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STATEMENT OF ADDITIONAL INFORMATION
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FLAG INVESTORS VALUE BUILDER FUND, INC.
One South Street
Baltimore, Maryland 21202
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH A PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR SECURITIES
DEALER OR SHAREHOLDER SERVICING AGENT OR BY WRITING OR
CALLING THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated:
August 1, 1999, as supplemented
through October 25, 1999,
relating to the Prospectuses Dated:
August 1, 1999, as supplemented
through October 11, 1999
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TABLE OF CONTENTS
1. GENERAL INFORMATION AND HISTORY......................................1
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS...............1
3. VALUATION OF SHARES AND REDEMPTION...................................7
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.................8
5. MANAGEMENT OF THE FUND..............................................11
6. INVESTMENT ADVISORY AND OTHER SERVICES..............................15
7. DISTRIBUTION OF FUND SHARES.........................................16
8. BROKERAGE...........................................................20
9. CAPITAL STOCK.......................................................21
10. SEMI-ANNUAL REPORTS.................................................22
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES...................22
12. INDEPENDENT ACCOUNTANTS.............................................23
13. LEGAL MATTERS.......................................................23
14. PERFORMANCE INFORMATION.............................................23
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................25
16. FINANCIAL STATEMENTS................................................26
APPENDIX...........................................................A-1
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1. GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an open-end
management investment company, or mutual fund. Under the rules and regulations
of the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The Fund
currently offers four classes of shares: Flag Investors Value Builder Fund Class
A Shares (the "Class A Shares"), Flag Investors Value Builder Fund Class B
Shares (the "Class B Shares"); Flag Investors Value Builder Fund Class C Shares
(the "Class C Shares"); and Flag Investors Value Builder Fund Institutional
Shares (the "Institutional Shares") (collectively, the "Shares"). As used
herein, the "Fund" refers to Flag Investors Value Builder Fund, Inc. and
specific references to any class of the Fund's Shares will be made using the
name of such class.
Important information concerning the Fund is included in the Fund's
Prospectuses which may be obtained without charge from the Fund's distributor
(the "Distributor") or from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Fund's Registration Statement filed with the SEC. Copies of the
Registration Statement as filed, including such omitted items, may be obtained
from the SEC by paying the charges prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
March 5, 1992. The Fund filed a registration statement with the SEC registering
itself as an open-end, diversified management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
its Shares under the Securities Act of 1933, as amended, and began operations on
June 15, 1992. The Fund began offering the Class B Shares on January 3, 1995,
the Institutional Shares on November 2, 1995, and the Class C Shares on April 8,
1998.
Under a license agreement dated June 15, 1992 between the Fund and Alex.
Brown & Sons Incorporated ("Alex. Brown") (predecessor to BT Alex. Brown
Incorporated), Alex. Brown & Sons Incorporated licenses to the Fund the "Flag
Investors" name and logo but retains the rights to the name and logo, including
the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective is to maximize total return through a
combination of long-term capital appreciation and current income. The Fund seeks
to achieve this objective through a policy of diversified investments in equity
and debt securities (including common stocks, convertible securities and
government and corporate fixed-income obligations). Under normal market
conditions, between 40% and 75% of the Fund's total assets will be invested in
equity securities and at least 25% of the Fund's total assets will be invested
in fixed-income securities, all as more fully described below. There can be no
assurance that the Fund's investment objective will be achieved.
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 Fund's investment advisor (the "Advisor") and the Fund's sub-advisor (the
"Sub-Advisor") (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
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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.)
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 S&P or Moody's or are unrated by S&P or Moody's but 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 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.
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Only call options which are traded on a national securities exchange
will be written. Currently, call options may be traded on the Chicago Board
Options Exchange and the American, Pacific, Philadelphia and New York Stock
Exchanges. Call options are issued by The Options Clearing Corporation, which
also serves as the clearing house for transactions with respect to options. The
price of a call option is paid to the writer without refund on expiration or
exercise, and no portion of the price is retained by The Options Clearing
Corporation or the exchanges listed above. Writers and purchasers of options pay
the transaction costs, which may include commissions charged or incurred in
connection with such option transactions.
Call options may be purchased by the Fund, but only to terminate an
obligation as a writer of a call option. This is accomplished by making a
closing purchase transaction, that is, the purchase of a call option on the same
security with the same Exercise Price and expiration date as specified in the
call option which had been written previously. A closing purchase transaction
with respect to calls traded on a national securities exchange has the effect of
extinguishing the obligation of a writer. Although the cost to the Fund of such
a transaction may be greater than the net premium received by the Fund upon
writing the original option, the Directors believe that it is appropriate for
the Fund to have the ability to make closing purchase transactions in order to
prevent its portfolio securities from being purchased pursuant to the exercise
of a call. 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
The Fund may invest in convertible securities. In general, the market
value of a convertible security is at least the higher of its "investment value"
(i.e., its value as a fixed-income security) or its "conversion value" (i.e.,
the value of the underlying shares of common stock if the security is
converted). A convertible security tends to increase in market value when
interest rates decline and tends to decrease in value when interest rates rise.
However, the price of a convertible security also is influenced by the market
value of the security's underlying common stock. Thus, the price of a
convertible security tends to increase as the market value of the underlying
common stock increases, whereas it tends to decrease as the market value of the
underlying stock
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declines. Investments in convertible securities generally entail less risk than
investment in common stock of the same issuer.
NON-INVESTMENT GRADE SECURITIES
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 gains. Appendix A to this Statement
of Additional Information sets forth a description of the S&P and Moody's rating
categories, which indicate the rating agency's opinion as to the probability of
timely payment of interest and principal. These ratings range in descending
order of quality from AAA to D, in the case of S&P, and from Aaa to C, in the
case of Moody's. Generally, securities that are rated lower than BBB by S&P or
Baa by Moody's are described as below investment grade. Securities rated lower
than investment grade may be of a predominately speculative character and their
future cannot be considered well-assured. The issuer's ability to make timely
payments of principal and interest may be subject to material contingencies.
Securities in the lowest rating categories may be unable to make timely interest
or principal payments and may be in default and in arrears in interest and
principal payments.
Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, these ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, the Advisors do not rely
exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities, but supplement such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high-yield securities will be significantly affected not only by credit
quality but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisors of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high-yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.
Investing in higher yield, lower rated bonds entails substantially
greater risk than investing in investment grade bonds, including not only credit
risk, but potentially greater market volatility and lower liquidity. Yields and
market values of high-yield bonds will fluctuate over time, reflecting not only
changing interest rates but also the bond market's perception of credit quality
and the outlook for economic growth. When economic conditions appear to be
deteriorating, lower rated bonds may decline in value due to heightened concern
over credit quality, regardless of prevailing interest rates. In adverse
economic conditions, the liquidity of the secondary market for junk bonds may be
significantly reduced. In addition, adverse economic developments could disrupt
the high-yield market, affecting both price and liquidity, and could also affect
the ability of issuers to repay principal and interest, thereby leading to a
default rate higher than has been the case historically. Even under normal
conditions, the market for lower rated bonds may be less liquid than the market
for investment grade corporate bonds. There are fewer securities dealers in the
high-yield market and purchasers of high-yield bonds are concentrated among a
smaller group of securities dealers and institutional investors. In periods of
reduced market liquidity, the market for lower rated bonds may become more
volatile and there may be significant disparities in the prices quoted for
high-yield securities by various dealers. Under conditions of increased
volatility and reduced liquidity, it would become more 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.
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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,
1999, 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 9.66
AA 2.04
A 4.80
BBB 10.17
BB 4.57
B and Below 4.79
Unrated 0.00
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.
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 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
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gains without undue risk. Foreign investments involve substantial and different
risks which should be carefully considered by any potential investor. Such
investments are usually not denominated in dollars so changes in the value of
the dollar relative to other currencies will affect the value of foreign
investments. In general, less information is publicly available about foreign
companies than is available about companies in the United States. Most foreign
companies are not subject to uniform audit and financial reporting standards,
practices and requirements comparable to those in the United States. In most
foreign markets volume and liquidity are less than in the United States and, at
times, volatility of price can be greater than in the United States. Fixed
commissions on foreign stock exchanges are generally higher than the negotiated
commissions on United States exchanges. There is generally less government
supervision and regulation of foreign stock exchanges, brokers, and companies in
the United States. The settlement periods for foreign securities, which are
often longer than those for securities of U.S. issuers, may affect portfolio
liquidity. Portfolio securities held by the Fund which are listed on foreign
exchanges may be traded on days that the Fund does not value its securities,
such as Saturdays and the customary United States business holidays on which the
New York Stock Exchange is closed. As a result, the net asset value of Shares
may be significantly affected on days when shareholders do not have access to
the Fund.
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.
