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[LOGO]
VALUE BUILDER FUND, INC.
(Class A, Class B and Class C Shares)
Prospectus & Application -- March 30, 1998
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This mutual fund (the "Fund") is designed to maximize total return through a
combination of long-term growth of capital and current income.
Shares of the Fund are available through 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, 1997, as supplemented through March 30,
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 .................... 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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Shareholder Transaction Expenses:
<TABLE>
<CAPTION>
Class A
Shares
Initial Sales
Charge
Alternative
---------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................................ 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ................ None
Maximum Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is lower) ......... 0.50%*
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees ..................................................... 0.82%
12b-1 Fees .......................................................... 0.25%
Other Expenses (including a 0.25% shareholder servicing
fee for Class B and Class C Shares) ................................ 0.20%
------
Total Fund Operating Expenses ....................................... 1.27%
Class B Class C
Shares Shares
Deferred Level
Sales Charge Sales Charge
Alternative Alternative
--------------------- ---------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................................ None None
Maximum Sales Charge Imposed on Reinvested Dividends ................ None None
Maximum Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is lower) ......... 4.00%** 1.00%***
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees ..................................................... 0.82% 0.82%
12b-1 Fees .......................................................... 0.75% 0.75%
Other Expenses (including a .25% shareholder servicing
fee for Class B and Class C Shares) ................................ 0.45%**** 0.45%****
Total Fund Operating Expenses ....................................... 2.02% 2.02%
======= =======
</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.
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<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 ......................................... $57 $83 $112 $191
Class B Shares* ........................................ $61 $93 $129 $198*
Class C Shares ......................................... $31 $63 N/A N/A
You would pay the following expenses on the same
investment, assuming no redemption:
Class B Shares* ........................................ $21 $63 $109 $198*
Class C Shares ......................................... $21 $63 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 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. (For more complete
descriptions of the various costs and expenses, see "How to Buy Shares,"
"Investment Advisor and Sub-Advisor" and "Distributor.") The Expenses and
Example for the Class C Shares, which have not been offered prior to the date
of this Prospectus, 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 -- Purchases at Net Asset
Value.") 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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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, except for the unaudited financial statements for the
six-month period ended September 30, 1997, have been audited by Coopers &
Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the fiscal year ended March 31, 1997 and the report
thereon of Coopers & Lybrand L.L.P. and the unaudited financial statements and
financial highlights for the six-month period ended September 30, 1997 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, 1997 and its Semi-Annual
Report for the six-month period ended September 30, 1997, which can be
obtained at no charge by calling the Fund at (800) 767-FLAG. The Class C
Shares were not offered prior to the date of this Prospectus.
(For a share outstanding throughout each period)
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<TABLE>
<CAPTION>
Class A Shares
----------------------------------------------------------------------------
For the Six
Months Ended For the Year Ended March 31,
September 30, 1997 ------------------------------------------------------
(Unaudited) 1997 1996 1995 1994
-------------------- ------------ ------------ ------------ ------------
<S> <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
------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income .......... 0.23 0.39 0.36 0.35 0.40
Net realized and unrealized
gain/(loss) on investments .... 3.07 2.49 3.03 0.80 (0.04)
------- ------- ------- ------- -------
Total from Investment
Operations .................... 3.30 2.88 3.39 1.15 0.36
Less Distributions:
Distributions from net
investment income and
net realized short-term
gains ......................... (0.21) (0.36) (0.41) (0.35) (0.38)
Distributions from net realized
long-term gains ............... -- (0.06) (0.32) (0.01) --
------- ------- ------- ------- -------
Total distributions ............ (0.21) (0.42) (0.73) (0.36) (0.38)
------- ------- ------- ------- -------
Net asset value at end of
period ........................ $ 20.23 $ 17.14 $ 14.68 $ 12.02 $ 11.23
======= ======= ======= ======= =======
Total Return(2) ................. 19.42% 19.90% 28.86% 10.57% 3.14%
Ratios to Average Daily
Net Assets:
Expenses(3) .................... 1.15%(4) 1.27% 1.31% 1.35% 1.35%
Net investment income(5) ....... 2.52%(4) 2.51% 2.72% 3.07% 3.14%
Supplemental Data:
Net assets at end of period
(000) ......................... $374,094 $278,130 $200,020 $146,986 $131,097
Portfolio turnover rate ........ 6%(4) 13% 15% 18% 8%
Average commissions per
share(6) ...................... $ 0.057 $ 0.066 -- -- --
</TABLE>
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<TABLE>
<CAPTION>
Class B Shares
Class A Shares -------------------------------------------------------------------
------------------ Class B Shares For the Period
For the Period For the Six For the Year January 3, 1995(1)
June 15, 1992(1) Months Ended Ended March 31, Ended March 31,
through September 30, 1997 ------------------------- through
March 31, 1993 (Unaudited) 1997 1996 March 31, 1995
------------------ -------------------- ----------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period ........... $ 10.00 $ 17.16 $ 14.71 $ 12.01 $ 11.14
--------- ------- ------- -------- ----------
Income from Investment
Operations:
Net investment income .......... 0.18 0.17 0.26 0.21 0.08
Net realized and unrealized
gain/(loss) on investments .... 1.18 3.07 2.51 3.05 0.79
--------- ------- ------- -------- ----------
Total from Investment
Operations .................... 1.36 3.24 2.77 3.26 0.87
Less Distributions:
Distributions from net
investment income and
net realized short-term
gains ......................... (0.11) (0.16) (0.26) (0.24) --
Distributions from net realized
long-term gains ............... -- -- (0.06) (0.32) --
--------- ------- ------- -------- ----------
Total distributions ............ (0.11) (0.16) (0.32) (0.56) --
--------- ------- ------- -------- ----------
Net asset value at end of
period ........................ $ 11.25 $ 20.24 $ 17.16 $ 14.71 $ 12.01
========= ======= ======= ======== ==========
Total Return(2) ................. 13.73% 19.01% 19.00% 27.89% 7.81%
Ratios to Average Daily
Net Assets:
Expenses(3) .................... 1.35%(4) 1.90%(4) 2.02% 2.06% 2.10%(4)
Net investment income(5) ....... 2.88%(4) 1.77%(4) 1.84% 1.97% 2.94%(4)
Supplemental Data:
Net assets at end of period
(000) ......................... $ 83,535 $38,612 $ 17,311 $ 4,178 $ 341
Portfolio turnover rate ........ 8% 6%(4) 13% 15% 18%
Average commissions per
share(6) ...................... -- $ 0.057 $ 0.066 -- --
</TABLE>
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(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 1.40%, 1.38% and 1.70% (annualized) for
Class A Shares for the years ended March 31, 1995, 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.
(4) Annualized.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 3.02%, 3.11% and 2.53%
(annualized) for Class A Shares for the years ended March 31, 1995, 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.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
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 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 (secur-ities 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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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, 1997, presented as a percentage of total investments. These percentages
are historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
S&P Rating Average
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AAA 0.72%
AA 0.53%
A 3.43%
BBB 9.05%
BB 5.40%
B 2.99%
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.
<PAGE>
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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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).
The Fund is subject to further investment restrictions that are set
forth 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.
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.
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
5
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the class you are buying. The amount of any sales charge included in your
purchase price will be according to the following schedule:
<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
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</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 have to 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:
1) If you are buying shares in any of the following types of accounts:
(i) 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;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
3) 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).
4) 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.
<PAGE>
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' 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>
- --------------------------------------------------------------------------------
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.
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.
<PAGE>
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 ................ 0.50%* 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.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) The sales charge is applied to the lesser of the cost of the shares or
their current market value.
2) No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
3) 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.
4) If you acquired the shares through an exchange of shares of another Flag
Investors fund, the period of
7
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<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.
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 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.
4) 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.
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
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<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
In addition to the commissions shown above, for as long as you own your
shares, 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. 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.
<PAGE>
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of quarterly dividends. The Fund
may distribute to shareholders any taxable net capital gains on an annual
basis or, alternatively, may elect to retain net capital gains and pay tax
thereon.
Tax Treatment of Dividends and Distributions
The following 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 the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult your tax advisor regarding specific
questions as to federal, state and local income taxes.
The Statement of Additional Information sets forth further information
concerning taxes.
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 (the "Code"). As long as the Fund qualifies for this tax treatment, it
will be relieved of federal income tax on amounts 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 in cash or reinvested in additional shares.
You will be taxed on distributions from the Fund out of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, as gains from the sale of a capital asset held for more than
twelve months regardless of the length of time you have held the shares. You
will be taxed on all other income distributions as ordinary income. Corporate
shareholders 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 tax status of all distributions.
Ordinarily, you should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been received by you and paid by the Fund in
the year in which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange, or redemption of 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.
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 also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc., which funds, together with the Fund, had
approximately $6.5 billion of net assets as of December 31, 1997. ABIM is a
registered investment advisor with approximately $7.2 billion under management
as of December 31, 1997.
Pursuant to the terms of the Investment Advisory Agreement, ICC
supervises and manages all of the Fund's operations. Under the Investment
Advisory and Sub-Advisory Agreements, ICC delegates to ABIM certain of its
duties, provided that ICC continues to supervise the performance of ABIM and
report thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. The Board has established procedures under which ABIM may
allocate transactions to 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,
1997, ICC received from the Fund a
10
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<PAGE>
- --------------------------------------------------------------------------------
fee equal to 0.82% of the Fund's average daily net assets and, for the same
period, ICC paid ABIM a fee equal to 0.60% of the Fund's average daily net
assets.
ICC is an indirect subsidiary of Bankers Trust New York 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 ser-vices 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.
Hobart C. Buppert, II -- 25 Years Investment Experience
Mr. Buppert has been a Vice President of ABIM since 1980. Prior to
joining ABIM, Mr. Buppert worked as a Portfolio Manager for T. Rowe Price
Associates from 1976 to 1980 and as a Portfolio Manager and Research Analyst
for the Equitable Trust Company from 1972 to 1976. Mr. Buppert received his
B.A. and M.B.A. degrees from Loyola College in 1970 and 1974, respectively. He
is a member of the Baltimore Security Analysts Society and the Financial
Analysts Federation.
DISTRIBUTOR
- --------------------------------------------------------------------------------
Effective August 31, 1997, ICC Distributors, Inc. ("ICC Distributors" or
the "Distributor") acts as distributor of each class of the Fund's 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 either the Advisor or the Sub-Advisor.
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, ICC Distributors receives a fee equal to 0.25% of the average daily
net assets of the Class A Shares.
As compensation for providing distribution and shareholder services for
each of the Class B Shares and the Class C Shares, ICC Distributors receives a
distribution fee equal to 0.75% of the related class' average daily net assets
and a shareholder servicing fee equal to 0.25% of the related class' 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 and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services to the Fund is less than the payments received, the unexpended portion
of the distribution fees may be retained as profit by the Distributor. ICC
Distributors or the Advisor and their respective affiliates may make payments
from their own resources to securities dealers and servicing agents. Payments by
the Distributor will 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, 1997, ICC received a fee equal to 0.03% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
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 per- formance
of the Fund, as well as the performance of such investment companies or
indices, may not reflect sales charges, which, if reflected, would reduce
performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services 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 performance should not
be considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by your bank with respect to the account
through which your shares may be purchased, although not included in
calculations of performance, will reduce your performance results.
