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[LOGO]
Value Builder Fund, Inc.
(Class A, Class B, and Class C Shares)
Prospectus
August 1, 2000
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
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[LOGO]
This mutual fund (the "Fund") is designed to maximize total return through a
combination of long-term growth of capital and current income.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ("Class A Shares"), Flag Investors Class B Shares ("Class B
Shares") and Flag Investors Class C Shares ("Class C Shares") of the Fund. These
separate classes give you a choice of sales charges and fund expenses. (Refer to
the section on Sales Charges.)
TABLE OF CONTENTS
-----------------
Investment Summary ......................................... 1
Fees and Expenses of the Fund .............................. 3
Investment Program ......................................... 4
The Fund's Net Asset Value ................................. 4
How to Buy Shares .......................................... 5
How to Redeem Shares ....................................... 6
Telephone Transactions ..................................... 6
Sales Charges .............................................. 7
How to Choose the Class
That Is Right for You .................................... 9
Dividends and Taxes ........................................ 9
Investment Advisor and Sub-Advisor ......................... 9
Financial Highlights ....................................... 11
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203
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INVESTMENT SUMMARY
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Objective and Strategies
The Fund seeks to maximize total return through a combination of long-term
growth of capital and current income by investing primarily in a portfolio of
common stocks and corporate bonds.
The Fund's investment advisor and sub-advisor (the "Advisors")may alter
the percentages of assets invested in common stocks and bonds depending on their
judgment as to general market and economic conditions, trends in yields and
interest rates, and changes in fiscal and monetary policy. Under normal market
conditions, between 40% and 75% of the Fund's assets will be invested in common
stocks and at least 25% of the Fund's assets will be invested in bonds.
In selecting common stocks for the Fund's portfolio, the Advisors use a
"flexible value" approach. With this approach, they try to find common stocks
that are undervalued in the marketplace based on such characteristics as
earnings, cash flow, or asset values. In evaluating a stock's potential, they
also consider other factors such as earnings growth, industry position, and the
strength of management. The Advisors' strategy gives them the flexibility to
purchase traditional value stocks as well as the stocks of high growth rate
companies. While the Fund does not limit its investments to issuers in a
particular capitalization range, the Advisors currently focus on securities of
larger companies.
In selecting bonds for the Fund, the Advisors purchase securities with a
range of maturities based on their assessment of the relative yields available
on securities of different maturities. The Advisors currently anticipate that
the average maturity of the bonds in the Fund's portfolio will be between two
and ten years. The bonds purchased by the Fund will generally be investment
grade, but may also be non-investment grade.
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Risk Profile
The Fund may be suited for you if you are seeking both long-term growth of
capital and current income through an approach that combines investments in
common stocks and bonds. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the common stocks and the bonds in
the Fund's portfolio. The Fund's investments in common stocks can be expected to
be more volatile than the Fund's investments in bonds.
General Stock Risk. The prices of common stocks purchased by the Fund will
fluctuate based upon investor perceptions of the economy, the markets, and the
companies represented in the Fund's portfolio.
General Fixed Income Risk. The value of the bonds in the Fund's portfolio
can be expected to increase during periods of falling interest rates and
decrease during periods of rising interest rates. The magnitude of these
increases and decreases will generally be larger if the Fund holds securities
with longer maturities. It is also possible that the issuer of a bond may be
unable to make principal and interest payments when due.
Style Risk. As with any investment strategy, the "flexible value" strategy
used in managing the Fund's equity portfolio will, at times, perform better than
or worse than other investment styles and the overall market. If the Advisors
overestimate the value or return potential of one or more common stocks, the
Fund may underperform the general equity market.
Asset Allocation Risk. The Advisors' assessment of market and economic
conditions may cause them to invest too much or too little in either stocks or
bonds. This could adversely affect the Fund's performance.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
1
<PAGE>
Fund Performance
The following bar chart and table show the performance of the Fund both
year by year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
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Class A Shares*
For years ended December 31,
35.00%
32.74%
30.00%
25.00%
24.64%
22.67%
20.00%
18.53%
15.00%
11.76%
13.81%
10.00%
5.00%
0.00%
(0.37%)
-5.00%
1993 1994 1995 1996 1997 1998 1999
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-----------
* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown. For the period from December 31, 1999 through June 30, 2000,
the total return for Class A Shares was (8.25)%.
