<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
One South 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 THE FUND, ONE SOUTH STREET, BALTIMORE, MARYLAND
21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1997, as supplemented through September 1, 1997,
relating to the Prospectuses Dated:
August 1, 1997, as supplemented through September 1, 1997,
relating to the Class A, Class B and
Institutional Shares
<PAGE>
TABLE OF CONTENTS
Page
1. General Information and History................................... 1
2. Investment Objective, Policies and Risk Considerations............ 1
3. Valuation of Shares and Redemption................................ 8
4. Federal Tax Treatment of Dividends and
Distributions................................................... 8
5. Management of the Fund............................................ 11
6. Investment Advisory and Other Services............................ 16
7. Distribution of Fund Shares....................................... 17
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........................................... 24
14. Control Persons and Principal Holders of
Securities...................................................... 26
15. Financial Statements.............................................. 26
Appendix.......................................................... A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an
open-end management investment company, or mutual fund. 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 the Fund's
distributor (the "Distributor") 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 & Sons Incorporated, now BT Alex. Brown Incorporated ("BT
Alex. Brown"), BT Alex. Brown licenses to the Fund the "Flag Investors" name
and logo but retains the rights to the name and logo, including the right to
permit other investment companies to use them.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund'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% and 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
1
<PAGE>
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 S&P or Moody's 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 as described below, and an additional 10% of its total assets in
the aggregate in equity and debt securities issued by foreign governments or
corporations and not traded in the United States.
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 (the "Advisor"), or the Fund's
sub-advisor (the "Sub-Advisor") (collectively, 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 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
2
<PAGE>
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. The Advisors 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 the Advisors believe 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, will restrict the use of covered call options. (See
"Federal Tax Treatment of Dividends and Distributions" below.)
Convertible Securities
As described in the Prospectus, the Fund may invest in
convertible securities. In general, the market value of a convertible security
is at least the higher of its "investment value" (i.e., its value as a
fixed-income security) or its "conversion value" (i.e., the value of the
underlying shares of common stock if the security is converted). A convertible
security tends to increase in market value when interest rates decline and
tends to decrease in value when interest rates rise. However, 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
3
<PAGE>
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 S&P or
Moody's, 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 generally are 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 that 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, these ratings are not absolute standards of quality and
may not reflect changes in an issuer's creditworthiness. Accordingly, the
Advisors do not rely exclusively on ratings issued by S&P or Moody's in
selecting portfolio securities, but supplement such ratings with independent
and ongoing review of credit quality. In addition, the total return the Fund
may earn from investments in high-yield securities will be significantly
affected not only by credit quality but by fluctuations in the markets in
which such securities are traded. Accordingly, selection and supervision by
the Advisors of investments in lower rated securities involves continuous
analysis of individual issuers, general business conditions, activities in the
high-yield bond market and other factors. The analysis of issuers may include,
among other things, historic and current financial conditions, strength of
management, responsiveness to business conditions, credit standing and current
and anticipated results of operations. Analysis of general business conditions
and other factors may include anticipated changes in economic activity in
interest rates, the availability of new investment opportunities and the
economic outlook for specific industries.
Investing in higher yield, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high-yield bonds will fluctuate over
time, reflecting not only changing interest rates but also the bond market's
perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, lower rated bonds may decline
in value due to heightened concern over credit quality, regardless of
prevailing interest rates. In 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
4
<PAGE>
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 the Advisors, 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 sub-normal 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 the Fund's assets in
American Depository Receipts and other securities, which are traded in the
United States and represent interests in foreign issuers. The Advisors may
also invest up to 10% of the Fund's assets in securities of foreign companies,
and in debt and equity securities issued by foreign corporate and government
issuers and which are not traded in the United States when the Advisors
believe that such investments provide good opportunities for achieving income
and capital gains without undue risk. Foreign investments involve substantial
and different risks which should be carefully considered by any potential
investor. Such investments are usually not denominated in dollars so changes
in the relative values of the dollar and other currencies will affect the
value of foreign investments. In general, less information is publicly
available about foreign companies than is available about companies in the
United States. Most foreign companies are not subject to uniform audit and
financial reporting standards, practices and requirements comparable to those
in the United States. In most foreign markets volume and liquidity are less
than in the United States and, at times, volatility 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
5
<PAGE>
periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. Portfolio
securities held by the Fund which are listed on foreign exchanges may be
traded on days that the Fund does not value its securities, such as Saturdays
and the customary United States business holidays on which the New York Stock
Exchange is closed. As a result, the net asset value of Shares may be
significantly affected on days when shareholders do not have access to the
Fund.