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 of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have
12
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<PAGE>
- --------------------------------------------------------------------------------
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
Unless required by applicable Maryland law, the Fund does not expect to
hold annual meetings of share-holders. However, shareholders of the Fund
retain the right, under certain circumstances, to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with
shareholder communications in connection with the meeting.
Reports
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, Coopers & Lybrand L.L.P.
Shareholder Inquiries
If you have questions concerning your shares, you should 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.
Flag Investors Funds (Eastern Time).
P.O. Box 419663
Kansas City, MO 64141-6663 To open an IRA account, please call 1-800-767-3524 for an IRA
Attn: Flag Investors Value Builder Fund, Inc. information kit.
</TABLE>
I wish to purchase the following class of shares of the Fund, in the amount
indicated below. (Please check the applicable box and indicate the amount of
purchase.)
[ ] Class A Shares (4.5% maximum initial sales charge) in the amount of $______
[ ] Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $________
[ ] Class C Shares (1.0% maximum contingent deferred sales charge) in the
amount of $________
- -------------------------------------------------------------------------------
The minimum initial purchase for each class of shares is $2,000, except that
the minimum initial purchase for shareholders of any other Flag Investors Fund
or class is $500 and the minimum initial purchase for participants in the
Fund's Automatic Investing Plan is $250 per class. The Fund reserves the right
not to accept checks for more than $50,000 that are not certified or bank
checks.
Your Account Registration (Please Print)
Existing Account No., if any: ___________________
Individual or Joint Tenant
- ---------------------------------------------
First Name Initial Last Name
- ---------------------------------------------
Social Security Number
- ---------------------------------------------
Joint Tenant Initial Last Name
<PAGE>
Corporations, Trusts, Partnerships, etc.
- ---------------------------------------------
Name of Corporation, Trust or Partnership
- -------------------- ---------------------
Tax ID Number Date of Trust
- ---------------------------------------------
Name of Trustees (If to be included in the
Registration)
- ---------------------------------------------
For the Benefit of
Gifts to Minors
- ---------------------------------------------
Custodian's Name (only one allowed by law)
- ---------------------------------------------
Minor's Name (only one)
- ---------------------------------------------
Social Security Number of Minor
under the __________________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
- ---------------------------------------------
Street
- ---------------------------------------------
City State Zip
( )
- --------------------------------------
Daytime Phone
<PAGE>
Letter of Intent (Class A Shares only) (Optional)
[ ] I agree to the Letter of Intent and Escrow Arrangement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares of Flag Investors Value
Builder Fund, Inc., in an aggregate amount at least equal to
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Right of Accumulation (Optional)
List the Account numbers of other Flag Investors Funds that you or your
immediate 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
distributions will be reinvested in additional shares of the same class of the
Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
A-1
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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.)
Minimum Initial Investment: $250 per class [ ] Monthly ($100 minimum per class)
Subsequent Investments (check one): [ ] Quarterly ($250 minimum per class)
Please attach a voided check.
- ------------------------------------ -----------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------ -----------------------------------------
Existing Flag Investors Fund Account Depositor's Signature Date
No., if any (if joint acct., both must sign)
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of __________ , 19__ please send me checks on a monthly
or quarterly basis, as indicated below, in the amount of (complete as
applicable) $________ , from Class A Shares and/or $_______ from Class B Shares
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:____________________
________________________
<PAGE>
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.
- -------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus. I acknowledge that the
telephone redemption and exchange privileges are automatic and will be
effected as described in the Fund's current prospectus (see "Telephone
Transactions"). I also acknowledge that I may bear the risk of loss in the
event of fraudulent use of such privileges. If I do not want telephone
redemption or exchange privileges, I have so indicated on this Application.
- -------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<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. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
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 PARTICIPATING DEALER OR SHAREHOLDER
SERVICING AGENT OR BY WRITING OR CALLING THE FUND, ONE SOUTH
STREET, BALTIMORE, MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1997, as supplemented through March 30, 1998,
relating to the Prospectuses Dated:
August 1, 1997, as supplemented through September 1, 1997,
relating to the Institutional Shares and
March 30, 1998 relating to the Class A, Class B and Class C Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Informaion and History................................... 1
2. Investment Objective, Policies and Risk Considerations........... 1
3. Valuation of Shares and Redemption................................ 8
4. Federal Tax Treatment of Dividends and
Distributions................................................... 8
5. Management of the Fund............................................ 11
6. Investment Advisory and Other Services............................ 16
7. Distribution of Fund Shares....................................... 17
8. Brokerage......................................................... 21
9. Capital Stock..................................................... 23
10. Semi-Annual Reports............................................... 23
11. Custodian, Transfer Agent and Accounting Services................. 24
12. Independent Accountants........................................... 24
13. Performance Information........................................... 24
14. Control Persons and Principal Holders of
Securities...................................................... 26
15. Financial Statements.............................................. 26
Appendix.......................................................... A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an
open-end management investment company, or mutual fund. Under the rules and
regulations of the Securities and Exchange Commission (the "SEC"), all mutual
funds are required to furnish prospective investors with certain information
concerning the activities of the company being considered for investment. The
Fund currently offers 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 Registration Statement for the Fund and its Shares filed with
the SEC. Copies of the Registration Statement as filed, including such omitted
items, may be obtained from the SEC by paying the charges prescribed under its
rules and regulations.
The Fund was incorporated under the laws of the State of Maryland
on March 5, 1992. The Fund filed a registration statement with the SEC
registering itself as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, as amended, and commenced
operations on June 15, 1992. The Fund commenced offering the Class B Shares on
January 3, 1995 and the Institutional Shares on November 2, 1995. The Class C
Shares have not been offered prior to the date of this Statement of Additional
Information.
For the period from November 9, 1992 through November 18, 1994,
the Fund offered another class of shares: Flag Investors Value Builder Fund
Class D Shares, which were known at the time as Flag Investors Value Builder
Fund Class B Shares and reclassified as Flag Investors Value Builder Fund Class
D Shares on November 18, 1994. Shares of that class are not currently being
offered, although some Class D Shares remain outstanding.
Under a license agreement dated June 15, 1992 between the Fund
and Alex. Brown & Sons Incorporated, now BT Alex. Brown Incorporated ("BT Alex.
Brown"), BT Alex. Brown licenses to the Fund the "Flag Investors" name and logo
but retains the rights to the name and logo, including the right to permit other
investment companies to use them.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective is to maximize total return
through a combination of long-term capital appreciation and current income. The
Fund seeks to achieve this objective through a policy of diversified investments
in equity and debt securities (including common stocks, convertible securities
and government and corporate fixed-income obligations). Under normal market
conditions,
1
<PAGE>
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 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
2
<PAGE>
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 also is influenced by the market value of the security's
underlying common stock.
3
<PAGE>
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
4
<PAGE>
corporate bonds. There are fewer securities dealers in the high-yield market and
purchasers of high-yield bonds are concentrated among a smaller group of
securities dealers and institutional investors. In periods of reduced market
liquidity, the market for lower rated bonds may become more volatile and there
may be significant disparities in the prices quoted for high-yield securities by
various dealers. Under conditions of increased volatility and reduced liquidity,
it would become more difficult for the Fund to value its portfolio securities
accurately because there might be less reliable, objective data available.
Finally, prices for high-yield bonds may be affected by
legislative and regulatory developments. For example, from time to time,
Congress has considered legislation to restrict or eliminate the corporate tax
deduction for interest payments or to regulate corporate restructurings such as
takeovers, mergers or leveraged buyouts. Such legislation may significantly
depress the prices of outstanding high-yield bonds.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks
or broker-dealers deemed to be creditworthy by 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
5
<PAGE>
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.
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
6
<PAGE>
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;
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 this restriction apply
at the time of purchase of securities.
7
<PAGE>
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the close
of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time)
each day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays: New Year's Day, Martin Luther King, Jr.'s Birthday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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.
Redemption
The Fund may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Class A Shares,
Class B Shares and Class C Shares by check, and Institutional Shares by wire
transfer of funds, as described in the Prospectuses relating to such Shares.
However, if the Board of Directors determines that it would be in the best
interests of the remaining shareholders of the Fund to make payment of the
redemption price in whole or in part by a distribution in kind of readily
marketable securities from the portfolio of the Fund in lieu of cash, in
conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming shareholder
will incur brokerage costs in later converting the assets into cash. The method
of valuing portfolio securities is described in the Prospectus under "How to
Invest" and such valuation will be made as of the same time the redemption price
is determined. The Fund, however, has elected to be governed by Rule 18f-1 under
the Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following discussion of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
8
<PAGE>
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 fails to meet the Asset Diversification
Test solely as a result of a fluctuation in value of portfolio assets not
attributable to a purchase. The Fund may curtail its investments in certain
securities where the application thereto of the Asset Diversification Test is
uncertain.
Under Subchapter M of the Code, the Fund is exempt from federal
income tax on its net investment income and capital gains which it distributes
to shareholders, provided that it distributes at least 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gains over net long-term capital losses) for the year (the "Distribution
Requirement") and complies with the other requirements of the Code described
above. Distributions of investment company taxable income made during the
taxable year or, under certain specified circumstances, within twelve months
after the close of the taxable year will satisfy the Distribution Requirement.
The Distribution Requirement for any year may be waived if a RIC establishes to
the satisfaction of the Internal Revenue Service that it is unable to satisfy
the Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax.
Although the Fund intends to distribute substantially all of its
net investment income and capital gains for any taxable year, the Fund will be
subject to federal income taxation to the extent any such income or gains are
not distributed.
If for any taxable year, the Fund does not qualify as a RIC, all
of its taxable income will be subject to tax at regular corporate income tax
rates without any deduction for distributions to shareholders, and all such
distributions generally will be taxable to shareholders as ordinary dividends to
the extent of the Fund's current and accumulated earnings and profits. Such
distributions generally will be eligible for the 70% dividends received
deduction for corporate shareholders.
9
<PAGE>
Fund Distributions
Distributions of investment company taxable income, generally,
will be taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in additional Shares. The Fund
anticipates that it will distribute substantially all of its investment company
taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gains") for each taxable year. If such gains are distributed as a
capital gains distribution, they are taxable to shareholders as gain from the
sale or exchange of a capital asset held for more than one year, regardless of
the length of time the shareholder has held Shares, whether or not such gains
were recognized by the Fund prior to the date on which a shareholder acquired
Shares and whether or not the distribution was paid in cash or reinvested in
Shares. Conversely, if the Fund elects to retain its net capital gains, it will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the applicable corporate capital gains tax rate. In this event, it is
expected that the Fund also will elect to have shareholders treated as having
received a distribution of such gains, with the result that shareholders will be
required to report such gains on their returns as gain from the sale or exchange
of a capital asset held for more than one year, will receive a tax credit for
their allocable share of capital gains tax paid by the Fund on the gains, and
will increase the tax basis for their Shares by an amount equal to 65% of such
gains.
In the case of corporate shareholders, Fund distributions (other
than capital gains distributions) generally qualify for the 70% dividends
received deduction to the extent of the gross amount of certain qualifying
dividends received by the Fund for the year. Generally, a dividend will be
treated as a qualifying dividend if it has been received from a domestic
corporation. For purposes of the alternative minimum tax and the environmental
tax, corporate shareholders generally will be required to take the full amount
of any dividend received from the Fund into account in determining their
adjusted current earnings for purposes of computing "alternative minimum taxable
income."