During the 7-year period shown in the bar chart, the highest return for a
quarter was 17.91% (quarter ended 12/31/98) and the lowest return for a quarter
was (9.66)% (quarter ended 9/30/98).
<PAGE>
Average Annual Total Return (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
91-Day U.S. Lipper Balanced
Class A Shares(1) S&P 500(2) Treasury Bill(3) Fund Index(4)
----------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Past One Year ........... 7.55% 21.04% 4.85% 8.98%
Past Five Years ......... 20.94% 28.56% 5.35% 16.33%
Since Inception ......... 16.20%(6/15/92) 21.25%(5) 4.78%(5) 13.00%(5)
91-Day U.S. Lipper Balanced
Class B Shares(1) S&P 500(2) Treasury Bill(3) Fund Index(4)
----------------- ---------- ---------------- ----------------
Past One Year ........... 7.37% 21.04% 4.85% 8.98%
Since Inception ......... 21.10%(1/3/95) 28.56%(6) 5.35%(6) 16.33%(6)
91-Day U.S. Lipper Balanced
Class C Shares(1) S&P 500(2) Treasury Bill(3) Fund Index(4)
----------------- ---------- ---------------- ----------------
Past One Year ........... 11.89% 21.04% 4.85% 8.98%
Since Inception ......... 10.76%(4/8/98) 19.50%(7) 4.99%(7) 8.97%(7)
</TABLE>
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(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the current maximum sales charges
which increased on January 18, 2000.
(2) The Standard & Poor's 500 Index is an unmanaged index that is a widely
recognized benchmark of general market performance. The index does not
factor in the costs of buying, selling, and holding securities -- costs
which are reflected in the Fund's results.
(3) The 91-Day U.S. Treasury Bill is a measure of short-term bond market
performance.
(4) The Lipper Balanced Fund Index is a non-weighted index of the 30 largest
funds within the Lipper balanced fund investment category. Typically, the
stock/bond ratio of the funds in the index ranges around 60%/40%.
(5) For the period from 6/30/92 through 12/31/99.
(6) For the period from 12/31/94 through 12/31/99.
(7) For the period from 3/31/98 through 12/31/99.
2
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FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
Initial Sales Deferred Deferred
Charge Sales Charge Sales Charge
Alternative Alternative Alternative
------------- ------------ ------------
<S> <C> <C> <C>
Shareholder Fees:
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) ........................................... 5.50%* None None
Maximum Deferred Sales Charge (Load)(as a percentage of original purchase
price or redemption proceeds, whichever is lower) ............................. 1.00%* 5.00%** 1.00%***
Maximum Sales Charge (Load) Imposed on Reinvested Dividends .................... None None None
Redemption Fee ................................................................. None None None
Exchange Fee ................................................................... None None None
Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)
Management Fees ................................................................ 0.74% 0.74% 0.74%
Distribution and/or Service (12b-1) Fees ....................................... 0.25% 0.75% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for
Class B and Class C Shares) ................................................... 0.10% 0.35% 0.36%
----- ----- -----
Total Annual Fund Operating Expenses ........................................... 1.09% 1.84% 1.85%
===== ===== =====
</TABLE>
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* You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your shares. (See "Sales Charges -- Redemption Price.")
** Contingent deferred sales charges decline over time and reach zero after six
years. After seven years, Class B Shares convert automatically to Class A
Shares. (See "Sales Charges" and "How to Choose the Class That Is Right for
You.")
*** You will be required to pay a contingent deferred sales charge if you redeem
your Class C Shares within one year after purchase. (See "Sales Charges --
Redemption Price.")
Example:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares ........................................................ $655 $878 $1,118 $1,806
Class B Shares ........................................................ $687 $879 $1,195 $1,870
Class C Shares ........................................................ $288 $582 $1,001 $2,184
You would pay the following expenses if you did not redeem your shares:
Class A Shares ........................................................ $655 $878 $1,118 $1,806
Class B Shares ........................................................ $187 $579 $ 995 $1,870
Class C Shares ........................................................ $188 $582 $1,001 $2,184
</TABLE>
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (Refer to the section on Sales Charges.) If you hold your
3
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shares for a long time, the combination of the initial sales charge you paid and
the recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
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Investment Objective, Policies, and
Risk Considerations
The Fund seeks to maximize total return through a combination of long-term
growth of capital and current income by investing primarily in a portfolio of
common stocks and corporate bonds.