Although the Fund intends to invest in securities of companies
and governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation
or confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments 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.
Mortgage Securities
The Fund may purchase mortgage-backed debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
Mortgage-backed securities represent an ownership interest in a pool of
residential and commercial mortgage loans. Generally, these securities are
designed to provide monthly payments of interest and principal to the
investor. The mortgagee's monthly payments to his/her lending institution are
passed through to investors such as the Fund. Most issuers or poolers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual
loan, title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various Governmental and Government-related organizations. The
Fund may invest in securities issued or guaranteed by the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association (FNMA) and other government agencies.
Mortgage-backed securities are subject to certain risks that
are different from those associated with other debt securities. Due to the
possibility that prepayments on home mortgages will alter cash flow on
mortgage securities, it is not possible to determine in advance the actual
final maturity date or average life. Like debt securities in general,
mortgage-backed securities will generally decline in price when interest rates
rise. Rising interest rates also tend to discourage refinancings of home
mortgages, with the result that the average life of mortgage securities held
by the Fund may be lengthened. This extension of average life causes the
market price of the securities to decrease further than if their average lives
were fixed. However, when interest rates fall, mortgages may not enjoy as
large a gain in market value due to prepayment risk because additional
mortgage prepayments must be reinvested at lower interest rates. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement could
be and to calculate the effect that it will have on the price of the security.
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as
federal regulatory limitations. The investment restrictions recited below are
in addition to those described in the Fund's Prospectuses, and are matters of
6
<PAGE>
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:
1. 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 equaling 5% or more of
the Fund's total assets are outstanding, the Fund will not purchase
securities;
2. Invest in real estate or mortgages on real estate;
3. Purchase or sell commodities or commodities contracts,
including financial futures contracts;
4. 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;
5. Issue senior securities;
6. 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;
7. Effect short sales of securities;
8. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
9. Purchase participations or other direct interests in oil,
gas or other mineral leases or exploration or development programs; or
10. 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 investment restriction may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered
under the Investment Company Act, except as permitted by federal law.
The percentage limitations contained in these restrictions
apply at the time of purchase of securities.
7
<PAGE>
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the
close of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern
Time) each day on which the New York Stock Exchange is open for business (a
"Business Day"). The New York Stock Exchange is open for business on all
weekdays except for the following holidays: New Year's Day, Martin Luther
King, Jr.'s Birthday, 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 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").
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 of the Code, 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.
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.
9
<PAGE>
Fund Distributions
Distributions of investment company taxable income, generally,
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 gain from the
sale or exchange of a capital asset held for more than one year, 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 gain
from the sale or exchange of a capital asset held for more than one year, 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 for individual shareholders, gain or loss on the sale
or exchange of a Share will be capital gain or loss which will be long-term
capital gain if the Share has been held for more than eighteen months,
mid-term capital gain if the Shares have been held for more than twelve, but
less than eighteen months, and otherwise will be short-term capital gain.
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). 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.
10
<PAGE>
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 non-deductible 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 One South Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman (10/27/27)
Managing Director, BT Alex. Brown Incorporated; Director, Investment
Company Capital Corp. (registered investment advisor). Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated (now known as BT Alex. Brown
Incorporated).
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).
11
<PAGE>
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); Chartered Financial Analyst.
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); Director, Central Carolina Bank
& Trust (banking), Key Funds (registered investment companies), and
AMBAC Treasurers Trust (registered investment company) and DP Mann
Holdings (insurance).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103-7017. President and Chief Executive
Officer, The Pew Charitable Trusts; Director and Executive Vice
President, The Glenmede Trust Company. Formerly, Executive Director,
The Pew Charitable Trusts.
