discretion of the Non-Interested Directors then in office.
For the fiscal year ended March 31, 1996, the Fund paid $32,318
to Alex. Brown, the Fund's distributor, pursuant to the Plan. Alex. Brown, in
turn, paid the distribution-related expenses of the Fund including one or more
of the following: advertising expenses; printing and mailing of prospectuses to
other than current shareholders; compensation to dealers and sales personnel;
and interest, carrying or other financing charges.
In addition, with respect to the Class A and Class B
Shares, the Fund may enter into Shareholder Servicing Agreements with certain
financial institutions, such as banks, to act as Shareholder Servicing Agents,
pursuant to which Alex. Brown will allocate a portion of its distribution fee
as compensation for such financial institutions' ongoing
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<PAGE>
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 Prospectuses 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 the 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 Class A
Shares' average daily net assets for any period or if the cost of providing
distribution services to Class B Shares is less than .75% of the Class B Shares'
average daily net assets 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 related
Distribution Agreement terminates.
The Institutional Shares
The Institutional Distribution Agreement provides that
Alex. Brown has the exclusive right to distribute the Institutional Shares,
either directly or through other broker-dealers and further provides that Alex.
Brown will solicit and receive orders for the purchase of Institutional Shares,
accept or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective Prospectus for the Institutional Shares and transmit such
orders as are accepted to the Fund's transfer agent as promptly as possible,
receive requests for redemption and transmit such redemption requests to the
Fund's transfer agent as promptly as possible, respond to inquiries from the
Fund's shareholders concerning the status of their accounts with the Fund,
maintain such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors, and take all actions deemed
necessary to carry into effect the distribution of the Institutional Shares.
Alex. Brown has not undertaken to sell any specific number of Institutional
Shares. The Institutional Distribution Agreement further provides that, in
connection with the distribution of Institutional Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services provided by Alex.
Brown to the Fund are not exclusive, and Alex. Brown is free to provide similar
services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown receives no compensation for distributing
the Institutional Shares.
Alex. Brown and Participating Dealers have entered into
Sub-Distribution Agreements under which such Participating Dealers have agreed
to process investor purchase and redemption orders and respond to inquiries from
shareholders concerning the status of their accounts and the operations of the
Fund.
The Institutional Distribution Agreement was approved by
the Fund's Board of Directors on September 25, 1995 and by the sole shareholder
of the class on October 31, 1995. It has an initial term of two years and will
remain in effect from year to year thereafter, if specifically approved at least
annually by the Fund's Board of
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<PAGE>
Directors and by the affirmative vote of a majority of the Non-Interested
Directors by votes cast at a meeting called for such purpose. It may be
terminated at any time upon sixty days' written notice, without penalty, by the
vote of a majority of the Fund's Non-Interested Directors or by a vote of a
majority of the outstanding Institutional Shares (as defined under Capital
Stock). The Institutional Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment.
General Information
For the fiscal years ended March 31, 1996, March 31,
1995 and March 31, 1994, Alex. Brown received sales commissions on the Class A
Shares of $431,884, $225,285 and $440,149, respectively, and from such amounts
retained $430,833, $204,552 and $412,988 for each such year, respectively. For
the fiscal year ended March 31, 1996 and for the period from January 3, 1995
through March 31, 1995, Alex. Brown received contingent deferred sales loads on
the Class B Shares of $133,944 and $34,265, respectively, and from such amounts
retained $126,571 and $33,025, respectively. 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, 1996, March
31, 1995 and March 31, 1994, Alex. Brown received from the Fund aggregate
commissions and fees in the amount of $1,548, $69,979 and $55,128, respectively,
and from such fees paid $1,246, $36,600 and $0, respectively, to its investment
representatives and $302, $2,106 and $0, respectively, to Participating Dealers.
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; membership dues of industry associations; interest
payable on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Fund's operation unless otherwise explicitly
assumed by Alex. Brown, ICC or ABIM.
The address of Alex. Brown is 135 East Baltimore Street,
Baltimore, Maryland 21202.
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.
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<PAGE>
In over-the-counter transactions, orders are placed
directly with a principal market maker and such purchases normally include a
mark up over the bid to the broker-dealer based on the spread between the bid
and asked price for the security. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter. On occasion, certain money market instruments may be purchased
directly from an issuer without payment of a commission or concession. The Fund
will not deal with Alex. Brown in any transaction in which Alex. Brown acts as a
principal; that is, an order will not be placed with Alex. Brown if execution of
the trade involves Alex. Brown serving as a principal with respect to any part
of the Fund's order, nor will the Fund buy or sell over-the-counter securities
with Alex. Brown acting as market maker.