Generally for individual shareholders, gain or loss on the sale
or exchange of a Share will be capital gain or loss which will be long-term
capital gain if the Share has been held for eighteen months or more, mid-term
capital gain if the Share has been held for more than twelve, but less than
eighteen months, and otherwise will be short-term capital gain. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution
with respect to the Share (or has included in income any undistributed net
capital gains of the Fund with respect to such Share), the shareholder must
treat the loss as a long-term capital loss to the extent of the amount of the
prior capital gains distribution (or any undistributed net capital gains of the
Fund with respect to such Share which have been included in the shareholder's
income). In addition, any loss realized on a sale or other disposition of Shares
will be disallowed to the extent an investor repurchases (or enters into a
contract or option to repurchase) Shares within a period of 61 days (beginning
30 days before and ending 30 days after the disposition of the Shares). This
loss disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase may have reflected the amount of such
forthcoming dividend or distribution.
10
<PAGE>
The Fund will be required in certain cases to withhold and remit
to the United States Treasury 31% of distributions payable to any shareholder
who (1) has provided either an incorrect taxpayer identification number or no
number at all, (2) is subject to backup withholding by the Internal Revenue
Service for failure to properly report receipt of interest or dividends, or (3)
who has failed to certify to the Fund that such shareholder is not subject to
backup withholding.
The Fund will provide a statement annually to shareholders as to
the federal income tax status of distributions paid (or deemed to be paid) by
the Fund during the year, including the amount of dividends eligible for the
corporate dividends received deduction.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a non-deductible 4% federal excise tax on RICs
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period 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.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is One South Street, Baltimore, Maryland 21202.
*TRUMAN T. SEMANS, Chairman (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated. Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated. (now known as BT Alex. Brown
Incorporated); Vice Chairman, Alex. Brown Capital Advisory & Trust Company;
and Director, Investment Company Capital Corp. (registered investment
advisor).
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present. Formerly, Senior
Vice President and Chief Financial Officer, General Dynamics Corporation
(defense), 1989-1993; and Director, The Arch Fund (registered investment
company).
11
<PAGE>
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); Chartered
Financial Analyst.
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM Funds
(registered investment companies). Formerly, Consultant, Wendell & Stockel
Associates, Inc. (consulting firm); General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-Clark
Corporation (personal consumer products) and Household International
(banking and finance); Chairman of the Quality Control Inquiry Committee,
American Institute of Certified Public Accountants. Formerly, Trustee,
Merrill Lynch Funds for Institutions, 1991-1993; Adjunct Professor,
Columbia University-Graduate School of Business, 1991-1992; Partner, KPMG
Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main Street,
Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care); Director, Central Carolina Bank & Trust
(banking), Key Funds (registered investment companies) and 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.
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); Director, 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, Director, Flag
Investors/ISI/BT Alex. Brown Family of Funds; Trustee, Rockefeller
Foundation; Director, Merrill Lynch Cluster C Funds (registered investment
companies); and Trustee, Reed College (education).
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present. Formerly,
Senior Manager, Coopers & Lybrand LLP, September 1988-June 1997.
12
<PAGE>
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown Incorporated and Vice President, Investment
Company Capital Corp. (registered investment advisor), September
1995-Present. Formerly, Vice President and Treasurer, The Delaware Group of
Funds (registered investment companies) and Vice President, Delaware
Management Company, Inc. (investments), 1980-August, 1995.
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.
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 its
affiliates 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, 1997, Independent Directors' fees attributable to the assets of the Fund
totaled approximately $19,242.
13
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Pension or Retirement Total Compensation from the Fund and
Position the Fund Payable to Directors Benefits Accrued as Fund Complex Payable to Directors for the
for the Fiscal Year Ended Part of Fund Expenses Fiscal Year Ended March 31, 1997
March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans (1) $0 $0 $0
Chairman
W. James Price (1,2) $0 $0 $0
Director
Richard T. Hale (1) $0 $0 $0
Director
Charles W. Cole, Jr. (1,3) $0 $0 $0
Director,
James J. Cunnane $1,860 (4) $ (5) $39,000 for service
Director on 12 Boards
John F. Kroeger $2,337 (4) $ (5) $49,000 for service
Director on 12 Boards
Louis E. Levy $1,860 (4) $ (5) $39,000 for service
Director on 12 Boards
Eugene J. McDonald $1,860 (4) $ (5) $39,000 for service
Director on 12 Boards
Rebecca W. Rimel $552 (4) $ (5) $39,000 for service
Director on 10 Boards (6)
Carl W. Vogt $557 (4) $ (5) $39,000 for service
Director on 10 Boards (6)
Harry Woolf (2) $1,321 (4) $ (5) $29,250 for service
Director on 12 Boards
</TABLE>
- -----------------
1 A Director who is an "interested person" as defined in the Investment
Company Act.
2 Messrs. Price and Woolf each retired as Directors of the Fund,
effective December 31, 1996. Effective September 1, 1997, Mr. Woolf
serves as President of the Fund and other funds in the Fund Complex.
For serving as President, Mr. Woolf receives compensation from the
Fund and certain other funds in the Fund Complex in addition to his
retirement benefits.
3 Retired, effective August 13, 1997.
4 Of amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt
and Woolf and Ms. Rimel $1,860, $0, $0, $1,860, $557, $1,321 and $552,
respectively, was deferred pursuant to a deferred compensation plan.
5 The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
year ended March 31, 1997 was approximately $10,628.
6 Ms. Rimel and Mr. Vogt received proportionately higher compensation
from each fund for which they serve.
14
<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. Another participant, who
retired on January 31, 1996 and died on June 2, 1996, was paid fees of $8,090 by
the Fund Complex under the Retirement Plan in the period ended December 31,
1996. Such fees are allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at March 31, 1997 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1 year;
and for Mr. Vogt, 1 year.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Levy, McDonald and Vogt and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select various Flag Investors funds and BT Alex. Brown
Cash Reserve Fund, Inc. 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.
15
<PAGE>
The Code of Ethics requires that any officer, director or
employee of the Fund, the Distributor 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 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 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.
6. 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 New York
Corporation. ABIM is a limited partnership affiliated with the Advisor. Buppert,
Behrens & Owens, Inc., a company organized and owned by three employees of ABIM,
owns a 49% limited partnership interest and a 1% general partnership interest in
ABIM. BT Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex.
Brown Holdings, Inc. owns the remaining 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.
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.
16
<PAGE>
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: 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ICC $2,227,355 $ 1,651,971 $ 1,248,666*
- -------------------------------------------------------------------------------------------------------------------------------
ABIM $1,633,167 $ 1,225,064 $ 967,323
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
* Net of fee waivers.
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.")
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors") serves as the
exclusive distributor of the Fund's Shares pursuant to the Distribution
Agreement, effective 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 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
17
<PAGE>
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.
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.
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
18
<PAGE>
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, Alex. Brown received fees
in the following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 12b-1 $575,090 $435,163 $342,916
- --------------------------------------------------------------------------------------------------------------------------------
Class B 12b-1 $ 64,138 $ 14,685 $ 305*
- --------------------------------------------------------------------------------------------------------------------------------
Class B Shareholder
Servicing Fee $ 21,379 $ 4,895 $ 101*
- --------------------------------------------------------------------------------------------------------------------------------
Class D 12b-1 $ 86,879 $ 77,244 $ 69,979
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*for the period from January 3, 1995 through March 31,1995
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
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
19
<PAGE>
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
Alex. Brown received commissions on the sale of Class A Shares
and contingent deferred sales loads on the Class B Shares, of which only a
portion of these amounts was retained by Alex. Brown, in the following amounts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------------
Class 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
Commissions $937,641 $868,899 $431,884 $430,833 $225,285 $204,552
- --------------------------------------------------------------------------------------------------------------------------------
Class B $483,596 $350,485 $133,944 $126,571 $34,265* $33,025*
Contingent
Deferred Sales
Charge
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*for the period from January 3, 1995 through March 31,1995
Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory and distribution fees; the charges and expenses of any
registrar, any custodian or depository appointed by the Fund for the safekeeping
of cash, portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and
20
<PAGE>
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.
The address of ICC Distributors is P.O. Box 7558, Portland, Maine
04101.
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for
the Fund, for the broker-dealer selection and for negotiation of commission
rates, subject to the supervision of ICC. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a commission
for their services. Brokerage commissions are subject to negotiation between
ABIM and the broker-dealers. ABIM may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, its affiliates and ICC Distributors.
In over-the-counter transactions, orders are placed directly with
a principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with the
Advisors or their affiliates in any transaction in which any of them acts as a
principal nor will the Fund buy or sell over-the-counter securities with the
Advisors or their affiliates acting as market maker.
If the Advisors or their affiliates 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
21
<PAGE>
investment advice. In over-the-counter transactions, ABIM will not pay any
commission or other remuneration for research services. ABIM's policy is to pay
a broker-dealer higher commissions effected on an agency (but not on a
principal) basis for particular transactions than might be charged if a
different broker-dealer had been chosen when, in ABIM's opinion, this policy
furthers the overall objective of obtaining best price and execution. Subject to
periodic review by the Fund's Board of Directors, ABIM is also authorized to pay
broker-dealers other than the Advisors or their affiliates 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 the Advisors or their affiliates. At the time of such authorization, the
Board adopted certain policies and procedures incorporating the standards of
Rule 17e-1 under the Investment Company Act which requires that the commissions
paid the Advisors or their affiliates must be "reasonable and fair compared to
the commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC and
ABIM to furnish reports and to maintain records in connection with such reviews.
ABIM manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transactions Directed $38,947,268 $31,958,910 $38,044,707
- --------------------------------------------------------------------------------------------------------------------------------
Commissions Paid $111,113 $78,634 $89,162
- --------------------------------------------------------------------------------------------------------------------------------
</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, 1997, the Fund held
a 6.25% repurchase agreement issued by Goldman Sachs & Co. valued at $23,392,000
and a 6.78% note of J.P. Morgan due January 15, 2007, valued at $4,831,250.
Goldman Sachs & Co. and J.P. Morgan are "regular brokers or dealers" of the
Fund.
22
<PAGE>
9. 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 four classes of Shares: Flag Investors Value Builder
Fund Class A Shares, Flag Investors Value Builder Fund Class B Shares, Flag
Investors Value Builder Fund 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. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights applicable
to any of the Shares. The issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information the term
"majority of the outstanding Shares" means the vote of the lesser of (i) 67% or
more of the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Effective September 22, 1997, Bankers Trust Company ("Bankers
Trust"), has been retained to act 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.
Investment Company Capital Corp. has been retained to act as transfer and
dividend disbursing agent. As compensation for
23
<PAGE>
providing these services, the Fund pays ICC up to $15.00 per account per year,
plus reimbursement for out-of-pocket expenses incurred in connection therewith.
For the fiscal year ended March 31, 1997 such fees totaled $105,449.
ICC also provides certain accounting services to the Fund. As
compensation for these services, ICC receives an annual fee, calculated daily
and paid monthly as shown below.