ILLIQUID SECURITIES
In addition, the Fund may invest up to 10% of its net assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days, provided that no more than 5% of its total assets may
be invested in restricted securities. Not included within this limitation are
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act, if the securities are determined to
be liquid. The Board of Directors has adopted guidelines and delegated to the
Advisors, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal regulatory
limitations. The investment restrictions recited below are in addition to those
described in the Fund's Prospectuses, and are matters of fundamental policy and
may not be changed without the affirmative vote of a majority of the outstanding
Shares. Accordingly, the Fund will not:
1. 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;
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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);
4. Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and in an amount not exceeding 10%
of the value of the total assets of the Fund at the time of such borrowing,
provided that while borrowings by the Fund equaling 5% or more of the Fund's
total assets are outstanding, the Fund will not purchase securities;
5. Invest in real estate or mortgages on real estate;
6. Purchase or sell commodities or commodities contracts, including
financial futures contracts;
7. 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;
8. Issue senior securities;
9. 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;
10. Effect short sales of securities;
11. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
12. Purchase participations or other direct interests in oil, gas or
other mineral leases or exploration or development programs; or
13. Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal or state securities laws), including
repurchase agreements with remaining maturities in excess of seven days,
provided, however, that the Fund shall not invest more than 5% of its total
assets in securities that the Fund is restricted from selling to the public
without registration under the Securities Act of 1933, as amended (excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended, that have been determined to be liquid by
the Fund's Board of Directors based upon the trading markets for such
securities).
The following investment restriction may be changed by a vote of the
majority of the Board of Directors. The Fund will not invest in shares of any
other investment company registered under the Investment Company Act, except as
permitted by federal law.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
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
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business (a "Business Day"). The New York Stock Exchange is open for business on
all weekdays except for the following holidays (or the days on which they are
observed): New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). Under such agreements, so
long as a third party receives an order prior to the Fund's close of business,
the order is deemed to have been received by the Fund and, accordingly, may
receive the net asset value computed at the close of business that day. These
"late day" agreements are intended to permit shareholders placing orders with
third parties to place orders up to the same time as other shareholders.
REDEMPTION
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem shares by check or by
wire transfer of funds. However, if the Board of Directors determines that it
would be in the best interests of the remaining shareholders of the Fund to make
payment of the redemption price in whole or in part by a distribution in kind of
readily marketable securities from the portfolio of the Fund in lieu of cash, in
conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming shareholder
will incur brokerage costs in later converting the assets into cash. The method
of valuing portfolio securities is described under "Valuation of Shares" and
such valuation will be made as of the same time the redemption price is
determined. The Fund, however, has elected to be governed by Rule 18f-1 under
the Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's prospectus is not intended as a substitute for
careful tax planning. Shareholders are urged to consult with their tax advisors
with specific reference to their own tax situation, including their state and
local tax liabilities.
The following general discussion of certain 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.
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QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends to qualify and elect to be treated as a "regulated
investment company" ("RIC") as defined under Subchapter M of the Code. By
following such a policy, the Fund expects to eliminate or reduce to a nominal
amount the federal taxes to which it may be subject.
In order to qualify as a RIC, the Fund must distribute at least 90% of
its net investment income (that generally includes dividends, taxable interest,
and the excess of net short-term capital gains over net long-term capital losses
less operating expenses) and at least 90% of its net tax exempt interest income,
for each tax year, if any, to its shareholders and also must meet several
additional requirements. Included among these requirements are the following:
(i) at least 90% of the Fund's gross income each taxable year must be derived
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock or securities, or certain other
income; (ii) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities, with
such other securities limited, in respect to any one issuer, to an amount that
does not exceed 5% of the value of the Fund's assets and that does not represent
more than 10% of the outstanding voting securities of such issuer; and (iii) at
the close of each quarter of the Fund's taxable year, not more than 25% of the
value of its assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
If the Fund fails to qualify for any taxable year 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 such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
FUND DISTRIBUTIONS
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders who are individuals at a maximum rate of 20%, regardless
of the length of time the shareholder has held the shares. If any such gains are
retained, the Fund will pay federal income tax thereon.
In the case of corporate shareholders, distributions (other than
capital gains distributions) from a RIC generally qualify for the
dividends-received deduction to the extent of the gross amount of qualifying
dividends received by a Fund for the year. Generally, and subject to certain
limitations, a dividend will be treated as a qualifying dividend if it has been
received from a domestic corporation. Accordingly, distributions from the Fund
generally will qualify for the corporate dividends-received deduction.
-9-
<PAGE>
Ordinarily, investors should include all dividends as income in the
year of payment. However, dividends declared payable to shareholders of record
in October, November, or December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Fund in the year in which the dividends were
declared.
The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
SALE OR EXCHANGE OF FUND SHARES
Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution
with respect to the Share (or any undistributed net capital gains of a Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of a Fund that have been included in determining
such shareholder's long-term capital gains). In addition, any loss realized on a
sale or other disposition of Shares will be disallowed to the extent an investor
repurchases (or enters into a contract or option to repurchase) Shares within a
period of 61 days (beginning 30 days before and ending 30 days after the
disposition of the Shares). This loss disallowance rule will apply to Shares
received through the reinvestment of dividends during the 61-day period.
In certain cases, the Fund will be required to withhold, and remit to
the United States Treasury, 31% of any distributions paid to a shareholder who
(1) has failed to provide a correct taxpayer identification number, (2) is
subject to backup withholding by the Internal Revenue Service, or (3) has failed
to certify to the Fund that such shareholder is not subject to backup
withholding.
FEDERAL EXCISE TAX
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon.
STATE AND LOCAL TAXES
The Fund is not liable for any income or franchise tax in Massachusetts
if it qualifies as a RIC for federal income tax purposes. Depending upon state
and local law, distributions by the Fund to shareholders and the ownership of
shares may be subject to state and local taxes. 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.
-10-
<PAGE>
5. MANAGEMENT OF THE FUND
Directors and Officers
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 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 and Director (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust
Company (formerly, Alex. Brown Capital Advisory & Trust Company);
Director, Investment Company Capital Corp. (registered investment
advisor) and Virginia Hot Springs Inc. (property management). Formerly,
Managing Director and Vice Chairman, Alex. Brown Incorporated (now BT
Alex. Brown Incorporated) and Director, ISI Family of Funds (registered
investment companies).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company (agribusiness operations), Hollinger International,
Inc. (publishing), Homestake Mining (mining and exploration), HCL
Technologies (information technology) and Anchor Technologies (gaming
software and equipment); Director, Mitchell Hutchins family of funds
and Deutsche Funds, Inc., and Trustee, Deutsche Portfolios (registered
investment companies); and Member, Textron Corporation International
Advisory Council. Formerly, partner, McKinsey & Company (consulting),
1991-1994; U.S. Chief Negotiator in Strategic Arms Reduction Talks
(START) with former Soviet Union and U.S. Ambassador to the Federal
Republic of Germany, 1985-1991.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management Americas; Managing
Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor).
Formerly, Director, ISI Family of Funds (registered investment
companies). Chartered Financial Analyst.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI
Family of Funds (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments), President and Chief Executive
Officer, The National Association of Securities Dealers, Inc. and The
NASDAQ Stock Market, Inc., 1987-1997; Chief Operating Officer of Alex.
Brown & Sons Incorporated (now BT Alex. Brown Incorporated), 1985-1987;
General Partner, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and ISI Family of Funds (registered
-11-
<PAGE>
investment companies). Formerly, Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants,
Trustee, Merrill Lynch Funds for Institutions, 1991-1993; Adjunct
Professor, Columbia University-Graduate School of Business, 1991-1992;
and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director AMBAC
Treasurers Trust (registered investment company), DP Mann Holdings
(insurance) and ISI Family of Funds (registered investment companies).
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 (charitable foundation);
Director and Executive Vice President, The Glenmede Trust Company
(investment trust and wealth management). Formerly, Executive Director,
The Pew Charitable Trusts and Director, ISI Family of Funds (registered
investment companies).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, The Wadsworth Group (registered investment advisor), First
Fund Distributors, Inc. (registered broker-dealer) and Guinness Flight
Investments Funds, Inc.; Director, The Germany Fund, Inc., The Central
European Equity Fund, Inc., Deutsche Funds, Inc., Trustee, Deutsche
Portfolios, and Vice President, Professionally Managed Portfolios and
Advisors Series Trust (registered investment companies).
CARL W. VOGT, Esq., President (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);
Interim President of Williams College; Director, Yellow Corporation
(trucking), American Science & Engineering (x-ray detection equipment),
and ISI Family of Funds (registered investment companies). Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); and Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration).
Formerly, Director of each fund in the Fund Complex.
CHARLES A. RIZZO, Treasurer (8/5/57)
Vice President and Department Head, Deutsche Asset Management Americas,
since 1999; and Vice President and Department Head, BT Alex. Brown
Incorporated, 1998-1999. Formerly, Senior Manager,
PricewaterhouseCoopers LLP, 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, Deutsche Asset Management Americas, since 1999; and
Vice President, BT Alex. Brown Incorporated, 1997-1999. Formerly,
Senior Manager, PricewaterhouseCoopers LLP, 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas, since 1999. Principal, BT
Alex. Brown Incorporated, 1998-1999. Formerly, Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
---------------------
-12-
<PAGE>
* Messrs. Semans and Hale are directors who are "interested persons," as
defined in the 1940 Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other BT Alex. Brown") or its affiliates. There are currently
eight funds in the Flag Investors Funds and Deutsche Banc Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of three other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of four
funds in the Fund Complex. Ms. Rimel serves as Director of seven funds in the
Fund Complex. Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth serve as
Directors of each of the funds in the Fund Complex. Mr. Vogt serves as President
of seven of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms.
Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, for
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 or its affiliates 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 as director, each Director who is not an
"interested person" of the Fund (as defined in the 1940 Act) (an "Independent
Director") and Mr. Vogt, 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 Chairmen of the
Fund Complex's Audit Committee and Executive Committee receive an annual fee
from the Fund Complex. Payment of such fees and expenses is allocated among all
such funds described above in direct proportion to their relative net assets.