If Alex. Brown is participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, ABIM may, in its discretion, effect
transactions with broker-dealers that furnish statistical, research or other
information or services which are deemed by ABIM to be beneficial to the Fund's
investment program. Certain research services furnished by broker-dealers may be
useful to ABIM with clients other than the Fund. Similarly, any research
services received by ABIM through placement of portfolio transactions of other
clients may be of value to ABIM in fulfilling its obligations to the Fund. No
specific value can be determined for research and statistical services furnished
without cost to ABIM by a broker-dealer. ABIM is of the opinion that because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing ABIM's research and
analysis. Therefore, it may tend to benefit the Fund by improving ABIM's
investment advice. In over-the-counter transactions, ABIM will not pay any
commission or other remuneration for research services. ABIM's policy is to pay
a broker-dealer higher commissions effected on an agency (but not on a
principal) basis for particular transactions than might be charged if a
different broker-dealer had been chosen when, in ABIM's opinion, this policy
furthers the overall objective of obtaining best price and execution. Subject to
periodic review by the Fund's Board of Directors, ABIM is also authorized to pay
broker-dealers other than Alex. Brown higher commissions on brokerage
transactions for the Fund in order to secure research and investment services
described above. The allocation of orders among broker-dealers and the
commission rates paid by the Fund will be reviewed periodically by the Board.
Subject to the above considerations, the Board of
Directors has authorized the Fund to effect portfolio transactions, on an agency
basis, through Alex. Brown. At the time of such authorization, the Board adopted
certain policies and procedures incorporating the standards of Rule 17e-1 under
the Investment Company Act which requires that the commissions paid Alex. Brown
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABIM to furnish
reports and to maintain records in connection with such reviews. The
Distribution Agreements between Alex. Brown and the Fund do not provide for any
reduction in the distribution fee to be received by Alex. Brown from the Fund as
a result of profits from brokerage commissions on transactions of the Fund
effected through Alex. Brown.
ABIM manages other investment accounts. It is possible
that, at times, identical securities will be acceptable for the Fund and one or
more of such other accounts; however, the position of each account in the
securities of the same issuer may vary and the length of time that each account
may choose to hold its investment in such securities may likewise vary. The
timing and amount of purchase by each account will also be determined by its
cash position. If the purchase or sale of securities consistent with the
investment policies of the Fund or one or more of these accounts is considered
at or about the same time, transactions in such securities will be allocated
among the accounts in a manner deemed equitable by ABIM. ABIM may combine such
transactions, in accordance with applicable laws and regulations, in order to
obtain the best net price and most favorable execution. Such simultaneous
22
<PAGE>
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 years ended March 31, 1996, March 31,
1995 and March 31, 1994, Alex. Brown directed $31,958,910, $38,044,707 and
$39,012,152, respectively, of transactions to broker-dealers and paid $78,634,
$89,162 and $82,078, respectively, to broker-dealers in related commissions
because of research services provided. Alex. Brown received no brokerage
commissions from the Fund in any such year. The Fund is required to identify any
securities of its "regular brokers or dealers" (as such term is defined in the
1940 Act) which the Fund has acquired during its most recent fiscal year. As of
March 31, 1996, the Fund held a 5.30% repurchase agreement issued by Goldman
Sachs & Co. valued at $8,966,000. Goldman Sachs & Co. is a "regular broker or
dealer" of the Fund. As of March 31, 1996, the Fund held a $1,500,000 note
issued by Salomon, Inc. valued at $1,507,500. Salomon, Inc. is a "regular broker
or dealer" of the Fund.
9. CAPITAL STOCK
The Fund is authorized to issue thirty-five million
Shares of common stock, par value $.001 per share. The Board of Directors may
increase or decrease the number of authorized Shares without shareholder
approval.
The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of Shares by the Directors
at any time without shareholder approval. The Fund currently has one Series and
the Board has designated four classes of Shares: Flag Investors Value Builder
Fund Class A Shares, Flag Investors Value Builder Fund Class B Shares, Flag
Investors Value Builder Fund Institutional Shares and Flag Investors Value
Builder Fund Class D Shares. The Flag Investors Value Builder Fund Institutional
Shares are offered only to certain eligible institutions and to clients of
investment advisory affiliates of Alex. Brown. The Flag Investors Value Builder
Fund Class D Shares are not currently being offered. In the event separate
series or classes are established, all Shares of the Fund, regardless of series
or class would have equal rights with respect to voting, except that with
respect to any matter affecting the rights of the holders of a particular series
or class, the holders of each series or class would vote separately. In general,
each such series would be managed separately and shareholders of each series
would have an undivided interest in the net assets of that series. For tax
purposes, the series would be treated as separate entities. Generally, each
class of Shares issued by a particular series would be identical to every other
class and expenses of the Fund (other than 12b-1 and any applicable service
fees) are prorated between all classes of a series based upon the relative net
assets of each class. Any matters affecting any class exclusively will be voted
on by the holders of such class.
Shareholders of the Fund do not have cumulative voting
rights, and therefore the holders of more than 50% of the outstanding Shares
voting together for election of Directors may elect all the members of the Board
of Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights
applicable to any of the Shares. The issued and outstanding Shares are fully
paid and non-assessable. In the event of liquidation or dissolution of the Fund,
each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of Shares if there is more than one series) after
all debts and expenses have been paid.