Average Net Assets Incremental Annual Accounting Fee
- ------------------ ---------------------------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 .100%
$20,000,000 - $30,000,000 .080%
$30,000,000 - $40,000,000 .060%
$40,000,000 - $50,000,000 .050%
$50,000,000 - $60,000,000 .040%
$60,000,000 - $70,000,000 .030%
$70,000,000 - $100,000,000 .020%
$100,000,000 - $500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following out of
pocket expenses incurred in connection with ICC's performance of its services
under the Master Services Agreement: express delivery service, independent
pricing and storage.
For the fiscal year ended March 31, 1997, ICC received accounting
fees of $80,766.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers
& Lybrand L.L.P., whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund
to that of other open-end diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5-, or
10-year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of the
1-, 5- or 10-year periods.
24
<PAGE>
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five-, and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the 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.
Calculated according to SEC rules, the ending redeemable value
and average annual total return of a hypothetical $1,000 investment for the
periods ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
One-Year Period Ended
March 31, 1997 Since Inception
- ------------------------------------------------------------------------------------------------------------------
Ending Average Ending Average
Redeemable Annual Total Redeemable Annual Total
Class Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
June 15, 1992* $1145.00 14.50% $2003.77 14.49%
- ------------------------------------------------------------------------------------------------------------------
Class B
January 3, 1995* $1149.80 14.98% $1600.43 23.35%
- ------------------------------------------------------------------------------------------------------------------
Class D
November 9, 1992* $1166.85 16.69% $1846.66 14.99%
- ------------------------------------------------------------------------------------------------------------------
Institutional
November 2, 1995* $1202.40 20.24% $1307.13 20.95%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
25
<PAGE>
The Fund may also from time to time include in such advertising
total return figures that are not calculated according to the formula set forth
above to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc. or CDA Investment Technologies
Inc., or with the performance of the Lehman Government Corporate Bond Index, the
Consumer Price Index, the return on 90-day U.S. Treasury bills, the Standard and
Poor's 500 Stock Index or the Dow Jones Industrial Average, the Fund calculates
its aggregate and average annual total return for the specified periods of time
by assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges. 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 1997 was 13% and in fiscal year
1996 was 15%.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons held
beneficially or of record 5% or more of the Fund's outstanding Shares as of
March 6, 1998:
T. Rowe Price TR
Alex. Brown & Sons Inc. Plan 100460 5.91%
Flag Investors Value Builder
Attn: Asset Recon
P.O. Box 17215
Baltimore, MD 21297-1215
401k Plan
As of March 6, 1998, Directors and officers as a group
beneficially owned an aggregate of less than 1% of the Fund's total outstanding
shares.
15. FINANCIAL STATEMENTS
See next page.
26
<PAGE>
Alex Brown FI Value Builder AR Form N-30D
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets March 31, 1997
Market Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 60.0%
Banking: 3.3%
35,000 Citicorp $ 3,788,750
100,000 KeyCorp 4,875,000
10,000 Wells Fargo & Company 2,841,250
-----------
11,505,000
-----------
Basic Industry: 3.8%
70,077 Agrium, Inc. 893,482
20,000 Georgia-Pacific Corp. 1,450,000
30,000 Hercules, Inc. 1,267,500
32,232 Martin Marietta Materials, Inc. 829,974
140,000 Monsanto Co. 5,355,000
44,654 Potash Corp. of Saskatchewan 3,393,766
-----------
13,189,722
-----------
Business Services: 1.7%
81,900 First Data Corp. 2,774,363
151,100 SEI Corp. 3,173,100
-----------
5,947,463
-----------
Capital Goods: 1.2%
36,000 Eaton Corp. 2,551,500
110,300 Westinghouse Air Brake Co. 1,433,900
-----------
3,985,400
-----------
Consumer Durables/Non-Durables: 5.1%
140,000 Blyth Industries, Inc.* 5,057,500
33,500 Eastman Kodak Co. 2,541,812
110,000 Ford Motor Company 3,451,250
50,000 Liz Claiborne, Inc. 2,181,250
37,200 Philip Morris Cos., Inc. 4,245,450
-----------
17,477,262
-----------
Consumer Services: 3.5%
92,000 America Online, Inc.* 3,898,500
124,875 CUC International, Inc.* 2,809,688
30,000 Gannett Co. 2,576,250
50,000 Times Mirror Co. Class A 2,731,250
-----------
12,015,688
-----------
27
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) March 31, 1997
Market Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS (continued)
Defense/Aerospace: 2.9%
31,171 Lockheed Martin Corp. $ 2,618,364
120,000 McDonnell Douglas Corp. 7,320,000
-----------
9,938,364
-----------
Electric Utilities: 0.6%
100,000 Unicom Corp. 1,950,000
-----------
Energy: 0.6%
71,600 MAPCO, Inc. 2,219,600
-----------
Entertainment: 0.9%
300,000 LodgeNet Entertainment Corp.* 3,150,000
-----------
Financial Services: 6.0%
83,500 American Express Co. 4,999,562
87,500 Countrywide Credit Industries, Inc. 2,165,625
172,000 Federal Home Loan Mortgage Corp. 4,687,000
118,125 MBNA Corp. 3,292,734
114,000 Travelers Group, Inc. 5,457,750
-----------
20,602,671
-----------
Health Care: 5.7%
50,000 Amgen, Inc.* 2,793,750
40,000 Baxter International, Inc. 1,725,000
38,000 Bristol-Myers Squibb 2,242,000
54,434 Eli Lilly & Co. 4,477,196
114,000 Johnson & Johnson 6,027,750
60,000 Mallinckrodt Group 2,467,500
-----------
19,733,196
-----------
Hotels/Gaming: 1.8%
200,000 Harrah's Entertainment, Inc.* 3,425,000
40,000 Hilton Hotels Corp. 970,000
32,500 ITT Corp.* 1,913,438
-----------
6,308,438
-----------
Housing: 1.8%
200,000 Champion Enterprises, Inc.* 2,975,000
108,000 USG Corp.* 3,388,500
-----------
6,363,500
-----------
28
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Market Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS (concluded)
Insurance: 8.8%
495,858 Conseco, Inc. $ 17,664,941
80,000 EXEL Limited 3,380,000
135,000 GCR Holding Limited 3,088,125
32,500 ITT Hartford Group, Inc. 2,344,063
80,000 Mid Ocean Ltd. 3,820,000
-----------
30,297,129
-----------
Multi-Industry: 2.5%
42,500 ITT Industries, Inc. 950,937
33,400 Loews Corp. 2,968,425
64,000 United Technologies Corp. 4,816,000
-----------
8,735,362
-----------
Real Estate: 2.5%
60,200 General Growth Properties, Inc. 1,911,350
324,136 Host Marriott Corp.* 5,510,312
35,000 National Health Investors, Inc. 1,299,375
-----------
8,721,037
-----------
Retail: 3.4%
124,664 J.C. Penney Company, Inc. 5,937,123
300,000 Kmart Corp.* 3,637,500
45,000 Tandy Corp. 2,255,625
-----------
11,830,248
-----------
Technology: 2.8%
70,400 Autodesk, Inc. 2,182,400
43,000 International Business Machines Corp. 5,907,125
33,400 Millipore Corp. 1,415,325
-----------
9,504,850
-----------
Telecommunications: 0.7%
69,000 MCI Communications 2,458,125
-----------
Transportation: 0.4%
17,491 Delta Air Lines, Inc. 1,471,430
-----------
Total Common Stock
(Cost $123,460,459) 207,404,485
-----------
29
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) March 31, 1997
Shares/ Market Value
Par(000) (Note 1)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK: 2.4%
32,300 Conseco Inc., $4.28 Cvt. Pfd., Series E $ 4,089,988
75,000 Host Marriott Financial Trust 4,237,500
-----------
Total Convertible Preferred Stock
(Cost $5,724,337) 8,327,488
-----------
PREFERRED SECURITIES: 0.7%
100,000 Conseco Financial Trust
(Cost $2,500,000) 2,512,500
-----------
CONVERTIBLE BONDS: 1.6%
$2,000 Capstone Capital Corp., Cvt. Deb.,
6.55%, 3/14/02 1,830,000
339 Richardson Electronics, Cvt. Deb.,
7.25%, 12/15/06 276,285
1,661 Richardson Electronics, Cvt. Deb.,
8.25%, 6/15/06 1,422,231
2,000 Sizeler Property Investors, Cvt. Deb.,
8.00%, 7/15/03 1,840,000
-----------
Total Convertible Bonds
(Cost $5,461,496) 5,368,516
-----------
CORPORATE BONDS: 23.4%
1,000 American Life Holding Co., Sr Sub Nt,
11.25%, 9/15/04 1,131,250
1,000 Caesar's World, 8.875%, 8/15/02 1,040,000
873 Chattem, Inc., Sr Sub Deb, 12.75%, 6/15/04 953,753
-- Chattem, Inc., 1,000 Warrants, Expiring 6/17/99 8,900
3,000 Conseco, Inc., Nt, 8.125%, 2/15/03 3,048,750
700 CSX Corp., Nt, 7.00%, 9/15/02 695,625
575 Dillard Dept. Stores, Nt, 7.15%, 9/1/02 571,406
3,000 Eckerd Corp., Nt, 9.25%, 2/15/04 3,187,500
300 Exxon Capital Corp., Nt, 6.50%, 7/15/99 298,875
2,000 FMC Corp., Nt, 8.75%, 4/1/99 2,050,000
1,000 Fund America Enterprise, Nt, 7.75%, 2/1/03 990,000
4,500 HMH Properties, Nt, 9.50%, 5/15/05 4,590,000
3,000 Host Marriott Travel Plaza, Nt, 9.50%, 5/15/05 3,060,000
30
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Par Market Value
(000) (Note 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS (concluded)
$2,775 ITT Corp., Nt, 6.25%, 11/15/00 $ 2,684,813
2,000 ITT Corp., Nt, 6.75%, 11/15/03 1,905,000
2,000 John Q. Hammons Hotels LP, Nt,
8.875%, 2/15/04 1,982,500
2,000 Jordan Industries, Nt, 10.375%, 8/1/03 1,982,500
5,000 J.P. Morgan, Nt, 6.875%, 1/15/07 4,831,250
2,200 Lockheed Martin Corp., Nt, 6.85%, 5/15/01 2,180,750
2,500 Lockheed Martin Corp., Nt, 7.25%, 5/15/06 2,471,875
5,000 LodgeNet Entertainment, Nt, 10.25%, 12/15/06 4,925,000
1,285 Markel Corp., Nt, 7.25%, 11/1/03 1,270,544
2,500 Marriott International, 6.75%, 12/15/03 2,396,875
2,100 Marriott International, 7.875%, 4/15/05 2,121,000
1,100 Masco Corp., Nt, 6.625%, 9/15/99 1,095,875
1,000 Masco Corp., Nt, 6.125%, 9/15/03 938,750
2,000 McDonnell Douglas Corp., Nt, 6.875%, 11/1/06 1,927,500
2,000 MCI Communications, Nt, 6.25%, 3/23/99 1,985,000
500 MCI Communications, Nt, 7.50%, 8/20/04 509,375
2,100 Millipore Corp., Nt, 7.20%, 4/1/02 2,089,500
2,100 Millipore Corp., Nt, 7.50%, 4/1/07 2,085,468
2,000 Nabisco, Inc., 6.70%, 6/15/02 1,945,000
500 New England Telephone & Telegraph, Nt,
6.15%, 9/1/99 494,375
1,000 Noble Drilling Company, Nt, 9.25%, 10/1/03 1,053,750
500 PepsiCo, Inc., Nt, 6.25%, 9/1/99 495,625
325 Petroleum Heat & Power, Nt, 12.25%, 2/1/05 354,656
2,000 Petroleum Heat & Power, Nt, 9.375%, 2/1/06 1,897,500
4,000 Premier Parks, Nt, 9.75%, 1/15/07 4,130,000
2,000 RJR Nabisco Inc., Nt, 7.625%, 9/15/03 1,905,000
1,500 Salomon, Inc., Nt, 7.125%, 8/1/99 1,507,500
1,000 Tektronix, Inc., Nt, 7.50%, 8/1/03 990,000
1,000 Tenneco, Inc., Nt, 8.075%, 10/1/02 1,035,000
1,000 Travelers Group, Inc., Nt, 6.125%, 6/15/00 970,000
1,000 Union Pacific Co., 6.25%, 3/15/99 988,750
1,660 USG Corp., 8.50%, 8/1/05 1,678,675
500 Xerox Corp., Nt, 7.15%, 8/1/04 496,250
----------
Total Corporate Bonds
(Cost $80,723,099) 80,951,715
----------
31
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) March 31, 1997
Par Market Value
(000) (Note 1)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY SECURITIES: 4.0%
$1,000 Federal National Mortgage Assoc., 7.6%, 5/24/06 $ 985,940
----------
U.S. Treasury Notes
3,000 5.125%, 2/28/98 2,975,880
3,000 5.875%, 2/28/99 2,972,400
3,000 6.25%, 5/31/00 2,969,220
4,000 6.125%, 12/31/01 3,900,840
----------
12,818,340
----------
Total U.S. Government Securities
(Cost $13,906,131) 13,804,280
----------
REPURCHASE AGREEMENT: 6.8%
23,392 Goldman Sachs & Co., 6.25%
Dated 3/31/97, to be repurchased on 4/1/97,
collateralized by U.S. Treasury Notes with
a market value of $23,860,630.
