<PAGE>
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FLAG INVESTORS
VALUE BUILDER FUND, INC.
(Class A, Class B and Class C Shares)
Prospectus & Application -- August 1, 1998
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This mutual fund (the "Fund") seeks to maximize total return through a
combination of long-term growth of capital and current income.
Shares of the Fund are available through your securities dealer or the Fund's
transfer agent. This Prospectus relates to Flag Investors Class A Shares
("Class A Shares"), Flag Investors Class B Shares ("Class B Shares") and Flag
Investors Class C Shares ("Class C Shares") of the Fund. The separate classes
provide you with alternatives as to sales load and Fund expenses. (See "How to
Buy Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated August 1, 1998 has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by calling the Fund
at (800) 767-FLAG.
[GRAPHIC OMITTED]
TABLE OF CONTENTS
Fee Table .................................. 1
Financial Highlights ....................... 2
Investment Program ......................... 3
Investment Restrictions .................... 4
The Fund's Net Asset Value ................. 5
How to Buy Shares .......................... 5
How to Redeem Shares ....................... 7
Telephone Transactions ..................... 8
How to Choose the Class
That Is Right For You ................... 9
Dealer Compensation ........................ 9
Dividends and Taxes ........................ 9
Management of the Fund ..................... 10
Investment Advisor and Sub-Advisor ......... 10
Distributor ................................ 11
Custodian, Transfer Agent and
Accounting Services ..................... 12
Performance Information .................... 12
General Information ........................ 12
Application ................................ A-1
The Fund's shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank. The shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government
agency. Investment in the shares involves risk, including possible loss of
principal.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
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These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
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FEE TABLE
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<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
Initial Sales Deferred Level
Charge Sales Charge Sales Charge
Shareholder Transaction Expenses: Alternative Alternative Alternative
--------------- ------------------- ------------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) .............................. 4.50%* None None
Maximum Sales Charge Imposed on Reinvested Dividends .............. None None None
Maximum Deferred Sales Charge for purchases made before May 1,
1999 (as a percentage of original purchase price or redemption
proceeds, whichever is lower) .................................... 0.50%* 4.00%** 1.00%***
Maximum Deferred Sales Charge for purchases made on or after
May 1, 1999 (as a percentage of original purchase price or redemp-
tion proceeds, whichever is lower) ............................... 1.00%* 4.00%** 1.00%***
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees ................................................... 0.77% 0.77% 0.77%
12b-1 Fees ........................................................ 0.25% 0.75% 0.75%
Other Expenses (including a 0.25% shareholder servicing
fee for Class B and Class C Shares) .............................. 0.12% 0.37%**** 0.37%****
----
Total Fund Operating Expenses ..................................... 1.14% 1.89% 1.89%
==== ==== ====
</TABLE>
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* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How to
Buy Shares" and "How to Redeem Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem your Class B Shares within six years of purchase. The amount of the
charge declines in relation to the time you hold your shares. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Redeem Shares.")
*** You will be required to pay a contingent deferred sales charge if you
redeem your Class C Shares within one year after purchase. (See "How to
Redeem Shares.")
**** A portion of the shareholder servicing fee is allocated to your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you
with information about your investment.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period:
Class A Shares ......................................... $56 $80 $105 $177
Class B Shares* ........................................ $59 $89 $122 $184*
Class C Shares ......................................... $29 $59 N/A N/A
You would pay the following expenses on the same invest-
ment, assuming no redemption:
Class B Shares* ........................................ $19 $59 $102 $184*
Class C Shares ......................................... $19 $59 N/A N/A
</TABLE>
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*Expenses assume that Class B Shares are converted to Class A Shares at the end
of six years. Therefore, the expense figures assume six years of Class B
expenses and four years of Class A expenses.
The Expenses and Example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the
Fund. If you purchase shares of any class through a financial institution, you
may be charged separate fees by that institution. The Expenses and Example for
the Class C Shares, which have been offered only since April 8, 1998, are
expected to be the same as those incurred by the Class B Shares.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, you may qualify for reduced sales charges or no sales
charge at all. (See "How to Buy Shares.") Due to the continuous nature of Rule
12b-1 fees, you may pay more than the equivalent of the maximum sales charges
permitted by the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD Rules") if you hold your shares for a long time.
1
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<PAGE>
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FINANCIAL HIGHLIGHTS
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The financial highlights included in the following tables are a part of
the Fund's financial statements for the Class A and Class B Shares for the
periods indicated and have been audited by PricewaterhouseCoopers LLP,
independent accountants. The financial statements and financial highlights for
the fiscal year ended March 31, 1998 and the report thereon of
PricewaterhouseCoopers LLP are included in the Statement of Additional
Information. Additional performance information for the Class A and Class B
Shares is contained in the Fund's Annual Report for the fiscal year ended March
31, 1998, which can be obtained at no charge by calling the Fund at (800)
767-FLAG. The Class C Shares were not offered in the fiscal year ended March
31, 1998.
(For a share outstanding throughout each period)
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<TABLE>
<CAPTION>
Class A Shares
----------------------------------------------------------------------------------------
For the Period
June 15, 1992(1)
For the Year Ended March 31,
-------------------------------------------------------------------- through
1998 1997 1996 1995 1994 March 31, 1993
------------ ------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period ......... $ 17.14 $ 14.68 $ 12.02 $ 11.23 $ 11.25 $ 10.00
------- ------- ------- ------- ------- ---------
Income from Investment
Operations:
Net investment income ........ 0.47 0.39 0.36 0.35 0.40 0.18
Net realized and unrealized
gain/(loss) on invest-
ments ....................... 5.21 2.49 3.03 0.80 ( 0.04) 1.18
------- ------- ------- ------- -------- ---------
Total from Investment
Operations .................. 5.68 2.88 3.39 1.15 0.36 1.36
------- ------- ------- ------- -------- ---------
Less Distributions:
Net investment income and
short-term gains ............ ( 0.47) ( 0.36) ( 0.41) ( 0.35) ( 0.38) ( 0.11)
Net realized mid-term and
long-term gains ............. ( 0.26) ( 0.06) ( 0.32) ( 0.01) -- --
-------- -------- -------- -------- -------- ---------
Total distributions .......... ( 0.73) ( 0.42) ( 0.73) ( 0.36) ( 0.38) ( 0.11)
-------- -------- -------- -------- -------- ---------
Net asset value at end of
period ...................... $ 22.09 $ 17.14 $ 14.68 $ 12.02 $ 11.23 $ 11.25
======= ======== ======== ======== ======== =========
Total Return .................. 33.82% 19.90% 28.86% 10.57% 3.14% 13.73%
Ratios to Average
Net Assets:
Expenses(2) .................. 1.14% 1.27% 1.31% 1.35% 1.35% 1.35%(3)
Net investment income(4) ..... 2.49% 2.51% 2.72% 3.07% 3.14% 2.88%(3)
Supplemental Data:
Net assets at end of period
(000) ....................... $491,575 $278,130 $200,020 $146,986 $131,097 $ 83,535
Portfolio turnover rate ...... 7% 13% 15% 18% 8% 8%
Average Commissions Per
Share ....................... $ 0.062 $ 0.066 -- -- -- --
<PAGE>
<CAPTION>
Class B Shares
-------------------------------------------------------------
For the Year For the Period
Ended March 31, January 3, 1995(1)
-------------------------------------- through
1998 1997 1996 March 31, 1995
----------- ----------- ------------ --------------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period ......... $ 17.16 $ 14.71 $ 12.01 $ 11.14
------- ------- -------- ----------
Income from Investment
Operations:
Net investment income ........ 0.34 0.26 0.21 0.08
Net realized and unrealized
gain/(loss) on invest-
ments ....................... 5.20 2.51 3.05 0.79
------- ------- -------- ----------
Total from Investment
Operations .................. 5.54 2.77 3.26 0.87
------- ------- -------- ----------
Less Distributions:
Net investment income and
short-term gains ............ ( 0.36) ( 0.26) ( 0.24) --
Net realized mid-term and
long-term gains ............. ( 0.26) ( 0.06) ( 0.32) --
-------- -------- --------- ----------
Total distributions .......... ( 0.62) ( 0.32) ( 0.56) --
-------- -------- --------- ----------
Net asset value at end of
period ...................... $ 22.08 $ 17.16 $ 14.71 $ 12.01
======== ======== ========= ==========
Total Return .................. 32.84 % 19.00 % 27.89% 7.81%
Ratios to Average
Net Assets:
Expenses(2) .................. 1.89 % 2.02 % 2.06% 2.10%(3)
Net investment income(4) ..... 1.75 % 1.84 % 1.97% 2.94%(3)
Supplemental Data:
Net assets at end of period
(000) ....................... $64,498 $ 17,311 $ 4,178 $ 341
Portfolio turnover rate ...... 7% 13% 15% 18%
Average Commissions Per
Share ....................... $ 0.062 $ 0.066 -- --
</TABLE>
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(1) Commencement of operations.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.40%, 1.38% and 1.70% (annualized) for Class A
Shares for the years ended March 31, 1995, March 31, 1994 and the period
ended March 31, 1993, respectively, and 2.17% (annualized) for Class B
Shares for the period ended March 31, 1995.
(3) Annualized.
(4) Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 3.02%, 3.11% and 2.53% (annualized) for
Class A Shares for the years ended March 31, 1995, March 31, 1994 and the
period ended March 31, 1993, respectively, and 2.87% (annualized) for
Class B Shares for the period ended March 31, 1995.
2
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INVESTMENT PROGRAM
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Investment Objective, Policies and Risk
Considerations
The Fund's investment objective is to maximize total return through a
combination of long-term growth of capital and current income. The Fund seeks
to achieve this objective through a policy of diversified investments in equity
and debt securities, including common stocks, convertible securities and
government and corporate fixed-income obligations. There can be no assurance,
however, that the Fund will achieve its investment objective.
The Fund's investment advisor (the "Advisor") and the Fund's sub-advisor
(the "Sub-Advisor") (collectively, the "Advisors") are responsible for managing
the Fund's investments. (See "Investment Advisor and Sub-Advisor.") The
Advisors consider both the opportunity for gain and the risk of loss in making
investments, and may alter the relative percentages of assets invested in
equity and fixed-income securities from time to time, depending on the judgment
of the Advisors as to general market and economic conditions, trends in yields
and interest rates and changes in fiscal and monetary policies.
Under normal market conditions, between 40% and 75% of the Fund's total
assets will be invested in common stock and other equity investments (including
preferred stocks, convertible debt, warrants and other securities convertible
into or exchangeable for common stocks). In selecting securities for the Fund's
portfolio, the Advisors expect to apply a "flexible value" approach to the
selection of equity investments. Under this approach, the Advisors will attempt
to identify securities that are undervalued in the marketplace, but will also
consider such factors as current and expected earnings, dividends, cash flows
and asset values in their evaluation of a security's investment potential.
At least 25% of the Fund's total assets will be invested in fixed-income
securities, defined for this purpose to include non-convertible corporate debt
securities, non-convertible preferred stock and government obligations. The
average maturity of these investments will vary from time to time depending on
the Advisors' assessment of the relative yields available on securities of
different maturities. It is currently anticipated that the average maturity of
the fixed-income securities in the Fund's portfolio will be between two and ten
years under normal market conditions. In general, non-convertible corporate debt
obligations held in the Fund's portfolio will be rated, at the time of purchase,
BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa or higher by
Moody's Investors Service, Inc. ("Moody's") or, if unrated by S&P or Moody's,
determined to be of comparable quality by the Advisors under criteria approved
<PAGE>
by the Board of Directors. Investment grade securities (securi-ties rated BBB or
higher by S&P or Baa or higher by Moody's) are generally thought to provide the
highest credit quality and the smallest risk of default. Securities rated BBB by
S&P or Baa by Moody's have speculative characteristics. Up to 10% of the Fund's
assets may be invested in lower quality debt obligations (securities rated BB or
lower by S&P or Ba or lower by Moody's). Securities that were investment grade
at the time of purchase, but are subsequently downgraded to BB, Ba or lower will
be included in the 10% category. In the event that any security owned by the
Fund is downgraded, the Advisors will review the situation and take appropriate
action, but will not be required to sell any such security. If such a downgrade
causes the 10% limit to be exceeded, the Fund will be precluded from investing
further in below investment grade debt securities. (See "Investments in
Non-Investment Grade Securities" below.)
The Fund may also purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (including certain
mortgage-related debt securities), and may invest in high quality short-term
debt securities such as commercial paper rated A-1 or A-1+ by S&P or P-1 by
Moody's.
Investments in Non-Investment Grade
Securities
Lower rated debt obligations, also known as "junk bonds," are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. Securities in the lowest rating
category that the Fund may purchase (securities rated D by S&P or C by
Moody's) may present a particular risk of default, or may be in default and in
arrears in payment of principal and interest. In addition, C- or D-rated
securities may be regarded as having extremely poor prospects of ever attaining
investment standing. Yields and market values of these bonds will fluctuate
over time, reflecting changing interest rates and the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated bonds may decline in value, regardless
of prevailing interest rates. Accordingly, adverse economic developments,
including a recession or a substantial
3
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<PAGE>
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period of rising interest rates, may disrupt the high-yield bond market,
affecting both the value and liquidity of such bonds. The market prices of
these securities may fluctuate more than those of higher rated securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. An economic downturn could adversely
affect the ability of issuers of such bonds to make payments of principal and
interest to a greater extent than issuers of higher rated bonds might be
affected. The ratings categories of S&P and Moody's are described more fully in
the Appendix to the Statement of Additional Information.
The following table provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted averages
of month-end portfolio holdings during the fiscal year ended March 31, 1998,
presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
S&P Rating Average
------------ -----------
AAA 11.89%
AA 1.65%
A 4.24%
BBB 11.51%
BB 3.41%
B 3.74%
Unrated 0.00%
Investments in Repurchase Agreements
The Fund may agree to purchase U.S. Government securities from
creditworthy financial institutions, such as banks or broker-dealers subject to
the seller's agreement to repurchase the securities at an established time and
price. Default by or bankruptcy proceedings with respect to the seller may,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
Investments in Securities of Foreign Issuers
From time to time, the Fund may invest in American Depositary Receipts,
which are interests in securities of foreign companies, and up to 10% of the
Fund's total assets in debt and equity securities of foreign issuers not
publicly traded in the United States when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Nevertheless, foreign investments involve different risks
from investments in the United States, including currency, market and political
risks. Accordingly, the Advisors intend to seek securities of companies in, and
governments of, developed, stable nations.
<PAGE>
Other Investments
For temporary, defensive purposes the Fund may invest up to 100% of its
assets in high quality short-term money market instruments, and in notes or
bonds issued by the U.S. Treasury Department or by other agencies of the U.S.
Government.
The Fund may write covered call options on common stock that it owns or
has the immediate right to acquire through conversion or exchange of other
securities, provided that any such option is traded on a national securities
exchange. The Fund may also enter into closing transactions with respect to
such options.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days, provided that no more than 5% of its total assets may be
invested in restricted securities. Not included within this limitation are
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined to
be liquid. The Board of Directors has adopted guidelines and delegated to the
Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
INVESTMENT RESTRICTIONS
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The investment restrictions recited below are matters of fundamental
policy and may not be changed without shareholder approval. Accordingly, the
Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in any
one industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an industry);
2) Invest in the securities of any single issuer if, as a result, the Fund would
hold more than 10% of the outstanding voting securities of such issuer; or
4
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<PAGE>
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3) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for these purposes the U.S.