For the fiscal year ended March 31, 1999, Independent Directors' fees (including
fees paid to the Fund's President) attributable to the assets of the Fund
totaled approximately $36,141.
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, 1999.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Pension or Retirement Total Compensation from the
Position the Fund Payable to Benefits Accrued as Part Fund and Fund Complex Payable
Directors for the Fiscal of Fund Expenses to Directors for the Fiscal
Year Ended March 31, 1999 Year Ended March 31, 1999
<S> <C> <C> <C>
Truman T. Semans (1) $0 $0 $0
Chairman
Richard T. Hale (1) $0 $0 $0
Director
James J. Cunnane(8) $3,448 (2) $ (3) $39,000 for service
Director on 13(4) Boards
Joseph R. Hardiman(5) $2,717 $ (3) $29,500 for service
Director on 12(6) Boards
John F. Kroeger(7) $3,232 $ (3) $36,750 for service
Director on 13(4) Boards
Louis E. Levy $4,111 $ (3) $46,500 for service
Director on 13(4) Boards
Eugene J. McDonald $3,885 (2) $ (3) $44,000 for service
Director on 13(4) Boards
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Rebecca W. Rimel $3,501(2) $ (3) $39,000 for service
Director on 11(4,6) Boards
Carl W. Vogt $3,523 (2) $ (3) $39,000 for service
Director on 12(4,6) Boards
N/A N/A
Richard R. Burt(9) N/A
Director
N/A N/A
Robert H. Wadsworth(9) N/A
Director
</TABLE>
- --------------------------------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Of amounts payable to Ms. Rimel and Messrs. Cunnane, McDonald, and Vogt
$3,501, $3,448, $3,885 and $3,523, respectively, was deferred pursuant to a
deferred compensation plan.
(3) The Fund Complex has adopted a retirement plan for eligible Directors and
the Fund's President, as described below. The actuarially computed pension
expense for the year ended March 31, 1999 was approximately $14,319.
(4) One of these Funds ceased operations on July 29, 1998.
(5) Elected to Fund's board effective September 27, 1998.
(6) Ms. Rimel receives and Messrs. Hardiman and Vogt received (prior to their
appointment or election as Director to all of the funds in the Fund
Complex) proportionately higher compensation from each fund for which they
serve as Director.
(7) Retired, effective September 27, 1998; Deceased, November 26, 1998.
(8) Retired, effective October 7, 1999.
(9) Elected to the Fund's board effective October 7, 1999.
-13-
<PAGE>
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by the Participant in his or her
last year of service. Upon retirement, each Participant will receive annually
10% of such fee for each year that he or she served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by the
Participant in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which the Participant serves. The Retirement Plan is
unfunded and unvested. The Fund has two Participants, a Director who retired
effective December 31, 1994 and another Director who retired effective December
31, 1996, who have qualified for the Retirement Plan by serving thirteen and
fourteen years, respectively, as Directors in the Fund Complex and each of whom
will be paid a quarterly fee of $4,875 by the Fund Complex for the rest of his
life. Such fees are allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex. Mr. McDonald has qualified
for, but has not received, benefits.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 are as follows: for Ms. Rimel, 3 years; for Mr. Levy, 4 years;
for Mr. McDonald, 6 years; for Mr. Vogt, 3 years; for Mr. Hardiman, 1 year and
for Mr. Burt and Mr. Wadsworth, 0 years.
Years of Service Estimated Annual Benefits Payable By Fund Complex
Upon Retirement
-------------------------------------------------
Chairmen of Audit and Executive Other Participants
Committees
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
-14-
<PAGE>
Any Director who receives fees from the Fund is permitted to defer 50%
to 100% of his or her annual compensation pursuant to a Deferred Compensation
Plan. Messrs. Levy, McDonald and Vogt and Ms. Rimel have each executed a
Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors funds, Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc. and BT International Equity Fund in which all or part of their
deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in generally equal
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
offecers of the Fund, as well as to designated officers, directors and employees
of the Advisors' investment personnel, including the portifolio managers and
employees who execute or help execute a portifolio manager's decisions or who
obtain contempooraneous information regarding the purchase or sale of a security
by the Fund.
The Codec of Ethics requires that any officer, director, or employee of
the Fund or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an sutomatic dividend reinvestment plan). The foregoing would apply to any
-15-
<PAGE>
officer, director or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity (including trades of
both clients and covered persons) do not exceed ten percent of the daily average
trading volume of the security for the prior 15 days. Officers, directors and
employees of the Advisors and the Distributor may comply with codes instituted
by those entities so long as they contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On March 30, 1999, the Board of Directors of the Fund including a
majority of the Independent Directors, approved a new investment advisory
agreement between the Fund and Investment Company Capital Corp ("ICC" or the
"Advisor") and a new sub-advisory agreement among the Fund, ICC and Alex. Brown
Investment Management "ABIM" or the "Sub-Advisor"). The Investment Advisory
Agreement and Sub-Advisory Agreement were approved by shareholders on October 7,
1999. Deutsche Bank is a major global banking institution that is engaged in a
wide range of financial services, including investment managment, mutual funds,
retail and commercial banking, investment banking and insurance. Deutsche Asset
Management Americas is an operating unit of Deutsche Bank consisting of ICC and
other asset management affiliates of Deutsche Bank. ABIM is a limited
partnership affiliated with the Advisor. 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 and 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 foe 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.
-16-
<PAGE>
As compensation for its 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 of
$200 million. As compensation for its services, ABIM is entitled to receive a
fee from ICC, payable from its advisory fee based on the Fund's average daily
net assets. This fee is calculated daily and payable monthly, at the annual rate
of 0.75% of the first $50 million, 0.60% of the next $150 million, and 0.50% of
the amount in excess of $200 million.
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: 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ICC $5,619,259 $3,769,264 $2,227,355
ABIM $4,056,393 $2,735,069 $1,633,167
</TABLE>
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors") serves as the exclusive
distributor of the Fund's Shares pursuant to a Distribution Agreement effective
August 31, 1997, which provides for distribution of each class of Shares.
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 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
-17-
<PAGE>
duties or obligations under the Distributiom 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 indemnity each other for losses relating to
disclosures in the Fund's registration statement
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate In the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on September 27, 1999.
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 Class C Shares. In addition, with respect to the Class B and Class
C Shares, ICC Distributors receives a shareholder servicing fee at an annual
rate of 0.25% of the respective average daily net assets of the Class B and the
-18-
<PAGE>
Class C Shares. (See the Prospectus.) ICC Distributors receives no compensation
for distributing the Institutional Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
- --------------------------------------------------------------------------------
Fiscal Year Ended March 31,
--------------------------------------------
Fee 1999 1998 1997
- --------------------------------------------------------------------------------
12b-1 Fee $2,095,410(1) $1,318,534(2) $726,107(4)
- --------------------------------------------------------------------------------
Class B Shareholder Servicing Fee $ 206,332 (1) $ 98,025(2) $ 21,379(4)
- --------------------------------------------------------------------------------
Class C Shareholder Servicing Fee $ 19,316 N/A N/A
- --------------------------------------------------------------------------------
- ---------------
(1) Fees received by ICC Distributors,
(2) Of this amount Alex. Brown, the Fund's distributor prior to August 31.
1997, received $457,116 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $861,418.
(3) Of this amount, Alex, Brown, the Fund's distributor prior to August 31,
1997, received $26,604 and ICC Distributors, the Fund's distributor
effective August 31. 1997, received $69.421.
(4) Fees received by Alex. Brown.
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 in effect
from year to year thereafter, as specifically approved (a) at least annually by
the Fund's Board of Directors and (b) by the affirmative vote of a majority of
the 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 27, 1999
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 by the vote of a majority of the Fund's
Independent Directors or by a vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Stock").
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plans to ICC Distributors pursuant to the
Distribution Agreement and to Participating Dealers pursuant to any
Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under the Plans. Payments under the Plans are made as described above regardless
of ICC Distributors' actual cost of providing distribution services and may be
used to pay ICC Distributors' overhead expenses. If the cost of providing
distribution services to the Class A Shares is less than 0.25% of the Class A
Shares'average daily net assets for any period or if the cost of providing
distribution services to the Class B Shares and the Class C Shares is less than
0.75% of the classes' respective average daily net assets for any period, the
unexpended portion of the distribution fees may be retained by ICC Distributors.
The Plans do not provide for any charges to the Fund for excess
-19-
<PAGE>
amounts expended by ICC Distributors and, if any of the Plans is terminated in
accordance with its terms, the obligation of the Fund to make payments to ICC
Distributors pursuant to such Plan will cease and the Fund will not be required
to make any payments past the date the Distribution Agreement terminates with
respect to that class. In return for payments received pursuant to the Plans,
ICC Distributors pays the distribution-related expenses of the Fund including
one or more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges.
GENERAL INFORMATION
The Fund's distributor received commissions on the sale of the Flag
Investors Class A Shares and contingent deferred sales charges on the Flag
Investors Class B and Class C Shares and retained from such commissions and
sales charges the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------------- --------------------------
Class Received Retained Received Retained Received Retained
-------- ------------- -------- -------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class A
Commissions $1,159,313(1) $0(1) $1,547,315(2) $1,308,006(4) $937,641(6) $868,899(6)
Class B
Contingent
Deferred Sales $1,607,852(1) $0(1) $1,498,689(3) $1,128,132(5) $483,596(6) $350,485(6)
Charge
Class C Contingent
Deferred Sales $159,062(1) $0(1) N/A N/A N/A N/A
Charge
</TABLE>
- -------------
(1) By ICC Distributors.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $566,160 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $981,154.