(Cost $23,392,000) $ 23,392,000
------------
Total Investment In Securities: 98.9%
(Cost $255,167,522)** 341,760,984
Other Assets in Excess of Liabilities, Net: 1.1% 3,664,622
------------
Net Assets: 100.0% $345,425,606
============
32
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Market Value
(Note 1)
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Class A Share
($278,130,436 / 16,228,513 shares outstanding) $17.14
======
Class B Share
($17,311,481 / 1,008,822 shares outstanding) $17.16+
======
Class D Share
($15,212,749 / 889,149 shares outstanding) $17.11++
======
Institutional Share
($34,770,940 / 2,013,930 shares outstanding) $17.27
======
Maximum Offering Price Per:
Class A Share ($17.14 / .955) $17.95
======
Class B Share $17.16
======
Institutional Share $17.27
======
- ------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
+ Redemption value is $16.47 following 4% maximum contingent deferred sales
charge.
++ Redemption value is $16.94 following 1% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
33
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
March 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $ 6,100,648
Dividends 4,215,000
-----------
Total income 10,315,648
-----------
Expenses:
Investment advisory fee (Note 2) 2,227,355
Distribution fee (Note 2) 747,486
Transfer agent fee (Note 2) 105,449
Registration fees 85,812
Accounting fee (Note 2) 80,766
Miscellaneous 68,067
Printing and postage 53,700
Legal 51,314
Custodian fee 42,540
Audit 32,040
Director's fees 19,242
Pricing fee 11,041
Organizational expense (Note 1) 10,202
-----------
Total expenses 3,535,014
-----------
Net investment income 6,780,634
-----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 4,707,093
Change in unrealized appreciation or depreciation of
investments 34,681,754
-----------
Net gain on investments 39,388,847
-----------
Net increase in net assets resulting from operations $46,169,481
===========
See Notes to Financial Statements.
34
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended March 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 6,780,634 $ 5,157,897
Net realized gain from security transactions 4,707,093 4,755,355
Change in unrealized appreciation or
depreciation of investments 34,681,754 37,398,630
------------ ------------
Net increase in net assets resulting
from operations 46,169,481 47,311,882
------------ ------------
Distributions to Shareholders from:
Net investment income:
Class A Shares (5,070,551) (4,710,084)
Class B Shares (119,491) (25,557)
Class D Shares (280,846) (319,956)
Institutional Shares (391,368) (19,252)
Net realized short-term gains:
Class A Shares -- (517,708)
Class B Shares -- (7,307)
Class D Shares -- (37,816)
Institutional Shares -- (12,834)
Net realized long-term gains:
Class A Shares (874,810) (4,012,860)
Class B Shares (38,817) (52,673)
Class D Shares (53,442) (298,195)
Institutional Shares (71,368) (76,965)
------------ ------------
Total distributions (6,900,693) (10,091,207)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 100,059,836 51,325,277
Value of shares issued in reinvestment
of dividends 6,063,887 9,094,751
Cost of shares repurchased (29,688,897) (26,963,230)
------------ ------------
Increase in net assets derived from
capital share transactions 76,434,826 33,456,798
------------ ------------
Total increase in net assets 115,703,614 70,677,473
Net Assets:
Beginning of year 229,721,992 159,044,519
------------ ------------
End of year $345,425,606 $229,721,992
============ ============
See Notes to Financial Statements.
35
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
For the Year Ended
March 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 14.68
--------
Income from Investment Operations:
Net investment income 0.39
Net realized and unrealized gain/(loss)
on investments 2.49
--------
Total from Investment Operations 2.88
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.36)
Distributions from net realized
long-term gains (0.06)
--------
Total distributions (0.42)
--------
Net asset value at end of period $ 17.14
========
Total Return(2) 19.90%
Ratios to Average Daily Net Assets:
Expenses(3) 1.27%
Net investment income(4) 2.51%
Supplemental Data:
Net assets at end of period (000) $278,130
Portfolio turnover rate 13%
Average commissions per share $ 0.066(6)
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.40%, 1.38% and 1.70%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 3.02%, 3.11% and 2.53%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
36
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
For the Period
June 15, 1992(1)
through
For the Year Ended March 31, March 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 12.02 $ 11.23 $ 11.25 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.36 0.35 0.40 0.18
Net realized and unrealized gain/(loss)
on investments 3.03 0.80 (0.04) 1.18
------- ------- ------- -------
Total from Investment Operations 3.39 1.15 0.36 1.36
------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.41) (0.35) (0.38) (0.11)
Distributions from net realized
long-term gains (0.32) (0.01) -- --
------- ------- ------- -------
Total distributions (0.73) (0.36) (0.38) (0.11)
------- ------- ------- -------
Net asset value at end of period $ 14.68 $ 12.02 $ 11.23 $ 11.25
======= ======= ======= =======
Total Return(2) 28.86% 10.57% 3.14% 13.73%
Ratios to Average Daily Net Assets:
Expenses(3) 1.31% 1.35% 1.35% 1.35%(5)
Net investment income(4) 2.72% 3.07% 3.14% 2.88%(5)
Supplemental Data:
Net assets at end of period (000) $200,020 $146,986 $131,097 $83,535
Portfolio turnover rate 15% 18% 8% 8%
Average commissions per share -- -- -- --
</TABLE>
See 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,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 14.71
-------
Income from Investment Operations:
Net investment income 0.26
Net realized and unrealized gain
on investments 2.51
-------
Total from Investment Operations 2.77
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.26)
Distributions from net realized long-term gains (0.06)
-------
Total distributions (0.32)
-------
Net asset value at end of period $ 17.16
=======
Total Return(2) 19.00%
Ratios to Average Daily Net Assets:
Expenses(3) 2.02%
Net investment income(4) 1.84%
Supplemental Data:
Net assets at end of period (000) $17,311
Portfolio turnover rate 13%
Average commissions per share $ 0.066(6)
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.17% (annualized) for the period
ended March 31, 1995.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.87% (annualized) for
the period ended March 31, 1995.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
38
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
For the Period
For the Year Jan. 3, 1995(1)
Ended through
March 31, March 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $12.01 $11.14
------ ------
Income from Investment Operations:
Net investment income 0.21 0.08
Net realized and unrealized gain
on investments 3.05 0.79
------ ------
Total from Investment Operations 3.26 0.87
------ ------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains (0.24) --
Distributions from net realized
long-term gains (0.32) --
------ ------
Total distributions (0.56) --
------ ------
Net asset value at end of period $14.71 $12.01
====== ======
Total Return(2) 27.89% 7.81%
Ratios to Average Daily Net Assets:
Expenses(3) 2.06% 2.10%(5)
Net investment income(4) 1.97% 2.94%(5)
Supplemental Data:
Net assets at end of period (000) $4,178 $ 341
Portfolio turnover rate 15% 18%
Average commissions per share -- --
See 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,
- -------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 14.66
--------
Income from Investment Operations:
Net investment income 0.35
Net realized and unrealized gain/
(loss) on investments 2.47
--------
Total from Investment Operations 2.82
--------
Less Distributions:
Distributions from net investment
income and net realized short-term
gains (0.31)
Distributions from net realized long-term
gains (0.06)
--------
Total distributions (0.37)
--------
Net asset value at end of period $ 17.11
========
Total Return(2) 19.46%
Ratios to Average Daily Net Assets:
Expenses(3) 1.62%
Net investment income(4) 2.15%
Supplemental Data:
Net assets at end of period (000) $ 15,213
Portfolio turnover rate 13%
Average commissions per share $ 0.066(6)
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.74%, 1.73% and 1.93%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.68%, 2.76% and 2.60%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
40
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Nov. 9, 1992(1)
through
For the Year Ended March 31, March 31,
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 12.01 $ 11.22 $ 11.24 $10.45
------- ------- ------- ------
Income from Investment Operations:
Net investment income 0.33 0.31 0.36 0.14
Net realized and unrealized gain/(loss)
on investments 3.02 0.80 (0.04) 0.74
------- ------- ------- ------
Total from Investment Operations 3.35 1.11 0.32 0.88
------- ------- ------- ------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.31) (0.34) (0.09)
Distributions from net realized long-term gains (0.32) (0.01) -- --
------- ------- ------- ------
Total distributions (0.70) (0.32) (0.34) (0.09)
------- ------- ------- ------
Net asset value at end of period $ 14.66 $ 12.01 $ 11.22 $11.24
======= ======= ======= ======
Total Return(2) 28.44% 10.18% 2.78% 9.00%
Ratios to Average Daily Net Assets:
Expenses(3) 1.66% 1.70% 1.70% 1.70%(5)
Net investment income(4) 2.37% 2.72% 2.79% 2.83%(5)
Supplemental Data:
Net assets at end of period (000) $ 13,757 $11,717 $11,051 $6,285
Portfolio turnover rate 15% 18% 8% 8%
Average commissions per share -- -- -- --
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout each period)
For the Period
For the Nov. 2, 1995(1)
Year Ended through
March 31, March 31,
- --------------------------------------------------------------------------------
1997 1996
Per Share Operating Performance:
Net asset value at beginning of period $ 14.77 $ 13.89
------- -------
Income from Investment Operations:
Net investment income 0.41 0.13
Net realized and unrealized gain
on investments 2.53 1.17
------- -------
Total from Investment Operations 2.94 1.30
------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.10)
Distributions from net realized
long-term gains (0.06) (0.32)
------- -------
Total distributions (0.44) (0.42)
------- -------
Net asset value at end of period $ 17.27 $ 14.77
======= =======
Total Return 20.24% 21.12%
Ratios to Average Daily Net Assets:
Expenses 1.02% 1.03%(2)
Net investment income 2.83% 2.89%(2)
Supplemental Data:
Net assets at end of period (000) $34,771 $11,768
Portfolio turnover rate 13% 15%
Average commissions per share $ 0.066(3) --
- ------------
(1) Commencement of operations.