Government and its agencies and instrumentalities are not considered an
issuer).
Further investment restrictions are listed in the Statement of Additional
Information.
THE FUND'S NET ASSET VALUE
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The following sections describe how to buy and redeem shares of the Fund.
The price you pay or receive is based on the Fund's net asset value per
share. When you buy Class A Shares, the price you pay may be increased by a
sales charge. When you redeem shares of any of the classes, the price you
receive may be reduced by a sales charge. Read the sections on how to buy
shares and how to redeem shares for details on how and when these charges may
or may not be imposed.
The net asset value per share of each class is determined on each
business day as of the close of trading on the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern Time). It is calculated by subtracting the
liabilities attributable to a class from its proportionate share of the Fund's
assets and dividing the result by the outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ from time to time.
In valuing the Fund's assets, its investments are priced at their market
value which is normally based on current prices but which may be determined
according to "fair value" procedures approved by the Fund's Board of Directors.
You may buy or redeem shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that
day, the price you pay or receive will be based on the next Business Day's net
asset value per share.
<PAGE>
HOW TO BUY SHARES
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You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund. The Application Form, which includes
instructions, is attached to this Prospectus.
You may purchase Class A Shares unless you are a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments
may be as low as $250. Refer to the section on the Fund's Automatic
Investing Plan for details.
o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
Purchase Price
The price you pay to buy shares will be the Fund's offering price which
is calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
5
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<PAGE>
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<TABLE>
<CAPTION>
Class A Sales
Charge as % of
-------------------------
Offering Net Amount Class B Sales Class C Sales
Amount of Purchase Price Invested Charge Charge
- ------------------------------- ---------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Less than $ 50,000 ........... 4.50% 4.71% None None
$ 50,000 - $ 99,999.......... 3.50% 3.63% None None
$ 100,000 - $249,999 ......... 2.50% 2.56% None None
$ 250,000 - $499,999 ......... 2.00% 2.04% None None
$ 500,000 - $999,999.......... 1.50% 1.52% None None
$1,000,000 and over ........... None None None None
- -------------------------------- ---- ---- --------------- --------------
</TABLE>
Although you do not pay an initial sales charge when you invest
$1,000,000 or more in Class A Shares or when you buy any amount of Class B or
Class C Shares, you may pay a sales charge when you redeem your shares. Refer
to the section on how to redeem shares for details.
The sales charge you pay on your current purchase of Class A Shares may
be reduced under the circumstances listed below.
Rights of Accumulation. If you are also purchasing Class A shares of this
or any other Flag Investors fund or if you already have investments in Class A
or Class D shares, you may combine the value of your purchases with the value
of your existing investments to determine whether you qualify for a reduced
sales charge. (For this purpose your existing investments will be valued at the
higher of cost or current value.) You may also combine your purchases and
investments with those of your spouse and your children under the age of 21 for
this purpose. You must be able to provide sufficient information to verify that
you qualify for this right of accumulation.
Letter of Intent. If you anticipate making additional purchases of Class
A Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to
initially purchase at least 5% of the total. When you make each purchase during
the period, you will pay the sales charge applicable to their combined value.
If, at the end of the 13-month period, the total value of your purchases is
less than the amount you indicated, you will be required to pay the difference
between the sales charges you paid and the sales charges applicable to the
amount you actually did purchase. Some of the shares you own will be redeemed
to pay this difference.
Purchases at Net Asset Value. You may buy Class A Shares without paying a
sales charge under the following circumstances:
<PAGE>
1) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
2) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a description of
the conditions).
3) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following (or their respective affiliates): the Distributor, the Advisors
and any broker-dealer authorized to sell shares of the Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A Flag Investors fund payroll savings plan program;
(iii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional
fee by your securities dealer or servicing agent if you buy shares
in this manner.
Purchases by Exchange
You may exchange shares of any other Flag Investors fund with the same
sales charge structure for an equal dollar amount of Class A, B or C Shares, as
applicable, without payment of the sales charges described above or any other
charge. If you exchange Class A shares of any Flag Investors fund with a lower
sales charge structure into Class A Shares, you will be charged the difference
in sales charges unless (with the exception of Flag Investors Cash Reserve
Prime Class A Shares) you have owned the shares for at least 24 months. You may
enter both your redemption and purchase orders on the same Business Day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' prior written notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
6
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<PAGE>
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Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or
the Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have
your distributions invested in shares of other Flag Investors funds. To make
either of these elections or to terminate automatic reinvestment, complete the
appropriate section of the attached Application Form or notify the Transfer
Agent, your securities dealer or your servicing agent at least five days before
the date on which the next dividend or distribution will be paid.
Systematic Purchase Plan. You may also purchase any class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If your shares are in an
account with the Fund, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.
<PAGE>
Your securities dealer, your servicing agent or the Transfer Agent may
require the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by
all owners of the shares exactly as their names appear on the account.
2) If you are redeeming more than $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company,
broker, dealer, securities exchange or association, clearing agency,
savings association or (if authorized by state law) credit union.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
4) Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.
Redemption Price
The price you receive when you redeem shares will be the net asset value
of the class of shares you are redeeming less any applicable sales charge. The
amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
Sales Charge as a Percentage of the Dollar Amount Subject to Charge
- ----------------------------------------------------------------------
Class A Class B Class C
Years Since Purchase Shares Shares Shares
- ---------------------- ---------- --------- ----------
First ................ 1.00%* 4.00% 1.00%
Second ............... 0.50%* 4.00% None
Third ................ None 3.00% None
Fourth ............... None 3.00% None
Fifth ................ None 2.00% None
Sixth ................ None 1.00% None
Thereafter ........... None None None
- ----------------------- ---- ---- ----
* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1,000,000 or
more. For purchases of $1,000,000 or more of Class A Shares made before May 1,
1999, you will pay a sales charge of 0.50% if you redeem your shares within
the first year of purchase instead of the 1.00% reflected in the above
chart.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
2) If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
3) If you acquired the shares through an exchange of shares of another Flag
Investors fund, the period of
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
time you held the original shares will be combined with the period of time
you held the shares being redeemed to determine the years since purchase.
4) The sales charge is applied to the lesser of the cost of the shares or their
current market value.
Waiver of Sales Charge. You may redeem shares without paying a sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Flag Investors fund
with the same sales charge structure.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent or the Transfer Agent that such circumstances exist.
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000 and your securities dealer has agreed to return to the
Distributor any payments received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares six years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.
Other Redemption Information
If you own Fund shares having a value of at least $10,000, you may
arrange to have some of your shares redeemed monthly or quarterly under the
Fund's Systematic Withdrawal Plan. Each redemption under this plan involves all
the tax and sales charge implications normally associated with Fund
redemptions. Contact your securities dealer, your servicing agent or the
Transfer Agent for information on this plan.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be paid to you by check, whether or not that is the payment
option you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice.
<PAGE>
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges unless you specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the
time your account is opened and prior to effecting each telephone transaction.
You may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
- --------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy
your shares but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares
and, except in the case of investments of $1,000,000 or more, no sales charge
if you redeem them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of six years, your shares convert to Class A Shares thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On
the other hand, expenses on Class C Shares are the same as those on Class B
Shares and, since there is no conversion to Class A Shares at the end of six
years, the higher expenses continue for as long as you own your shares.
In general, if you intend to invest more than $100,000, your combined
sales charges and expenses are lower with Class A Shares. If you intend to
invest less than $100,000 and expect to hold your shares for more than six
years, your combined sales charges and expenses are lower with Class B Shares.
If you intend to buy less than $100,000 and expect to hold your shares for less
than six years, your combined sales charges and expenses are lower with Class C
Shares.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DEALER COMPENSATION
- --------------------------------------------------------------------------------
Your securities dealer is paid a commission when you buy shares and is
paid a servicing fee for as long as you hold your shares.
<TABLE>
<CAPTION>
Dealer Compensation as a % of Offering Price
-----------------------------------------------------
Amount of Purchase Class A Shares Class B Shares Class C Shares
- ------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $ 50,000............ 4.00% 4.00% 1.00%
$ 50,000 - $ 99,999.......... 3.00% 4.00% 1.00%
$ 100,000 - $249,999.......... 2.00% 4.00% 1.00%
$ 250,000 - $499,999 ......... 1.50% 4.00% 1.00%
$ 500,000 - $999,999.......... 1.25% 4.00% 1.00%
$1,000,000 and over............ * 4.00% 1.00%
- -------------------------------- ---- ---- ----
</TABLE>
* Your securities dealer may be paid up to 1.00% of the Offering Price
<PAGE>
In addition to the commissions shown above, your securities dealer may be
paid an annual fee equal to 0.25% of the value of your Class A Shares or Class
B Shares and an annual fee equal to 1.00% of the value of your Class C Shares
for as long as you hold them. The annual fee for the Class A and Class B Shares
will begin when you buy your shares. The annual fee for the Class C Shares will
begin one year after you buy your shares.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of quarterly dividends. The Fund
may distribute any taxable net capital gains on an annual basis or,
alternatively, may elect to retain net capital gains and pay tax thereon.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or its shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding
specific questions.
There is further information concerning taxes in the Statement of
Additional Information.
9
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As long as the Fund qualifies for this tax treatment, it will not pay
federal income tax on that part of its net investment income that is
distributed to shareholders. Unless you are otherwise exempt, you will be
generally subject to income tax on the amounts distributed to you, regardless
of whether such distributions are paid to you in cash or reinvested in
additional shares.
Capital gains distributions from the Fund are classified as either
short-term or long-term depending upon how long the Fund held the securities it
sold to generate the gains. You will be taxed on the distributions according to
the category stipulated by the Fund regardless of how long you have held your
Fund shares. You will be taxed on all other income distributions as ordinary
income. If you are a corporate shareholder, you may be entitled to the dividends
received deduction on a portion of dividends received from the Fund. You will be
advised annually as to the federal income tax status of all distributions.
Dividends declared payable to shareholders of record in December of one
year, but paid in January of the following year, will be deemed for tax
purposes to have been paid by the Fund and received by you in the year in which
the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of Fund shares is a taxable event for
you.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Advisors and to the Distributor. A majority
of the Directors of the Fund have no affiliation with the Advisors or the
Distributor.
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is the investment advisor to mutual
funds with approximately $7.4 billion of net assets as of March 31, 1998. In
addition to this Fund, these include other funds in the Flag Investors family
of funds and BT Alex. Brown Cash Reserve Fund, Inc. ABIM is a registered
investment advisor with approximately $8.4 billion under management as of March
31, 1998.
ICC supervises and manages all of the Fund's operations. Under the
Investment Advisory and Sub-Advisory Agreements, ICC delegates to ABIM certain
of its duties, provided that ICC continues to supervise the performance of ABIM
and report thereon to the Fund's Board of Directors. Pursuant to the terms of
the Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates. The Board has established procedures under which ABIM may
allocate transactions to certain affiliates, provided that compensation on each
transaction is reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other broker-dealers in connection
with comparable transactions involving similar securities during a comparable
period of time. In addition, consistent with NASD Rules, and subject to seeking
the most favorable price and execution available and such other policies as the
Board may determine, ABIM may consider services in connection with the sale of
shares as a factor in the selection of broker-dealers to execute portfolio
transactions for the Fund.
As compensation for its services for the fiscal year ended March 31,
1998, ICC received from the Fund a
10
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<PAGE>
- --------------------------------------------------------------------------------
fee equal to 0.77% of the Fund's average daily net assets and, for the same
period, ICC paid ABIM a fee equal to 0.56% of the Fund's average daily net
assets.
ICC is an indirect subsidiary of Bankers Trust Corporation. ABIM is a
limited partnership affiliated with the Advisor. Buppert, Behrens & Owen, Inc.,
a company organized and owned by three employees of ABIM, owns a 49% limited
partnership interest and a 1% general partnership interest in ABIM. BT Alex.
Brown Incorporated ("BT Alex. Brown") owns a 1% general partnership interest in
ABIM and BT Alex. Brown Holdings, Inc. owns the remaining 49% limited
partnership interest.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
Portfolio Manager
Mr. Hobart C. Buppert, II has primary responsibility for managing the
Fund's assets. From the Fund's inception until July 31, 1997, he shared that
responsibility with Messrs. J. Dorsey Brown, III and Lee S. Owen.
Mr. Buppert has 26 years of investment experience. He has been a Vice
President of ABIM since 1980. Prior to joining ABIM, Mr. Buppert worked as a
Portfolio Manager for T. Rowe Price Associates from 1976 to 1980 and as a
Portfolio Manager and Research Analyst for the Equitable Trust Company from
1972 to 1976. Mr. Buppert received his B.A. and M.B.A. degrees from Loyola
College in 1970 and 1974, respectively. He is a member of the Baltimore
Security Analysts Society and the Financial Analysts Federation.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of the Fund's shares since August 31, 1997. ICC
Distributors is a registered broker-dealer that offers distribution services to
a variety of registered investment companies including other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC
Distributors is not affiliated with the Advisors.
<PAGE>
The Fund has adopted a Distribution Agreement and related Plans of
Distribution with respect to the Class A Shares, the Class B Shares and the
Class C Shares (the "Plans"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended. In addition, the Fund may enter into
agreements with certain financial institutions, including certain banks and BT
Alex. Brown, to provide shareholder services, pursuant to which the Distributor
may allocate on a proportional basis up to all of its distribution fee as
compensation for such financial institutions' ongoing shareholder services.
Such financial institutions may charge you separately for these services.
As compensation for providing distribution services for the Class A
Shares for the period from August 31, 1997 through March 31, 1998, the
Distributor received a fee equal to 0.25% (annualized) of the Class A Shares'
average daily net assets.
As compensation for providing distribution and shareholder services for
the Class B Shares for the period from August 31, 1997 through March 31, 1998,
the Distributor received a distribution fee equal to 0.75% (annualized) and a
shareholder servicing fee equal to 0.25% (annualized) of the Class B Shares'
average daily net assets. As compensation for providing distribution and
shareholder services for the Class C Shares, the Distributor receives a
distribution fee equal to 0.75% and a shareholder servicing fee equal to 0.25%
of the Class C Shares' average daily net assets. The distribution fees are used
to compensate the Distributor for its services and expenses in distributing the
Class B Shares and the Class C Shares. The shareholder servicing fees are used
to compensate the Distributor, securities dealers and servicing agents for
services provided and expenses incurred in maintaining your account, responding
to your inquiries and providing you with information on your investments.
Payments under the Plans are made as described above regardless of the
Distributor's actual cost of providing distribution services. If the cost of
providing distribution services is less than the payments received, the
Distributor may retain the unexpended portion of the distribution fee. The
Advisor or the Distributor and their respective affiliates may make payments
from their own resources to securities dealers and servicing agents. Payments
by the Distributor may include additional discounts or promotional incentives
in the form of cash or other compensation (including merchandise or travel).
11
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<PAGE>
- --------------------------------------------------------------------------------
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended March
31, 1998, ICC received a fee equal to 0.02% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust Corporation, acts
as custodian of the Fund's assets. (See the Statement of Additional
Information.)
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares or Class C Shares redeemed at the end of the specified period covered by
the total return figure, over one-, five- and ten-year periods or, if such
periods have not yet elapsed, shorter periods corresponding to the life of the
Fund. Such total return quotations will be computed by finding average annual
compounded rates of return over such periods that would equate an assumed
initial investment of $1,000 to the ending redeemable value, net of the maximum
sales charge and other fees according to the required standardized calculation.