As used in this Statement of Additional Information the
term "majority of the outstanding Shares" means the vote of the lesser of (i)
67% or more of the Shares present at a meeting, if the holders of more than 50%
of the outstanding Shares are present or represented by proxy, or (ii) more than
50% of the outstanding Shares.
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<PAGE>
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. As compensation for providing these
services, the Fund pays ICC up to $15.00 per account per year, plus
reimbursement for out-of-pocket expenses incurred in connection therewith. For
the fiscal year ended March 31, 1996 such fees totalled $98,872.
ICC also provides certain accounting services to the
Fund. As compensation for these services, ICC receives an annual fee, calculated
daily and paid monthly as shown below.
Average 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, 1996, ICC received accounting
fees of $68,731.
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.
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<PAGE>
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund
to that of other open-end diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date of the Fund (or
the later commencement of operations of a Series or class) commenced operations
(provided such date is subsequent to the date the registration statement became
effective). In calculating the ending redeemable value, the maximum sales load
(for the Flag Investors Value Builder Class A Shares 4.5% and for the Flag
Investors Value Builder Class B Shares, 4.0% for the one year period, 2.0% for
the five year period and no sales charge thereafter) is deducted from the
initial $1,000 payment and all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
Prospectuses on the reinvestment dates during the period. "T" in the formula
above is calculated by finding the average annual compounded rate of return over
the period that would equate an assumed initial payment of $1,000 to the ending
redeemable value. Any sales loads that might in the future be made applicable at
the time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
The 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
25
<PAGE>
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, 1996, the ending redeemable value of a hypothetical $1,000
payment for the Class A Shares was $1,230, resulting in an annual total return
for such Shares equal to 23.06%. For the period from the effectiveness of the
Fund's registration statement on June 15, 1992 through its fiscal year ended
March 31, 1996, the ending redeemable value of a hypothetical $1,000 payment for
the Class A Shares was $1,596, resulting in an average annual total return equal
to 13.112%.
Calculated according to SEC rules, for the one-year period ended March 31,
1996, the ending redeemable value of a hypothetical $1,000 payment for Class B
Shares was $1,238.90, resulting in an annual total return equal to 23.89%. For
the period from January 3, 1995 (commencement of offering of Class B Shares)
through March 31, 1996, the ending redeemable value of a hypothetical $1,000
payment for Class B Shares was $1,339 resulting in an aggregate total return
equal to 26.50%.
Calculated according to SEC rules, for the one-year period ended
March 31, 1996, the ending redeemable value of a hypothetical $1,000 payment for
the Class D Shares was $1,255, resulting in an annual total return equal to
25.53%. For the period from November 9, 1992 (commencement of operations of the
Class D Shares) through the Fund's fiscal year ended March 31, 1996, the ending
redeemable value of a hypothetical $1,000 payment for the Class D Shares was
$1,544, resulting in an average annual total return equal to 13.67%.
Calculated according to the SEC rules, for the period from
commencement of operations of the Institutional Shares on November 2, 1995
through the fiscal period ended March 31, 1996, the ending redeemable value of a
hypothetical $1,000 payment for Institutional Shares was $1,087, resulting in an
aggregate total return equal to 8.72%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the one-year
period ended March 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Class A Shares was $12,886, resulting in an annual total
return equal to 28.86%. For the period from the effectiveness of the Fund's
registration statement on June 15, 1992 through its fiscal year ended March 31,
1996, the ending redeemable value of a hypothetical $10,000 investment in Class
A Shares was $16,712, resulting in an average annual total return equal to
14.49%.
Calculated according to the alternative computation, which
assumes no sales charge and reinvestment of all distributions, for the one-year
period ended March 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Class B shares was $12,789, resulting in an annual total
return equal to 27.89%. For the period from January 3, 1995 (commencement of
offering of Class B Shares) through March 31, 1996, the ending redeemable value
of a hypothetical $10,000 investment in Class B Shares was $13,788 resulting in
an average annual total return equal to 37.88%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the one-year
period ended March 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Class D Shares was $12,844, resulting in a total return
equal to 28.43%. For the period from November 9, 1992 (commencement of
operations of
26
<PAGE>
the Class D Shares) through the Fund's fiscal year ended March 31, 1996 the
ending redeemable value of a hypothetical $10,000 investment in Class D Shares
was $15,777, resulting in an average annual total return equal to 14.39%.
Calculated according to the alternative computation, which
assumes no sales charges and reinvestment of all distributions, for the period
from commencement of operations of the Institutional Shares on November 2, 1995
through the fiscal period ended March 31, 1996, the ending redeemable value of a
hypothetical $10,000 investment in Institutional Shares was $1,087, resulting in
an aggregate total return equal to 8.72%.
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, 1996 and March 31, 1995, the Fund's portfolio
turnover rate was 15% and 18%, respectively.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 16, 1996, 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 11.81%
of the Fund's outstanding Class A Shares and Alex. Brown & Sons Incorporated,
135 E. Baltimore Street, Baltimore, MD 21202, owned of record 75.62% of the
Fund's outstanding Class A Shares*.