(3) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $539,410 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $959,279.
(4) Of commissions received, Alex. Brown retained $130,006 and ICC Distributors
retained $0.
(5) Of sales charges received, Alex. Brown retained $418,559 and ICC
Distributors retained $709,573.
(6) By Alex. Brown.
Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depository appointed by the Fund for the safekeeping of cash,
portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and transfer
taxes, and fees payable by the Fund to federal, state or other governmental
agencies; the costs and expenses of engraving or printing of certificates
representing Shares; all costs and expenses in connection with the registration
and maintenance of registration of the Fund and its Shares with the SEC and
various states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of printing, including
typesetting and distributing prospectuses and statements of additional
information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing proxy statements and reports to shareholders; fees and
-20-
<PAGE>
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.
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for the
Fund, for broker-dealer selection and for negotiation of commission rates,
subject to the supervision of ICC. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a commission
for their services. Brokerage commissions are subject to negotiation between
ABIM and the broker-dealers. ABIM may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, its affiliates and ICC Distributors.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with
affiliates of the Advisors in any transaction in which they act as a principal.
If affiliates of the Advisors are participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ABIM may, in its discretion, effect transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ABIM to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ABIM with clients other than the Fund. Similarly, any research services received
by ABIM through placement of portfolio transactions of other clients may be of
value to ABIM in fulfilling its obligations to the Fund. No specific value can
be determined for research and statistical services furnished without cost to
ABIM by a broker-dealer. ABIM is of the opinion that because the material must
be analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing ABIM's research and analysis.
Therefore, it may tend to benefit the Fund by improving ABIM's investment
advice. In over-the-counter transactions, ABIM will not pay any commission or
other remuneration for research services. ABIM's policy is to pay a
broker-dealer higher commissions for particular transactions than might be
charged if a different broker-dealer had been chosen when, in ABIM's opinion,
this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, ABIM is
also authorized to pay broker-dealers other than affiliates of the Advisors
higher commissions than another broker might have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation of
orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board.
-21-
<PAGE>
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through affiliates of the Advisors. At the time of such authorization, the Board
adopted certain policies and procedures incorporating the standards of Rule
17e-1 under the Investment Company Act which requires that the commissions paid
affiliates of the Advisors must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC and
ABIM to furnish reports and to maintain records in connection with such reviews.
ABIM manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------------------
1999 1998 1997
---- ----------- -----------
<S> <C> <C> <C>
Transactions Directed $0 $80,647,030 $38,947,268
Commissions Paid $0 $ 174,443 $ 111,113
</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, 1999, the Fund held
a 4.80% repurchase agreement issued by Goldman Sachs & Co. valued at $32,211,000
and corporate debt of J.P. Morgan Securities, Inc. with a market value of
$5,143,750. Goldman Sachs & Co. and J.P. Morgan Securities, Inc. are "regular
brokers or dealers" of the Fund.
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 and Flag Investors Value Builder Fund Institutional
Shares. The Flag Investors Value Builder Fund
-22-
<PAGE>
Institutional Shares are offered only to certain eligible institutions and to
clients of investment advisory affiliates of BT Alex. Brown. In the event
separate series or classes are established, all Shares of the Fund, regardless
of series or class would have equal rights with respect to voting, except that
with respect to any matter affecting the rights of the holders of a particular
series or class, the holders of each series or class would vote separately. In
general, each such series would be managed separately and shareholders of each
series would have an undivided interest in the net assets of that series. For
tax purposes, the series would be treated as separate entities. Generally, each
class of Shares issued by a particular series would be identical to every other
class and expenses of the Fund (other than 12b-1 and any applicable service
fees) are prorated between all classes of a series based upon the relative net
assets of each class. Any matters affecting any class exclusively will be voted
on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
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
Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives such compensation from the Fund for
its services as custodian as may be agreed to from time to time by Bankers Trust
and the Fund. For the fiscal year ended March 31, 1999, Bankers Trust was paid
$92,747 as compensation for providing custody services to the Fund. Investment
Company Capital Corp. has been retained to act as transfer and dividend
disbursing agent. As compensation for providing these services, the Fund pays
ICC up to $16.83 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal year ended March 31,
1999 such fees totaled $335,996.
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.
-23-
<PAGE>
Average Net Assets Incremental Annual Accounting Fee
- ------------------ ---------------------------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 0.100%
$20,000,000 - $30,000,000 0.80%
$30,000,000 - $40,000,000 0.60%
$40,000,000 - $50,000,000 0.50%
$50,000,000 - $60,000,000 0.40%
$60,000,000 - $70,000,000 0.30%
$70,000,000 - $100,000,000 0.20%
$100,000,000 - $500,000,000 0.15%
$500,000,000 - $1,000,000,000 0.05%
over $1,000,000,000 0.01%
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, 1999, ICC received accounting fees of
$127,817.
12. INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
13. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
14. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to that
of other open-end diversified management investment companies and to stock or
other relevant indices in advertisements or in certain reports to shareholders,
performance will be stated in terms of total return rather than in terms of
yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5-, or 10-year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- or 10-year periods.
-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, 1999 were as follows:
<TABLE>
<CAPTION>
ONE-YEAR PERIOD ENDED FIVE YEAR PERIOD ENDED
MARCH 31, 1999 MARCH 31, 1999 SINCE INCEPTION
--------------------------- -------------------------- --------------------------
Average Average
Ending Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return
- ------- ---------- ------ ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A $1,088 8.78% $2,487 19.99% $2,917 17.07%
6/15/92*
Class B $1,090 9.05% N/A N/A $2,444 23.47%
1/3/95*
Class C N/A N/A N/A N/A $1,105 10.53%
4/8/98*
Institutional $1,142 14.22% N/A N/A $2,002 22.59%
11/2/95*
</TABLE>
- -----------
* Inception Date
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc. or CDA Investment Technologies
Inc., or with the performance of the Lehman Government Corporate Bond Index, the
Consumer Price Index, the return on 90-day U.S.
-25-
<PAGE>
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 1999 was 10% and in fiscal year 1998 was 7%.
15. 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 outstanding shares of a class of the Fund, as of
May 11, 1999:
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage of Ownership
---------------- -------- ------------ ---------------------------
<S> <C> <C> <C>
Bankers Trust Corp & Affil 401K X 10.05% of Class A Shares
Savings Plan
The Partnershare Plan of
Bankers Trust NY Corp & Affil
100 Plaza One
Jersey City, NJ 07311
Mercantile Safe Dep & Tr Co X 8.91% of Institutional Shares
Cust
FBO Calvert School Pension
Plan
2 Hopkins Plz Lowr Level
Baltimore, MD 21201
Mercantile Safe Dep & Tr Co X 10.86% of Institutional Shares
Cust
FBO Calvert School
AB Flag Value A/C #1166032
766 Hammonds Ferry Road
Linthicum, MD 21090-1317
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BT Alex. Brown Incorporated X X 13.96% of Institutional Shares
FBO 250-10788-16
Brown Advisory House Acct.
P.O. Box 1346
Baltimore, MD 21203
Nationsbank Montgomery X 23.59% of Institutional Shares
Securities
FBO 800002431
P.O. Box 37156
San Francisco, CA 94137-0001
</TABLE>
As of May 11, 1999, Directors and officers as a group beneficially
owned an aggregate of less than 1% of the Fund's total outstanding shares.
16. FINANCIAL STATEMENTS
See next page.