The standardized calculation is required by the SEC to provide consistency and
comparability in investment company advertising and is not equivalent to a
yield calculation.
If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which such
comparative data and indices are stated, which is normally total return rather
than yield. For these purposes, the performance of the Fund, as well as the
performance of such investment companies or indices, may not reflect sales
charges, which, if reflected, would reduce performance results.
<PAGE>
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90-day U.S.
Treasury bills, long-term U.S. Treasury bonds, bank certificates of deposit,
the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate, and any statement of past results should not
be considered as representative of the future performance of the Fund.
Performance is generally a function of the type and quality of instruments held
by the Fund, operating expenses and market conditions. Any fees charged by your
bank with respect to your account are not included in calculations of
performance and will reduce your investment returns.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Capital Shares
The Fund is an open-end, diversified management investment company,
organized under the laws of the State of Maryland on March 5, 1992 and is
authorized to issue 90 million shares of capital stock, with a par value of
$.001 per share. Shares of the Fund have equal rights with respect to voting.
Voting rights are not cumulative, so the holders of more than 50% of the
outstanding shares voting together for the election of Directors may elect all
the members of the Board of Directors of the Fund. In the event of liquidation
or dissolution of the Fund, each share is entitled to its pro rata portion of
the Fund's assets after all debts and expenses have been paid. The fiscal
year-end of the Fund is March 31.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio
12
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<PAGE>
- --------------------------------------------------------------------------------
of securities, and separate classes of each series of the Fund. The shares
offered by this Prospectus have been designated: "Flag Investors Value Builder
Fund Class A Shares", "Flag Investors Value Builder Fund Class B Shares" and
"Flag Investors Value Builder Fund Class C Shares." The Board has no present
intention of establishing any additional series of the Fund, but the Fund does
have two other classes of shares in addition to the shares offered hereby:
"Flag Investors Value Builder Fund Class D Shares," which are not currently
being offered, and "Flag Investors Value Builder Fund Institutional Shares."
Additional information concerning the Fund's Institutional Shares may be
obtained by calling the Distributor at (800) 767-FLAG. Different classes of the
Fund may be offered to certain investors and holders of such shares may be
entitled to certain exchange privileges not offered to other classes of shares.
All classes of the Fund share a common investment objective, portfolio of
investments and advisory fee, but the classes may have different
distribution/service fees or sales load structures and, accordingly, the net
asset value per share of classes may differ at times.
Annual Meetings
The Fund does not expect to hold annual meetings of shareholders, unless
required by applicable Maryland law. Shareholders of the Fund retain the
right, under certain circumstances, to request that a meeting of shareholders
be held for the purpose of considering the removal of a Director from office,
and if such a request is made, the Fund will assist with shareholder
communications in connection with the meeting.
Reports
You will be furnished 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, PricewaterhouseCoopers LLP.
Shareholder Inquiries
If you have questions concerning your shares, contact the Fund at (800)
767-FLAG, the Transfer Agent at (800) 553-8080, or your securities dealer or
servicing agent.
13
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<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
NEW ACCOUNT APPLICATION
<TABLE>
<CAPTION>
<S> <C>
Make check payable to "Flag Investors Value Builder For assistance in completing this Application please call:
Fund, Inc." and mail with this Application to: 1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m.
(Eastern Time).
Flag Investors Funds
P.O. Box 419663 To open an IRA account, please call 1-800-767-3524 for an IRA
Kansas City, MO 64141-6663 information kit.
Attn: Flag Investors Value Builder Fund, Inc.
I wish to purchase the following class of shares of the Fund, in the amount below. (Please check the applicable box and indicate the
amount of purchase.)
/ / Class A Shares (4.5% maximum initial sales charge) in the amount of $________
/ / Class B Shares (4.0% maximum contingent deferred sales charge) in the amount of $________
/ / Class C Shares (1.0% maximum contingent deferred sales charge) in the amount of $________
Your Account Registration (Please Print)
Existing Account No., if any: __________________
Individual or Joint Tenant Gifts to Minors
- ------------------------------------------------------- --------------------------------------------------------------------
First Name Initial Last Name Custodian's Name (only one)
- ------------------------------------------------------- --------------------------------------------------------------------
Social Security Number Minor's Name (only one)
- ------------------------------------------------------- --------------------------------------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)
Corporations, Trusts, Partnerships, etc. Mailing Address
- -------------------------------------------------------- --------------------------------------------------------------------
Name of Corporation, Trust or Partnership Street
- ------------------- --------------------------------- --------------------------------------------------------------------
Tax ID Number Date of Trust City State Zip
( )
- -------------------------------------------------------- --------------------------------------------------------------------
Name of Trustees (If to be included in the Registration) Daytime Phone
- --------------------------------------------------------
For the Benefit of
Letter of Intent (Optional)
/ / I agree to the Letter of Intent and Escrow Arrangement set forth in the prospectus. Although I am not obligated to do so, I
intend to over a 13-month period in Class A Shares of Flag Investors Value Builder, Inc., in an aggregate amount at least equal to:
/ / $50,000 / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
Right of Accumulation (Optional)
List the Account numbers of other Flag Investors Funds that you or your family already own that qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Distribution Options
Please check the appropriate boxes. If none of the options are selected, all will be reinvested in additional shares of the same
class of the at no sales charge.
Income Dividends Capital Gains
/ / Reinvested in additional shares / / Reinvested in additional shares
/ / Paid in Cash / / Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other funds in the Flag Investors Family of Funds.
</TABLE>
A-1
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Automatic Investing Plan (Optional)
/ / I authorize you as Agent for the Automatic Investing Plan to automatically invest $______ in Class A Shares or $______ in Class
B Shares or $______ in Class C Shares for me, on a monthly or quarterly basis, on or about the 20th of each month or, if quarterly,
the 20th of January, April, July and October, and to draw a bank draft in payment of the investment against my checking account.
(Bank drafts may be drawn on commercial banks only.)
<S> <C> <C>
Minimum Initial Investment: $250 per class / / Monthly ($100 minimum per class) Please attach a voided check
Subsequent Investments (check one): / / Quarterly ($250 minimum per class)
- ------------------------------------------------ ------------------------------------------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------------------ ------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature (if joint acct., both must sign) Date
Systematic Withdrawal Plan (Optional)
/ / Beginning the month of ________ , 19__ please send me checks on a monthly or quarterly basis, as indicated below, in the amount
of (complete as applicable) $______, from Class A Shares and/or $_______ from Class B Shares and/or $_______ from Class C Shares
that I own, payable to the account registration address as shown above. (Participation requires minimum account value of $10,000 per
class.)
__Frequency (check one): / / Monthly / / Quarterly (January, April, July and October)
Telephone Transactions
I understand that I will automatically have telephone redemption privileges (for amounts up to $50,000) and telephone exchange
privileges (with respect to other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/We do not want: / / Telephone exchange privileges / / Telephone redemption privileges
Redemptions effected by telephone will be mailed to the address of record. If you would prefer redemptions mailed to a
pre-designated bank account, please provide the following information:
Bank: -------------------------------- Bank Account No.: -----------------------------
Address: -------------------------------- Bank Account Name: -----------------------------
Signature and Taxpayer Certification
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any taxable dividends, capital gains distributions and
redemption proceeds paid to any individual or certain other non-corporate shareholders who fail to provide the information and/or
certifications required below. This backup withholding is not an additional tax, and any amounts withheld may be credited against
your ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that the information on this Application is complete and
correct and that as required by federal law: (Please check applicable boxes)
/ / U.S. Citizen/Taxpayer:
/ / I certify that (1) the number shown above on this form is the correct Social Security Number or Tax ID Number and (2) I am
not subject to any backup withholding either because (a) I am exempt from backup withholding,or (b) I have not been notified
by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
/ / If no Tax ID Number or Social Security Number has been provided above, I have applied, or intend to apply, to the IRS or
the Social Security Administration for a Tax ID Number or a Social Security Number, and I understand that if I do not
provide either number to the Transfer Agent within 60 days of the date of this Application or if I fail to furnish my
correct Social Security Number or Tax ID Number, I may be subject to a penalty and a 31% backup withholding on distributions
and redemption proceeds. (Please provide either number on IRS Form W-9. You may request such form by calling the Transfer
Agent at 800-553-8080).
/ / Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:-----------------------------------------------------
Under penalties of perjury, I certify that I am not a U.S. citizen or resident and I am an exempt foreign person as defined
by the Internal Revenue Service.
<PAGE>
I acknowledge that I am of legal age in the state of my residence. I have a copy of the Fund's prospectus.
- -----------------------------------------------------------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required
to avoid backup withholding.
- ------------------------------------------------ ------------------------------------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
- ------------------------------------------------------------------------------------------------------------------------------------
- -------------------------------
For Dealer Use Only
- -------------------------------
Dealer's Name: ------------------------------ Dealer Code: -----------------------------------------------------------
Dealer's Address: ------------------------------ Branch Code: -----------------------------------------------------------
------------------------------
Representative: ------------------------------ Rep. No.: -----------------------------------------------------------
A-2
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
(Class A, Class B and Class C Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. PRICEWATERHOUSECOOPERS LLP
One South Street 250 West Pratt Street
Baltimore, Maryland 21202 Baltimore, Maryland 21201
1-800-553-8080
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
LOGO
FLAG INVESTORS
VALUE BUILDER FUND, INC.
(Institutional Shares)
Prospectus & Application -- August 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks to maximize total return through a
combination of long-term growth of capital and current income.
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through your securities dealer or the Fund's transfer agent and may
be purchased only by eligible institutions, certain qualified retirement plans
or investment advisory affiliates of BT Alex. Brown Incorporated ("BT Alex.
Brown"). (See "How to Buy Institutional Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated August 1, 1998, has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by calling the Fund
at (800) 767-FLAG.
TABLE OF CONTENTS
Fee Table .................................. 1
Financial Highlights ....................... 2
Investment Program ......................... 3
Investment Restrictions .................... 5
The Fund's Net Asset Value ................. 5
How to Buy Institutional Shares ............ 5
How to Redeem Institutional Shares ......... 6
Telephone Transactions ..................... 6
Dividends and Taxes ........................ 7
Management of the Fund ..................... 7
Investment Advisor and Sub-Advisor ......... 7
Distributor ................................ 8
Custodian, Transfer Agent and
Accounting Services ..................... 8
Performance Information .................... 9
General Information ........................ 9
Application ................................ A-1
The Fund's shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank. The shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government
agency. Investment in the shares involves risk, including possible loss of
principal.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
- --------------------------------------------------------------------------------
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases .................... None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Maximum Deferred Sales Charge ................................ None
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees ....................... 0.77%
12b-1 Fees ............................ None
Other Expenses ........................ 0.12%
-----
Total Fund Operating Expenses ......... 0.89%
=====
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
- --------------------------------------------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period: ............................ $9 $28 $49 $110
</TABLE>
The Expenses and Example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional Shares.
If you purchase Institutional Shares through a financial institution, you may
be charged separate fees by that institution.
1
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights included in the following table are a part of the
Fund's financial statements for the periods indicated and have been audited by
PricewaterhouseCoopers LLP, independent accountants. The financial statements
and financial highlights for the fiscal year ended March 31, 1998 and the
report thereon of PricewaterhouseCoopers LLP are included in the Statement of
Additional Information. Additional performance information is contained in the
Fund's Annual Report for the fiscal year ended March 31, 1998, which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Shares
-------------------------------------------------
For the Period
For the Year November 2, 1995(1)
Ended March 31, through
1998 1997 March 31, 1996
------------ ----------- --------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................. $ 17.27 $ 14.77 $ 13.89
-------- -------- -------
Income from Investment Operations:
Net investment income ................................... 0.51 0.41 0.13
Net realized and unrealized gain on investments ......... 5.25 2.53 1.17
--------- -------- -------
Total from Investment Operations ........................ 5.76 2.94 1.30
--------- -------- -------
Less Distributions:
Net investment income and short-term gains .............. ( 0.51) ( 0.38) ( 0.10)
Net realized mid-term and long-term gains ............... ( 0.26) ( 0.06) ( 0.32)
-------- -------- -------
Total distributions ..................................... ( 0.77) ( 0.44) ( 0.42)
-------- -------- -------
Net asset value at end of period $ 22.26 $ 17.27 $ 14.77
======== ======== ========
Total Return ............................................. 34.08% 20.24% 21.12%
Ratios to Average Net Assets:
Expenses ................................................ 0.89% 1.02% 1.03%(2)
Net investment income ................................... 2.75% 2.83% 2.89%(2)
Supplemental Data:
Net assets at end of period (000) ....................... $103,817 $ 34,771 $ 11,768
Portfolio turnover rate ................................. 7% 13% 15%
Average commissions per share ........................... $ 0.062 0.066 --
</TABLE>
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Annualized.
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
Investment Objective, Policies and Risk
Considerations
The Fund's investment objective is to maximize total return through a
combination of long-term growth of capital and current income. The Fund seeks
to achieve this objective through a policy of diversified investments in equity
and debt securities, including common stocks, convertible securities and
government and corporate fixed-income obligations. There can be no assurance,
however, that the Fund will achieve its investment objective.
The Fund's investment advisor (the "Advisor") and the Fund's sub-advisor
(the "Sub-Advisor") (collectively, the "Advisors") are responsible for managing
the Fund's investments. (See "Investment Advisor and Sub-Advisor.") The
Advisors consider both the opportunity for gain and the risk of loss in making
investments, and may alter the relative percentages of assets invested in
equity and fixed-income securities from time to time, depending on the judgment
of the Advisors as to general market and economic conditions, trends in yields
and interest rates and changes in fiscal and monetary policies.
Under normal market conditions, between 40% and 75% of the Fund's total
assets will be invested in common stock and other equity investments (including
preferred stocks, convertible debt, warrants and other securities convertible
into or exchangeable for common stocks). In selecting securities for the Fund's
portfolio, the Advisors expect to apply a "flexible value" approach to the
selection of equity investments. Under this approach, the Advisors will attempt
to identify securities that are undervalued in the marketplace, but will also
consider such factors as current and expected earnings, dividends, cash flows
and asset values in their evaluation of a security's investment potential.
At least 25% of the Fund's total assets will be invested in fixed-income
securities, defined for this purpose to include non-convertible corporate debt
securities, non-convertible preferred stock and government obligations. The
average maturity of these investments will vary from time to time depending on
the Advisors' assessment of the relative yields available on securities of
different maturities. It is currently anticipated that the average maturity of
the fixed-income securities in the Fund's portfolio will be between two and ten
years under normal market conditions. In general, non-convertible corporate
debt obligations held in the Fund's portfolio will be rated, at the time of
purchase, BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or, if unrated by S&P or
Moody's, determined to be of comparable quality by the Advisors under criteria
approved by the Board of Directors. Investment grade securities (securities
rated BBB or higher by S&P or Baa or higher by Moody's) are generally thought
to provide the highest credit quality and the smallest risk of default.
Securities rated BBB by S&P or Baa by Moody's have speculative characteristics.
Up to 10% of the Fund's assets may be invested in lower quality debt
obligations (securities rated BB or lower by S&P or Ba or lower by Moody's).
Securities that were investment grade at the time of purchase, but are
subsequently downgraded to BB, Ba or lower will be included in the 10%
category. In the event that any security owned by the Fund is downgraded, the
Advisors will review the situation and take appropriate action, but will not be
required to sell any such security. If such a downgrade causes the 10% limit to
be exceeded, the Fund will be precluded from investing further in below
investment grade debt securities. (See "Investments in Non-Investment Grade
Securities" below.)