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street,
Baltimore, MD 21202, owned of record 89.08% of the Fund's outstanding Class B
Shares.*
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street,
Baltimore, MD 21202, owned of record 89.42% of the Fund's outstanding Class D
Shares.*
Lauer & Co. Cust., David & Paula Miller, A/C #7098-00-4/3.2, c/o
Glenmede -- Inc. Collections Dept. 1650 Market St., Suite 1200, Philadelphia, PA
19103-7301, owned of record 6.52% of the Fund's outstanding Institutional
Shares. Lauer & Co. Cust., Peggy McLean, A/C #7058-04-4/3, c/o Glenmede -- Inc.
Collections Dept., 1650 Market St., Suite 1200, Philadelphia, PA 19103-7301,
owned of record 6.88% of the Fund's outstanding Institutional Shares. Alex.
Brown & Sons Incorporated, FBO 255-51941-10, P.O. Box 1346, Baltimore, MD
21203-1346, owned of record 6.73% of the Fund's outstanding Institutional
Shares. Alex. Brown & Sons Incorporated, FBO 255-61923-12, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 5.49% of the Fund's outstanding
Institutional Shares. Alex. Brown & Sons Incorporated, FBO 201-65158-13, P.O.
Box 1346, Baltimore, MD 21203-1346, owned of record 12.45% of the Fund's
outstanding Institutional Shares. Alex. Brown & Sons Incorporated, 135 E.
Baltimore Street, Baltimore, MD 21202, owned of record 73.40% of the Fund's
outstanding Institutional Shares.*
As of July 16, 1996, Directors and officers as a group owned
less than 1% of the Fund's total outstanding Class A Shares.
- ----------
* Alex. Brown owned beneficially less than 1% of such Shares.
15. FINANCIAL STATEMENTS
See next page.
27
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Statement of Net Assets March 31, 1996
<TABLE>
<CAPTION>
Market Value
Shares (Note A)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK: 64.1%
Banking: 2.9%
35,000 Citicorp $ 2,800,000
100,000 KeyCorp 3,862,500
- ---------------------------------------------------------------------------------------------------------
6,662,500
Basic Industry: 5.0%
25,000 Albemarle Corp. 559,375
168,700 Arcadian Corp. 3,331,825
20,000 Georgia-Pacific Corp. 1,387,500
30,000 Hercules, Inc. 1,860,000
28,000 Monsanto Co. 4,298,000
- ---------------------------------------------------------------------------------------------------------
11,436,700
Capital Goods: 1.8%
36,000 Eaton Corp. 2,169,000
32,500 ITT Industries Inc. 828,750
110,300 Westinghouse Air Brake Co. 1,185,725
- ---------------------------------------------------------------------------------------------------------
4,183,475
Consumer Durables/Non-Durables: 6.1%
109,100 Collins & Aikman Co.* 681,875
33,500 Eastman Kodak Co. 2,378,500
90,000 Ford Motor Company 3,093,750
50,000 Liz Claiborne Inc. 1,712,500
37,200 Philip Morris Cos., Inc. 3,264,300
40,400 Reebok International Ltd. 1,116,050
70,000 Unifi, Inc. 1,723,750
- ---------------------------------------------------------------------------------------------------------
13,970,725
Consumer Services/Retail: 5.7%
83,250 CUC International Inc.* 2,435,063
80,000 Eckerd Corp.* 3,850,000
20,000 Gannett Co. 1,345,000
52,827 Host Marriott Services Corp.* 369,789
19,000 J. C. Penney Company, Inc. 945,250
45,000 Tandy Corp. 2,081,250
50,000 Times Mirror Co. Class A 1,968,750
- ---------------------------------------------------------------------------------------------------------
12,995,102
Defense/Aerospace: 5.2%
38,000 Lockheed Martin Corp. 2,883,250
60,000 McDonnell Douglas Corp. 5,497,500
32,000 United Technologies Corp. 3,592,000
- ---------------------------------------------------------------------------------------------------------
11,972,750
</TABLE>
28
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
STATEMENT OF NET ASSETS (continued) March 31, 1996
<TABLE>
<CAPTION>
Market Value
Shares (Note A)
<S> <C> <C>
COMMON STOCK (continued)
Electric Utilities: 1.2%
100,000 Unicom Corp. $ 2,700,000
- ---------------------------------------------------------------------------------------------------------