(2) Annualized.
(3) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See 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. The Institutional
Shares do not have a front-end sales charge or a contingent deferred sales
charge. In addition, each class has a different 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. 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. The Fund has deferred the costs incurred by
its organization and the initial public offering of shares. These
costs are being amortized on the straight-line method over a five-year
period from the Fund's commencement of operations.
44
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., is the Fund's investment advisor and Alex. Brown Investment
Management ("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
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,
1997.
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 $80,766 for accounting services for the year ended
March 31, 1997.
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 $105,449 for
transfer agent services for the year ended March 31, 1997.
As compensation for providing distribution services, the Fund pays Alex.
Brown & Sons Incorporated ("Alex. Brown") 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, 1997,
distribution fees aggregated $747,486, of which $575,090 was attributable to the
Class A Shares, $85,517 was attributable to the Class B Shares and $86,879 was
attributable to the Class D Shares. The Fund did not pay Alex. Brown any
commissions for the year ended March 31, 1997.
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, 1997 was $10,628, and the accrued liability was $25,784.
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, 1997 March 31, 1996
-------------- --------------
Shares sold................................... 3,858,982 2,645,585
Shares issued to shareholders on
reinvestment of dividends.................. 330,808 611,385
Shares redeemed............................... (1,584,547) (1,862,910)
------------ ------------
Net increase in shares outstanding............ 2,605,243 1,394,060
============ ============
Proceeds from sale of shares.................. $ 64,502,359 $ 36,567,203
Value of reinvested dividends................. 5,229,071 8,303,476
Cost of shares redeemed....................... (25,438,783) (25,776,184)
------------ ------------
Net increase from capital share transactions.. $ 44,292,647 $ 19,094,495
============ ============
Class B Shares
---------------------------------
For the For the
Year Ended Year Ended
March 31, 1997 March 31, 1996
----------------- --------------
Shares sold................................... 754,825 252,563
Shares issued to shareholders on
reinvestment of dividends.................. 8,887 5,788
Shares redeemed............................... (38,898) (2,754)
----------- ----------
Net increase in shares outstanding............ 724,814 255,597
=========== ==========
Proceeds from sale of shares.................. $12,645,227 $3,471,865
Value of reinvested dividends................. 144,638 79,812
Cost of shares redeemed....................... (635,497) (39,242)
----------- ----------
Net increase from capital share transactions.. $12,154,368 $3,512,435
=========== ==========
46
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
March 31, 1997 March 31, 1996
-------------- --------------
Shares sold.................................... -- --
Shares issued to shareholders on
reinvestment of dividends................... 19,676 45,398
Shares redeemed................................ (68,822) (82,585)
----------- ------------
Net decrease in shares outstanding............. (49,146) (37,187)
=========== ============
Proceeds from sale of shares................... $ -- $ --
Value of reinvested dividends.................. 311,352 616,247
Cost of shares redeemed........................ (1,071,231) (1,105,221)
----------- ------------
Net decrease from capital share transactions... $ (759,879) $ (488,974)
=========== ============
Institutional Shares
-------------------------------
For the Period
For the Nov. 2, 1995*
Year Ended through
March 31, 1997 March 31, 1996
-------------- --------------
Shares sold................................... 1,343,738 793,108
Shares issued to shareholders on
reinvestment of dividends.................. 23,612 6,860
Shares redeemed............................... (150,351) (3,037)
----------- -----------
Net increase in shares outstanding............ 1,216,999 796,931
=========== ===========
Proceeds from sale of shares.................. $22,912,250 $11,286,209
Value of reinvested dividends................. 378,826 95,216
Cost of shares redeemed....................... (2,543,386) (42,583)
----------- -----------
Net increase from capital share transactions.. $20,747,690 $11,338,842
=========== ===========
- -------------
*Commencement of operations.
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 $79,767,274 and sales of investment
securities aggregated $28,149,581 for the year ended March 31, 1997.
Purchases of U.S. government obligations aggregated $10,920,000 and sales of
U.S. government obligations aggregated $4,994,843 for the period.
On March 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $89,444,695
and aggregate gross unrealized depreciation of all securities in which there is
an excess of tax cost over value was $2,851,233.
NOTE 5--Net Assets
On March 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares............................................... $195,270,863
Class B Shares............................................... 15,993,831
Class D Shares............................................... 9,448,443
Institutional Shares......................................... 32,084,870
Accumulated net realized gain from security transactions........ 3,856,762
Unrealized appreciation of investments.......................... 86,593,462
Undistributed net investment income............................. 2,177,375
------------
$345,425,606
============
NOTE 6--Shareholder Meeting
On March 7, 1997, the Flag Investors Value Builder Fund held a special
meeting for its shareholders. During the meeting, shareholders elected the
following Directors: Truman T. Semans, Charles W. Cole, Jr., James J. Cunnane,
Richard T. Hale, John F. Kroeger, Louis E. Levy, Eugene J. McDonald, Rebecca W.
Rimel and Carl W. Vogt.
NOTE 7--Merger Agreement
On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they had signed a definitive agreement to merge. The
merger, which is expected to be completed by the fourth quarter of 1997, is
subject to customary closing conditions, including certain regulatory and
shareholder approvals.
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, 1997 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, 1997 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, 1997, the results of its
operations for the year then ended, and the changes in its net assets 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 2, 1997
49
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK: 59.0%
Banking: 3.0%
35,000 Citicorp $ 4,687,813
100,000 KeyCorp 6,362,500
13,100 Wells Fargo & Company 3,602,500
-----------
14,652,813
-----------
Basic Industry: 2.7%
105,700 Airgas, Inc.* 1,790,294
30,000 Hercules, Inc. 1,492,500
20,000 Olin Corp. 936,250
44,654 Potash Corp. of Saskatchewan 3,505,339
28,000 Solutia, Inc.* 560,000
100,000 UCAR International, Inc.* 4,775,000
-----------
13,059,383
-----------
Business Services: 1.8%
81,900 First Data Corp. 3,076,369
176,400 SEI Corp. 5,821,200
-----------
8,897,569
-----------
Capital Goods: 1.1%
36,000 Eaton Corp. 3,325,500
96,200 Westinghouse Air Brake Co. 2,224,625
-----------
5,550,125
-----------
Consumer Durables/Non-Durables: 4.4%
230,000 Blyth Industries, Inc.* 6,440,000
33,500 Eastman Kodak Co. 2,175,406
125,000 Ford Motor Company 5,656,250
50,000 Liz Claiborne, Inc. 2,746,875
111,600 Philip Morris Cos., Inc. 4,638,375
-----------
21,656,906
-----------
Consumer Services: 4.3%
92,000 America Online, Inc.* 6,940,250
124,875 CUC International, Inc.* 3,871,125
30,000 Gannett Co. 3,238,125
300,000 The Learning Co., Inc.* 4,425,000
50,000 Times Mirror Co. Class A 2,746,875
-----------
21,221,375
-----------
</TABLE>
50
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK (continued)
Defense/Aerospace: 2.4%
156,000 Boeing Co. $ 8,492,250
31,171 Lockheed Martin Corp. 3,323,607
-----------
11,815,857
-----------
Electric Utilities: 0.5%
100,000 Unicom Corp. 2,337,500
-----------
Energy: 1.0%
100,000 Burlington Resources, Inc. 5,131,250
-----------
Entertainment: 1.3%
459,500 LodgeNet Entertainment Corp.* 6,088,375
-----------
Financial Services: 6.8%
83,500 American Express Co. 6,836,563
87,500 Countrywide Credit Industries, Inc. 3,188,281
172,000 Freddie Mac 6,063,000
100,000 Green Tree Financial Corp. 4,700,000
118,125 MBNA Corp. 4,784,062
114,000 Travelers Group, Inc. 7,780,500
-----------
33,352,406
-----------
Health Care: 5.1%
95,000 Amgen, Inc.* 4,554,062
40,000 Baxter International, Inc. 2,090,000
38,000 Bristol-Myers Squibb Co. 3,144,500
54,434 Eli Lilly & Co. 6,569,503
114,000 Johnson & Johnson 6,569,250
60,000 Mallinckrodt, Inc. 2,160,000
-----------
25,087,315
-----------
Hotels/Gaming: 1.2%
200,000 Harrah's Entertainment, Inc.* 4,487,500
40,000 Hilton Hotels Corp. 1,347,500
-----------
5,835,000
-----------
Housing: 2.2%
275,000 Champion Enterprises, Inc.* 5,259,375
118,000 USG Corp.* 5,656,625
-----------
10,916,000
-----------
</TABLE>
51
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK (concluded)
Insurance: 8.4%
495,858 Conseco, Inc. $ 24,204,069
80,000 EXEL Limited 4,765,000
32,500 Hartford Financial Services Group 2,797,031
80,000 Mid Ocean Ltd. 5,070,000
100,000 RenaissanceRe Holdings Ltd. 4,393,750
------------
41,229,850
------------
Multi-Industry: 3.2%
42,500 ITT Industries, Inc. 1,410,469
33,400 Loews Corp. 3,772,113
140,000 Monsanto Co. 5,460,000
64,000 United Technologies Corp. 5,184,000
------------
15,826,582
------------
Real Estate: 2.2%
60,200 General Growth Properties, Inc. 2,227,400
324,136 Host Marriott Corp.* 7,374,094
35,000 National Health Investors, Inc. 1,360,625
------------
10,962,119
------------
Retail: 3.0%
124,664 J.C. Penney Company, Inc. 7,261,678
300,000 Kmart Corp.* 4,200,000
90,000 Tandy Corp. 3,026,250
------------
14,487,928
------------
Technology: 3.6%
70,400 Autodesk, Inc. 3,194,400
100,000 Electronic Data Systems Corp. 3,550,000
86,000 International Business Machines Corp. 9,110,625
33,400 Millipore Corp. 1,640,775
------------
17,495,800
------------
Telecommunications: 0.4%
69,000 MCI Communications Corp. 2,026,875
------------
Transportation: 0.4%
17,491 Delta Air Lines, Inc. 1,647,434
------------
Total Common Stock
(Cost $147,036,477) 289,278,462
------------
</TABLE>
52
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Shares/ Market Value
Par (000) (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE PREFERRED STOCK: 2.2%
32,300 Conseco Inc., $4.28 Cvt. Pfd., Series E $ 5,523,300
75,000 Host Marriott Financial Trust 5,100,000
-----------
Total Convertible Preferred Stock
(Cost $5,724,337) 10,623,300
-----------
PREFERRED SECURITIES: 0.5%
100,000 Conseco Financial Trust
(Cost $2,500,000) 2,637,500
-----------