The Fund may also purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (including certain
mortgage-related debt securities), and may invest in high quality short-term
debt securities such as commercial paper rated A-1 or A-1+ by S&P or P-1 by
Moody's.
Investments in Non-Investment Grade
Securities
Lower rated debt obligations, also known as "junk bonds," are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. Securities in the lowest rating
category that the Fund may purchase (securities rated D by S&P or C by Moody's)
may present a particular risk of default, or may be in default and in arrears
in payment of principal and interest. In addition, C- or D-rated securities may
be regarded as having extremely poor prospects of ever attaining investment
standing. Yields and market values of these bonds will fluctuate over time,
reflecting changing interest rates and the market's perception of credit
quality and the outlook for economic growth. When economic conditions appear to
be deteriorating, lower rated bonds may decline in value, regardless of
prevailing interest rates. Accordingly, adverse economic developments,
including a recession or a substantial period of rising interest rates, may
disrupt the high-yield bond market, affecting both the value and liquidity of
such bonds. The market prices of these securities may fluctuate more than those
of higher rated securities and may decline significantly in periods of general
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
economic difficulty, which may follow periods of rising interest rates. An
economic downturn could adversely affect the ability of issuers of such bonds
to make payments of principal and interest to a greater extent than issuers of
higher rated bonds might be affected. The ratings categories of S&P and Moody's
are described more fully in the Appendix to the Statement of Additional
Information.
The following table provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted averages
of month-end portfolio holdings during the fiscal year ended March 31, 1998,
presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
S&P Rating Average
------------ -----------
AAA 11.89%
AA 1.65%
A 4.24%
BBB 11.51%
BB 3.41%
B 3.74%
Unrated 0.00%
Investments in Repurchase Agreements
The Fund may agree to purchase U.S. Government securities from
creditworthy financial institutions, such as banks or broker-dealers, subject
to the seller's agreement to repurchase the securities at an established time
and price. Default by or bankruptcy proceedings with respect to the seller may,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
Investments in Securities of Foreign Issuers
From time to time, the Fund may invest in American Depositary Receipts,
which are interests in securities of foreign companies, and up to 10% of the
Fund's total assets in debt and equity securities of foreign issuers not
publicly traded in the United States when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Nevertheless, foreign investments involve different risks
from investments in the United States, including currency, market and political
risks. Accordingly, the Advisors intend to seek securities of companies in, and
governments of, developed, stable nations.
Other Investments
For temporary, defensive purposes the Fund may invest up to 100% of its
assets in high quality short-term money market instruments, and in notes or
bonds issued by the U.S. Treasury Department or by other agencies of the U.S.
Government.
The Fund may write covered call options on common stock that it owns or
has the immediate right to acquire through conversion or exchange of other
securities, provided that any such option is traded on a national securities
exchange. The Fund may also enter into closing transactions with respect to
such options.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days, provided that no more than 5% of its total assets may be
invested in restricted securities. Not included within this limitation are
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined to
be liquid. The Board of Directors has adopted guidelines and delegated to the
Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions recited below are matters of fundamental
policy and may not be changed without shareholder approval. Accordingly, the
Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in any
one industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an industry);
2) Invest in the securities of any single issuer if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of such
issuer; or
3) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for these purposes the U.S.
Government and its agencies and instrumentalities are not considered an
issuer).
Further investment restrictions are listed in the Statement of Additional
Information.
THE FUND'S NET ASSET VALUE
- --------------------------------------------------------------------------------
The following sections describe how to buy and redeem shares of the Fund.
The price you pay or receive is based on the Fund's net asset value per
share. The net asset value per share of a class is determined on each business
day as of the close of trading on the New York Stock Exchange (ordinarily 4:00
p.m. Eastern Time). It is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the outstanding shares of the class.
In valuing the Fund's assets, its investments are priced at their market
value which is normally based on current prices but which may be determined
according to "fair value" procedures approved by the Fund's Board of Directors.
You may buy or redeem shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that
day, the price you pay or receive will be based on the next Business Day's net
asset value per share.
HOW TO BUY INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may buy Institutional Shares if you are any of the following:
o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution or a qualified retirement plan other than a
defined contribution plan).
o A defined contribution plan with assets of at least $75 million.
o An investment advisory affiliate of BT Alex. Brown purchasing shares
for the accounts of your investment advisory clients.
You may buy Institutional Shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy Institutional Shares by sending your check (along with
a completed Application Form) directly to the Fund. The Application Form, which
includes instructions, is attached to this Prospectus.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Investment Minimums
If you are an eligible institution, your initial investment must be at
least $500,000. The following are exceptions to the $500,000 minimum initial
investment:
o There is no minimum initial investment for investment advisory
affiliates of BT Alex. Brown purchasing shares for the accounts of
their investment advisory clients.
o There is no minimum initial investment for defined contribution plans
with assets of at least $75 million.
o The minimum initial investment for all other qualified retirement plans
is $1 million.
There are no minimums for subsequent investments.
Purchases by Exchange
You may exchange Institutional shares of any other Flag Investors fund for
an equal dollar amount of Institutional Shares of the Fund. The Fund may modify
or terminate this offer of exchange at any time on 60 days' prior written
notice.
You may request an exchange through your securities dealer or your
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund's Transfer Agent, you may also request an
exchange directly through the Transfer Agent by express mail or telephone.
Other Information
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such shares
will not be issued.
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may redeem your shares through your securities dealer or your
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund, you may also redeem them by contacting
the Transfer Agent by telephone (if you are redeeming less than $500,000). You
will be paid for redeemed shares by wire transfer of funds to your securities
dealer, servicing agent or bank upon receipt of a duly authorized redemption
request as promptly as feasible and, under most circumstances, within three
Business Days.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be remitted by wire to your securities dealer, servicing
agent or bank.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' written notice.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $500,000 or exchange them for Institutional Shares of
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges unless you
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the time
your account is opened and prior to effecting each telephone transaction. You
may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by express mail or facsimile.
6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. The Fund may distribute
any taxable net capital gains on an annual basis or, alternatively, may elect
to retain net capital gains and pay tax thereon.
Unless you elect otherwise, all income dividends and capital gains
distributions will be reinvested in additional Institutional Shares at net
asset value. You may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent, either directly or through your
securities dealer or servicing agent, at least five days before the next date
on which dividends or distributions will be paid.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or its shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding
specific questions.
There is further information concerning taxes in the Statement of
Additional Information.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As long as the Fund qualifies for this tax treatment, it will not pay
federal income tax on that part of its net investment income that is
distributed to shareholders. Unless you are otherwise exempt, you will be
generally subject to federal income tax on the amounts distributed to you,
regardless of whether such distributions are paid to you in cash or reinvested
in additional Institutional Shares.
Capital gains distributions from the Fund are classified as either
short-term or long-term depending upon how long the Fund held the securities it
sold to generate the gains. You will be taxed on the distributions according to
the category stipulated by the Fund regardless of how long you have held your
Fund shares. You will be taxed on all other income distributions as ordinary
income. If you are a corporate shareholder, you may be entitled to the dividends
received deduction on a portion of dividends received from the Fund. You will be
advised annually as to the federal income tax status of all distributions.
Dividends declared payable to shareholders of record in December of one
year, but paid in January of the following year, will be deemed for tax
purposes to have been paid by the Fund and received by you in the year in which
the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Institutional Shares is a taxable
event for you.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Advisors and the Distributor. A majority of
Directors of the Fund are not affiliated with the Advisors or the Distributor.
INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is the investment advisor to mutual
funds with approximately $7.4 billion of net assets as of May 31, 1998. In
addition to this Fund, these include other funds in the Flag Investors family
of funds and BT Alex. Brown Cash Reserve Fund, Inc. ABIM is a registered
investment advisor with approximately $8.4 billion under management as of May
31, 1998.
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ICC supervises and manages all of the Fund's operations. Under the
Investment Advisory and Sub-Advisory Agreements, ICC delegates to ABIM certain
of its duties, provided that ICC continues to supervise the performance of ABIM
and report thereon to the Fund's Board of Directors. Pursuant to the terms of
the Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates. The Board has established procedures under which ABIM may
allocate transactions to certain affiliates, provided that compensation to such
affiliates on each transaction is reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
broker-dealers in connection with comparable transactions involving similar
securities during a comparable period of time. In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc., and
subject to seeking the most favorable price and execution available and such
other policies as the Board may determine, ABIM may consider services in
connection with the sale of shares as a factor in the selection of broker-
dealers to execute portfolio transactions for the Fund.
As compensation for providing investment advisory services to the Fund
for the fiscal year ended March 31, 1998, ICC received a fee equal to 0.77% of
the Fund's average daily net assets and, for the same period, ICC paid ABIM a
fee equal to 0.56% of the Fund's average daily net assets.
ICC is an indirect subsidiary of Bankers Trust Corporation. ABIM is a
limited partnership affilated with the Advisor. Buppert, Behrens & Owen, Inc.,
a company organized and owned by three employees of ABIM, owns a 49% limited
partnership interest and a 1% general partnership interest in ABIM. BT Alex.
Brown Incorporated owns a 1% general partnership interest in ABIM and BT Alex.
Brown Holdings, Inc. owns the remaining limited partnership interest.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's Custodian. (See "Custodian, Transfer Agent and Accounting Services.")
Portfolio Manager
Mr. Hobart C. Buppert, II has primary responsibility for managing the
Fund's assets. From the Fund's inception until July 31, 1997, he shared that
responsibility with Messrs. J. Dorsey Brown, III and Lee S. Owen.
Mr. Buppert has 26 years of investment experienced. He has been a Vice
President of ABIM since 1980. Prior to joining ABIM, Mr. Buppert worked as a
Portfolio Manager for T. Rowe Price Associates from 1976 to 1980 and as a
Portfolio Manager and Research Analyst for the Equitable Trust Company from
1972 to 1976. Mr. Buppert received his B.A and M.B.A. degrees from Loyola
College in 1970 and 1974, respectively. He is a member of the Baltimore
Security Analysts Society and the Financial Analysts Federation.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as distributor of each class of the Fund's shares. ICC Distributors receives no
compensation for distributing the Institutional Shares. ICC Distributors is a
registered broker-dealer that offers distribution services to a variety of
registered investment companies including other funds in the Flag Investors
family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC Distributors is
not affiliated with the Advisors.
ICC Distributors bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to individuals and entities other than Fund shareholders. The Advisor or its
affiliates may make payments from their own resources to securities dealers and
servicing agents.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended March
31, 1998, ICC received from the Fund a fee equal to 0.02% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
8
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<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All advertisements of performance will show
the average annual total return over one-, five- and ten-year periods or, if
such periods have not yet elapsed, shorter periods corresponding to the life of
the Fund. Such total return quotations will be computed by finding average
annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value according
to the required standardized calculation. The standardized calculation is
required by the SEC to provide consistency and comparability in investment
company advertising and is not equivalent to a yield calculation.
If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which such
comparative data and indices are stated, which is normally total return rather
than yield.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90-day U.S.
Treasury bills, long-term U.S. Treasury bonds, bank certificates of deposit,
the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate, and any statement of past results should not
be considered as representative of the future performance of the Fund.
Performance is generally a function of the type and quality of instruments held
by the Fund, operating expenses and market conditions. Any fees charged by your
bank with respect to your account are not included in calculations of
performance and will reduce your investment returns.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Capital Shares
The Fund is an open-end, diversified management investment company,
organized under the laws of the State of Maryland on March 5, 1992 and is
authorized to issue 90 million shares of capital stock, with a par value of
$.001 per share. Shares have equal rights with respect to voting. Voting rights
are not cumulative, so the holders of more than 50% of the outstanding shares
voting together for the election of Directors may elect all the members of the
Board of Directors of the Fund. In the event of liquidation or dissolution of
the Fund, each share is entitled to its pro rata portion of the Fund's assets
after all debts and expenses have been paid. The fiscal year-end of the Fund is
March 31.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated: "Flag Investors Value
Builder Fund Institutional Shares." The Board has no present intention of
establishing any additional series of the Fund, but the Fund does have four
other classes of shares in addition to the shares offered hereby: "Flag
Investors Value Builder Fund Class A Shares," "Flag Investors Value Builder
Fund Class B Shares" and "Flag Investors Value Builder Fund Class C Shares,"
which are offered by a separate prospectus and "Flag Investors Value Builder
Fund Class D Shares," which are not currently being offered. Additional
information concerning the Fund's Class A Shares, Class B Shares and Class C
Shares may be obtained by calling the Fund at (800) 767-FLAG. Different classes
of the Fund may be offered to certain investors and holders of such shares may
be entitled to certain exchange privileges not offered to Institutional Shares.
All classes of the Fund share a common investment objective, portfolio of
investments and advisory fee, but the classes may have different distribution
fees or sales load structures and, accordingly, the net asset value per share
of the classes may differ at times.
Annual Meetings
The Fund does not expect to hold annual meetings of shareholders unless
required by applicable Maryland law. Shareholders of the Fund retain the right,
under certain circumstances, to request that a meeting of shareholders be held
for the purpose of considering
9
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<PAGE>
- --------------------------------------------------------------------------------
the removal of a Director from office, and if such a request is made, the Fund
will assist with shareholder communications in connection with the meeting.
Reports
You will be furnished 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, PricewaterhouseCoopers LLP.
Shareholder Inquiries
If you have questions concerning your Institutional Shares, contact the
Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080 or your securities
dealer or servicing agent.
10
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<PAGE>
FLAG INVESTORS VALUE BUILDER FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
<TABLE>
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this Application please call:
Flag Investors Funds 1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
330 West Ninth Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Value Builder Fund, Inc.
If you are paying by check, make check payable to "Flag Investors Value Builder
Fund, Inc." and mail with this Application. If you are paying by wire, see
instructions below.
- --------------------------------------------------------------------------------
Your Account Registration (Please Print)
Name on Account Mailing Address
- ---------------------------------- -----------------------------------------
Name of Corporation, Trust or Partnership Name of Individual to Receive Correspondence
- --------------------------- -----------------------------------------
Tax ID Number Street
/ / Corporation / / Partnership / / Trust -----------------------------------------
City State Zip
/ / Non-Profit or Charitable Organization / / Other ( )
If a Trust, please provide the following: ------- -----------------------------------------
Daytime Phone
- --------------------------------------------------------------------------------
Date of Trust For the Benefit of
- --------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
</TABLE>
Initial Investment
Indicate the amount to be invested and the method of payment:
A. By Mail: Enclosed is a check in the amount of $ payable to
- -- Flag Investors Value Builder Fund, Inc. -----------
B. By Wire: A bank wire in the amount of $ has been sent
- -- from -------------
-------------------------- ---------------------------------
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for initial
investment:
o Send completed Application by overnight carrier to BT Alex. Brown
Incorporated/Flag Investors Funds at the address listed above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary
Trust Company ("IFTC"), as follows:
IFTC
a/c Flag Investors Funds
Acct. # 7528167
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Value Builder Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to
------------------------------- ."
(Investor's Fund Account Number)
<PAGE>
Distribution Options
Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends Capital Gains
/ / Reinvested in additional shares / / Reinvested in additional shares
/ / Paid in cash / / Paid in cash
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, I do not want:
/ / Telephone redemption privileges / / Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account
designated below.