Energy: 1.3%
27,500 Burlington Resources Inc. 1,020,937
35,800 MAPCO Inc. 2,000,325
- ---------------------------------------------------------------------------------------------------------
3,021,262
Entertainment: 1.1%
200,000 LodgeNet Entertainment Corp.* 2,600,000
- ---------------------------------------------------------------------------------------------------------
Financial Services: 6.9%
83,500 American Express Co. 4,122,813
87,500 Countrywide Credit Industries, Inc. 1,935,937
43,000 Federal Home Loan Mortgage Corp. 3,665,750
78,750 MBNA Corp. 2,332,968
57,000 Travelers Group Inc. 3,762,000
- ---------------------------------------------------------------------------------------------------------
15,819,468
Health Care: 6.5%
40,000 Amgen, Inc.* 2,325,000
19,000 Bristol-Myers Squibb 1,626,875
54,434 Eli Lilly & Co. 3,538,213
57,000 Johnson & Johnson 5,258,250
60,000 Mallinckrodt Group 2,257,500
- ---------------------------------------------------------------------------------------------------------
15,005,838
Hotels/Lodging: 1.3%
10,000 Hilton Hotels Corp. 940,000
32,500 ITT Corp. 1,950,000
- ---------------------------------------------------------------------------------------------------------
2,890,000
Housing: 2.2%
60,000 Fleetwood Enterprises 1,485,000
55,000 Ryland Group Inc. 886,875
108,000 USG Corp.* 2,740,500
- ---------------------------------------------------------------------------------------------------------
5,112,375
Insurance: 6.4%
125,000 Alexander & Alexander Services Inc. 2,359,375
72,200 Conseco Inc. 5,225,475
40,000 EXEL Limited 2,760,000
32,500 ITT Hartford Group, Inc. 1,592,500
70,500 Mid Ocean Ltd.* 2,723,063
- ---------------------------------------------------------------------------------------------------------
14,660,413
</TABLE>
29
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
STATEMENT OF NET ASSETS (continued) March 31, 1996
<TABLE>
<CAPTION>
Shares/ Market Value
Par (000) (Note A)
<C> <S> <C>
COMMON STOCK (concluded)
Multi-Industry: 1.1%
33,400 Loews Corp. $ 2,525,875
- ---------------------------------------------------------------------------------------------------------
Real Estate: 3.4%
60,200 General Growth Properties, Inc. 1,414,700
324,136 Host Marriott Corp.* 4,375,841
25,000 Liberty Property Trust 515,625
35,000 National Health Investors Inc. 1,137,500
26,500 Town & Country Trust 374,313
- ---------------------------------------------------------------------------------------------------------
7,817,979
Technology: 3.3%
38,000 International Business Machines Corp. 4,222,750
23,500 Millipore Corp. 898,875
109,100 SEI Corp. 2,454,750
- ---------------------------------------------------------------------------------------------------------
7,576,375
Telecommunications: 1.7%
69,000 MCI Communications 2,087,250
57,000 Telefonos de Mexico SA ADS 1,873,875
3,961,125
Transportation: 1.0%
33,200 Conrail Inc. 2,377,950
- ---------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $98,058,836) 147,289,912
- ---------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK: 5.3%
50,000 American Express Co., $2.30 DECS 2,950,000
83,402 Arcadian Corp., $1.47 Cvt Pfd 1,678,465
66,000 Conseco Inc., $3.25 Cvt Pfd 3,828,000
32,300 Conseco Inc., $4.28 Cvt Pfd 2,301,375
23,000 Delta Air Lines Inc., $3.50 Cvt Pfd 1,405,875
- ---------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stock (Cost $9,782,099) 12,163,715
- ---------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS: 1.5%
$2,000 Richardson Electronics, Cvt Deb, 7.25%, 12/15/06 1,740,000
2,000 Sizeler Property Investors, Cvt Deb, 8.00%, 7/15/03 1,655,000
- ---------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Cost $3,633,784) 3,395,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
STATEMENT OF NET ASSETS (continued) March 31, 1996
<TABLE>
<CAPTION>
Par Market Value
(000) (Note A)
<C> <S> <C>
CORPORATE BONDS: 22.0%