-27-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets March 31, 1999
Shares Market Value
- --------------------------------------------------------------------------------
Common Stock: 66.5%
Banking: 2.3%
152,500 Bank of America Corporation ................ $ 10,770,312
200,000 KeyCorp .................................... 6,062,500
131,000 Wells Fargo & Company ...................... 4,593,187
------------
21,425,999
------------
Basic Industry: 1.3%
707,600 Airgas, Inc.* .............................. 5,926,150
140,000 Georgia Gulf Corp. ......................... 1,566,250
30,000 Hercules, Inc. ............................. 757,500
44,654 Potash Corp. of Saskatchewan, Inc. ......... 2,388,989
31,600 Schulman (A.), Inc. ........................ 430,550
28,000 Solutia, Inc. .............................. 486,500
------------
11,555,939
------------
Business Services: 3.1%
294,700 First Data Corp. ........................... 12,598,425
176,400 SEI Corp. .................................. 16,317,000
------------
28,915,425
------------
Capital Goods: 1.3%
300,000 Case Corp. ................................. 7,612,500
36,000 Eaton Corp. ................................ 2,574,000
96,200 Westinghouse Air Brake Co. ................. 2,008,175
------------
12,194,675
------------
Consumer Durables/Non-Durables: 5.7%
860,800 Blyth Industries, Inc.* .................... 20,336,400
33,500 Eastman Kodak Co. .......................... 2,139,812
140,000 Ford Motor Company ......................... 7,945,000
50,000 Liz Claiborne, Inc. ........................ 1,631,250
111,600 Philip Morris Cos., Inc. ................... 3,926,925
510,100 Richfood Holdings, Inc. .................... 10,999,031
414,800 Unifi, Inc.* ............................... 5,288,700
------------
52,267,118
------------
Consumer Services: 17.2%
736,000 America Online, Inc.* ...................... 107,456,000
1,632,400 Cendant Corp.* ............................. 25,710,300
60,000 Gannett Co. ................................ 3,780,000
202,000 Sinclair Broadcasting Group A* ............. 2,941,625
-28-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
Common Stock (continued)
Consumer Services (concluded)
559,400 The Learning Co., Inc.* ...................... $16,222,600
50,000 Times Mirror Co.-Class A ..................... 2,703,125
-----------
158,813,650
-----------
Defense/Aerospace: 0.8%
156,000 Boeing Co. ................................... 5,323,500
62,342 Lockheed Martin Corp. ........................ 2,349,514
-----------
7,673,014
-----------
Energy: 1.0%
125,000 Burlington Resources, Inc. ................... 4,992,187
250,000 Petroleum Geo Services* ...................... 3,812,500
-----------
8,804,687
-----------
Entertainment: 0.6%
796,700 Lodgenet Entertainment Corp.* ................ 5,228,344
-----------
Financial Services: 5.0%
83,500 American Express Co. ......................... 9,811,250
258,500 Citigroup .................................... 16,511,687
87,500 Countrywide Credit Industries, Inc. .......... 3,281,250
172,000 Freddie Mac .................................. 9,825,500
265,780 MBNA Corp. ................................... 6,345,497
-----------
45,775,184
-----------
Health Care Services: 4.2%
190,000 Amgen, Inc.* ................................. 14,226,250
40,000 Baxter International, Inc. ................... 2,640,000
76,000 Bristol-Myers Squibb Co. ..................... 4,887,750
114,000 Johnson & Johnson ............................ 10,680,375
77,200 Wellpoint Health Networks, Inc.* ............. 5,852,725
-----------
38,287,100
-----------
Hotels/Gaming: 0.4%
200,000 Harrah's Entertainment, Inc.* ................ 3,812,500
-----------
Housing: 1.5%
367,800 Champion Enterprises, Inc.* .................. 7,126,125
128,000 USG Corp. .................................... 6,576,000
-----------
13,702,125
-----------
-29-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) March 31, 1999
Shares/
Par (000) Market Value
- --------------------------------------------------------------------------------
Common Stock (continued)
Insurance: 7.2%
1,256,749 Conseco, Inc. ................................ $38,802,125
65,000 Hartford Financial Services Group ............ 3,692,812
77,900 NAC Re Corp. ................................. 4,182,256
150,000 RenaissanceRe Holdings Limited ............... 5,240,625
236,720 XL Capital Limited - Class A ................. 14,380,740
-----------
66,298,558
-----------
Multi - Industry: 0.9%
64,000 United Technologies Corp. .................... 8,668,000
-----------
Real Estate: 1.7%
89,913 Crestline Capital Corp.* ..................... 1,382,412
60,200 General Growth Properties, Inc. .............. 1,952,738
899,136 Host Marriott Corp. .......................... 10,002,888
35,000 National Health Investors, Inc. .............. 752,500
100,500 U.S. Restaurant Properties, Inc. ............. 1,940,906
-----------
16,031,444
-----------
Retail: 1.6%
53,164 J.C. Penney Co., Inc. ........................ 2,153,142
400,000 Kmart Corp.* ................................. 6,725,000
90,000 Tandy Corp. .................................. 5,743,125
-----------
14,621,267
-----------
Technology: 5.9%
70,400 Autodesk, Inc. ............................... 2,846,800
326,800 Cognex Corp.* ................................ 7,741,075
125,000 Electronic Data Systems Corp. ................ 6,085,938
86,000 International Business Machines Corp. ........ 15,243,500
903,000 Novell, Inc.* ................................ 22,744,313
-----------
54,661,626
-----------
Telecommunications: 2.7%
300,000 Comsat Corp. ................................. 8,681,250
190,689 MCI Worldcom, Inc.* .......................... 16,887,895
-----------
25,569,145
-----------
-30-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
March 31, 1999
Shares/
Par (000) Market Value
- --------------------------------------------------------------------------------
Common Stock (concluded)
Transportation: 1.1%
135,000 Canadian National Railway Co. ............ $ 7,509,375
34,982 Delta Air Lines, Inc. .................... 2,431,249
------------
9,940,624
------------
Utilities: 1.0%
204,700 Midamerican Energy Hldgs* ................ 5,731,600
881 Star Gas Partners L.P.* .................. 12,340
100,000 Unicom Corp. ............................. 3,656,250
------------
9,400,190
------------
Total Common Stock
(Cost $324,609,023) ...................... 613,646,614
------------
Preferred Stock: 0.8%
200,000 Conseco Financial Trust, 8.70% ............. 4,950,000
100,000 Conseco Financial Trust, 9.16% ............. 2,506,250
---------
Total Preferred Stock
(Cost $7,500,000) ........................ 7,456,250
---------
Convertible Preferred Stock: 1.8%
40,000 Fleetwood Capital Trust, Cvt. Pfd., 6.00% .. 1,620,000
75,000 Host Marriott Financial Trust,
Cvt. Pfd., 6.75% ........................... 3,075,000
95,000 Sinclair Broadcast Group Cvt. Pfd., 6.00% .. 3,877,188
423,600 U.S. Restaurant Properties, Series A,
Cvt. Pfd., 7.72% ........................... 7,889,550
----------
Total Convertible Preferred Stock
(Cost $20,341,867) ....................... 16,461,738
----------
-31-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (continued) March 31, 1999
Par
(000) Market Value
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS: 2.4%
$ 2,000 Healthcare Realty Trust, Cvt. Deb.,
6.55%, 3/14/02 ............................ $ 1,830,000
8,800 Platinum Technology International, Inc.,
Cvt. Deb. 6.25%, 12/15/02 ................. 8,338,000
1,661 Richardson Electronics, Cvt. Deb.
8.25%, 6/15/06 ............................ 1,407,698
339 Richardson Electronics, Cvt. Deb.
7.25%, 12/15/06 ........................... 224,164
10,907 Softkey International Cvt. Deb.,
5.50%, 11/1/00 ............................ 10,716,128
-----------
Total Convertible Bonds
(Cost $21,052,282) ........................ 22,515,990
-----------
CORPORATE BONDS: 23.0%
7,400 Amazon.com Inc., 0.00%, 5/1/08 .............. 5,032,000
3,000 Avon Products, Inc., 6.55%, 8/1/07 .......... 2,970,000
1,000 Caesar's World, 8.875%, 8/15/02 ............. 1,007,500
2,975 Calenergy Co., Inc., 7.23%, 9/15/05 ......... 3,082,844
5,000 Calenergy Co., Inc., 7.63%, 10/15/07 ........ 5,300,000
3,000 Campbell Soup Co., 6.15%, 12/1/02 ........... 3,056,250
1,000 Capstar Hotel, 8.75%, 8/15/07 ............... 957,500
8,000 Cendant Corp., 7.75%, 12/1/03 ............... 8,220,000
873 Chattem Inc., Sr Sub Deb, 12.75%, 6/15/04 ... 977,760
3,000 Circus Circus, 6.75%, 7/15/03 ............... 2,857,500
1,000 Citigroup, Inc, 6.125%, 6/15/00 ............. 1,004,270
5,100 Conseco, Inc., 6.80%, 6/15/05 ............... 4,927,875
700 CSX Corp., Nt, 7.00%, 9/15/02 ............... 720,125
5,000 Cytec Industries, Inc., 6.50%, 3/15/03 ...... 4,743,750
5,000 Cytec Industries, Inc., 6.75%, 3/15/08 ...... 5,031,250
300 Exxon Capital Corp., Nt, 6.50%, 7/15/99 ..... 300,993
2,150 First Tennessee Bank, 6.40%, 4/1/08 ......... 2,158,063
2,000 FMC Corp., Nt, 8.75%, 4/1/99 ................ 2,000,000
1,500 FMC Corp., Nt, 6.75%, 5/5/05 ................ 1,428,750
5,000 FMC Corp., Nt, 7.00%, 5/15/08 ............... 4,868,750
5,000 Frontier Corp., 7.25%, 5/15/04 .............. 5,112,500
1,000 Fund America Enterprise, Nt, 7.75%, 2/1/03 .. 1,020,000
5,000 Furon Co., 8.12%, 3/1/08 .................... 4,912,500
5,000 GTE Corp., 6.46%, 4/15/08 ................... 5,118,750
5,700 HMH Properties, Nt, 7.875%, 8/1/05 .......... 5,543,250
1,000 HMH Properties, Nt, 8.45%, 12/1/08 .......... 995,000
-32-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- --------------------------------------------------------------------------------
Par
(000) Market Value
- --------------------------------------------------------------------------------
CORPORATE BONDS (continued)
$ 3,000 Host Marriott Travel Plaza, 9.50%, 5/15/05 ... $ 3,131,250
5,000 HVIDE Marine, Inc., 8.375%, 2/15/08 .......... 3,425,000