CARL W. VOGT, ESQ., Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2604. Senior Partner, Fulbright & Jaworski
L.L.P. (law); Director, Yellow Corporation (trucking). Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration).
HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540.
Professor-at-Large Emeritus, Institute for Advanced Study; Director, ATL
and Spacelabs Medical Corp. (medical equipment) Director, Family Health
International (non-profit research and education); and Director,
Research America (non-profit medical research). Formerly, Trustee, Reed
College (education); Trustee, Rockefeller Foundation; and Director,
Merrill Lynch Cluster C Funds (registered investment companies).
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June, 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand, LLP, September,
1988-June, 1997.
12
<PAGE>
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present. Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company, Inc. (investments),
1980-August, 1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, BT Alex. Brown Incorporated.
- ---------------------
* 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 by BT Alex. Brown or its affiliates. There are currently
13 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash Reserve Fund,
Inc. fund complex (the "Fund Complex"). Mr. Semans serves as Chairman of five
funds and as a Director of five other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as Directors of each fund in the
Fund Complex. Mr. Hale serves as Chairman of four funds and as a Director of
each of the other funds in the Fund Complex. Ms. Rimel and Mr. Vogt each serve
as a Director of eleven funds in the Fund Complex. Mr. Woolf serves as
President of seven funds in the Fund Complex. Ms. Olmert serves as Secretary,
Mr. Finelli serves as Treasurer and Ms. Collidge 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, BT 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, other than Mr. Woolf, receive no direct
remuneration in such capacity from the Fund. Mr. Woolf receives annual
compensation from the Fund for serving as President of the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown may be
considered to have received remuneration indirectly. As compensation for his
or her services, each Director who is not an "interested person" of the Fund
(as defined in the Investment Company Act) (a "Disinterested Director")
receives an aggregate annual fee (plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with his or her attendance at
board and committee meetings) from each fund in the Fund Complex for which he
or she serves. In addition, the 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, 1997,
Disinterested Directors' fees attributable to the assets of the Fund totaled
approximately $19,242.
The following table shows aggregate compensation and retirement
benefits payable to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, and pension or retirement benefits accrued as part of
Fund expenses in the fiscal year ended March 31, 1997.
13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Pension or Retirement Total Compensation from the Fund and
Position the Fund Payable to Directors Benefits Accrued as Part of Fund Complex Payable to Directors for the
for the Fiscal Year Ended Fund Expenses Fiscal Year Ended March 31, 1997
March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans(1) $0 $0 $0
Chairman
W. James Price(1,2) $0 $0 $0
Director
Richard T. Hale(1) $0 $0 $0
Director
Charles W. Cole, Jr.(1,3) $0 $0 $0
Director,
James J. Cunnane $1,860(4) $(5) $39,000 for service
Director on 12 Boards
John F. Kroeger $2,337(4) $(5) $49,000 for service
Director on 12 Boards
Louis E. Levy $1,860(4) $(5) $39,000 for service
Director on 12 Boards
Eugene J. McDonald $1,860(4) $(5) $39,000 for service
Director on 12 Boards
Rebecca W. Rimel $552(4) $(5) $39,000 for service
Director on 10 Boards(6)
Carl W. Vogt $557(4) $(5) $39,000 for service
Director on 10 Boards(6)
Harry Woolf 2 $1,321(4) $(5) $29,250 for service
Director on 12 Boards
</TABLE>
- --------------------------------
(1) A Director who is an "interested person" as defined in the
Investment Company Act.
(2) Messrs. Price and Woolf each retired as Directors of the Fund,
effective December 31, 1996. Effective September 1, 1997, Mr. Woolf
serves as President of the Fund and other funds in the Fund Complex.
For serving as President, Mr. Woolf receives compensation from the
Fund and certain other funds in the Fund Complex.
(3) Retired, effective August 13, 1997.
(4) Of amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt
and Woolf and Ms. Rimel $1,860, $0, $0, $1,860, $557, $1,321 and
$552, respectively, was deferred pursuant to a deferred compensation
plan.
(5) 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, 1997 was approximately $10,628.