The Advisors are responsible for managing the Fund's investments. (Refer
to the section on Investment Advisor and Sub-Advisor.) In selecting investments
for the Fund, the Advisors determine the relative percentages of assets to be
invested in common stocks and bonds based on their judgment as to general market
and economic conditions, trends in yields and interest rates, and changes in
fiscal and monetary policy. Under normal market conditions, between 40% and 75%
of the Fund's assets will be invested in common stocks and at least 25% of the
Fund's assets will be invested in bonds.
In selecting common stocks for the Fund's portfolio, the Advisors use a
"flexible value" approach. With this approach, they try to find common stocks
that are undervalued in the marketplace based on such characteristics as
earnings, cash flow, or asset values. In evaluating a stock's potential, they
also consider other factors such as earnings growth, industry position, and the
strength of management. The Advisors' strategy gives them the flexibility to
purchase traditional value stocks as well as the stocks of high growth rate
companies. While the Fund does not limit its investment to issuers in a
particular capitalization range, the Advisors currently focus on securities of
larger companies.
In managing the Fund's bond portfolio, the Advisors invest primarily in
corporate bonds. The Advisors select bonds with a range of maturities based on
their assessment of the relative yields available on securities of different
maturities. The Advisors currently anticipate that the average maturity of the
<PAGE>
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bonds in the Fund's portfolio will be between two and ten years. In general, the
corporate bonds held by the Fund will be investment grade bonds. However, the
Fund also invests, to a limited extent, in non-investment grade bonds.
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run, stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors or the
securities markets as a whole. Bonds are subject to interest rate and credit
risk. The value of the Fund's bond portfolio can be expected to increase during
periods of falling interest rates and decrease during periods of rising interest
rates. The magnitude of these increases and decreases will generally be larger
if the Fund holds securities with longer maturities. It is also possible that
the issuer of a bond may be unable to make principal and interest payments when
due. Whether or not the Fund benefits from the allocation of assets between
common stocks and bonds will depend on the Advisors' success in assessing
economic trends and their impact on financial assets.
To reduce the Fund's risk under adverse market conditions, the Advisors
may make temporary defensive investments 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. While engaged in a temporary
defensive strategy, the Fund may not achieve its investment objective. The
Advisors would follow such a strategy only if they believed the risk of loss in
pursuing the Fund's primary investment strategies outweighed the opportunity for
gain.
THE FUND'S NET ASSET VALUE
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The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. Read the
section on Sales Charges for details on how and when these charges may or may
not be imposed.
4
<PAGE>
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 p.m. (Eastern
Time), it could be earlier on the day before a holiday. Contact the Transfer
Agent to determine whether the Fund will close early before a particular
holiday. The net asset value per share is calculated by subtracting the
liabilities attributable to a class from its proportionate share of the Fund's
assets and dividing the result by the number of outstanding shares of the class.
Because the different classes have different distribution or service fees, their
net asset values may differ.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its "fair value" using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
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You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may invest in Class A Shares unless you are a defined contribution
plan with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If you
participate in the quarterly plan, your subsequent investments may be as
low as $250. Refer to the section on the Fund's Automatic Investing Plan
for details.
o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension, or profit sharing plans.
<PAGE>
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Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer, or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
Systematic Purchase Plan. You may also purchase any class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.
5
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HOW TO REDEEM SHARES
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You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on Telephone
Transactions for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the shares exactly as their names appear on the
account.
2) If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
4) Any additional documents that may be required if your account is in the
name of a corporation, partnership, trust, or fiduciary.
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
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If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges, but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that either reasonably believes to be genuine.
Your telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
6
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SALES CHARGES
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Purchase Price
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
Class A
Sales Charge
as a % of
-------------------------
Class B Class C
Offering Net Amount Sales Sales
Amount of Purchase Price Invested Charge Charge
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $ 50,000 ......... 5.50% 5.82% None None
$ 50,000 - $ 99,999 ......... 4.50% 4.71% None None
$ 100,000 - $249,999 ......... 3.50% 3.63% None None
$ 250,000 - $499,999 ......... 2.50% 2.56% None None
$ 500,000 - $999,999 ......... 2.00% 2.04% None None
$1,000,000 and over ........... None None None None
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. Refer to the
section on Redemption Price for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
Rights of Accumulation. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
reduced sales charges. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
Letter of Intent. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
<PAGE>
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Purchases at Net Asset Value. You may buy Class A Shares without paying a
sales charge under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of Class A
Shares made within the prior 90 days.
2) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a description of the
conditions).
3) If you are a current or retired Director of this or any affiliated Fund, a
director, an employee, or a member of the immediate family of an employee of
any of the following (or their respective affiliates): the Fund's
distributor, the Advisors, or a broker-dealer authorized to sell shares of
the Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A Flag Investors fund payroll savings plan program;
(iii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or securities
dealer purchasing shares on your behalf. To qualify for this provision
you must be paying an account management fee for the fiduciary or
advisory services. You may be charged an additional fee by your
securities dealer or servicing agent if you buy shares in this manner.
Purchases by Exchange
You may exchange Class A, B, or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B or C Shares, respectively, without
payment of the sales charges described above or any other charge up to four
times a year. You may not exchange shares of Flag Investors Cash Reserve Fund
unless you acquired those shares through a prior exchange from shares of another
Flag Investors
7
<PAGE>
Fund. You may enter both your redemption and purchase orders on the same
Business Day or, if you have already redeemed the shares of the other fund, you
may enter your purchase order within 90 days of the redemption. The Fund may
modify or terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
Redemption Price
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge
(as a % of Cost or Value)
-----------------------------------------------
Class A Class B Class C
Year Since Purchase Sales Charge Sales Charge Sales Charge
-----------------------------------------------------------------------
First ............... 1.00%* 5.00% 1.00%
Second .............. 0.50%* 4.00% None
Third ............... None 3.00% None
Fourth .............. None 3.00% None
Fifth ............... None 2.00% None
Sixth ............... None 1.00% None
Thereafter .......... None None None
-----------------------------------------------------------------------
* You will pay a sales charge when you redeem Class A Shares only if your shares
were purchased at net asset value because they were part of an investment of
$1 million or more.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
2) If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
3) If you acquired your shares through an exchange of shares of another Flag
Investors fund, the period of time you held the original shares will be
combined with the period of time you held the shares being redeemed to
determine the years since purchase. If you bought your shares prior to
January 18, 2000, you will pay the sales charge that was in effect at the
time of your original purchase.
<PAGE>
4) The sales charge is applied to the lesser of the cost of the shares or their
value at the time of your redemption.
Waiver of Sales Charge. You may redeem shares without paying a sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Flag Investors fund
of the same class.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent, or the Transfer Agent that such circumstances exist.
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000, and your securities dealer has agreed to return to the Fund's
distributor any payments it received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your Class B Shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
8
<PAGE>
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy
your shares, but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares and,
except in the case of investments of $1,000,000 or more, no sales charge if you
redeem them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares. In addition,
your securities dealer is paid an annual fee as long as you hold your shares.
For Class A and Class B Shares, this fee begins when you purchase your shares.
For Class C Shares, this fee begins one year after you purchase your shares. In
addition to these payments, the Fund's investment advisor may provide
significant compensation to securities dealers and servicing agents for
distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
Distribution Plans
The Fund has adopted plans under Rule 12b-1 that allow it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and Class C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
and an annual shareholder servicing fee equal to 0.25% of average daily net
assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of quarterly dividends and to distribute
net capital gains on an annual basis.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive may be subject to federal, state, and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. Each sale or exchange of the Fund's shares is
generally a taxable event. For tax purposes, an exchange of your Fund shares for
shares of a different Flag Investors fund is the same as a sale.
Non-U.S. investors in the Fund may be subject to U.S. withholding and
estate tax and are encouraged to consult their tax advisor prior to investing
in the Fund.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state, and local income taxes.
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICCC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the
"Sub-Advisor") is the Fund's sub-advisor. ICCC is also the investment advisor
to other mutual funds in the Flag Investors family of funds and Deutsche Banc
Alex. Brown Cash Reserve Fund, Inc. These funds, together with the Fund, had
approximately $12 billion of net assets as of June 30, 2000.