5,000 ICI, 6.95%, 9/15/04 .......................... 4,968,750
1,775 ITT Corp., Nt, 6.25%, 11/15/00 ............... 1,723,969
2,000 ITT Corp., Nt, 6.75%, 11/15/03 ............... 1,870,000
5,000 J.P. Morgan, Nt, 6.875%, 1/15/07 ............. 5,143,750
4,000 Jeffries Group, Inc., 7.50%, 8/15/07 ......... 4,200,000
2,000 John Q. Hammons Hotels LP, Nt,
8.875%, 2/15/04 ............................ 1,870,000
3,000 Knight-Ridder, Inc., 6.625%, 11/1/07 ......... 3,082,500
5,000 Lilly Industries, Inc., 7.75%, 12/1/07 ....... 5,087,500
2,500 Lockheed Martin Corp., 7.25%, 5/15/06 ........ 2,646,875
2,200 Lockheed Martin Corp., Nt, 6.85%, 5/15/01 .... 2,244,000
5,000 LodgeNet Entertainment, Nt,
10.25%, 12/15/06 ........................... 5,112,500
1,285 Markel Corp., Nt, 7.25%, 11/1/03 ............. 1,338,006
10,000 Marriot International, Inc.,
6.625%, 11/15/03 ........................... 10,012,500
1,100 Masco Corp., Nt, 6.625%, 9/15/99 ............. 1,105,500
1,000 Masco Corp., Nt, 6.125%, 9/15/03 ............. 1,005,000
2,000 McDonnell Douglas Corp., Nt,
6.875%, 11/1/06 ............................ 2,100,000
500 MCI Communication, Nt, 7.50%, 8/20/04 ........ 532,500
9,800 Millipore Corp., 7.20%, 4/1/02 ............... 9,800,000
7,100 Millipore Corp., Nt, 7.50%, 4/1/07 ........... 6,984,625
4,000 Morgan Guaranty Trust Co., Nt,
5.75%, 10/8/99 ............................. 4,014,360
2,000 Nabisco, Inc., 6.70%, 6/15/02 ................ 2,012,500
1,500 Norfolk Southern, 6.95%, 5/1/02 .............. 1,537,500
1,500 Norfolk Southern, 7.35%, 5/15/07 ............. 1,603,125
5,000 Premier Parks, Nt, 9.25%, 4/1/06 ............. 5,225,000
4,000 Premier Parks, Nt, 9.75%, 1/15/07 ............ 4,350,000
3,815 Raychem Corp.,7.20%, 10/15/08 ................ 3,829,306
3,000 Raytheon Co., 6.45%, 8/15/02 ................. 3,052,500
5,000 Raytheon Co., 6.50%, 7/15/05 ................. 5,081,250
1,500 Salomon, Inc., Nt, 7.125%, 8/1/99 ............ 1,510,050
5,500 Solutia, Inc., 6.50%, 10/15/02 ............... 5,527,500
3,000 Tandy Corp., 6.95%, 09/1/07 .................. 3,120,000
1,000 Tektronix, Inc., Nt, 7.50%, 8/1/03 ........... 1,022,500
1,000 Tenneco, Inc., Nt, 8.075%, 10/1/02 ........... 1,042,500
5,000 United Defense Inds, Inc.,
8.75%, 11/15/07 ............................ 5,025,000
2,660 USG Corp., 8.50%, 8/1/05 ..................... 2,859,500
500 Xerox Corp., Nt, 7.15%, 8/1/04 ............... 522,500
-----------
Total Corporate Bonds (Cost $210,757,633) .... 212,066,496
-----------
-33-
<PAGE>
- -----------------------------------------------------------------------------
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Statement of Net Assets (concluded) March 31, 1999
Par
(000) Market Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY SECURITIES: 1.4%
$ 1,000 Federal National Mortgage Assoc.,
7.60%, 5/24/06 .......................... $ 1,003,280
-----------
U.S. Treasury Notes
4,000 6.25%, 5/31/00 .......................... 4,058,720
4,000 5.75%, 10/31/00 ......................... 4,043,760
4,000 6.125%, 12/31/01 ........................ 4,106,600
-----------
12,209,080
-----------
Total U.S. Government Agency Securities
(Cost $12,976,097) ...................... 13,212,360
-----------
Repurchase Agreement: 3.5%
32,211 Goldman Sachs & Co., 4.80%
Dated 3/31/99, to be repurchased on 4/1/99,
collateralized by U.S. Treasury Note with a
par value of $30,327,000, coupon rate of
6.375%, due 8/15/27, with a market value of
$32,620,328 (Cost $32,211,000) ................. 32,211,000
----------
Total Investments in Securities (Cost $629,447,902)** .. 99.4% $917,570,448
Other Assets in Excess of Liabilities .................. 0.6% 5,218,468
----- ------------
Net Assets ............................................. 100.0% $922,788,916
===== ============
Net Asset Value and Redemption Price Per:
Class A Share ($649,663,851 / 26,897,803 shares) .......... $ 24.15
=========
Class B Share ($110,679,674 / 4,590,241 shares) ........... $ 24.11***
=========
Class C Share ($17,450,549 / 723,521 shares) .............. $ 24.12****
=========
Institutional Share ($144,994,842 / 5,953,220 shares) ..... $ 24.36
=========
Maximum Offering Price Per:
Class A Share ($24.15 / 0.955) ............................ $ 25.29
=========
Class B Share ............................................. $ 24.11
=========
Class C Share ............................................. $ 24.12
=========
Institutional Share ....................................... $ 24.36
=========
- --------
* Non-income producing security.
** Aggregate cost for federal tax purposes is $629,224,848.
*** Redemption value is $23.15 following a 4% maximum contingent deferred
sales charge.
**** Redemption value is $23.88 following a 1% maximum contingent deferred
sales charge.
See accompanying Notes to Financial Statements.
-34-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
March 31,
- --------------------------------------------------------------------------------
1999
Investment Income:
Dividends ................................................ $ 8,804,013
Interest ................................................. 19,627,795
Less:Foreign taxes withheld .............................. (19,778)
-------------
Total income .................................... 28,412,030
-------------
Expenses:
Investment advisory fee .................................. 5,619,259
Distribution fee ......................................... 2,321,058
Transfer agent fee ....................................... 335,996
Accounting fee ........................................... 127,817
Registration fees ........................................ 119,352
Custodian fees ........................................... 92,747
Directors' fees .......................................... 36,141
Miscellaneous ............................................ 239,029
-------------
Total expenses .................................. 8,891,399
-------------
Net investment income .................................... 19,520,631
-------------
Realized and unrealized gain on investments:
Net realized gain from security transactions ............. 13,846,863
Change in unrealized appreciation/depreciation
of investments ......................................... 76,741,086
-------------
Net gain on investments .................................. 90,587,949
-------------
Net increase in net assets resulting from operations ........ $ 110,108,580
=============
See accompanying Notes to Financial Statements.
-35-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Years Ended March 31,
- ------------------------------------------------------------------------------
1999 1998
Increase in Net Assets:
Operations:
Net investment income .................... $ 19,520,631 $ 12,089,775
Net realized gain from security
transactions ........................... 13,846,863 4,718,485
Change in unrealized appreciation/
depreciation of investments ............ 76,741,086 124,787,999
------------- -------------
Net increase in net assets
resulting from operations .............. 110,108,580 141,596,259
------------- -------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares ......................... (13,804,511) (8,528,277)
Class B Shares ......................... (1,569,776) (625,533)
Class C Shares ......................... (128,906) --
Class D Shares ......................... (257,548) (351,052)
Institutional Shares ................... (3,045,076) (1,539,023)
Net realized long-term gains:
Class A Shares ......................... (8,542,386) (5,136,333)
Class B Shares ......................... (1,338,049) (601,637)
Class C Shares ......................... (156,874) --
Class D Shares ......................... -- (224,735)
Institutional Shares ................... (1,772,147) (1,098,467)
------------- -------------
Total distributions ...................... (30,615,273) (18,105,057)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares ............. 273,356,523 233,685,893
Value of shares issued in reinvestment
of dividends ........................... 27,465,074 16,203,251
Cost of shares repurchased ............... (135,894,760) (40,437,180)
------------- -------------
Increase in net assets derived from
capital share transactions ............. 164,926,837 209,451,964
------------- -------------
Total increase in net assets ............. 244,420,144 332,943,166
Net Assets:
Beginning of period ...................... 678,368,772 345,425,606
------------- -------------
End of period (including undistributed net
investment income of $4,505,377 and
$3,766,431, respectively) .............. $ 922,788,916 $ 678,368,772
============= =============
See accompanying Notes to Financial Statements.
-36-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the
Year Ended
March 31,
----------
1999
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period .......... $ 22.09
---------
Income from Investment Operations:
Net investment income ........................... 0.56
Net realized and unrealized gain on investments . 2.40
---------
Total from Investment Operations ................ 2.96
---------
Less Distributions:
Net investment income and short-term gains ...... (0.57)
Net realized mid-term and long-term capital gains (0.33)
---------
Total distributions ............................. (0.90)
---------
Net asset value at end of period ................ $ 24.15
=========
Total Return ....................................... 13.91%
Ratios to Average Net Assets:
Expenses ........................................ 1.12%
Net investment income ........................... 2.64%
Supplemental Data:
Net assets at end of period (000) ............... $ 649,664
Portfolio turnover rate ......................... 10%
</TABLE>
- ------
(1) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.40% for the year ended March 31, 1995.
(2) Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 3.02% for the year ended March 31, 1995.