(6) Ms. Rimel and Mr. Vogt received proportionately higher compensation
from each fund for which they serve.
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 the Participant
in his or her last year of service. Upon retirement, each Participant will
receive annually 10% of such fee for each year that he or she served after
completion of the first five years, up to a maximum annual benefit of 50% of
the fee earned by the Participant in his or her last year of service. The fee
will be paid quarterly, for life, by each Fund for which the Participant
serves. The Retirement Plan is unfunded and unvested. Mr. Kroeger has
qualified but has not yet received benefits. The Fund has two Participants, a
Director who retired effective December 31, 1994 and a Director who
14
<PAGE>
retired effective December 31, 1996, who have qualified for the Retirement
Plan by serving thirteen and fourteen years, respectively, as Directors in the
Fund Complex and each of whom will be paid a quarterly fee of $4,875 by the
Fund Complex for the rest of his life. Another participant, who retired on
January 31, 1996 and died on June 2, 1996, was paid fees of $8,090 by the Fund
Complex under the Retirement Plan in the period ended December 31, 1996. Such
fees are allocated to each fund in the Fund Complex based upon the relative
net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her
last year of service, as described above. The approximate credited years of
service at March 31, 1997 are as follows: for Mr. Cunnane, 2 years; for Mr.
Kroeger, 14 years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms.
Rimel, 1 year; and for Mr. Vogt, 1 year.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation
pursuant to a Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy,
McDonald and Vogt and Ms. Rimel have each executed a Deferred Compensation
Agreement. Currently, the deferring Directors may select various Flag
Investors funds and BT Alex. Brown Cash Reserve Fund in which all or part of
their deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in generally
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
applies to the personal investing activities of all of the directors and
officers of the Fund, as well as to designated officers, directors and
employees of the Advisors and the Distributor. As described below, the Code of
Ethics imposes additional restrictions on the Advisors' investment personnel,
including the portfolio managers and employees who execute or help execute a
portfolio manager's decisions or who obtain contemporaneous information
regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that covered employees of the
Advisors, certain directors or officers of the Distributor, and all Fund
Directors who are "interested persons", preclear 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 special
preclearance of the acquisition of securities in private placements.
Furthermore, the Code of Ethics provides for trading "blackout periods" that
prohibit trading by investment personnel and certain other employees within
periods of
15
<PAGE>
trading by the Fund in the same security. Officers, directors and employees of
the Advisors and the Distributor may comply with codes instituted by those
entities so long as they contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On June 17, 1997, the Board of Directors of the Fund, including
a majority of the Disinterested Directors, approved an Investment Advisory
Agreement between the Fund and Investment Company Capital Corp. ("ICC" or the
"Advisor") and a Sub-Advisory Agreement among the Fund, ICC and Alex. Brown
Investment Management ("ABIM" or the "Sub-Advisor"), both of which contracts
are described in greater detail below. The Investment Advisory Agreement and
the Sub-Advisory Agreement were approved by shareholders of the Fund on August
14, 1997. ICC, the investment advisor, is a wholly-owned subsidiary of BT
Alex. Brown and an indirect subsidiary of Bankers Trust New York Corporation.
ICC is also the investment advisor to BT 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
Short-Intermediate Income Fund, Inc. (formerly, 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. Prior to August 14, 1997, ICC
and ABIM provided investment advisory and sub-advisory services to the Fund
pursuant to an investment advisory agreement and a sub-advisory agreement,
each dated June 15, 1992.
ABIM is a limited partnership affiliated with BT 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. BT Alex. Brown owns a 1% general partnership
interest in ABIM and BT Alex. Brown Holdings, Inc. owns the remaining 49%
limited partnership interest. ABIM, which also is the sub-advisor to Flag
Investors Telephone Income Fund, Inc. and Flag Investors Equity Partners Fund,
Inc., is a registered investment advisor with approximately $6.3 billion under
management as of May 31, 1997.