9
<PAGE>
The Advisor is an indirect, wholly owned subsidiary of Deutsche Bank AG.
Deutsche Bank 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.
ABIM is a registered investment advisor with approximately $10.4 billion
under management as of June 30, 2000. ABIM is a limited partnership affiliated
with the Advisor. Buppert, Behrens & Owen, Inc., a company organized and owned
by three employees of ABIM, owns a 49% limited partnership interest and a 1%
general partnership interest in ABIM. DB Alex. Brown LLC owns the remaining 50%
general partnership interest in ABIM.
ICCC is responsible for supervising and managing all of the Fund's
operations, including overseeing the performance of ABIM. ABIM is responsible
for decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates.
As compensation for its services for the fiscal year ended March 31, 2000,
ICCC received from the Fund a fee equal to 0.74% of the Fund's average daily net
assets. ICCC compensates ABIM out of its advisory fee.
Portfolio Manager
Mr. Hobart C. Buppert, II has managed the Fund since its inception with
primary responsibility for managing the Fund's assets since July 31, 1997. Prior
to July 31, 1997, he shared that responsibility.
Mr. Buppert has 28 years of investment experience. He has been a Vice
President of ABIM since 1980. Prior to joining ABIM, Mr. Buppert worked as a
Portfolio Manager for T. Rowe Price Associates from 1976 to 1980 and as a
Portfolio Manager and Research Analyst for the Equitable Trust Company from
1972 to 1976. Mr. Buppert received his B.A. and M.B.A. degrees from Loyola
College in 1970 and 1974, respectively. He is a member of the Baltimore
Security Analysts Society and the Financial Analysts Federation.
10
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance for the past five fiscal years for Class A and
Class B Shares and since commencement of operations for Class C Shares. Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP
whose report, along with the Fund's financial statements, are included in the
Fund's Annual Report, which is available upon request.
Flag Investors Class A Shares
(For a share outstanding throughout each period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------
For the Years Ended March 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......... $ 24.15 $ 22.09 $ 17.14 $ 14.68 $ 12.02
------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income .......................... 0.49 0.56 0.47 0.39 0.36
Net realized and unrealized gain/(loss) on
investments .................................. (0.20) 2.40 5.21 2.49 3.03
-------- -------- -------- -------- --------
Total from Investment Operations ............... 0.29 2.96 5.68 2.88 3.39
-------- -------- -------- -------- --------
Less Distributions:
Net investment income and short-term capital
gains ........................................ (0.73) (0.57) (0.47) (0.36) (0.41)
Net realized long-term capital gains ........... (0.44) (0.33) (0.26) (0.06) (0.32)
-------- -------- -------- -------- --------
Total distributions ............................ (1.17) (0.90) (0.73) (0.42) (0.73)
-------- -------- -------- -------- --------
Net asset value at end of period ............... $ 23.27 $ 24.15 $ 22.09 $ 17.14 $ 14.68
======== ======== ======== ======== ========
Total Return(1) ................................. 1.11% 13.91% 33.82% 19.90% 28.86%
Ratios to Average Net Assets:
Expenses ....................................... 1.09% 1.12% 1.14% 1.27% 1.31%
Net investment income .......................... 2.06% 2.64% 2.49% 2.51% 2.72%
Supplemental Data:
Net assets at end of period (000) .............. $622,580 $649,664 $491,575 $278,130 $200,020
Portfolio turnover rate ........................ 26% 10% 7% 13% 15%
</TABLE>
-----------
(1) Total Return excludes the effect of sales charge.