$1,000 American Life Holding Co., Sr Sub Nt, 11.25%, 9/15/04 $ 1,033,750
3,000 Arcadian Partners LP, Nt, 10.75%, 5/1/05 3,270,000
1,000 Caesar's World, 8.875%, 8/15/02 1,035,000
873 Chattem Inc., Sr Sub Deb, 12.75%, 6/15/04 848,992
-- Chattem Inc., 1,000 Warrants, Expiring 6/17/99 3,000
3,000 Conseco Inc., Nt, 8.125%, 2/15/03 3,060,000
700 CSX Corp., Nt, 7.00%, 9/15/02 714,875
575 Dillard Dept. Stores, Nt, 7.15%, 9/1/02 585,781
1,000 Eckerd Corp., Nt, 9.25%, 2/15/04 1,055,000
300 Exxon Capital Corp., Nt, 6.50%, 7/15/99 302,250
2,000 FMC Corp., Nt, 8.75%, 4/1/99 2,095,000
1,000 Fund American Enterprise, Nt, 7.75%, 2/1/03 1,000,000
3,600 HMH Properties, Nt, 9.50%, 5/15/05 3,546,000
3,000 Host Marriott Travel Plaza, Nt, 9.50%, 5/15/05 2,917,500
1,875 ITT Corp., 6.25%, 11/15/00 1,849,219
2,000 John Q. Hammons Hotels LP, Nt, 8.875%, 2/15/04 1,945,000
2,000 Jordan Industries, Nt, 10.375%, 8/1/03 1,845,000
2,100 Marriott International, 7.875%, 4/15/05 2,202,375
1,285 Markel Corp., Nt, 7.25%, 11/1/03 1,243,237
1,100 Masco Corp., Nt, 6.625%, 9/15/99 1,105,500
2,000 MCI Communications, Nt, 6.25%, 3/23/99 2,002,500
500 MCI Communications, Nt, 7.50%, 8/20/04 521,875
2,000 Nabisco Inc., 6.70%, 6/15/02 1,965,000
500 New England Telephone & Telegraph, Nt, 6.15%, 9/1/99 495,625
1,000 Noble Drilling Company, Nt, 9.25%, 10/1/03 1,037,500
500 PepsiCo Inc., Nt, 6.25%, 9/1/99 499,375
700 Pet Incorporated, Nt, 5.75%, 7/1/98 689,500
325 Petroleum Heat & Power, Nt, 12.25%, 2/1/05 359,938
2,000 RJR Nabisco Inc., Nt, 7.625%, 9/15/03 1,867,500
1,500 Salomon Inc., Nt, 7.125%, 8/1/99 1,507,500
1,000 Tektronix Inc., Nt, 7.50%, 8/1/03 998,750
2,029 Teledyne Inc., Series C, Deb, 10.00%, 6/1/04 2,046,754
1,000 Tenneco Inc., Nt, 7.875%, 10/1/02 1,051,250
1,000 Travelers Group Inc., Nt, 6.125%, 6/15/00 980,000
1,000 Union Pacific, Nt, 6.25%, 3/15/99 996,250
850 USG Corp., 8.50%, 8/1/05 870,188
500 Wal-Mart Stores, Nt, 5.50%, 9/15/97 496,250
500 Xerox Corp., Nt, 7.15%, 8/1/04 505,625
- ---------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $50,013,736) 50,548,859
</TABLE>
31
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
STATEMENT OF NET ASSETS (concluded) March 31, 1996
<TABLE>
<CAPTION>
Par Market Value
(000) (Note A)
<C> <S> <C>
U.S. GOVERNMENT SECURITIES: 3.5%
U.S. Treasury Notes
$1,000 4.25%, 5/15/96 $ 998,880
3,000 5.125%, 2/28/98 2,965,860
2,000 5.25%, 12/31/97 1,983,700
2,000 5.625%, 6/30/97 2,000,860
- ---------------------------------------------------------------------------------------------------------
Total U.S. Government Securities (Cost $7,946,623) 7,949,300
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT: 3.9%
8,966 Goldman Sachs & Co., 5.30%
Dated 3/29/96, to be repurchased
on 4/1/96, collateralized by
U.S. Treasury Bonds with a
market value of $6,054,866
and U.S. Treasury Bills with a
market value of $3,090,805.
(Cost $8,966,000) 8,966,000
- ---------------------------------------------------------------------------------------------------------
Total Investment In Securities: 100.3%
(Cost $178,401,078) ** 230,312,786
Liabilities in Excess of Other Assets, Net: (0.3)% (590,794)
- ---------------------------------------------------------------------------------------------------------
Net Assets: 100.00% $229,721,992
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Class A Share
($200,019,962 / 13,623,270 shares outstanding) $14.68
Class B Share
($4,177,764 / 284,008 shares outstanding) $14.71(1)
Class D Share
($13,756,589 / 938,295 shares outstanding) $14.66(2)
Institutional Share
($11,767,677 / 796,931 shares outstanding) $14.77
Maximum Offering Price Per:
Class A Share
($14.68 / .955) $15.37
Class B Share $14.71
Institutional Share $14.77
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
(1) Redemption value is $14.12 following 4.00% maximum contingent deferred
sales charge.
(2) Redemption value is $14.51 following 1.00% contingent deferred sales
charge.
See accompanying Notes to Financial Statements.