Under the Investment Advisory Agreement, ICC is responsible for
obtaining and evaluating economic, statistical and financial information to
formulate and implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM, provided that ICC continues to supervise the
performance of ABIM and report thereon to the Fund's Board of Directors. Any
investment program undertaken by ICC or ABIM will at all times be subject to
policies and control of the Fund's Board of Directors. ICC will provide the
Fund with office space for managing its affairs, with the services of required
executive personnel and with certain clerical and bookkeeping services and
facilities. These services are provided by ICC without reimbursement by the
Fund for any costs. Neither ICC nor ABIM shall be liable to the Fund or its
shareholders for any act or omission by ICC or ABIM or any losses sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty. The services of ICC
and ABIM to the Fund are not exclusive and ICC and ABIM are free to render
similar services to others.
As compensation for its services, 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.
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.
16
<PAGE>
The Investment Advisory Agreement and the Sub-Advisory
Agreement will continue in effect until August 14, 1999, and thereafter, from
year to year if such continuance is specifically approved at least annually by
the Fund's Board of Directors, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, or
by a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICC may terminate the Investment Advisory Agreement on
sixty days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the
Investment Company Act). The Sub-Advisory Agreement has similar termination
provisions.
Advisory fees paid by the Fund to ICC and sub-advisory fees
paid by ICC to ABIM for the last three fiscal years were as follows:
- ------------------------------------------------------------------------------
Year Ended March 31,
- ------------------------------------------------------------------------------
Fees Paid to: 1997 1996 1995
- ------------------------------------------------------------------------------
ICC $2,227,355 $ 1,651,971 $ 1,248,666*
- ------------------------------------------------------------------------------
ABIM $1,633,167 $ 1,225,064 $ 967,323
- ------------------------------------------------------------------------------
- ----------------
* Net of fee waivers. Absent such fee waivers for the fiscal year ended
March 31, 1995, the Class A Shares' Total Operating Expenses would have
been 1.40% of its average daily net assets. Absent fee 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 daily net assets. Absent fee waivers
for the fiscal year ended March 31, 1995, the Class D Shares' Total
Operating Expenses would have been 1.74% of its average daily 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
ICC Distributors, Inc. ("ICC Distributors") serves as the
exclusive distributor of the Fund's Shares pursuant to the Distribution
Agreement, effective September 1, 1997, which provides for distribution of
each class of Shares. The Distribution Agreement also relates to various
classes of shares offered by other funds in the Fund Complex. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown & Sons"),
served as distributor of the Fund's Shares for the same compensation and on
substantially the same terms and conditions as ICC Distributors.
The Distribution Agreement provides that ICC Distributors has
the exclusive right to distribute Shares of the Fund either directly or
through other broker-dealers and further provides that ICC Distributors 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 Prospectuses 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; (d) respond to inquiries from shareholders concerning
the status of their accounts and the operations of the Fund; (e) maintain such
accounts, books and records as may be required by law or be deemed appropriate
by the Board of Directors; and (f) take all actions necessary to carry into
effect the distribution of the Shares. ICC Distributors has not undertaken to
sell any specific number of Shares. The Distribution Agreement further
provides that, in connection with the distribution of Shares, ICC Distributors
will be responsible for promotional expenses. The services provided by ICC
Distributors to the Fund are not exclusive, and ICC Distributors is free to
provide similar services to others. ICC Distributors shall not be liable to
the Fund or its shareholders for any act or omission by ICC Distributors or
17
<PAGE>
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 Distribution Agreement further provides that the Fund and ICC
Distributors will mutually indemnify each other for losses relating to the
disclosures in the Fund's registration statement. The Distribution Agreement
has an initial term of one year and 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
Disinterested Directors, by votes cast in person at a meeting called for such
purpose. The Distribution Agreement may be terminated at any time upon sixty
days' notice, without penalty, by the vote of a majority of the Fund's
Disinterested Directors or by a vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Stock"). The Distribution Agreement shall
terminate automatically in the event of its assignment.
ICC Distributors and certain broker-dealers ("Participating
Dealers") have entered into Sub-Distribution Agreements under which such
Participation Dealers have agreed to process investor purchase and redemption
orders and respond to inquiries from shareholders concerning the status of
their accounts and the operations of the Fund. Any Sub-Distribution Agreement
will terminate in the same manner as the Distribution Agreement.