Bank Account Designation
(This Section Must Be Completed)
Please attach a blank, voided check to provide account and bank routing
information.
- --------------------------------------------------------------------------------
Name of Bank Branch
- --------------------------------------------------------------------------------
Bank Address City/State/Zip
- --------------------------------------------------------------------------------
Name(s) on Account
- --------------------------------------------------------------------------------
Account Number A.B.A. Number
A-1
<PAGE>
Acknowledgment, Certificate and Signature
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding
is not an additional tax, and any amounts withheld may be credited against your
ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
/ / U.S. Citizen/Taxpayer:
/ / I certify that (1) the number shown above on this form is the correct
Tax ID Number and (2) I am not subject to any backup withholding either
because (a) I am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding.
/ / If no Tax ID Number has been provided above, I have applied, or intend
to apply, to the IRS for a Tax ID Number, and I understand that if I do
not provide such number to the Transfer Agent within 60 days of the date
of this Application or if I fail to furnish my correct Tax ID Number, I
may be subject to a penalty and a 31% backup withholding on
distributions and redemption proceeds. (Please provide your Tax ID
Number on IRS Form W-9. You may request such form by calling the
Transfer Agent at 800-553-8080.)
/ / Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes:
---------------------------------
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
I have received a copy of the Fund's prospectus.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
- --------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
<PAGE>
Person(s) Authorized to Conduct Transactions
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
- ------- * of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
- ---------------------------------- ----------------------------------
Name/Title Signature Date
- ---------------------------------- ----------------------------------
Name/Title Signature Date
- ---------------------------------- ----------------------------------
Name/Title Signature Date
- ---------------------------------- ----------------------------------
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that person's
signature. Investment Company Capital Corp. ("ICC") may, without inquiry, act
upon the instructions (whether verbal, written, or provided by wire,
telecommunication, or any other process) of any person claiming to be an
Authorized Person. Neither ICC nor any entity on behalf of which ICC is acting
shall be liable for any claims or expenses (including legal fees) or for any
losses resulting from actions taken upon any instructions believed to be
genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended Application.
Provisions of this Application shall be equally Applicable to any successor of
ICC.
* If this space is left blank, any one Authorized Person is authorized to give
instructions and make inquiries. Verbal instructions will be accepted from
any one Authorized Person. Written instructions will require signatures of
the number of Authorized Persons indicated in this space.
<PAGE>
- --------------------------------------------------------------------------------
Certificate of Authority
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)
I , Secretary of the above-named investor, do hereby
--------------------------certify that at a meeting on ,
----------------------
at which a quorum was present throughout, the Board of Directors (Board of
Trustees) of the investor duly adopted a resolution which is in full force and
effect and in accordance with the investor's charter and by-laws, which
resolution did the following: (1) empowered the officers/trustees executing this
Application (or amendment) to do so on behalf of the investor; (2) empowered the
above-named Authorized Person(s) to effect securities transactions for the
investor on the terms described above; (3) authorized the Secretary to certify,
from time to time, the names and titles of the officers of the investor and to
notify ICC when changes in officers occur; and (4) authorized the Secretary to
certify that such a resolution has been duly adopted and will remain in full
force and effect until ICC receives a duly-executed amendment to the
Certification form.
Witness my hand and seal on behalf of the investor.
This day of , 199
-- ------ ---
Secretary
---------------------------------------------------
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
- --------------------------------------------------------------------------------
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf of
the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If there
are not enough spaces here for all necessary signatures, complete a separate
certificate containing the language of this Certificate B and attach it to the
Application).
- --------------------------------------------------------------------------------
Signature and title Date
- --------------------------------------------------------------------------------
Signature and title Date
A-2
<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
(Institutional Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. PRICEWATERHOUSECOOPERS LLP
One South Street 250 West Pratt Street
Baltimore, Maryland 21202 Baltimore, Maryland 21201
1-800-553-8080
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
<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 SECURITIES
DEALER OR SHAREHOLDER SERVICING AGENT OR BY WRITING OR
CALLING THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1998
relating to the Prospectuses Dated:
August 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. GENERAL INFORMATION AND HISTORY...............................................................................1
2. YEAR 2000.....................................................................................................1
3. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS........................................................2
4. VALUATION OF SHARES AND REDEMPTION............................................................................7
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS..........................................................8
6. MANAGEMENT OF THE FUND.......................................................................................11
7. INVESTMENT ADVISORY AND OTHER SERVICES.......................................................................15
8. DISTRIBUTION OF FUND SHARES..................................................................................16
9. BROKERAGE....................................................................................................20
10. CAPITAL STOCK................................................................................................22
11. SEMI-ANNUAL REPORTS..........................................................................................22
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES............................................................23
13. INDEPENDENT ACCOUNTANTS......................................................................................23
14. LEGAL MATTERS................................................................................................23
15. PERFORMANCE INFORMATION......................................................................................24
16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................................................26
17. FINANCIAL STATEMENTS.........................................................................................26
APPENDIX....................................................................................................A-1
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an open-end
management investment company, 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 four 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"); Flag Investors Value Builder Fund Class C Shares
(the "Class C 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 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 Fund's Registration Statement 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, the Institutional Shares on November 2, 1995, and the Class C
Shares on April 8, 1998.
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. YEAR 2000
The Fund depends on the smooth functioning of computer systems in almost
every aspect of its business. The Fund could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Fund has asked its service providers whether they expect to have their
computer systems adjusted for the year 2000 transition and received assurances
from each that its system is expected to accommodate the year 2000 without
material adverse consequences to the Fund. The Fund and its shareholders may
experience losses if these assurances prove to be incorrect or if issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Fund does business, experience difficulties as a result
of year 2000 issues.
-1-
<PAGE>
3. 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 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 the Fund may invest up to 10% of its total assets in
non-convertible corporate debt obligations that are rated below investment grade
by Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("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 write covered call option contracts on certain 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 written. 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 call option obligations.
When the Fund writes a call option, 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 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
-2-
<PAGE>
Exchanges. Call options are issued by The Options Clearing Corporation, which
also serves as the clearing house for transactions with respect to options. The
price of a call option is paid to the writer without refund on expiration or
exercise, and no portion of the price is retained by The Options Clearing
Corporation or the exchanges listed above. Writers and purchasers of options pay
the transaction costs, which may include commissions charged or incurred in
connection with such option transactions.
Call options may be purchased by the Fund, but only to terminate an
obligation as a writer of a call option. This is accomplished by making a
closing purchase transaction, that is, the purchase of a call option on the same
security with the same Exercise Price and expiration date as specified in the
call option which had been written previously. A closing purchase transaction
with respect to calls traded on a national securities exchange has the effect of
extinguishing the obligation of a writer. Although the cost to the Fund of such
a transaction may be greater than the net premium received by the Fund upon
writing the original option, the Directors believe that it is appropriate for
the Fund to have the ability to make closing purchase transactions in order to
prevent its portfolio securities from being purchased pursuant to the exercise
of a call. 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 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
-3-
<PAGE>
also is influenced by the market value of the security's underlying common
stock. Thus, the price of a convertible security tends to increase as the market
value of the underlying common stock increases, whereas it tends to decrease as
the market value of the underlying stock declines. Investments in convertible
securities generally entail less risk than investment in common stock of the
same issuer.
Below Investment Grade Corporate Bonds
The Fund may purchase non-convertible corporate bonds that carry ratings
lower than those assigned to investment grade bonds by 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 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
-4-
<PAGE>
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 value of the dollar
relative to 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 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.
-5-
<PAGE>
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 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;
-6-
<PAGE>
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: 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.
4. 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. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). Under such agreements, so
long as a third party receives an order prior to the Fund's close of business,
the order is deemed to have been received by the Fund and, accordingly, may
receive the net asset value computed at the close of business that day. These
"late day" agreements are intended to permit shareholders placing orders with
third parties to place orders up to the same time as other shareholders.
-7-
<PAGE>
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem shares by check or by
wire transfer of funds. 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.
5. 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.
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. 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").
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
-8-
<PAGE>
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 dividends received deduction
for corporate shareholders.
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 a long-term capital gain,
currently taxed at a maximum rate of 20% with respect to shareholders who are
individuals, 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
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<PAGE>
the environmental tax, corporate shareholders generally will be required to take
the full amount of any dividend received from the Fund into account in
determining their adjusted current earnings for purposes of computing
"alternative minimum taxable income."
Generally gain or loss on the sale or exchange of a Share will be
capital gain or loss which will be long-term if the Share has been held for more
than twelve months, and otherwise will be short-term capital gain. For
individuals, long-term capital gains are currently taxed at a maximum rate of
20% and short-term capital gains are currently taxed at ordinary income tax
rates. However, if a shareholder realizes a loss on the sale, exchange or
redemption of a Share held for six months or less and has previously received a
capital gains distribution with respect to the Share (or 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.
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 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.
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 advisors as to the
consequences of these and other state and local tax rules affecting an
investment in the Fund.
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<PAGE>
6. 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 (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Vice Chairman,
Alex. Brown Capital Advisory & Trust Company and Director, Investment
Company Capital Corp. (registered investment advisor) and Director,
Virginia Hot Springs, Inc. (property Management); Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated).
JAMES J. CUNNANE, Director (3/11/38)
60 Seagate Drive, Unit P160, Naples, Florida 34103. 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).
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); and
Chartered Financial Analyst.
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Formerly, Consultant,
Wendell & Stockel Associates, Inc. (consulting firm); General Manager,
Shell Oil Company; Director/Trustee, AIM Funds (registered investment
companies).
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 and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care); Director, Central Carolina Bank & Trust
(banking), Key Funds (registered investment companies) and DP Mann
Holdings (insurance). Formerly, Director, AMBAC Treasurers Trust
(registered investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts; Director and Executive
Vice President, The Glenmede Trust Company. Formerly, Executive
Director, The Pew Charitable Trusts.
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<PAGE>
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) and American Science &
Engineering (x-ray detection equipment). 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, South 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);
Director, Research America (non-profit medical research). Formerly,
Trustee, Rockefeller Foundation and, Reed College (education); and
Director, Merrill Lynch Cluster C Funds and Director, Flag
Investors/ISI/BT Alex. Brown Cash Reserve Fund, Inc. Family of 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 L.L.P. (now
PricewaterhouseCoopers LLP), September 1988-June 1997.
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.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown Incorporated, July
1996-Present. Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994- July
1996; Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991- April 1994.
- ----------------
* 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 or 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 six other funds in the Fund Complex. Mr. Hale serves as Chairman of four
funds and as a Director of eight other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as Directors of each fund in the Fund
Complex. Ms. Rimel and Mr. Vogt serve as Directors of 11 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 Mr. Liotta
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.
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<PAGE>
With the exception of the Fund's President, officers of the Fund receive
no direct remuneration in such capacity from the Fund. Officers and Directors of
the Fund who are officers or directors of BT Alex. Brown or the Advisor may be
considered to have received remuneration indirectly. As compensation for his or
her services, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (an "Independent Director") and Mr.
Woolf, the Fund's President, receives an aggregate annual fee (plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
his or her attendance at board and committee meetings) from each fund in the
Fund Complex for which he or she serves. In addition, the Chairman of the Fund
Complex's Audit Committee receives an aggregate annual fee from the Fund
Complex. Payment of such fees and expenses is allocated among the funds in
direct proportion to their relative net assets. For the fiscal year ended March
31, 1998, Independent Directors' fees attributable to the assets of the Fund
totaled approximately $19,733.
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
March 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Pension or Retirement Total Compensation from the
Position the Fund Payable to Directors Benefits Accrued as Part of Fund and Fund Complex Payable
for the Fiscal Year Ended Fund Expenses to Directors for the Fiscal Year
March 31, 1998 Ended March 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans(1) $0 $0 $0
Chairman
Richard T. Hale(1) $0 $0 $0
Director
Charles W. Cole, Jr.(1,2) $0 $0 $0
Director,
James J. Cunnane $2,740 $ (4) $39,000 for service
Director on 13 Boards
John F. Kroeger $3,443 $ (4) $49,000 for service
Director on 13 Boards
Louis E. Levy $2,740 $ (4) $39,000 for service
Director on 13 Boards
Eugene J. McDonald $2,740(3) $ (4) $39,000 for service
Director on 13 Boards
Rebecca W. Rimel $2,794(3) $ (4) $39,000 for service
Director on 11 Boards(5)
Carl W. Vogt $2,822(3) $ (4) $39,000 for service
Director on 11 Boards(5)
</TABLE>
- --------------
1 A Director who is an "interested person" as defined in the Investment
Company Act.
2 Retired, effective August 13, 1997.
3 Of amounts payable to Messrs. Cunnane, McDonald, and Vogt and
Ms. Rimel $2,740, $2,740, $2,822 and $2,794,
respectively, was deferred pursuant to a deferred compensation plan.
4 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, 1998 was
approximately $14,969.
5 Ms. Rimel and Mr. Vogt received proportionately higher compensation
from each fund for which they serve.
-13-
<PAGE>
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 received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994 and Mr. Woolf who 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. 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
December 31, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger, 15
years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms. Rimel, 2 years;
and for Mr. Vogt, 2 years.
<TABLE>
<CAPTION>
Estimated Annual Benefits Payable By Fund Complex Upon Retirement
------------------------------------------------------------------
Years of Service 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, Levy, McDonald and Vogt and Ms.
Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors funds and BT
Alex. Brown Cash Reserve Fund, Inc. and BT International Equity Fund in which
all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors' deferral accounts will be paid in
cash, in generally 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.
-14-
<PAGE>
The Code of Ethics requires that any officer, director or employee of
the Fund, or the Advisors, preclear personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases which are part
of an automatic dividend reinvestment plan). The foregoing would also apply to
any officer, director or employee of the Distributor that is an access person.
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity (including trades of
both clients and covered persons) do not exceed ten percent of the daily average
trading volume of the security for the prior 15 days. Officers, directors and
employees of the Advisors and the Distributor may comply with codes instituted
by those entities so long as they contain similar requirements and restrictions.
7. INVESTMENT ADVISORY AND OTHER SERVICES
On June 17, 1997, the Board of Directors of the Fund, including a
majority of the Independent 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 and Sub-Advisory Agreements
were approved by shareholders of the Fund on August 14, 1997. ICC, the
investment advisor, is an indirect subsidiary of Bankers Trust Corporation. ABIM
is a limited partnership affiliated with the Advisor. Buppert, Behrens & Owen,
Inc., a company organized and owned by three employees of ABIM, owns a 49%
limited partnership interest and a 1% general partnership interest in ABIM. BT
Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex. Brown
Holdings, Inc. owns the remaining limited partnership interest. ICC also serves
as advisor and ABIM serves as sub-advisor to other funds in the Flag Investors
family of funds.
Under the Investment Advisory Agreement, ICC is responsible for
obtaining and evaluating economic, statistical and financial information to
formulate and implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM, provided that ICC continues to supervise the performance
of ABIM and report thereon to the Fund's Board of Directors. Any investment
program undertaken by ICC or ABIM will at all times be subject to policies and
control of the Fund's Board of Directors. ICC will provide the Fund with office
space for managing its affairs, with the services of required executive
personnel and with certain clerical and bookkeeping services and facilities.
These services are provided by ICC without reimbursement by the Fund for any
costs. Neither ICC nor ABIM shall be liable to the Fund or its shareholders for
any act or omission by ICC or ABIM or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty. The services of ICC and ABIM to the
Fund are not exclusive and ICC and ABIM are free to render similar services to
others.