32
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Statement of Operations For the Year Ended March 31, 1996
INVESTMENT INCOME (NOTE A):
Interest $ 4,669,072
Dividends 3,012,005
Other income 34,625
Total income 7,715,702
EXPENSES:
Investment advisory fee (Note B) 1,651,971
Distribution fees (Note B) 531,987
Transfer agent fees (Note B) 98,872
Accounting fee (Note B) 68,731
Printing and postage 53,045
Legal 41,628
Audit 37,180
Custodian fees 26,661
Miscellaneous 15,526
Directors' fees 11,092
Organizational expense (Note A) 10,230
Insurance 5,882
Registration fees 5,000
Total expenses 2,557,805
Net investment income 5,157,897
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 4,755,355
Change in unrealized appreciation of investments 37,398,630
Net gain on investments 42,153,985
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,311,882
- --------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
33
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
March 31, 1996 March 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 5,157,897 $ 4,527,978
Net realized gain from security transactions 4,755,355 295,501
Change in unrealized appreciation of investments 37,398,630 10,180,720
Net increase in net assets resulting from operations 47,311,882 15,004,199
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares (4,710,084) (4,153,376)
Class B Shares (25,557) --
Class D Shares (319,956) (313,209)
Institutional Shares (19,252) --
Net realized short-term gains:
Class A Shares (517,708) --
Class B Shares (7,307) --
Class D Shares (37,816) --
Institutional Shares (12,834) --
Net realized long-term gains:
Class A Shares (4,012,860) (183,928)
Class B Shares (52,673) --
Class D Shares (298,195) (15,454)
Institutional Shares (76,965) --
Total distributions (10,091,207) (4,665,967)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 51,325,277 24,574,387
Value of shares issued in reinvestment of dividends 9,094,751 4,064,365
Cost of shares repurchased (26,963,230) (22,079,629)
Increase in net assets derived from capital share transactions 33,456,798 6,559,123
Total increase in net assets 70,677,473 16,897,355
NET ASSETS:
Beginning of year 159,044,519 142,147,164
End of year $229,721,992 $159,044,519
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
34
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ --------------------------
For the For the
Period For the Period
June 15, 1992* Year Jan. 3, 1995*
For the Year Ended March 31, through Ended through
------------------------------- March 31, March 31, March 31,
1996 1995 1994 1993 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 12.02 $ 11.23 $ 11.25 $ 10.00 $12.01 $11.14
Income from Investment Operations:
Net investment income 0.36 0.35 0.40 0.18 0.21 0.08
Net realized and unrealized gain/(loss)
on investments 3.03 0.80 (0.04) 1.18 3.05 0.79
Total from Investment Operations 3.39 1.15 0.36 1.36 3.26 0.87
Less Distributions:
Dividends from net investment income
and short-term gains (0.41) (0.35) (0.38) (0.11) (0.24) --
Distributions from net realized
long-term gains (0.32) (0.01) -- -- (0.32) --
Total distributions (0.73) (0.36) (0.38) (0.11) (0.56) --
Net asset value at end of period $ 14.68 $ 12.02 $ 11.23 $ 11.25 $14.71 $12.01
Total Return** 28.86% 10.57% 3.14% 13.73% 27.89% 7.81%
Ratios to Average Daily Net Assets:
Expenses 1.31% 1.35%(2) 1.35%(2) 1.35%(1,2) 2.06% 2.10%(1,4)
Net investment income 2.72% 3.07%(3) 3.14%(3) 2.88%(1,3) 1.97% 2.94%(1,5)
Supplemental Data:
Net assets at end of period (000) $200,020 $146,986 $131,097 $ 83,535 $4,178 $341
Portfolio turnover rate 15% 18% 8% 8% 15% 18%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return excludes the effect of sales loads.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily 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 daily 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 daily 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 daily net assets would have been 2.87% (annualized)
for Class B Shares for the period ended March 31, 1995.
See accompanying Notes to Financial Statements.
35
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Financial Highlights (continued)
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Institutional
Class D Shares Shares
------------------------------------------------------ -------------
For the For the
Period Period
Nov. 9, 1992* Nov. 2, 1995*
For the Year Ended March 31, through through
----------------------------------- March 31, March 31,
1996 1995 1994 1993 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 12.01 $ 11.22 $ 11.24 $10.45 $ 13.89
Income from Investment Operations:
Net investment income 0.33 0.31 0.36 0.14 0.13
Net realized and unrealized gain/(loss)
on investments 3.02 0.80 (0.04) 0.74 1.17
Total from Investment Operations 3.35 1.11 0.32 0.88 1.30
Less Distributions:
Dividends from net investment income
and short-term gains (0.38) (0.31) (0.34) (0.09) (0.10)
Distributions from net realized
long-term gains (0.32) (0.01) -- -- (0.32)
Total distributions (0.70) (0.32) (0.34) (0.09) (0.42)
Net asset value at end of period $ 14.66 $ 12.01 $ 11.22 $11.24 $ 14.77
Total Return** 28.44% 10.18% 2.78% 9.00% 21.12%(1)
Ratios to Average Daily Net Assets:
Expenses 1.66% 1.70%(2) 1.70%(2) 1.70%(1,2) 1.03%(1)
Net investment income 2.37% 2.72%(3) 2.79%(3) 2.83%(1,3) 2.89%(1)
Supplemental Data:
Net assets at end of period (000) $13,757 $11,717 $11,051 $6,285 $11,768
Portfolio turnover rate 15% 18% 8% 8% 15%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return excludes the effect of sales loads.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily 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.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily 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 LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
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 fee. As of November 18, 1994, Class D Shares are 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. On November 2,
1995, the Fund began offering Institutional Shares, which are not subject to
a front-end sales charge or a distribution fee.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Security Valuation - Portfolio securities that 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
that will be sufficient to relieve it from all or substantially all federal
income and excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
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
Financial Corp., is the Fund's investment advisor and Alex. Brown
Investment Management
37
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Notes to Financial Statements (continued)
("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; 0.85% of the next $50 million of the Fund's
average daily net assets; 0.80% of the next $100 million of the Fund's
average daily net assets; and 0.70% of the Fund's average daily net assets
in excess of $200 million.