Compensation of the Distributor
Pursuant to Rule 12b-1 under the Investment Company Act,
investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders. The Fund has adopted a Plan of Distribution
for each of its classes of Shares (except the Institutional Shares) (the
"Plans"). Under each Plan, the Fund pays a fee to ICC Distributors for
distribution and other shareholder servicing assistance as set forth in the
Distribution Agreement, and ICC Distributors is authorized to make payments
out of its fee to its investment representatives and to Participating Dealers.
The Plans will remain in effect from year to year, 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 Disinterested Directors, by votes cast
in person at a meeting called for such purpose. The Distribution Agreement,
including the Plans and forms of Sub-Distribution Agreements, were approved by
the Fund's Board of Directors, including a majority of the Disinterested
Directors on August 4, 1997.
In approving the Plans, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable
likelihood that the Plans would benefit the Fund and its shareholders. The
Plans will be renewed only if the Directors make a similar determination in
each subsequent year. The Plans may not be amended to increase materially the
fee to be paid pursuant to the Distribution Agreement without the approval of
the shareholders of the Fund. The Plans may be terminated at any time without
penalty, by the vote of a majority of the Fund's Disinterested Directors or by
a vote of a majority of the Fund's outstanding Shares (as defined under
"Capital Stock").
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plan to ICC Distributors
pursuant to the Distribution Agreement and to Participating Dealers pursuant
to any Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Disinterested Directors
shall be committed to the discretion of the Disinterested Directors then in
office.
In return for payments received pursuant to the Plans, ICC
Distributors pays the distribution-related expenses of the Fund including one
or more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges. 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 ICC
Distributors will allocate a portion of its distribution fee as compensation
for such financial institutions' ongoing shareholder services. Although
banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Fund, according to interpretations
by various bank regulatory authorities, financial
18
<PAGE>
institutions are not prohibited from acting in other capacities, such as the
shareholder servicing capacities described above. Should future legislative,
judicial or administrative action prohibit or restrict the activities of the
Shareholder Servicing Agents in connection with the Shareholder Servicing
Agreements, the Fund may be required to alter materially or discontinue its
arrangements with the Shareholder Servicing Agents. Such financial
institutions may impose separate fees in connection with these services and
investors should review the Prospectuses and this Statement of Additional
Information in conjunction with any such institution's fee schedule.
As compensation for providing distribution services as
described above for the Class A Shares, ICC Distributors receives an annual
fee, paid monthly equal to .25% of the average daily net assets of the Class A
Shares. With respect to Class A Shares, ICC Distributors expects to allocate
up to all of its fee to broker-dealers who enter into Sub-Distribution
Agreements and Shareholder Servicing Agreements with ICC Distributors.
As compensation for providing distribution services as
described above for the Class B Shares, ICC Distributors receives an annual
fee, paid monthly, equal to .75% of the average daily net assets of the Class
B Shares. In addition, with respect to the Class B Shares, the Fund will pay
ICC Distributors a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.)
ICC Distributors receives no compensation for distributing the
Institutional Shares.
As compensation for providing distribution and shareholder
services to the Fund for the last three fiscal years, Alex. Brown & Sons
received fees in the following amounts:
- ------------------------------------------------------------------------------
Fiscal Year Ended March 31,
--------------------------------------------------------
Class 1997 1996 1995
- ------------------------------------------------------------------------------
Class A 12b-1 $575,090 $435,163 $342,916
- ------------------------------------------------------------------------------
Class B 12b-1 $ 64,138 $ 14,685 $ 305*
- ------------------------------------------------------------------------------
Class B Shareholder
Servicing Fee $ 21,379 $ 4,895 $ 101*
- ------------------------------------------------------------------------------
Class D 12b-1 $ 86,879 $ 77,244 $ 69,979
- ------------------------------------------------------------------------------
*for the period from January 3, 1995 through March 31,1995
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC
Distributors under the Plans. Payments under the Plans are made as described
above regardless of ICC Distributors' actual cost of providing distribution
services and may be used to pay ICC Distributors overhead expenses. If the
cost of providing distribution services to the Class A Shares is less than
.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 ICC Distributors. The
Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if any of the Plans is terminated in accordance with
its terms, the obligation of the Fund to make payments to ICC Distributors
pursuant to such Plan will cease and the Fund will not be required to make any
payments past the date the Distribution Agreement terminates.