CONVERTIBLE BONDS: 1.1%
$2,000 Capstone Capital Corp., Cvt. Deb.,
6.55%, 3/14/02 1,920,000
339 Richardson Electronics, Cvt. Deb.,
7.25%, 12/15/06 256,793
1,661 Richardson Electronics, Cvt. Deb.,
8.25%, 6/15/06 1,416,003
2,000 Sizeler Property Investors, Cvt. Deb.,
8.00%, 7/15/03 1,965,000
-----------
TOTAL CONVERTIBLE BONDS
(Cost $5,488,413) 5,557,796
-----------
CORPORATE BONDS: 24.0%
1,000 American Life Holding Co., Sr Sub Nt,
11.25%, 9/15/04 1,136,250
3,000 Argosy Gaming, 13.25%, 6/1/04 3,026,250
3,000 Avon Products, Inc., 6.55%, 8/1/07 2,988,750
1,000 Caesar's World, 8.875%, 8/15/02 1,036,250
1,000 Capstar Hotel, 8.75%, 8/15/07 1,010,000
873 Chattem, Inc., Sr Sub Deb, 12.75%, 6/15/04 983,216
-- Chattem, Inc., 1,000 Warrants, Expiring 6/17/99 56,180
3,000 Circus Circus, 6.75%, 7/15/03 2,958,750
3,000 Conseco, Inc., Nt, 8.125%, 2/15/03 3,153,750
700 CSX Corp., Nt, 7.00%, 9/15/02 715,750
3,000 Eckerd Corp., Nt, 9.25%, 2/15/04 3,232,500
300 Exxon Capital Corp., Nt, 6.50%, 7/15/99 303,000
2,000 FMC Corp., Nt, 8.75%, 4/1/99 2,065,000
5,000 Frontier Corp., 7.25%, 5/15/04 5,143,750
</TABLE>
53
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Market Value
(000) (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS (continued)
$1,000 Fund American Enterprise, Nt, 7.75%, 2/1/03 $ 1,022,500
4,500 HMH Properties, Nt, 9.50%, 5/15/05 4,758,750
3,000 Host Marriott Travel Plaza, Nt, 9.50%, 5/15/05 3,172,500
5,000 ICI Wilmington, 6.95%, 9/15/04 5,087,500
2,775 ITT Corp., Nt, 6.25%, 11/15/00 2,768,062
2,000 ITT Corp., Nt, 6.75%, 11/15/03 1,997,500
4,000 Jefferies Group, Inc., 7.50%, 8/15/07 4,025,000
2,000 John Q. Hammons Hotels LP, Nt,
8.875%, 2/15/04 2,030,000
5,000 J.P. Morgan, Nt, 6.875%, 1/15/07 5,068,750
2,200 Lockheed Martin Corp., Nt, 6.85%, 5/15/01 2,238,500
2,500 Lockheed Martin Corp., Nt, 7.25%, 5/15/06 2,600,000
5,000 LodgeNet Entertainment, Nt, 10.25%, 12/15/06 5,187,500
1,285 Markel Corp., Nt, 7.25%, 11/1/03 1,317,125
2,500 Marriott International, 6.75%, 12/15/03 2,487,500
2,100 Marriott International, 7.875%, 4/15/05 2,220,750
1,100 Masco Corp., Nt, 6.625%, 9/15/99 1,112,375
1,000 Masco Corp., Nt, 6.125%, 9/15/03 975,000
2,000 McDonnell Douglas Corp., Nt, 6.875%, 11/1/06 2,040,000
2,000 MCI Communications, Nt, 6.25%, 3/23/99 2,010,000
500 MCI Communications, Nt, 7.50%, 8/20/04 528,750
2,100 Millipore Corp., Nt, 7.20%, 4/1/02 2,149,875
2,100 Millipore Corp., Nt, 7.50%, 4/1/07 2,186,625
2,000 Nabisco, Inc., 6.70%, 6/15/02 2,015,000
1,500 Norfolk Southern, 6.95%, 5/1/02 1,535,625
1,500 Norfolk Southern, 7.35%, 5/15/07 1,565,625
2,000 Petroleum Heat & Power, Nt, 9.375%, 2/1/06 1,900,000
4,000 Premier Parks, Nt, 9.75%, 1/15/07 4,235,000
3,000 Raytheon Co., 6.45%, 8/15/02 3,003,750
5,000 Raytheon Co., 6.50%, 7/15/05 4,950,000
2,000 RJR Nabisco, Inc., Nt, 7.625%, 9/15/03 2,017,500
1,500 Salomon, Inc., Nt, 7.125%, 8/1/99 1,526,250
3,000 Tandy Corp., 6.95%, 9/1/07 3,022,500
1,000 Tektronix, Inc., Nt, 7.50%, 8/1/03 1,023,750
1,000 Tenneco, Inc., Nt, 8.075%, 10/1/02 1,061,250
1,000 Travelers Group, Inc., Nt, 6.125%, 6/15/00 1,000,000
1,000 Union Pacific Co., 6.25%, 3/15/99 1,002,500
</TABLE>
54
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Par Market Value
(000) (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS (concluded)
$ 2,660 USG Corp., 8.50%, 8/1/05 $ 2,846,200
500 Xerox Corp., Nt, 7.15%, 8/1/04 517,500
------------
Total Corporate Bonds
(Cost $114,533,091) 118,016,408
------------
U.S. GOVERNMENT AND AGENCY SECURITIES: 2.9%
1,000 Federal National Mortgage Assoc., 7.6%, 5/24/06 1,012,190
------------
U.S. Treasury Notes
3,000 5.125%, 2/28/98 2,996,970
3,000 5.875%, 2/28/99 3,005,610
3,000 6.25%, 5/31/00 3,028,170
4,000 6.125%, 12/31/01 4,019,480
------------
13,050,230
------------
Total U.S. Government and Agency Securities
(Cost $13,925,049) 14,062,420
------------
REPURCHASE AGREEMENT: 9.5%
46,727 Goldman Sachs & Co., 6.05%
Dated 9/30/97, to be repurchased on
10/1/97, collateralized by U.S. Treasury
Notes with a market value of $47,662,129.
(Cost $46,727,000) 46,727,000
------------
TOTAL INVESTMENT IN SECURITIES: 99.2%
(Cost $335,934,367)** 486,902,886
OTHER ASSETS IN EXCESS OF LIABILITIES, NET: 0.8% 3,742,926
------------
NET ASSETS: 100.0% $490,645,812
============
</TABLE>
55
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER:
CLASS A SHARE
($374,094,255 / 18,489,756 SHARES OUTSTANDING) $20.23
======
CLASS B SHARE
($38,611,858 / 1,907,874 shares outstanding) $20.24+
======
CLASS D SHARE
($17,709,912 / 876,914 shares outstanding) $20.20++
======
INSTITUTIONAL SHARE
($60,229,787 / 2,955,679 shares outstanding) $20.38
======
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE ($20.23 / 0.955) $21.18
======
CLASS B SHARE $20.24
======
INSTITUTIONAL SHARE $20.38
======
- -----------
*Non-income producing security.
** Also aggregate cost for federal tax purposes.
+ Redemption value is $19.43 following 4% maximum contingent deferred sales
charge.
++ Redemption value is $20.00 following 1% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
56
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the Six
Months Ended
September 30,
- ------------------------------------------------------------------------------------
1997(1)
<S> <C>
Investment Income (Note 1):
Interest $ 5,535,899
Dividends 2,115,469
Other income 57,327
-----------
Total income 7,708,695
-----------
Expenses:
Investment advisory fee (Note 2) 1,635,193
Distribution fee (Note 2) 596,392
Transfer agent fee (Note 2) 61,394
Accounting fee (Note 2) 51,604
Registration fees 32,739
Printing and postage 22,423
Legal 20,733
Custodian fee 19,817
Audit 14,245
Miscellaneous 12,131
Directors' fees 7,759
Pricing fee 4,576
Organizational expense (Note 1) 2,597
-----------
Total expenses 2,481,603
-----------
Net investment income 5,227,092
-----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 2,976,827
Change in unrealized appreciation or depreciation of investments 64,375,056
-----------
Net gain on investments 67,351,883
-----------
Net increase in net assets resulting from operations $72,578,975
===========
</TABLE>
- --------
(1) Unaudited.
See Notes to Financial Statements.
57
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
September 30, March 31,
- -----------------------------------------------------------------------------------
1997(1) 1997
<S> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 5,227,092 $ 6,780,634
Net realized gain from security transactions 2,976,827 4,707,093
Change in unrealized appreciation or
depreciation of investments 64,375,056 34,681,754
------------ ------------
Net increase in net assets resulting
from operations 72,578,975 46,169,481
------------ ------------
Distributions to Shareholders from:
Net investment income and net realized
short-term gains:
Class A Shares (3,516,907) (5,070,551)
Class B Shares (191,045) (119,491)
Class D Shares (159,888) (280,846)
Institutional Shares (495,671) (391,368)
Net realized long-term gains:
Class A Shares -- (874,810)
Class B Shares -- (38,817)
Class D Shares -- (53,442)
Institutional Shares -- (71,368)
------------ ------------
Total distributions (4,363,511) (6,900,693)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 92,421,496 100,059,836
Value of shares issued in reinvestment
of dividends 3,736,593 6,063,887
Cost of shares repurchased (19,153,347) (29,688,897)
------------ ------------
Increase in net assets derived from
capital share transactions 77,004,742 76,434,826
------------ ------------
Total increase in net assets 145,220,206 115,703,614
Net Assets:
Beginning of period 345,425,606 229,721,992
------------ ------------
End of period $490,645,812 $345,425,606
============ ============
</TABLE>
- ---------
(1) Unaudited.
See Notes to Financial Statements.
58
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
September 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 17.14
--------
Income from Investment Operations:
Net investment income 0.23
Net realized and unrealized gain/(loss) on investments 3.07
--------
Total from Investment Operations 3.30
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.21)
Distributions from net realized long-term gains --
--------
Total distributions (0.21)
--------
Net asset value at end of period $ 20.23
========
Total Return(3) 19.42%
Ratios to Average Daily Net Assets:
Expenses(4) 1.15%(6)
Net investment income(5) 2.52%(6)
Supplemental Data:
Net assets at end of period (000) $374,094
Portfolio turnover rate 6%(6)
Average commissions per share(7) $ 0.057
- ---------
(1) Unaudited.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.40%, 1.38% and 1.70% (annualized)
for the years ended March 31, 1995, 1994 and the period ended March 31,
1993, respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 3.02%, 3.11% and 2.53%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
59
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
June 15, 1992(2)
through
For the Year Ended March 31, March 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.68 $ 12.02 $ 11.23 $ 11.25 $ 10.00
-------- -------- -------- -------- -------
Income from Investment Operations:
Net investment income 0.39 0.36 0.35 0.40 0.18
Net realized and unrealized gain/(loss) on investments 2.49 3.03 0.80 (0.04) 1.18
-------- -------- -------- -------- -------
Total from Investment Operations 2.88 3.39 1.15 0.36 1.36
-------- -------- -------- -------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.36) (0.41) (0.35) (0.38) (0.11)
Distributions from net realized long-term gains (0.06) (0.32) (0.01) -- --
-------- -------- -------- -------- -------
Total distributions (0.42) (0.73) (0.36) (0.38) (0.11)
-------- -------- -------- -------- -------
Net asset value at end of period $ 17.14 $ 14.68 $ 12.02 $ 11.23 $ 11.25
======== ======== ======== ======== =======
Total Return(3) 19.90% 28.86% 10.57% 3.14% 13.73%
Ratios to Average Daily Net Assets:
Expenses(4) 1.27% 1.31% 1.35% 1.35% 1.35%(6)
Net investment income(5) 2.51% 2.72% 3.07% 3.14% 2.88%(6)
Supplemental Data:
Net assets at end of period (000) $278,130 $200,020 $146,986 $131,097 $83,535
Portfolio turnover rate 13% 15% 18% 8% 8%
Average commissions per share(7) $ 0.066 -- -- -- --
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
September 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 17.16
-------
Income from Investment Operations:
Net investment income 0.17
Net realized and unrealized gain on investments 3.07
-------
Total from Investment Operations 3.24
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.16)
Distributions from net realized long-term gains --
-------
Total distributions (0.16)
-------
Net asset value at end of period $ 20.24
=======
Total Return(3) 19.01%
Ratios to Average Daily Net Assets:
Expenses(4) 1.90%(6)
Net investment income(5) 1.77%(6)
Supplemental Data:
Net assets at end of period (000) $38,612
Portfolio turnover rate 6%(6)
Average commissions per share(7) $ 0.057
- --------
(1) Unaudited.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.17% (annualized) for the period
ended March 31, 1995.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.87% (annualized) for
the period ended March 31, 1995.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.See Notes to Financial
Statements.