-37-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended March 31,
---------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .......... $ 17.14 $ 14.68 $ 12.02 $ 11.23
--------- --------- --------- ---------
Income from Investment Operations:
Net investment income ........................... 0.47 0.39 0.36 0.35
Net realized and unrealized gain on investments . 5.21 2.49 3.03 0.80
--------- --------- --------- ---------
Total from Investment Operations ................ 5.68 2.88 3.39 1.15
--------- --------- --------- ---------
Less Distributions:
Net investment income and short-term gains ...... (0.47) (0.36) (0.41) (0.35)
Net realized mid-term and long-term capital gains (0.26) (0.06) (0.32) (0.01)
--------- --------- --------- ---------
Total distributions ............................. (0.73) (0.42) (0.73) (0.36)
--------- --------- --------- ---------
Net asset value at end of period ................ $ 22.09 $ 17.14 $ 14.68 $ 12.02
========= ========= ========= =========
Total Return ....................................... 33.82% 19.90% 28.86% 10.57%
Ratios to Average Net Assets:
Expenses ........................................ 1.14% 1.27% 1.31% 1.35%(1)
Net investment income ........................... 2.49% 2.51% 2.72% 3.07%(2)
Supplemental Data:
Net assets at end of period (000) ............... $ 491,575 $ 278,130 $ 200,020 $ 146,986
Portfolio turnover rate ......................... 7% 13% 15% 18%
</TABLE>
See accompanying Notes to Financial Statements.
-38-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the
Year Ended
March 31,
----------
1999
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period .......... $ 22.08
---------
Income from Investment Operations:
Net investment income ........................... 0.41
Net realized and unrealized gain on investments . 2.38
---------
Total from Investment Operations ................ 2.79
---------
Less Distributions:
Net investment income and short-term gains ...... (0.43)
Net realized mid-term and long-term capital gains (0.33)
---------
Total distributions ............................. (0.76)
---------
Net asset value at end of period ................ $ 24.11
=========
Total Return ....................................... 13.10%
Ratios to Average Net Assets:
Expenses ........................................ 1.87%
Net investment income ........................... 1.90%
Supplemental Data:
Net assets at end of period (000) ............... $ 110,680
Portfolio turnover rate ......................... 10%
</TABLE>
- -------------
(1) Annualized
(2) Commencement of Operations.
(3) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 2.17% annualized for the period ended March 31, 1995.
(4) Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 2.87% annualized for the period ended
March 31, 1995.
-39-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
Jan. 3, 1995(2)
through
For the Years Ended March 31, March 31,
--------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .......... $ 17.16 $ 14.71 $ 12.01 $ 11.14
--------- --------- --------- ---------
Income from Investment Operations:
Net investment income ........................... 0.34 0.26 0.21 0.08
Net realized and unrealized gain on investments . 5.20 2.51 3.05 0.79
--------- --------- --------- ---------
Total from Investment Operations ................ 5.54 $ 2.77 3.26 0.87
--------- --------- --------- ---------
Less Distributions:
Net investment income and short-term gains ...... (0.36) (0.26) (0.24) --
Net realized mid-term and long-term capital gains (0.26) (0.06) (0.32) --
--------- --------- --------- ---------
Total distributions ............................. (0.62) (0.32) (0.56) --
--------- --------- --------- ---------
Net asset value at end of period ................ $ 22.08 $ 17.16 $ 14.71 $ 12.01
========= ========= ========= =========
Total Return ....................................... 32.84% 19.00% 27.89% 7.81%
Ratios to Average Net Assets:
Expenses ........................................ 1.89% 2.02% 2.06% 2.10%(1,3)
Net investment income ........................... 1.75% 1.84% 1.97% 2.94%(1,4)
Supplemental Data:
Net assets at end of period (000) ............... $ 64,498 $ 17,311 $ 4,178 $ 341
Portfolio turnover rate ......................... 7% 13% 15% 18%
</TABLE>
See accompanying Notes to Financial Statements.
-40-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class C Shares
(For a share outstanding throughout each period)
For the Period
April 8, 1998(1)
through
March 31,
----------------
1999
Per Share Operating Performance:
Net asset value at beginning of period .......... $ 22.31
-------
Income from Investment Operations:
Net investment income ........................... 0.39
Net realized and unrealized gain on investments . 2.10
-------
Total from Investment Operations ................ 2.49
-------
Less Distributions:
Net investment income and short-term gains ...... (0.35)
Net realized mid-term and long-term capital gains (0.33)
-------
Total distributions ............................. (0.68)
-------
Net asset value at end of period ................ $ 24.12
=======
Total Return ....................................... 11.50%(3)
Ratios to Average Net Assets:
Expenses ........................................ 1.91%(2)
Net investment income ........................... 2.05%(2)
Supplemental Data:
Net assets at end of period (000) ............... $17,450
Portfolio turnover rate ......................... 10%
See accompanying Notes to Financial Statements.
- ----------
(1) Commencement of operations.
(2) Annualized
(3) Total return is since inception.
-41-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
April 1, 1998
through
November 20,(1)
---------------
1999
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $22.05
------
Income from Investment Operations:
Net investment income ......................... 0.29
Net realized and unrealized gain on investments (0.06)
------
Total from Investment Operations .............. 0.23
------
Less Distributions:
Net investment income and short-term gains .... (0.32)
Net realized long-term capital gains .......... --
------
Total distributions ........................... (0.32)
------
Net asset value at end of period .............. $21.96
======
Total Return ..................................... 1.09%
Ratios to Average Net Assets:
Expenses ...................................... 1.50%
Net investment income ......................... 2.04%
Supplemental Data:
Net assets at end of period (000) ............. $ --
Portfolio turnover rate ....................... 10%
</TABLE>
- --------
(1) Class D Shares were converted to Class A Shares on November 20, 1998.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.74% for Class D Shares for the year ended
March 31, 1995.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 2.68% for Class D Shares for the year
ended March 31, 1995.
-42-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 17.11 $ 14.66 $ 12.01 $ 11.22
------- ------- ------- -------
Income from Investment Operations:
Net investment income ......................... 0.43 0.35 0.33 0.31
Net realized and unrealized gain on investments 5.17 2.47 3.02 0.80
------- ------- ------- -------
Total from Investment Operations .............. 5.60 2.82 3.35 1.11
------- ------- ------- -------
Less Distributions:
Net investment income and short-term gains .... (0.40) (0.31) (0.38) (0.31)
Net realized long-term capital gains .......... (0.26) (0.06) (0.32) (0.01)
------- ------- ------- -------
Total distributions ........................... (0.66) (0.37) (0.70) (0.32)
------- ------- ------- -------
Net asset value at end of period .............. $ 22.05 $ 17.11 $ 14.66 $ 12.01
======= ======= ======= =======
Total Return ..................................... 33.33% 19.46% 28.44% 10.18%
Ratios to Average Net Assets:
Expenses ...................................... 1.49% 1.62% 1.66% 1.70%(2)
Net investment income ......................... 2.14% 2.15% 2.37% 2.72%(3)
Supplemental Data:
Net assets at end of period (000) ............. $18,478 $15,213 $13,757 $11,717
Portfolio turnover rate ....................... 7% 13% 15% 18%
</TABLE>
See accompanying Notes to Financial Statements.
-43-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the
Year Ended
March 31,
----------
1999
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 22.26
--------
Income from Investment Operations:
Net investment income ......................... 0.63
Net realized and unrealized gain on investments 2.41
--------
Total from Investment Operations .............. 3.04
--------
Less Distributions:
Net investment income and short-term gains .... (0.61)
Net realized long-term capital gains .......... (0.33)
--------
Total distributions ........................... (0.94)
--------
Net asset value at end of period .............. $ 24.36
========
Total Return ..................................... 14.20%
Ratios to Average Net Assets:
Expenses ...................................... 0.87%
Net investment income ......................... 2.88%
Supplemental Data:
Net assets at end of period (000) ............. $144,995
Portfolio turnover rate ....................... 10%
</TABLE>
- --------
(1) Commencement of operations.
(2) Annualized
-44-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
Jan. 3, 1995(2)
through
For the Years Ended March 31, March 31,
--------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 17.27 $ 14.77 $ 13.89
-------- ------- -------
Income from Investment Operations:
Net investment income ......................... 0.51 0.41 0.13
Net realized and unrealized gain on investments 5.25 2.53 1.17
-------- ------- -------
Total from Investment Operations .............. 5.76 2.94 1.30
-------- ------- -------
Less Distributions:
Net investment income and short-term gains .... (0.51) (0.38) (0.10)
Net realized long-term capital gains .......... (0.26) (0.06) (0.32)
-------- ------- -------
Total distributions ........................... (0.77) (0.44) (0.42)
-------- ------- -------
Net asset value at end of period .............. $ 22.26 $ 17.27 $ 14.77
======== ======= =======
Total Return ..................................... 34.08% 20.24% 21.12%
Ratios to Average Net Assets:
Expenses ...................................... 0.89% 1.02% 1.03%(2)
Net investment income ......................... 2.75% 2.83% 2.89%(2)
Supplemental Data:
Net assets at end of period (000) ............. $103,817 $34,771 $11,768
Portfolio turnover rate ....................... 7% 13% 15%
</TABLE>
See accompanying Notes to Financial Statements.
-45-
<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 in vestments
in a professionally managed balanced portfolio of equity and debt securities.
The Fund consists of four share classes: Class A Shares, which were first
offered June 15, 1992; Class B Shares, which were first offered January 3, 1995;
Institutional Shares, which were first offered November 2, 1995; and Class C
Shares, which were first offered April 8, 1998. The Fund previously offered
Class DShares which were converted to Class A Shares on November 20, 1998.
The Class A, Class B, and Class C Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge and the Class B and C
Shares have a contingent deferred sales charge. In addition each of the classes
has a different distribution fee. The Institutional Shares do not have a
front-end sales charge, a contingent deferred sales charge or a distribution
fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation-- 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.
-46-
<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 seller agrees to repurchase at a set time and price.
The third party, which is the seller'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 seller defaults.
The Fund's access to the collateral may be delayed or limited if the
seller defaults and the value of the collateral declines or if the
seller enters into an insolvency proceeding.