19
<PAGE>
Class D Shares
For the period from November 9, 1992 through November 18, 1994
the Fund offered the Flag Investors Value Builder Fund Class D Shares (which
were known at that time as the Flag Investors Value Builder Fund Class B
Shares). Although Class D Shares are no longer offered, some Class D Shares
remain issued and outstanding. Alex. Brown & Sons received commissions on the
sale of Class D Shares in the following amounts:
- ------------------------------------------------------------------------------
Year Ended March 31,
- ------------------------------------------------------------------------------
Class D 1997 1996 1995
- ------------------------------------------------------------------------------
Commissions $0 $1,548 $69,979
- ------------------------------------------------------------------------------
Paid to Investment $0 $1,246 $36,600
Representatives
- ------------------------------------------------------------------------------
Paid to Participating $0 $ 302 $ 2,106
Dealers
- ------------------------------------------------------------------------------
General Information
Alex. Brown & Sons received commissions on the sale of Class A
Shares and contingent deferred sales loads on the Class B Shares, of which
only a portion of these amounts was retained by Alex. Brown & Sons, in the
following amounts.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Paid Retained Paid Retained Paid Retained
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
Commissions $937,641 $868,899 $431,884 $430,833 $225,285 $204,552
- ---------------------------------------------------------------------------------------------------------------
Class B
Contingent
Deferred Sales
Charge $483,596 $350,485 $133,944 $126,571 $34,265* $33,025*
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*for the period from January 3, 1995 through March 31,1995
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
20
<PAGE>
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 Disinterested Directors, and of independent auditors,
in connection with any matter relating to the Fund; membership dues of
industry associations; interest payable on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Directors) of the
Fund which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of the
Fund's operation unless otherwise explicitly assumed by ICC Distributors, ICC
or ABIM.
The address of ICC Distributors is P.O. Box 7558, Portland, Maine 04101.
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, its affiliates and ICC Distributors.
In over-the-counter transactions, orders are placed directly
with a principal market maker and such purchases normally include a mark up
over the bid to the broker-dealer based on the spread between the bid and
asked price for the security. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter. On occasion, certain money market instruments may be purchased
directly from an issuer without payment of a commission or concession. The
Fund will not deal with the Advisors or their affiliates in any transaction in
which any of them acts as a principal; that is, an order will not be placed
with the Advisors or their affiliates if execution of the trade involves the
Advisors or their affiliates 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 the Advisors or their affiliates acting as market maker.
If the Advisors or their affiliates 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
21
<PAGE>
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 the Advisors or their affiliates. 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 the Advisors or their affiliates must be "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time." Rule 17e-1 also
contains requirements for the review of such transactions by the Board of
Directors and requires ICC and ABIM to furnish reports and to maintain records
in connection with such reviews.
ABIM manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities
of the same issuer may vary and the length of time that each account may
choose to hold its investment in such securities may likewise vary. The timing
and amount of purchase by each account will also be determined by its cash
position. If the purchase or sale of securities consistent with the investment
policies of the Fund or one or more of these accounts is considered at or
about the same time, transactions in such securities will be allocated among
the accounts in a manner deemed equitable by ABIM. ABIM may combine such
transactions, in accordance with applicable laws and regulations, in order to
obtain the best net price and most favorable execution. Such simultaneous
transactions, however, could adversely affect the ability of the Fund to
obtain or dispose of the full amount of a security which it seeks to purchase
or sell.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
------------------------------------------------
Fiscal Year Ended March 31,
------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Transactions Directed $38,947,268 $31,958,910 $38,044,707
- -------------------------------------------------------------------------------
Commissions Paid $111,113 $78,634 $89,162
- -------------------------------------------------------------------------------
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, 1997, the
Fund held a 6.25% repurchase agreement issued by Goldman Sachs & Co. valued at
$23,392,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
As of March 31, 1997, 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.