-15-
<PAGE>
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, 0.85% of the next $50
million of the Fund's average daily net assets, 0.80% of the next $100 million
of the Fund's average daily net assets, and 0.70% of the Fund's average daily
net assets in excess of $200 million. As compensation for its 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 0.75% of the first $50 million
of the Fund's average daily net assets, 0.60% of the next $150 million of the
Fund's average daily net assets, and 0.50% of the Fund's average daily net
assets in excess of $200 million.
ICC has 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, 2.10% of the Class C Shares' average daily net assets and
1.10% of the Institutional Shares' average daily net assets.
The Investment Advisory Agreement and the Sub-Advisory Agreement will
continue for an initial term of two years, and thereafter, from year to year if
such continuance is specifically approved at least annually by the Fund's Board
of Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such agreements, by votes cast in
person at a meeting called for such purpose, or by a vote of a majority of the
outstanding Shares (as defined under "Capital Stock"). The Fund or ICC may
terminate the Investment Advisory Agreement on sixty days' written notice
without penalty. The Investment Advisory Agreement will terminate automatically
in the event of assignment (as defined in the Investment Company Act). The
Sub-Advisory Agreement has similar termination provisions.
Advisory fees paid by the Fund to ICC and sub-advisory fees paid by ICC
to ABIM for the last three fiscal years were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ended March 31,
Fees Paid to: 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ICC $3,769,264 $2,227,355 $1,651,971
- ------------------------------------------------------------------------------------------------------------
ABIM $2,735,069 $1,633,167 $1,225,064
- ------------------------------------------------------------------------------------------------------------
</TABLE>
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
8. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors") serves as the exclusive
distributor of the Fund's Shares pursuant to a Distribution Agreement effective
August 31, 1997, which provides for distribution of each class of Shares. Prior
to August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown"), served as
distributor of the Fund's Shares for the same rate of compensation and on
substantially the same terms and conditions as ICC Distributors.
The Distribution Agreement provides that ICC Distributors shall; (i) use
reasonable efforts to sell Shares upon the terms and conditions contained in the
Distribution Agreement and the Fund's then current Prospectus; (ii) use its best
-16-
<PAGE>
efforts to conform with the requirements of all federal and state laws relating
to the sale of the Shares; (iii) adopt and follow procedures as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. and any other applicable self-regulatory organization; (iv)
perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of the reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on March 27, 1998.
ICC Distributors and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which such Participating
Dealers have agreed to process investor purchase and redemption orders and
respond to inquiries from shareholders concerning the status of their accounts
and the operations of the Fund. Any Sub-Distribution Agreement may be terminated
in the same manner as the Distribution Agreement and shall automatically
terminate in the event of an assignment.
In addition, with respect to the Class A, Class B and Class C Shares,
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, such as BT Alex. Brown and certain banks, to act as Shareholder
Servicing Agents, pursuant to which ICC Distributors will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor or its affiliates will provide
compensation out of its own resources for ongoing shareholder services. Although
banking laws and regulations prohibit banks from distributing shares of open-end
investment companies such as the Fund, according to interpretations by various
bank regulatory authorities, financial institutions are not prohibited from
acting in other capacities, such as the shareholder servicing capacities
described above. Should future legislative, judicial or administrative action
prohibit or restrict the activities of the Shareholder Servicing Agents in
connection with the Shareholder Servicing Agreements, the Fund may be required
to alter materially or discontinue its arrangements with the Shareholder
Servicing Agents. Such financial institutions may impose separate fees in
connection with these services and investors should review the Prospectuses and
this Statement of Additional Information in conjunction with any such
institution's fee schedule.
-17-
<PAGE>
As compensation for providing distribution services as described above
for the Class A Shares, ICC Distributors receives an annual fee, paid monthly
equal to 0.25% of the average daily net assets of the Class A Shares. With
respect to Class A Shares, ICC Distributors expects to allocate up to all of its
fee to Participating Dealers and Shareholder Servicing Agents. As compensation
for providing distribution services as described above for the Class B Shares,
ICC Distributors receives an annual fee, paid monthly, equal to 0.75% of the
average daily net assets of the Class B Shares. As compensation for providing
distribution services as described above for Class C Shares, ICC Distributors
receives an annual fee, paid monthly, equal to 0.75% of the average daily net
assets of the Class C Shares. In addition, with respect to the Class B and Class
C Shares, the Fund will pay ICC Distributors a shareholder servicing fee at an
annual rate of 0.25% of the respective average daily net assets of the Class B
and the Class C Shares. (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, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
--------------------------------------------------------------
Fee 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12b-1 Fee $1,318,534(1) $726,107(3) $527,092(3)
- ----------------------------------------------------------------------------------------------------------------
Class B Shareholder Servicing Fee $ 96,025(2) $ 21,379(3) $4,895(3)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
1 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $457,116 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $861,418.
2 Of this amount, Alex. Brown, the Fund's distributor prior to
August 31, 1997, received $26,604 and ICC Distributors, the
Fund's distributor effective August 31, 1997, received $69,421.
3 Fees received by Alex. Brown, the Fund's distributor for the fiscal
years ended March 31, 1997 and March 31, 1996.
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 Participating
Dealers and Shareholder Servicing Agents. 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 Independent
Directors, by votes cast in person at a meeting called for such purpose. The
Plans were most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors, on September 16, 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
-18-
<PAGE>
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 Independent 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 Plans to ICC Distributors pursuant to the
Distribution Agreement and to Participating Dealers pursuant to any
Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under the Plans. Payments under the Plans are made as described above regardless
of ICC Distributors' actual cost of providing distribution services and may be
used to pay ICC Distributors overhead expenses. If the cost of providing
distribution services to the Class A Shares is less than 0.25% of the Class A
Shares' average daily net assets for any period or if the cost of providing
distribution services to the Class B Shares and the Class C Shares is less than
0.75% of the classes' respective average daily net assets for any period, the
unexpended portion of the distribution fees may be retained by ICC Distributors.
The Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if any of the Plans is terminated in accordance with
its terms, the obligation of the Fund to make payments to ICC Distributors
pursuant to such Plan will cease and the Fund will not be required to make any
payments past the date the Distribution Agreement terminates with respect to
that class. In return for payments received pursuant to the Plans, ICC
Distributors pays the distribution-related expenses of the Fund including one or
more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges.
General Information
The Fund's distributor received commissions on the sale of the Flag
Investors Class A Shares and contingent deferred sales charges on the Flag
Investors Class B Shares and retained from such commissions and sales charges
the following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
Class Received Retained Received Retained Received Retained
- --------------------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions $1,547,315(1) $1,308,006(3) $937,641(5) $868,899(5) $431,884(5) $430,833(5)
Class B
Contingent
- --------------------------------------------------------------------------------------------------------------------------
Deferred Sales $1,498,689(2) $1,128,132(4) $483,596(5) $350,485(5) $133,944(5) $126,571(5)
Charge
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
1 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $566,160 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $981,154.
2 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $539,410 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $959,279.
3 Of commissions received, Alex. Brown retained $130,006 and ICC Distributors
retained $0, respectively.
4 Of sales charges received, Alex. Brown retained $418,559 and ICC
Distributors retained $709,573, respectively.
5 By Alex. Brown, the Fund's distributor for the fiscal years ended
March 31, 1997 and March 31, 1996.
-19-
<PAGE>
Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depository appointed by the Fund for the safekeeping of cash,
portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and transfer
taxes, and fees payable by the Fund to federal, state or other governmental
agencies; the costs and expenses of engraving or printing of certificates
representing Shares; all costs and expenses in connection with the registration
and maintenance of registration of the Fund and its Shares with the SEC and
various states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of printing, including
typesetting and distributing prospectuses and statements of additional
information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing proxy statements and reports to shareholders; fees and travel expenses
of Directors and Director members of any advisory board or committee; all
expenses incident to the payment of any dividend, distribution, withdrawal or
redemption, whether in Shares or in cash; charges and expenses of any outside
service used for pricing of the Shares; fees and expenses of legal counsel,
including counsel to the Independent Directors, and of independent auditors, in
connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by ICC Distributors, ICC or ABIM.
9. 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
affiliates of the Advisors in any transaction in which they act as a principal.
-20-
<PAGE>
If affiliates of the Advisors are participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ABIM may, in its discretion, effect transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ABIM to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ABIM with clients other than the Fund. Similarly, any research services received
by ABIM through placement of portfolio transactions of other clients may be of
value to ABIM in fulfilling its obligations to the Fund. No specific value can
be determined for research and statistical services furnished without cost to
ABIM by a broker-dealer. ABIM is of the opinion that because the material must
be analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing ABIM's research and analysis.
Therefore, it may tend to benefit the Fund by improving ABIM's investment
advice. In over-the-counter transactions, ABIM will not pay any commission or
other remuneration for research services. ABIM's policy is to pay a
broker-dealer higher commissions for particular transactions than might be
charged if a different broker-dealer had been chosen when, in ABIM's opinion,
this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, ABIM is
also authorized to pay broker-dealers other than affiliates of the Advisors
higher commissions than another broker might have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation of
orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through affiliates of the Advisors. At the time of such authorization, the Board
adopted certain policies and procedures incorporating the standards of Rule 17e-
1 under the Investment Company Act which requires that the commissions paid
affiliates of the Advisors must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC and
ABIM to furnish reports and to maintain records in connection with such reviews.
ABIM manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
-21-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transactions Directed $80,647,030 $38,947,268 $31,958,910
- ---------------------------------------------------------------------------------------------------------------
Commissions Paid $ 174,443 $111,113 $78,634
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998, the Fund held
a 5.75% repurchase agreement issued by Goldman Sachs & Co. valued at
$62,984,000, corporate debt of the Jeffries Group, Inc. with a market value of
$4,145,000, and corporate debt of Morgan Guaranty Trust Co. with a market value
of $3,985,000. Goldman Sachs & Co., Jeffries Group, Inc. and Morgan Guaranty
Trust Co. are "regular brokers or dealers" of the Fund.
10. CAPITAL STOCK
The Fund is authorized to issue 90 million Shares of common stock, par
value $.001 per share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated five classes of Shares: Flag Investors Value Builder Fund Class A
Shares, Flag Investors Value Builder Fund Class B Shares, Flag Investors Value
Builder Fund Class C 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.
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
-22-
<PAGE>
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.
11. 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.
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives such compensation from the Fund for
its services as custodian as may be agreed to from time to time by Bankers Trust
and the Fund. For the period from September 22, 1997 to March 31, 1998, Bankers
Trust was paid $26,014 as compensation for providing custody services to the
Fund. Investment Company Capital Corp. has been retained to act as transfer and
dividend disbursing agent. As compensation for providing these services, the
Fund pays ICC up to $16.20 per account per year, plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended March 31, 1998 such fees totaled $150,057.
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.
<TABLE>
<CAPTION>
Average Net Assets Incremental Annual Accounting Fee
- ------------------ ---------------------------------
<S> <C>
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 0.100%
$20,000,000 - $30,000,000 0.80%
$30,000,000 - $40,000,000 0.60%
$40,000,000 - $50,000,000 0.50%
$50,000,000 - $60,000,000 0.40%
$60,000,000 - $70,000,000 0.30%
$70,000,000 - $100,000,000 0.20%
$100,000,000 - $500,000,000 0.15%
$500,000,000 - $1,000,000,000 0.05%
over $1,000,000,000 0.01%
</TABLE>
In addition, the Fund will reimburse ICC for the following out of pocket
expenses incurred in connection with ICC's performance of its services under the
Master Services Agreement: express delivery service, independent pricing and
storage.
For the fiscal year ended March 31, 1998, ICC received accounting fees of
$110,551.
-23-
<PAGE>
13. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by
PricewaterhouseCoopers LLP, 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.
PricewaterhouseCoopers LLP has offices at 250 West Pratt Street, Baltimore,
Maryland 21201.
14. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
15. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to that
of other open-end diversified management investment companies and to stock or
other relevant indices in advertisements or in certain reports to shareholders,
performance will be stated in terms of total return rather than in terms of
yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1-, 5- or 10-year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to 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. In calculating the
performance of the Class C Shares, the applicable contingent deferred sales
charge (1.00% for the one-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.
-24-
<PAGE>
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, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
One-Year Period Ended Five Year Period Ended
March 31, 1998 March 31, 1998 Since Inception
- ------------------------------------------------------------------------------------------------------------------------
Average Average Average
Ending Annual Ending Annual Ending Annual
Class Redeemable Total Redeemable Total Redeemable Total
Value Return Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 1,278.00 27.80% 2,251.76 17.63% 2,560.81 17.63%
6/15/92*
Class B
1/3/95* 1,288.40 28.84% N/A N/A 2,149.06 26.65%
Class D
11/9/92* 1,303.50 30.35% 2,281.91 17.94% 2,475.38 18.32%
Institutional
11/2/95* 1,340.80 34.08% N/A N/A 1,752.59 26.24%
</TABLE>
- -----------
* Inception Date
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. 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. The Fund's portfolio
turnover rate in fiscal year 1998 was 7% and in fiscal year 1997 was 13%.
-25-
<PAGE>
16. 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 as of July 8, 1998:
T. Rowe Price Tr 5.4%
Alex. Brown & Sons Inc. Plan 100460
Flag Investors Value Builder
Attn: Asset Recon
P.O. Box 17215
Baltimore, MD 21297-1215
As of July 8, 1998, Directors and officers as a group beneficially
owned an aggregate of less than 1% of the Fund's total outstanding shares.
17. FINANCIAL STATEMENTS
See next page.