C. Federal Income Taxes-- 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. The Fund designates $11,809,456
as being paid from long-term capital gains.
D. Securities Transactions, Investment Income, Distributions and Other--
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
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.
-47-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2 Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor. 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.
For the year ended March 31, 1999 ICC's advisory fee was $5,619,259 of
which $559,244 was payable at the end of the period.
ICC also provides accounting services to the Fund for which the Fund pays
ICCan annual fee that is calculated daily and paid monthly based on the Fund's
average daily net assets. For the year ended March 31, 1999 ICC's fee was
$127,817 of which $11,441 was payable at the end of the period.
ICC also provides transfer agency services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the year
ended March 31, 1999 ICC's fee was $335,996 of which $25,461 was payable at the
end of the period.
Bankers Trust Corporation is the Fund's custodian. For the year ended March
31, 1999, custody fees amounted to $92,747, of which $35,500 was payable at the
end of the period.
Certain officers and directors of the Fund are also officers or directors
of ICC.
Alex. Brown Investment Management ("ABIM") is the Fund's sub-advisor. As
compensation for its sub-advisory services, ICC pays ABIMa 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 Distributors, Inc., a member of the Forum Group of companies, provides
distribution services to the Fund for which the Fund pays ICC Distributors an
annual fee that is calculated daily and paid monthly at the following annual
rates: 0.25% of the Class A Shares' average daily net assets and 1.00% of the
Class B and Class C Shares' average daily net assets. The fees for the Class B
and Class C Shares include a 0.25% shareholder servicing fee.
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, 1999 was $14,319 and the accrued liability was $31,300.
-48-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
NOTE 2 -- concluded
On November 30, 1998, Bankers Trust Corporation entered into an Agreement
and Plan of Merger with Deutsche Bank AG under which Bankers Trust Corporation
would merge with and into a subsidiary of Deutsche Bank AG. Deutsche Bank AG is
a major global banking institution that is engaged in a wide range of financial
services, including investment management, mutual funds, retail and commercial
banking, investment banking and insurance. The transaction is contingent upon
various regulatory approvals, and continuation of the Fund's advisory
relationship with ICC thereafter is subject to the approval of Fund
shareholders. On March 30, 1999, the Board of Directors approved a new advisory
agreement between ICC and the Fund in the event the merger is approved and
completed. The new advisory agreement and a new sub-advisory agreement will be
subject to shareholder approval. If the transaction is approved and completed,
Deutsche Bank AG, as ICC's new parent company, will control its operations as
investment advisor. ICC believes that, under this new arrangement, the services
provided to the Fund will be maintained at their current level.
NOTE 3 Capital Share Transactions
The Fund is authorized to issue up to 90 million shares of $.001 par value
capital stock (40 million Class A, 15 million Class B, 15 million Institutional,
15 million Class C, 3 million Class D and 2 million undesignated). Transactions
in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
----------------------------------
For the For the
Year Ended Year Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Shares sold ................................ 7,667,470 7,042,839
Shares issued to shareholders on
reinvestment of dividends ................ 927,793 641,162
Shares converted from Class D .............. 744,609 --
Shares redeemed ............................ (4,698,072) (1,656,511)
------------- -------------
Net increase in shares outstanding ......... 4,641,800 6,027,490
============ =============
Proceeds from sale of shares ............... $ 167,786,940 $ 140,113,104
Value of reinvested dividends .............. 20,162,879 12,406,231
Value of shares converted from Class D ..... 16,366,512 --
Cost of shares redeemed .................... (102,312,507) (32,747,372)
------------- -------------
Net increase from capital share
transactions .............................. $ 102,003,824 $ 119,771,963
============= =============
</TABLE>
-49-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3 continued
<TABLE>
<CAPTION>
Class B Shares
----------------------------------
For the For the
Year Ended Year Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Shares sold ................................ 1,963,448 1,916,773
Shares issued to shareholders on
reinvestment of dividends ................ 119,699 58,431
Shares redeemed ............................ (414,281) (62,652)
----------- -----------
Net increase in shares outstanding ......... 1,668,866 1,912,552
=========== ===========
Proceeds from sale of shares ............... $42,732,188 $37,749,769
Value of reinvested dividends .............. 2,606,348 1,143,662
Cost of shares redeemed .................... (8,899,431) (1,250,962)
----------- -----------
Net increase from capital share
transactions ............................. $36,439,105 $37,642,469
=========== ===========
</TABLE>
Class C Shares
------------
For Period
April 8, 1998(1)
through
March 31, 1999
---------------
Shares sold ................................ 735,840
Shares issued to shareholders on
reinvestment of dividends ................ 12,033
Shares redeemed ............................ (24,353)
------------
Net increase in shares outstanding ......... 723,520
============
Proceeds from sale of shares ............... $ 16,181,630
Value of reinvested dividends .............. 261,764
Cost of shares redeemed .................... (544,762)
------------
Net increase from capital share
transactions ............................. $ 15,898,632
============
- ----------
(1) Commencement of operations.
-50-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
NOTE 3 -- concluded
Class D Shares(1)
--------------------------------------
For the Period
April 1, 1998 For the
through Year Ended
November 20, 1998 March 31, 1998
----------------- --------------
Shares sold ........................ -- --
Shares issued to shareholders on
reinvestment of dividends ........ 9,988 26,051
Shares converted to Class A ........ (745,254) --
Shares redeemed .................... (102,674) (77,261)
------------ ------------
Net decrease in shares outstanding . (837,940) (51,210)
============ ============
Proceeds from sale of shares ....... $ -- $ --
Value of reinvested dividends ...... 212,526 500,413
Value of shares converted to Class A (16,366,512)
Cost of shares redeemed ............ (2,130,846) (1,566,659)
------------ ------------
Net decrease from capital share
transactions ..................... $(18,284,832) $ (1,066,246)
============ ============
- -----------
(1) Converted to Class A Shares on November 20, 1998.
Institutional Shares
-----------------------------------
For the For the
Year Ended Year Ended
March 31, 1999 March 31, 1998
------------ ------------
Shares sold ...................... 2,172,982 2,782,404
Shares issued to shareholders on
reinvestment of dividends ...... 192,473 109,243
Shares redeemed .................. (1,076,590) (241,221)
------------ ------------
Net increase in shares outstanding 1,288,865 2,650,426
============ ============
Proceeds from sale of shares ..... $ 46,655,765 $ 55,823,020
Value of reinvested dividends .... 4,221,557 2,152,945
Cost of shares redeemed .......... (22,007,214) (4,872,187)
------------ ------------
Net increase from capital share
transactions ................... $ 28,870,108 $ 53,103,778
============ ============
-51-
<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 $248,879,467 and sales of investment securities
aggregated $70,765,644 for the year ended March 31, 1999. Purchases of U.S.
government obligations aggregated $1,012,734, and sales of U.S. government
obligations aggregated $7,034,903 for the period.
On March 31, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $312,827,053
and aggregate gross unrealized depreciation of all securities in which there is
an excess of tax cost over value was $24,481,453.
Note 5 -- Net Assets
On March 31, 1999, net assets consisted of:
Paid-in capital:
Class A Shares $407,144,016
Class B Shares 90,075,405
Class C Shares 15,898,631
Institutional Shares 114,058,757
Accumulated net realized gain from security transactions 2,984,183
Unrealized appreciation of investments 288,122,547
Undistributed net investment income 4,505,377
------------
$922,788,916
============
-52-
<PAGE>
FLAG INVESTORS VALUE BUILDER FUND
- -----------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Value Builder Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Flag Investors Value Builder Fund, Inc. (the "Fund"), at March 31, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, MD
April 30, 1999
- -----------------------------------------------------------------------------
Tax Information (Unaudited)
For the Tax Year Ended March 31, 1999
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $11,809,456 from
long-term capital gains; of which $11,809,456 was subject to the 20% rate gains
category.
Of ordinary distributions made during the fiscal year ended March 31, 1999,
41.71% qualifies for the dividends received deduction available to corporate
shareholders.
-53-
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues rated
A-1+ are those with "extremely strong" safety characteristics. Those rated A-1
reflect a " strong" degree of safety regarding timely payment.
MOODY'S COMMERCIAL PAPER RATINGS
Commercial paper issuers rated Prime-1 by Moody's are judged by Moody's to be of
the highest quality on the basis of relative repayment capacity.
CORPORATE BOND RATINGS
STANDARD & POOR'S BOND RATINGS
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and, in the majority of instances, differs from the highest rated issues only in
small degree. Also qualify as high quality debt obligations.
A -- Strong capacity to pay interest and repay principal although
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. While normally exhibiting adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, and CC and C -- Regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
C -- The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
D -- In default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
A-1
<PAGE>
MOODY'S BOND RATINGS
Aaa -- Judged to be of the best quality. Carries the smallest
degree of investment risk and generally referred to as "gilt edged." Interest
payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Judged to be of high quality by all standards. Together
with the Aaa group comprise what are generally known as "high-grade" bonds.
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 Aaa securities.
A -- Possess many favorable investment attributes and considered
as upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa -- Considered as medium-grade obligations (i.e., 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. Lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Judged to have speculative elements; future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterize bonds in
this class.
B -- Generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Of poor standing. May be in default or there may be
present elements of danger with respect to principal or interest.
Ca -- Speculative in a high degree. Often in default or have
other marked shortcomings.
C -- The lowest rated class of bonds. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1,2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
that generic rating category.