29
<PAGE>
9. CAPITAL STOCK
The Fund is authorized to issue seventy-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 BT 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.
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. The Fund's Board of Directors has approved
Bankers Trust Company, a subsidiary of Bankers Trust New York Corporation and
an affiliate of the Fund, as Custodian. Currently, it is anticipated that
Bankers Trust Company will provide custodial services to the Fund effective
September 22, 1997. Investment Company Capital Corp. One South Street,
23
<PAGE>
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,
1997 such fees totalled $105,449.
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 Annual Accounting 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, 1997, ICC received
accounting fees of $80,766.
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by
Coopers & Lybrand L.L.P., whose report thereon appears elsewhere herein, and
have been included herein in reliance upon the report of such firm of
accountants given on their authority as experts in accounting and auditing.
Coopers & Lybrand L.L.P. has offices at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the
Fund to that of other open-end diversified management investment companies and
to stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than
in terms of yield. The total return quotations, under the rules of the SEC,
must be calculated according to the following formula:
P(1 + T)n = ERV
24
<PAGE>
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 for the Class A Shares, the maximum sales load (4.5%) 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. In calculating the
performance of the Class B Shares, the applicable contingent deferred sales
charge (4.0% for the one-year period, 2.0% for the five-year period and no
sales charge thereafter) is deducted from the ending redeemable value and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the prospectus on the reinvestment dates
during the period. "T" in the formula above is calculated by finding the
average annual compounded rate of return over the period that would equate an
assumed initial payment of $1,000 to the ending redeemable value. Any sales
loads that might in the future be made applicable at the time to reinvestments
would be included as would any recurring account charges that might be imposed
by the Fund.
Calculated according to SEC rules, the ending redeemable value
and average annual total return of a hypothetical $1,000 investment for the
periods ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
One-Year Period Ended
March 31, 1997 Since Inception
- -----------------------------------------------------------------------------------------------------------------
Ending Average Ending Average
Redeemable Annual Total Redeemable Annual Total
Class Value Return Value Return
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
June 15, 1992* $1145.00 14.50% $2003.77 14.49%
- -----------------------------------------------------------------------------------------------------------------
Class B
January 3, 1995* $1149.80 14.98% $1600.43 23.35%
- -----------------------------------------------------------------------------------------------------------------
Class D
November 9, 1992* $1166.85 16.69% $1846.66 14.99%
- -----------------------------------------------------------------------------------------------------------------
Institutional
November 2, 1995* $1202.40 20.24% $1307.13 20.95%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
25
<PAGE>
The Fund may also from time to time include in such advertising
total return figures that are not calculated according to the formula set
forth above to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or CDA
Investment Technologies Inc., or with the performance of the Lehman Government
Corporate Bond Index, the Consumer Price Index, the return on 90-day U.S.
Treasury bills, the Standard and Poor's 500 Stock Index or the Dow Jones
Industrial Average, the Fund calculates its aggregate and average annual total
return for the specified periods of time by assuming the investment of $10,000
in Shares and assuming the reinvestment of each dividend or other distribution
at net asset value on the reinvestment date. For this alternative computation,
the Fund assumes that the $10,000 invested in Shares is net of all sales
charges (as distinguished from the computation required by the SEC where the
$1,000 payment is reduced by sales charges before being invested in Shares).
The Fund will, however, disclose the maximum sales charges and will also
disclose that the performance data do not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing
that such performance data represent past performance and that the investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
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, 1997 and March 31, 1996, the Fund's portfolio
turnover rate was 13% and 15%, respectively.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons held
beneficially or of record 5% or more of the Fund's outstanding Shares of any
class, as of July 23, 1997:
T. Rowe Price, Trustee 7.49%
Plan 100460
Flag Investors Value Builder
Attn: Asset Recon
P.O. Box 17215
Baltimore, MD 21297-0354
As of July 23, 1997, Directors and officers as a group
beneficially owned an aggregate of 1.76% of the Fund's total outstanding
shares.
15. FINANCIAL STATEMENTS
See next page.
26
<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