As compensation for its subadvisory services, ABIM receives a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly, at an
annual rate of 0.75% of the first $50 million of the Fund's average daily
net assets; 0.60% of the next $150 million of the Fund's average daily net
assets; and 0.50% 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,
1.70% of the average daily net assets of Class D Shares and 1.10% of the
average daily net assets of the Institutional Shares.
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 $68,731 for accounting services for the year ended
March 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $98,872 for
transfer agent services for the year ended March 31, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated ("Alex. Brown") receives from the Fund an annual fee,
calculated daily and paid monthly, at an annual rate equal to 0.25% of the
average daily net assets of Class A Shares, 1.00% (includes 0.25%
shareholder servicing fee) of the average daily net assets of Class B
Shares, and 0.60% of the average daily net assets of Class D Shares. For the
year ended March 31, 1996, distribution fees, aggregated $531,987 of which
$435,163 was attributable to Flag Investors Class A Shares, $19,580 was
attributable to Flag Investors Class B Shares and $77,244 was attributable
to Flag Investors Class D Shares. Alex. Brown received no commissions from
the Fund for the year ended March 31, 1996.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense for the
year ended March 31, 1996 was approximately $7,000.
C. Capital Share Transactions - The Fund is authorized to issue up to 35
million shares of $.001 par value capital stock (20 million Class A, 5
million Class B, 5 million Institutional, 3 million Class D and 2 million
undesignated). Transactions of the Fund were as follows:
Class A Shares
For the Year For the Year
Ended Ended
March 31, March 31,
1996 1995
Shares sold 2,645,585 2,019,949
Shares issued to share-
holders on reinvest-
ment of dividends 611,385 340,078
Shares redeemed (1,862,910) (1,802,800)
Net increase in shares
outstanding 1,394,060 557,227
Proceeds from sale
of shares $ 36,567,203 $ 23,014,817
Reinvested dividends 8,303,476 3,755,243
Net asset value of
shares redeemed (25,776,184) (20,417,857)
Net increase from
capital share
transactions $ 19,094,495 $ 6,352,203
38
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Notes to Financial Statements (continued)
Class B Shares
For the Year For the Period
Ended January 3, 1995*
March 31, to March 31,
1996 1995
Shares sold 252,563 28,411
Shares issued to share-
holders on reinvest-
ment of dividends 5,788 --
Shares redeemed (2,754) --
Net increase in shares
outstanding 255,597 28,411
Proceeds from sale
of shares $3,471,865 $327,879
Reinvested dividends. 79,812 --
Net asset value of
shares redeemed (39,242) --
Net increase from
capital share
transactions $3,512,435 $327,879
Class D Shares
For the Year For the Year
Ended Ended
March 31, March 31,
1996 1995
Shares sold 0 110,073
Shares issued to share-
holders on reinvest-
ment of dividends 45,398 28,011
Shares redeemed (82,585) (147,152)
Net decrease in shares
outstanding (37,187) (9,068)
Proceeds from sale
of shares $ 0 $ 1,231,691
Reinvested dividends 616,247 309,122
Net asset value of
shares redeemed (1,105,221) (1,661,772)
Net decrease from
capital share
transactions $ (488,974) $ (120,959)
Institutional Shares
For the Period
November 2, 1995* to
March 31, 1996
Shares sold 793,108
Shares issued to share-
holders on reinvest-
ment of dividends 6,860
Shares redeemed (3,037)
Net increase in shares
outstanding 796,931
Proceeds from sale
of shares $11,286,209
Reinvested dividends 95,216
Net asset value of
shares redeemed (42,583)
Net increase from
capital share
transactions $11,338,842
- --------------------------------------------------------------------------------
* Commencement of operations.
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term and U.S. government obligations, aggregated
$43,995,097 and $27,187,948, respectively, for the year ended March 31,
1996. Purchases of U.S. government obligations aggregated $6,947,340, and
there were no sales of U.S. government obligations for the year.
At March 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was
$54,252,907 and aggregate gross unrealized depreciation of all securities in
which there is an excess of tax cost over value was $2,341,199.
39
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
VALUE BUILDER FUND
Notes to Financial Statements (concluded)
E. Net Assets - At March 31, 1996, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $150,991,612
Flag Investors Class B Shares 3,840,296
Flag Investors Class D Shares 10,209,056
Flag Investors Institutional Shares 11,338,842
Undistributed net
investment income 1,319,621
Accumulated net realized gain
from security transactions 110,857
Unrealized appreciation of
investments 51,911,708
------------
$229,721,992
============
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, 1996, 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, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the over all 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, 1996, 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 10, 1996
40
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
S & P - Commercial paper rated A-1+ or A-1 by S&P has the
following characteristics. Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management is unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
Moody's Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial
paper rating assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationship which exists with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
P-1, P-2 or P-3.
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, and CC and C -- Regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
A-1
<PAGE>
D -- In default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as "high-grade" bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or the
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2