-26-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS MARCH 31, 1998
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCKS: 56.9%
BANKING: 2.5%
35,000 Citicorp $ 4,970,000
200,000 KeyCorp 7,562,500
13,100 Wells Fargo & Company 4,339,375
-----------
16,871,875
-----------
BASIC INDUSTRY: 2.9%
400,000 Airgas, Inc.* 6,900,000
30,000 Hercules, Inc. 1,481,250
140,000 International Paper Company 6,553,750
44,654 Potash Corp. of Saskatchewan 4,057,932
28,000 Solutia, Inc. 833,000
-----------
19,825,932
-----------
BUSINESS SERVICES: 3.0%
244,700 First Data Corp. 7,952,750
176,400 SEI Corp. 12,039,300
-----------
19,992,050
-----------
CAPITAL GOODS: 0.9%
36,000 Eaton Corp. 3,426,750
96,200 Westinghouse Air Brake Co. 2,855,938
-----------
6,282,688
-----------
CONSUMER DURABLES/NON-DURABLES: 4.6%
332,800 Blyth Industries, Inc.* 11,356,800
5,857 Chattem Inc.* 147,889
33,500 Eastman Kodak Co. 2,173,313
140,000 Ford Motor Company 9,073,750
50,000 Liz Claiborne, Inc. 2,493,750
111,600 Philip Morris Cos., Inc. 4,652,325
31,700 Polaroid Corp. 1,394,800
-----------
31,292,627
-----------
CONSUMER SERVICES: 4.7%
184,000 America Online, Inc.* 12,569,500
124,875 Cendant Corp.* 4,948,172
60,000 Gannett Co. 4,312,500
300,000 The Learning Co., Inc.* 6,937,500
50,000 Times Mirror Co. Class A 3,168,750
-----------
31,936,422
-----------
27
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONTINUED) MARCH 31, 1998
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCKS (continued)
DEFENSE/AEROSPACE: 1.7%
156,000 Boeing Co. $ 8,131,500
31,171 Lockheed Martin Corp. 3,506,738
-----------
11,638,238
-----------
ELECTRIC UTILITIES: 0.5%
100,000 Unicom Corp. 3,500,000
-----------
ENERGY: 0.9%
125,000 Burlington Resources, Inc. 5,992,187
-----------
ENTERTAINMENT: 1.1%
652,000 LodgeNet Entertainment Corp.* 7,599,875
-----------
FINANCIAL SERVICES: 7.4%
83,500 American Express Co. 7,666,344
87,500 Countrywide Credit Industries, Inc. 4,653,906
172,000 Freddie Mac 8,159,250
450,000 Green Tree Financial Corp. 12,796,875
177,187 MBNA Corp. 6,345,509
171,000 Travelers Group, Inc. 10,260,000
-----------
49,881,884
-----------
HEALTH CARE: 3.9%
95,000 Amgen, Inc.* 5,783,125
40,000 Baxter International, Inc. 2,205,000
38,000 Bristol-Myers Squibb Co. 3,963,875
108,868 Eli Lilly & Co. 6,491,255
114,000 Johnson & Johnson 8,357,625
-----------
26,800,880
-----------
HOTELS/GAMING: 0.7%
200,000 Harrah's Entertainment, Inc.* 4,912,500
-----------
HOUSING: 2.0%
275,000 Champion Enterprises, Inc.* 7,339,063
118,000 USG Corp.* 6,394,125
-----------
13,733,188
-----------
INSURANCE: 7.6%
495,858 Conseco, Inc. 28,077,959
80,000 EXEL Limited 6,200,000
32,500 Hartford Financial Services Group 3,526,250
28
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCKS (concluded)
INSURANCE (CONCLUDED)
80,000 Mid Ocean Ltd. $ 6,200,000
150,000 RenaissanceRe Holdings Ltd. 7,500,000
-----------
51,504,209
-----------
MULTI-INDUSTRY: 2.5%
33,400 Loews Corp. 3,481,950
140,000 Monsanto Co. 7,280,000
64,000 United Technologies Corp. 5,908,000
-----------
16,669,950
-----------
REAL ESTATE: 1.6%
60,200 General Growth Properties, Inc. 2,219,875
324,136 Host Marriott Corp.* 6,138,325
35,000 National Health Investors, Inc. 1,395,625
28,500 U.S. Restaurant Properties, Inc. 780,188
-----------
10,534,013
-----------
RETAIL: 3.0%
124,664 J.C. Penney Company, Inc. 9,435,506
400,000 Kmart Corp.* 6,675,000
90,000 Tandy Corp. 4,230,000
-----------
20,340,506
-----------
TECHNOLOGY: 4.0%
70,400 Autodesk, Inc. 3,036,000
143,200 Cognex Corp. 3,060,900
125,000 Electronic Data Systems Corp. 5,734,375
86,000 International Business Machines Corp. 8,933,250
33,400 Millipore Corp. 1,160,650
500,000 Novell, Inc.* 5,359,375
-----------
27,284,550
-----------
TELECOMMUNICATIONS: 1.1%
153,300 MCI Communications Corp. 7,588,350
-----------
TRANSPORTATION: 0.3%
17,491 Delta Air Lines, Inc. 2,068,311
-----------
Total Common Stock
(Cost $186,513,717) 386,250,235
-----------
29
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONTINUED) MARCH 31, 1998
Shares/
Par (000) Market Value
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK: 3.6%
32,300 Conseco Inc., $4.28, 7% Cvt. Pfd., Series E $ 6,254,087
40,000 Fleetwood Capital Trust, 6% 2,350,000
100,000 Host Marriott Financial Trust, 6.75% 5,700,000
383,600 U.S. Restaurant Properties, Series A, 7.72% 10,596,950
-----------
Total Convertible Preferred Stock
(Cost $18,793,259) 24,901,037
-----------
PREFERRED STOCK: 0.4%
100,000 Conseco Financial Trust
(Cost $2,500,000) 2,606,250
-----------
CONVERTIBLE BONDS: 1.0%
$2,000 Capstone Capital Corp., Cvt. Deb.,
6.55%, 3/14/02 2,017,500
339 Richardson Electronics, Cvt. Deb.,
7.25%, 12/15/06 280,099
1,661 Richardson Electronics, Cvt. Deb.,
8.25%, 6/15/06 1,503,205
3,000 Softkey International, Cvt. Deb.,
5.50%, 11/01/00 2,760,000
-----------
Total Convertible Bonds
(Cost $6,232,766) 6,560,804
-----------
CORPORATE BONDS: 25.9%
3,000 Argosy Gaming, 13.25%, 6/1/04 3,315,000
3,000 Avon Products, Inc., 6.55%, 8/1/07 3,022,500
1,000 Caesar's World, 8.875%, 8/15/02 1,033,750
5,000 Calenergy Co., Inc., 7.625%, 10/15/07 5,012,500
3,000 Campbell Soup Co., 6.15%, 12/1/02 3,026,250
1,000 Capstar Hotel, 8.75%, 8/15/07 1,040,000
873 Chattem, Inc., Sr Sub Deb, 12.75%, 6/15/04 989,764
3,000 Circus Circus, 6.75%, 7/15/03 2,988,750
3,000 Conseco, Inc., Nt, 8.125%, 2/15/03 3,180,000
700 CSX Corp., Nt, 7.00%, 9/15/02 720,125
5,000 Cytec Industries, Inc., 6.50%, 3/15/03 4,981,250
5,000 Cytec Industries, Inc., 6.75%, 3/15/08 4,950,000
30
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Par
(000) Market Value
- --------------------------------------------------------------------------------
CORPORATE BONDS (continued)
$3,000 Eckerd Corp., Nt, 9.25%, 2/15/04 $ 3,232,500
300 Exxon Capital Corp., Nt, 6.50%, 7/15/99 302,004
2,150 First Tennessee Bank, 6.40%, 4/1/08 2,136,562
2,000 FMC Corp., Nt, 8.75%, 4/1/99 2,045,000
5,000 Frontier Corp., 7.25%, 5/15/04 5,225,000
1,000 Fund American Enterprise, Nt, 7.75%, 2/1/03 1,035,000
4,500 Furon Co., Nt, 8.125%, 3/1/08 4,539,375
4,500 HMH Properties, Nt, 9.50%, 5/15/05 4,792,500
3,000 Host Marriott Travel Plaza, Nt, 9.5%, 5/15/05 3,191,250
5,000 HVIDE Marine, Inc., 8.375%, 2/15/08 4,887,500
5,000 ICI, 6.95%, 9/15/04 5,162,500
2,000 ITT Corp., Nt, 6.75%, 11/15/03 1,965,000
2,775 ITT Corp., Nt, 6.25%, 11/15/00 2,747,250
2,000 John Q. Hammons Hotels LP, Nt, 8.875%, 2/15/04 2,035,000
4,000 Jefferies Group, Inc., 7.50%, 8/15/07 4,145,000
3,000 Knight-Ridder, Inc., 6.625%, 11/1/07 3,026,250
5,000 Lilly Industries, Inc., 7.75%, 12/1/07 5,025,000
2,200 Lockheed Martin Corp., Nt, 6.85%, 5/15/01 2,246,750
2,500 Lockheed Martin Corp., Nt, 7.25%, 5/15/06 2,640,625
5,000 LodgeNet Entertainment, Nt, 10.25%, 12/15/06 5,200,000
1,285 Markel Corp., Nt, 7.25%,11/1/03 1,331,581
2,500 Marriott International, 6.75%, 12/15/03 2,600,000
2,100 Marriott International, 7.875%, 4/15/05 2,323,125
1,100 Masco Corp., Nt, 6.625%, 9/15/99 1,111,000
1,000 Masco Corp., Nt, 6.125%, 9/15/03 991,250
2,000 McDonnell Douglas Corp., Nt, 6.875%, 11/1/06 2,097,500
2,000 MCI Communications, Nt, 6.25%, 3/23/99 2,002,500
500 MCI Communications, Nt, 7.50%, 8/20/04 528,125
2,100 Millipore Corp., Nt, 7.2%, 4/1/02 2,160,375
2,100 Millipore Corp., Nt, 7.5%, 4/1/07 2,231,250
5,000 J.P. Morgan, Nt, 6.875%, 1/15/07 5,112,500
4,000 Morgan Guaranty Trust Co., Nt, 5.75%, 10/8/99 3,985,000
2,000 Nabisco, Inc., 6.70%, 6/15/02 2,030,000
1,500 Norfolk Southern, 6.95%, 5/1/02 1,545,000
1,500 Norfolk Southern, 7.35%, 5/15/07 1,597,500
2,000 Petroleum Heat & Power, Nt, 9.375%, 2/1/06 1,845,000
4,700 Premier Parks, Nt, 9.25%, 4/1/06 4,817,500
4,000 Premier Parks, Nt, 9.75%, 1/15/07 4,325,000
31
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED) MARCH 31, 1998
Par
(000) Market Value
- -------------------------------------------------------------------------------
CORPORATE BONDS (concluded)
$2,000 RJR Nabisco, Inc., Nt, 7.625%, 9/15/03 $ 2,027,500
5,000 Raytheon Co., 6.50%, 7/15/05 5,056,250
3,000 Raytheon Co., 6.45%, 8/15/02 3,030,000
1,500 Salomon, Inc., Nt, 7.125%, 8/1/99 1,521,420
5,500 Solutia Inc., 6.50%, 10/15/02 5,534,375
3,000 Tandy Corp., 6.95%, 9/1/07 3,090,000
1,000 Tektronix, Inc., Nt, 7.50%, 8/1/03 1,036,250
1,000 Tenneco, Inc., Nt, 8.075%, 10/1/02 1,065,000
1,000 Travelers Group, Inc., Nt, 6.125%, 6/15/00 1,003,750
1,000 Union Pacific Co., 6.25%, 3/15/99 1,002,500
2,660 USG Corp., 8.50%, 8/1/05 2,862,825
5,000 United Defense Inds, Inc., 8.75%, 11/15/07 5,125,000
500 Xerox Corp., Nt, 7.15%, 8/1/04 525,000
------------
Total Corporate Bonds
(Cost $114,533,091) 175,354,031
------------
U.S. GOVERNMENT AND AGENCY SECURITIES: 3.0%
1,000 Federal National Mortgage Assoc., 7.6%, 5/24/06 1,015,940
------------
U.S. Treasury Notes
3,000 5.875%, 2/28/99 3,008,850
4,000 5.625%, 10/31/99 3,997,500
4,000 5.75%, 10/31/00 4,011,880
4,000 6.25%, 5/31/00 4,051,960
4,000 6.125%, 12/31/01 4,058,880
------------
19,129,070
------------
Total U.S. Government Securities
(Cost $19,958,395) 20,145,010
------------
REPURCHASE AGREEMENT: 9.3%
62,984 Goldman Sachs & Co., 5.75%
Dated 3/31/98, to be repurchased on
4/1/98, collateralized by U.S. Treasury
Notes with a market value of $63,773,564.
(Cost $62,984,000) 62,984,000
------------
32
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES: 100.1%
(Cost $467,419,906)** $678,801,367
OTHER ASSETS IN EXCESS OF LIABILITIES, NET: (0.1)% (432,595)
------------
NET ASSETS: 100.0% $678,368,772
============
NET ASSET VALUE AND REDEMPTION PRICE PER:
Class A Share
($491,575,295 / 22,256,003 shares outstanding) $22.09
======
CLASS B SHARE
($64,497,962 / 2,921,374 shares outstanding) $22.08(1)
======
CLASS D SHARE
($18,478,093 / 837,940 shares outstanding) $22.05(2)
======
INSTITUTIONAL CLASS SHARE
($103,817,422 / 4,664,355 shares outstanding) $22.26
======
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE ($22.09 / .955) $23.13
======
CLASS B SHARE $22.08
======
INSTITUTIONAL SHARE $22.26
======
- ---------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
(1) Redemption value is $21.20 following 4.00% maximum contingent deferred sales
charge.
(2) Redemption value is $20.00 following 1.00% maximum contingent deferred sales
charge.
See accompanying Notes to Financial Statements.
33
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
March 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Interest $ 13,132,204
Dividends 4,758,389
------------
Total income 17,890,593
------------
Expenses:
Investment advisory fee 3,769,264
Distribution fees 1,414,559
Transfer agent fees 150,057
Accounting fee 110,551
Registration fees 103,691
Printing and postage 52,873
Custodian fee 45,741
Directors' fees 19,733
Miscellaneous 134,349
------------
Total expenses 5,800,818
------------
Net investment income 12,089,775
------------
Realized and unrealized gain on investments:
Net realized gain from security transactions 4,718,485
Change in unrealized appreciation of investments 124,787,999
------------
Net gain on investments 129,506,484
------------
Net increase in net assets resulting from operations $141,596,259
============
See accompanying Notes to Financial Statements.
34
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended March 31,
- --------------------------------------------------------------------------------
1998 1997
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 12,089,775 $ 6,780,634
Net realized gain from security transactions 4,718,485 4,707,093
Change in unrealized appreciation/
depreciation of investments 124,787,999 34,681,754
------------ -----------
Net increase in net assets resulting
from operations 141,596,259 46,169,481
------------ -----------
Distributions to Shareholders from:
Net investment income and short-term
capital gains:
Class A Shares (8,528,277) (5,070,551)
Class B Shares (625,533) (119,491)
Class D Shares (351,052) (280,846)
Institutional Shares (1,539,023) (391,368)
Net realized mid-term and long-term capital gains:
Class A Shares (5,136,333) (874,810)
Class B Shares (601,637) (38,817)
Class D Shares (224,735) (53,442)
Institutional Shares (1,098,467) (71,368)
------------ -----------
Total distributions (18,105,057) (6,900,693)
------------ -----------
Capital Share Transactions:
Proceeds from sale of shares 233,685,893 100,059,836
Value of shares issued in reinvestment
of dividends 16,203,251 6,063,887
Cost of shares repurchased (40,437,180) (29,688,897)
------------ -----------
Increase in net assets derived from
capital share transactions 209,451,964 76,434,826
------------ -----------
Total increase in net assets 332,943,166 115,703,614
------------ -----------
Net Assets:
Beginning of period 345,425,606 229,721,992
------------ -----------
End of period $678,368,772 $345,425,606
============ ============
See accompanying Notes to Financial Statements.
35
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year Ended
March 31,
- -------------------------------------------------------------------------------
1998
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.14
--------
Income from Investment Operations:
Net investment income 0.47
Net realized and unrealized gain/(loss)
on investments 5.21
--------
Total from Investment Operations 5.68
--------
Less Distributions:
Net investment income and short-term gains (0.47)
Net realized mid-term and long-term capital gains (0.26)
--------
Total distributions (0.73)
--------
Net asset value at end of period $ 22.09
========
Total Return 33.82%
Ratios to Average Net Assets:
Expenses 1.14%
Net investment income 2.49%
Supplemental Data:
Net assets at end of period (000) $491,575
Portfolio turnover rate 7%
Average Commissions Per Share $ 0.062
</TABLE>
- ------------
(1) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average net assets would have been 1.40%, and 1.38% for Class A Shares for
the years ended March 31, 1995, and 1994, respectively.
(2) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average net assets would have been 3.02%, and 3.11% for Class A
Shares for the years ended March 31, 1995, and 1994, respectively.