11
<PAGE>
Flag Investors Class B Shares
(For a share outstanding throughout each period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares
------------------------------------------------------------------
For the Years Ended March 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning of period..... $ 24.11 $ 22.08 $ 17.16 $ 14.71 $12.01
-------- -------- ------- ------- ------
Income from Investment
Operations:
Net investment income ..................... 0.31 0.41 0.34 0.26 0.21
Net realized and unrealized
gain/(loss) on investments .............. (0.20) 2.38 5.20 2.51 3.05
-------- -------- ------- ------- ------
Total from Investment Operations .......... 0.11 2.79 5.54 $ 2.77 3.26
-------- -------- ------- ------- ------
Less Distributions:
Net investment income and short-
term capital gains ...................... (0.56) (0.43) (0.36) (0.26) (0.24)
Net realized long-term capital gains ...... (0.44) (0.33) (0.26) (0.06) (0.32)
-------- -------- ------- ------- ------
Total distributions ....................... (1.00) (0.76) (0.62) (0.32) (0.56)
-------- -------- ------- ------- ------
Net asset value at end of period .......... $ 23.22 $ 24.11 $ 22.08 $ 17.16 $14.71
======== ======== ======= ======= ======
Total Return(1) ............................ 0.36% 13.10% 32.84% 19.00% 27.89%
Ratios to Average Net Assets:
Expenses .................................. 1.84% 1.87% 1.89% 2.02% 2.06%
Net investment income ..................... 1.30% 1.90% 1.75% 1.84% 1.97%
Supplemental Data:
Net assets at end of period (000) ......... $121,117 $110,680 $64,498 $17,311 $4,178
Portfolio turnover rate ................... 26% 10% 7% 13% 15%
</TABLE>
-----------
(1) Total Return excludes the effect of sales charges.
<PAGE>
Flag Investors Class C Shares
(For a share outstanding throughout the period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares
--------------------------------------------------------------------------------
For the Period
For the April 8, 1998(1)
Year Ended through
March 31, March 31,
------------ ---------------
2000 1999
---- ----
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......................... $ 24.12 $ 22.31
------- -------
Income from Investment Operations:
Net investment income .......................................... 0.31 0.39
Net realized and unrealized gain/(loss) on investments ......... (0.21) 2.10
------- -------
Total from Investment Operations ............................... 0.10 2.49
------- -------
Less Distributions:
Net investment income and short-term capital gains ............. (0.56) (0.35)
Net realized long-term capital gains ........................... (0.44) (0.33)
------- -------
Total distributions ............................................ (1.00) (0.68)
------- -------
Net asset value at end of period ............................... $ 23.22 $ 24.12
======= =======
Total Return(3) ................................................. 0.31% 11.50%
Ratios to Average Net Assets:
Expenses ....................................................... 1.85% 1.91%(2)
Net investment income .......................................... 1.34% 2.05%(2)
Supplemental Data:
Net assets at end of period (000) .............................. $33,989 $17,450
Portfolio turnover rate ........................................ 26% 10%
</TABLE>
-----------
(1) Commencement of operations.
(2) Annualized
(3) Total Return excludes the effect of sales charge.
12
<PAGE>
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor
ALEX. BROWN INVESTMENT MANAGEMENT
One South Street
Baltimore, Maryland 21202
Distributor
ICC DISTRIBUTORS, INC.
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, Maryland 21201
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
Flag Investors o P.O. Box 515 o Baltimore, MD 21203 o (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 1-202-942-8090 to find out about the operation of the Public
Reference Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-6600 VBPRS (8/00)
<PAGE>
[LOGO]
Value Builder Fund, Inc.
(Institutional Shares)
Prospectus
August 1, 2000
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
This mutual fund (the "Fund") is designed to maximize total return through a
combination of long-term growth of capital and current income.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Institutional Shares (the "Institutional Shares") of the Fund. Institutional
Shares may be purchased only by eligible institutions, by certain qualified
retirement plans or by investment advisory affiliates of DB Alex. brown LLC or
the Flag Investors family of funds on behalf of their clients.
TABLE OF CONTENTS
-----------------
Investment Summary .............................. 1
Fees and Expenses of
Institutional Shares ......................... 3
Investment Program .............................. 3
The Fund's Net Asset Value ...................... 4
How to Buy Institutional Shares ................. 4
How to Redeem Institutional Shares .............. 5
Telephone Transactions .......................... 5
Dividends and Taxes ............................. 5
Investment Advisor and Sub-Advisor .............. 6
Financial Highlights ............................ 7
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
Objective and Strategies
The Fund seeks to maximize total return through a combination of long-term
growth of capital and current income by investing primarily in a portfolio of
common stocks and corporate bonds.
The Fund's investment advisor and sub-advisor (the "Advisors") may alter
the percentages of assets invested in common stocks and bonds depending on their
judgment as to general market and economic conditions, trends in yields and
interest rates, and changes in fiscal and monetary policy. Under normal market
conditions, between 40% and 75% of the Fund's assets will be invested in common
stocks and at least 25% of the Fund's assets will be invested in bonds.