61
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Jan. 3, 1995(2)
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:
Distributions from net investment income
and net realized short-term gains (0.26) (0.24) --
Distributions from net realized 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(3) 19.00% 27.89% 7.81%
Ratios to Average Daily Net Assets:
Expenses(4) 2.02% 2.06% 2.10%(6)
Net investment income(5) 1.84% 1.97% 2.94%(6)
Supplemental Data:
Net assets at end of period (000) $17,311 $4,178 $ 341
Portfolio turnover rate 13% 15% 18%
Average commissions per share(7) $ 0.066 -- --
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
September 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 17.11
--------
Income from Investment Operations:
Net investment income 0.20
Net realized and unrealized gain/(loss) on investments 3.07
--------
Total from Investment Operations 3.27
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.18)
Distributions from net realized long-term gains --
--------
Total distributions (0.18)
--------
Net asset value at end of period $ 20.20
========
Total Return(3) 19.25%
Ratios to Average Daily Net Assets:
Expenses(4) 1.50%(6)
Net investment income(5) 2.17%(6)
Supplemental Data:
Net assets at end of period (000) $ 17,710
Portfolio turnover rate 6%(6)
Average commissions per share(7) $ 0.057
- ----------
(1) Unaudited.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.74%, 1.73% and 1.93% (annualized)
for the years ended March 31, 1995, 1994 and the period ended March 31,
1993, respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.68%, 2.76% and 2.60%
(annualized) for the years ended March 31, 1995, 1994 and the period ended
March 31, 1993, respectively.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
63
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Nov. 9, 1992(2)
through
For the Year Ended March 31, March 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.66 $ 12.01 $ 11.22 $ 11.24 $10.45
------- ------- ------- ------- ------
Income from Investment Operations:
Net investment income 0.35 0.33 0.31 0.36 0.14
Net realized and unrealized gain/(loss) on investments 2.47 3.02 0.80 (0.04) 0.74
------- ------- ------- ------- ------
Total from Investment Operations 2.82 3.35 1.11 0.32 0.88
------- ------- ------- ------- ------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.31) (0.38) (0.31) (0.34) (0.09)
Distributions from net realized long-term gains (0.06) (0.32) (0.01) -- --
------- ------- ------- ------- ------
Total distributions (0.37) (0.70) (0.32) (0.34) (0.09)
------- ------- ------- ------- ------
Net asset value at end of period $ 17.11 $ 14.66 $ 12.01 $ 11.22 $11.24
======= ======= ======= ======= ======
Total Return(3) 19.46% 28.44% 10.18% 2.78% 9.00%
Ratios to Average Daily Net Assets:
Expenses(4) 1.62% 1.66% 1.70% 1.70% 1.70%(6)
Net investment income(5) 2.15% 2.37% 2.72% 2.79% 2.83%(6)
Supplemental Data:
Net assets at end of period (000) $15,213 $13,757 $11,717 $11,051 $6,285
Portfolio turnover rate 13% 15% 18% 8% 8%
Average commissions per share(7) $ 0.066 -- -- -- --
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
September 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 17.27
-------
Income from Investment Operations:
Net investment income 0.26
Net realized and unrealized gain on investments 3.08
-------
Total from Investment Operations 3.34
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.23)
Distributions from net realized long-term gains --
-------
Total distributions (0.23)
-------
Net asset value at end of period $ 20.38
=======
Total Return 19.52%
Ratios to Average Daily Net Assets:
Expenses 0.90%(3)
Net investment income 2.77%(3)
Supplemental Data:
Net assets at end of period (000) $60,230
Portfolio turnover rate 6%(3)
Average commissions per share(4) $ 0.057
- --------
(1) Unaudited.
(2) Commencement of operations.
(3) Annualized.
(4) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
65
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year Nov. 2, 1995(2)
Ended through
March 31, March 31,
- ---------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.77 $ 13.89
------- -------
Income from Investment Operations:
Net investment income 0.41 0.13
Net realized and unrealized gain on investments 2.53 1.17
------- -------
Total from Investment Operations 2.94 1.30
------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.10)
Distributions from net realized long-term gains (0.06) (0.32)
------- -------
Total distributions (0.44) (0.42)
------- -------
Net asset value at end of period $ 17.27 $ 14.77
======= =======
Total Return 20.24% 21.12%
Ratios to Average Daily Net Assets:
Expenses 1.02% 1.03%(3)
Net investment income 2.83% 2.89%(3)
Supplemental Data:
Net assets at end of period (000) $34,771 $11,768
Portfolio turnover rate 13% 15%
Average commissions per share(4) $ 0.066 --
</TABLE>
See Notes to Financial Statements.
66
<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 and commenced operations June 15,
1992, is registered under the Investment Company Act of 1940 as a diversified,
open-end Investment Management Company. The Fund is designed to maximize total
return through a combination of long-term growth of capital and current income.
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. The Institutional
Shares do not have a front-end sales charge or a contingent deferred sales
charge. In addition, each class has a different 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.
67
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
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. 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.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund has deferred the costs incurred by its organization and the
initial public offering of shares. These costs were amortized on the
straight-line method over a five-year period from the Fund's
commencement of operations.
NOTE 2 -- Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, is the Fund's investment advisor and
68
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2 -- continued
Alex. Brown Investment Management ("ABIM") is the Fund's subadvisor. As
compensation for its advisory services, the Fund pays ICC an annual fee based on
the Fund's average daily net assets. This fee 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 based on the Fund's average daily net assets. This fee 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 six months ended
September 30, 1997.
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 $51,604 for accounting services for the six months
ended September 30, 1997.
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 $61,394 for
transfer agent services for the six months ended September 30, 1997.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICCDistributors") 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 six months ended September 30, 1997,
distribution fees aggregated $596,392, of which $410,120 was attributable to the
Class A Shares, $136,107 was attributable to the Class B Shares and $50,165 was
attributable to the Class D Shares. The Fund did not pay ICCDistributors any
commissions for the six months ended September 30, 1997. Prior to September 1,
1997, Alex. Brown & Sons Incorporated served as the Fund's distributor for the
same compensation and on substantially the same terms and conditions as
ICC Distributors.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
69
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTE 2 -- concluded
April 1, 1997 through September 30, 1997 was $7,505, and the accrued liability
was $27,274.
NOTE 3 -- Capital Share Transactions
The Fund is authorized to issue up to 75 million shares of $.001 par
value capital stock (40 million Class A, 15 million Class B, 15 million
Institutional, 3 million Class D and 2 million undesignated). Transactions in
shares of the Fund were as follows:
Class A Shares
-----------------------------------
For the Six For the
Months Ended Year Ended
September 30, 1997* March 31, 1997
-----------------------------------
Shares sold 2,916,118 3,858,982
Shares issued to shareholders on
reinvestment of dividends 171,681 330,808
Shares redeemed (826,556) (1,584,547)
------------ ------------
Net increase in shares outstanding 2,261,243 2,605,243
============ ============
Proceeds from sale of shares $ 54,951,402 $ 64,502,359
Value of reinvested dividends 3,080,532 5,229,071
Cost of shares redeemed (15,657,787) (25,438,783)
------------ ------------
Net increase from capital share transactions $ 42,374,147 $ 44,292,647
============ ============
Class B Shares
-----------------------------------
For the Six For the
Months Ended Year Ended
September 30, 1997* March 31, 1997
-----------------------------------
Shares sold 907,985 754,825
Shares issued to shareholders on
reinvestment of dividends 9,778 8,887
Shares redeemed (18,711) (38,898)
------------ ------------
Net increase in shares outstanding 899,052 724,814
============ ============
Proceeds from sale of shares $17,172,730 $12,645,227
Value of reinvested dividends 176,433 144,638
Cost of shares redeemed (350,612) (635,497)
------------ ------------
Net increase from capital share transactions $16,998,551 $12,154,368
============ ============
- ------------
*Unaudited.
70
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3 -- concluded
Class D Shares
-----------------------------------
For the Six For the
Months Ended Year Ended
September 30, 1997* March 31, 1997
-----------------------------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 8,329 19,676
Shares redeemed (20,564) (68,822)
--------- -----------
Net decrease in shares outstanding (12,235) (49,146)
========= ===========
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 148,506 311,352
Cost of shares redeemed (394,360) (1,071,231)
--------- -----------
Net decrease from capital share transactions $(245,854) $ (759,879)
========= ===========
Institutional Shares
-----------------------------------
For the Six For the
Months Ended Year Ended
September 30, 1997* March 31, 1997
-----------------------------------
Shares sold 1,063,856 1,343,738
Shares issued to shareholders on
reinvestment of dividends 18,347 23,612
Shares redeemed (140,454) (150,351)
----------- -----------
Net increase in shares outstanding 941,749 1,216,999
=========== ===========
Proceeds from sale of shares $20,297,364 $22,912,250
Value of reinvested dividends 331,122 378,826
Cost of shares redeemed (2,750,588) (2,543,386)
----------- -----------
Net increase from capital share transactions $17,877,898 $20,747,690
=========== ===========
- --------
*Unaudited.
71
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
NOTE 4 -- Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $66,783,883 and sales of investment securities
aggregated $12,253,941 for the six months ended September 30, 1997.
Purchases of U.S. government obligations aggregated $3,953,750, and there were
no sales of U.S. government obligations for the period.
On September 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $151,427,953
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $459,434.
NOTE 5 -- Net Assets
On September 30, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $237,645,010
Class B Shares 32,992,382
Class D Shares 9,202,589
Institutional Shares 49,962,768
Undistributed net investment income 3,040,955
Accumulated net realized gain from security transactions 6,833,589
Unrealized appreciation of investments 150,968,519
------------
$490,645,812
============
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 New York
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.
72
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APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
S & P - Commercial paper rated A-1+ or A-1 by S&P has the
following characteristics. Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management is unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
Moody's Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial
paper rating assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationship which exists with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
P-1, P-2 or P-3.
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, and CC and C -- Regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
A-1
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` D -- In default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as "high-grade" bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or the
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