36
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended March 31,
- -------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.68 $ 12.02 $ 11.23 $ 11.25
-------- ------- -------- --------
Income from Investment Operations:
Net investment income 0.39 0.36 0.35 0.40
Net realized and unrealized gain/(loss)
on investments 2.49 3.03 0.80 (0.04)
-------- ------- -------- --------
Total from Investment Operations 2.88 3.39 1.15 0.36
-------- ------- -------- --------
Less Distributions:
Net investment income and short-term gains (0.36) (0.41) (0.35) (0.38)
Net realized mid-term and long-term capital gains (0.06) (0.32) (0.01) --
-------- ------- -------- --------
Total distributions (0.42) (0.73) (0.36) (0.38)
-------- ------- -------- --------
Net asset value at end of period $ 17.14 $ 14.68 $ 12.02 $ 11.23
======== ======= ======== ========
Total Return 19.90% 28.86% 10.57% 3.14%
Ratios to Average Net Assets:
Expenses 1.27% 1.31% 1.35%(1) 1.35%(1)
Net investment income 2.51% 2.72% 3.07%(2) 3.14%(2)
Supplemental Data:
Net assets at end of period (000) $278,130 $200,020 $146,986 $131,097
Portfolio turnover rate 13% 15% 18% 8%
Average Commissions Per Share $ 0.066 -- -- --
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(For a share outstanding throughout each period)
For the Year
Ended
March 31,
- --------------------------------------------------------------------------------
1998
Per Share Operating Performance:
Net asset value at beginning of period $ 17.16
-------
Income from Investment Operations:
Net investment income 0.34
Net realized and unrealized gain
on investments 5.20
-------
Total from Investment Operations 5.54
-------
Less Distributions:
Net investment income and short-term gains (0.36)
Net realized mid-term and long-term gains (0.26)
-------
Total distributions (0.62)
-------
Net asset value at end of period $ 22.08
=======
Total Return 32.84%
Ratios to Average Net Assets:
Expenses 1.89%
Net investment income 1.75%
Supplemental Data:
Net assets at end of period (000) $64,498
Portfolio turnover rate 7%
Average Commissions Per Share $ 0.062
- ---------------------------
* Commencement of operations.
(1) Annualized.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average net assets would have been 2.17% (annualized) for Class B Shares for
the period ended March 31, 1995.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average net assets would have been 2.87% (annualized) for Class B
Shares for the period ended March 31, 1995.
38
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Jan. 3, 1995*
through
For the Year Ended March 31, March 31,
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.71 $ 12.01 $ 11.14
------- ------- -------
Income from Investment Operations:
Net investment income 0.26 0.21 0.08
Net realized and unrealized gain
on investments 2.51 3.05 0.79
------- ------- -------
Total from Investment Operations 2.77 3.26 0.87
------- ------- -------
Less Distributions:
Net investment income and short-term gains (0.26) (0.24) --
Net realized mid-term and long-term gains (0.06) (0.32) --
------- ------- -------
Total distributions (0.32) (0.56) --
------- ------- -------
Net asset value at end of period $ 17.16 $ 14.71 $ 12.01
======= ======= =======
Total Return 19.00% 27.89% 7.81%
Ratios to Average Net Assets:
Expenses 2.02% 2.06% 2.10%(1,2)
Net investment income 1.84% 1.97% 2.94%(1,3)
Supplemental Data:
Net assets at end of period (000) $17,311 $ 4,178 $ 341
Portfolio turnover rate 13% 15% 18%
Average Commissions Per Share $ 0.066 -- --
</TABLE>
See accompanying Notes to Financial Statements.
39
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS D SHARES
(For a share outstanding throughout each period)
For the Year Ended
March 31,
- --------------------------------------------------------------------------------
1998
Per Share Operating Performance:
Net asset value at beginning of period $ 17.11
-------
Income from Investment Operations:
Net investment income 0.43
Net realized and unrealized gain/(loss)
on investments 5.17
-------
Total from Investment Operations 5.60
-------
Less Distributions:
Net investment income and short-term gains (0.40)
Net realized mid-term and long-term gains (0.26)
-------
Total distributions (0.66)
-------
Net asset value at end of period $ 22.05
=======
Total Return 33.33%
Ratios to Average Net Assets:
Expenses 1.49%
Net investment income 2.14%
Supplemental Data:
Net assets at end of period (000) $18,478
Portfolio turnover rate 7%
Average Commissions Per Share $ 0.062
- ---------
(1) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average net assets would have been 1.74%, and 1.73% for Class D Shares for
the years ended March 31, 1995, and 1994, respectively.
(2) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average net assets would have been 2.68% and 2.76% for Class D
shares for the years ended March 31, 1995, and 1994, respectively.
40
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended March 31,
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.66 $ 12.01 $ 11.22 $ 11.24
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.35 0.33 0.31 0.36
Net realized and unrealized gain/(loss)
on investments 2.47 3.02 0.80 (0.04)
------- ------- ------- -------
Total from Investment Operations 2.82 3.35 1.11 0.32
------- ------- ------- -------
Less Distributions:
Net investment income and short-term gains (0.31) (0.38) (0.31) (0.34)
Net realized mid-term and long-term gains (0.06) (0.32) (0.01) --
------- ------- ------- -------
Total distributions (0.37) (0.70) (0.32) (0.34)
------- ------- ------- -------
Net asset value at end of period $ 17.11 $ 14.66 $ 12.01 $ 11.22
======= ======= ======= =======
Total Return 19.46% 28.44% 10.18% 2.78%
Ratios to Average Net Assets:
Expenses 1.62% 1.66% 1.70%(1) 1.70%(1)
Net investment income 2.15% 2.37% 2.72%(2) 2.79%(2)
Supplemental Data:
Net assets at end of period (000) $15,213 $13,757 $11,717 $11,051
Portfolio turnover rate 13% 15% 18% 8%
Average Commissions Per Share $ 0.066 -- -- --
</TABLE>
See accompanying Notes to Financial Statements.
41
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
Nov. 1, 1995*
through
For the Year Ended March 31, March 31,
- --------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 17.27 $ 14.77 $ 13.89
------- ------- -------
Income from Investment Operations:
Net investment income 0.51 0.41 0.13
Net realized and unrealized gain
on investments 5.25 2.53 1.17
------- ------- -------
Total from Investment Operations 5.76 2.94 1.30
------- ------- -------
Less Distributions:
Net investment income and
short-term gains (0.51) (0.38) (0.10)
Net realized mid-term and
long-term gains (0.26) (0.06) (0.32)
------- ------- -------
Total distributions (0.77) (0.44) (0.42)
------- ------- -------
Net asset value at end of period $ 22.26 $ 17.27 $ 14.77
======= ======= =======
Total Return 34.08% 20.24% 21.12%
Ratios to Average Net Assets:
Expenses 0.89% 1.02% 1.03%(1)
Net investment income 2.75% 2.83% 2.89%(1)
Supplemental Data:
Net assets at end of period (000) $103,817 $34,771 $11,768
Portfolio turnover rate 7% 13% 15%
Average Commissions Per Share $ 0.062 $ 0.066 --
</TABLE>
- ---------
* Commencement of operations.
(1) Annualized.
See accompanying Notes to Financial Statements.
42
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- Significant Accounting Policies
Flag Investors Value Builder Fund, Inc. ("the Fund"), which was organized
as a Maryland Corporation on March 5, 1992, commenced operations June 15, 1992.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end Investment Management Company. Its objective is to seek
long-term growth of capital and current income through diversified investments
in a professionally managed balanced portfolio of equity and debt securities.
The Fund consists of four share classes: Class A Shares, which commenced
June 15, 1992; Class D Shares (formerly Class B Shares), which commenced
November 9, 1992; Class B Shares, which commenced January 3, 1995; and
Institutional Shares, which commenced November 2, 1995. The Fund has not sold
Class D Shares since November 18, 1994, but existing shareholders may reinvest
their dividends.
The Class A, Class B and Class D Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge, the Class B Shares
have a contingent deferred sales charge and the Class D Shares have both a
front-end sales charge and a contingent deferred sales charge. In addition each
of the other classes has a different distribution fee. The Institutional Shares
do not have a front-end sales charge, a contingent deferred sales charge or a
distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.
The Fund values short-term obligations with maturities of 60 days or
less at amortized cost.
43
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- concluded
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. FEDERAL INCOME TAXES--The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND
OTHER--The Fund uses the trade date to account for security
transactions and the specific identification method for financial
reporting and income tax purposes to determine the cost of investments
sold or redeemed. Interest income is recorded on an accrual basis and
includes the pro rata scientific method for amortization of premiums
and accretion of discounts when appropriate. Expenses are recorded as
incurred. Income and common expenses are allocated to each class based
on its respective average net assets. Class specific expenses are
charged directly to each class. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee. This fee is based on the Fund's
44
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
average daily net assets and is calculated daily and paid monthly at the
following annual rates: 1.00% of the first $50 million, 0.85% of the next $50
million, 0.80% of the next $100 million and 0.70% of the amount over $200
million.
As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee. This fee is based on the Fund's average daily net assets and is
calculated daily and paid monthly at the following annual rates: 0.75% of the
first $50 million, 0.60% of the next $150 million and 0.50% of the amount over
$200 million.
ICC has agreed to reduce its aggregate fees so that ordinary Fund expenses
for any fiscal year 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, 1.70% of the
Class D Shares' average daily net assets and 1.10% of the Institutional Shares'
average daily net assets. No fees were reduced for the year ended March 31,
1998.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $110,551 for accounting services for the year ended
March 31, 1998.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $150,057 for
transfer agent services for the year ended March 31, 1998.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997 PNCBank served as the Fund's custodian.
From September 22, 1997 to March 31, 1998, the Fund paid $26,014 in custody
expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors") an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the Class
A Shares' average daily net assets, 1.00% (includes 0.25% shareholder servicing
fee) of the Class B Shares' average daily net assets and 0.60% of the Class D
Shares' average daily net assets. For the year ended March 31, 1998,
distribution fees aggregated $1,414,559, of which $927,293 was attributable to
the Class A Shares, $384,100 was attributable to the Class B Shares and $103,166
was attributable to the Class D Shares. The Fund did not pay Alex. Brown any
commissions for the year ended March 31, 1998. Prior to September 1, 1997 Alex.
Brown &Sons, Inc. served as the Fund's distributor for the same rate of
compensation and on substantially the same terms as ICC Distributors and earned
$335,760 for Class A Shares, $106,442, for Class B Shares, and $41,545 for Class
D Shares.
45
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- concluded
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
March 31, 1998 was $14,969, and the accrued liability was $23,649.
NOTE 3 -- Capital Share Transactions
The Fund is authorized to issue up to 35 million shares of $.001 par
value capital stock (20 million Class A, 5 million Class B, 5 million
Institutional, 3 million Class D and 2 million undesignated). Transactions in
shares of the Fund were as follows:
Class A Shares
-------------------------------
For the For the
Year Ended Year Ended
March 31, 1998 March 31, 1997
-------------- --------------
Shares sold 7,042,839 3,858,982
Shares issued to shareholders on
reinvestment of dividends 641,162 330,808
Shares redeemed (1,656,511) (1,584,547)
------------ ------------
Net increase in shares outstanding 6,027,490 2,605,243
============ ============
Proceeds from sale of shares $140,113,104 $ 64,502,359
Value of reinvested dividends 12,406,231 5,229,071
Cost of shares redeemed (32,747,372) (25,438,783)
------------ ------------
Net increase from capital share transactions $119,771,963 $ 44,292,647
============ ============
Class B Shares
-------------------------------
For the For the
Year Ended Year Ended
March 31, 1998 March 31, 1997
-------------- --------------
Shares sold 1,916,773 754,825
Shares issued to shareholders on
reinvestment of dividends 58,431 8,887
Shares redeemed (62,652) (38,898)
------------ ------------
Net increase in shares outstanding 1,912,552 724,814
============ ============
Proceeds from sale of shares $37,749,769 $12,645,227
Value of reinvested dividends 1,143,662 144,638
Cost of shares redeemed (1,250,962) (635,497)
------------ ------------
Net increase from capital share transactions $37,642,469 $12,154,368
============ ============
46
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
March 31, 1998 March 31, 1997
-------------- --------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 26,051 19,676
Shares redeemed (77,261) (68,822)
------------ ------------
Net decrease in shares outstanding (51,210) (49,146)
============ ============
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 500,413 311,352
Cost of shares redeemed (1,566,659) (1,071,231)
------------ ------------
Net decrease from capital share transactions $(1,066,246) $ (759,879)
============ ============
Institutional Shares
-------------------------------
For the For the
Year Ended Year Ended
March 31, 1998 March 31, 1997
-------------- --------------
Shares sold 2,782,404 1,343,738
Shares issued to shareholders on
reinvestment of dividends 109,243 23,612
Shares redeemed (241,221) (150,351)
------------ ------------
Net increase in shares outstanding 2,650,426 1,216,999
============ ============
Proceeds from sale of shares $ 55,823,020 $ 22,912,250
Value of reinvested dividends 2,152,945 378,826
Cost of shares redeemed (4,872,187) (2,543,386)
------------ ------------
Net increase from capital share transactions $ 53,103,778 $ 20,747,690
============ ============
47
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4 -- Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $186,927,340 and sales of investment securities
aggregated $29,226,279 for the year ended March 31, 1998. Purchases of U.S.
government obligations aggregated $11,956,250, and there were no sales of U.S.
government obligations for the period.
On March 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $211,917,936
and aggregate gross unrealized depreciation of all securities in which there is
an excess of tax cost over value was $536,475.
NOTE 5 -- Net Assets
On March 31, 1998, net assets consisted of:
Paid-in capital:
Class A Shares $315,042,826
Class B Shares 53,636,300
Class D Shares 8,382,197
Institutional Shares 85,188,649
Accumulated net realized gain from security transactions 970,908
Unrealized appreciation of investments 211,381,461
Undistributed net investment income 3,766,431
------------
$678,368,772
============
NOTE 6 -- Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust Corporation on
September 1, 1997. Due to the change in control of Alex. Brown Incorporated, the
Flag Investors Value Builder Fund held a special meeting for its shareholders on
August 14, 1997. During the meeting, shareholders approved a new Investment
Advisory Agreement between the Fund and ICC and a new Sub-Advisory Agreement
among the Fund, ICC and ABIM. The new agreements are substantially the same as
the former agreements.
NOTE 7 -- Federal Tax Information (unaudited)
39.07% of the net investment income dividends paid by the Fund during the
tax year ended March 31, 1998 qualified for the Dividends Received Deduction.
48
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Value Builder Fund, Inc.
We have audited the accompanying statement of net assets of Flag Investors
Value Builder Fund, Inc. as of March 31, 1998 and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
March 31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Value Builder Fund, Inc. as of March 31, 1998, the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended and its financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
May 1, 1998
49
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues rated
A-1+ are those with "extremely strong" safety characteristics. Those rated A-1
reflect a " strong" degree of safety regarding timely payment.
Moody's Commercial Paper Ratings
Commercial paper issuers rated Prime-1 by Moody's are judged by Moody's to be of
the highest quality on the basis of relative repayment capacity.
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, in the majority of instances, differs from the highest rated issues only in
small degree. Also qualify as high quality debt obligations.
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, on balance, as
predominantly speculative 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.
C -- The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
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
A-1
<PAGE>
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 -- 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 -- 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 -- 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 -- 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 -- 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 -- 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 --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 -- Represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- 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.
Moody's applies numerical modifiers 1,2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
that generic rating category.
A-2