In selecting common stocks for the Fund's portfolio, the Advisors use a
"flexible value" approach. With this approach, they try to find common stocks
that are undervalued in the marketplace based on such characteristics as
earnings, cash flow, or asset values. In evaluating a stock's potential, they
also consider other factors such as earnings growth, industry position, and the
strength of management. The Advisors' strategy gives them the flexibility to
purchase traditional value stocks as well as the stocks of high growth rate
companies. While the Fund does not limit its investments to issuers in a
particular capitalization range, the Advisors currently focus on securities of
larger companies.
In selecting bonds for the Fund, the Advisors purchase securities with a
range of maturities based on their assessment of the relative yields available
on securities of different maturities. The Advisors currently anticipate that
the average maturity of the bonds in the Fund's portfolio will be between two
and ten years. The bonds purchased by the Fund will generally be investment
grade, but may also be non-investment grade.
Risk Profile
The Fund may be suited for you if you are seeking both long-term growth of
capital and current income through an approach that combines investments in
common stocks and bonds. The value of an investment in the Fund will vary from
<PAGE>
day to day based on changes in the prices of the common stocks and the bonds in
the Fund's portfolio. The Fund's investments in common stocks can be expected to
be more volatile than the Fund's investments in bonds.
General Stock Risk. The prices of common stocks purchased by the Fund will
fluctuate based upon investor perceptions of the economy, the markets, and the
companies represented in the Fund's portfolio.
General Fixed Income Risk. The value of the bonds in the Fund's portfolio
can be expected to increase during periods of falling interest rates and
decrease during periods of rising interest rates. The magnitude of these
increases and decreases will generally be larger if the Fund holds securities
with longer maturities. It is also possible that the issuer of a bond may be
unable to make principal and interest payments when due.
Style Risk. As with any investment strategy, the "flexible value" strategy
used in managing the Fund's equity portfolio will, at times, perform better than
or worse than other investment styles and the overall market. If the Advisors
overestimate the value or return potential of one or more common stocks, the
Fund may underperform the general equity market.
Asset Allocation Risk. The Advisors' assessment of market and economic
conditions may cause them to invest too much or too little in either stocks or
bonds. This could adversely affect the Fund's performance.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
Fund Performance
The following bar chart and table show the performance of the Fund both
year by year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
1
<PAGE>
--------------------------------------------------------------------------------
Institutional Shares*
For Years ended December 31,
30.00%
25.00%
24.99%
22.95%
20.00%
18.84%
15.00%
14.08%
10.00%
5.00%
0.00%
1996 1997 1998 1999
--------------------------------------------------------------------------------
-----------
* For the period from December 31, 1999 through June 30, 2000, the total return
for Institutional Shares was (8.11)%.
During the 4-year period shown in the bar chart, the highest return for a
quarter was 18.00% (quarter ended 12/31/98) and the lowest return for a quarter
was (9.59)% (quarter ended 9/30/98).
Average Annual Total Return (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
Lipper
91-Day U.S. Balanced
Institutional Shares(1) S&P 500(2) Treasury Bills(3) Fund Index(4)
----------------------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Past One Year ........... 14.08% 21.04% 4.85% 8.98%
Since Inception ......... 20.28%(11/2/95) 27.09%(5) 5.22%(5) 14.94%(5)
</TABLE>
-----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.
(2) The Standard & Poor's 500 Index is an unmanaged index that is a widely
recognized benchmark of general market performance. The index does not
factor in the costs of buying, selling and holding securities -- costs which
are reflected in the Fund's results.
(3) The 91-Day U.S. Treasury Bill is a measure of short-term bond market
performance.
(4) The Lipper Balanced Fund Index is a non-weighted index of the 30 largest
funds within the Lipper balanced fund investment category. Typically, the
stock/bond ratio of the funds in the index ranges around 60%/40%.
(5) For the period 10/31/95 through 12/31/99.
2
<PAGE>
FEES AND EXPENSES OF INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold Institutional Shares.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment):
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases ............................ None
Maximum Deferred Sales Charge (Load) ........................................ None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ................. None
Redemption Fee .............................................................. None
Exchange Fee ................................................................ None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees ............................................................. 0.74%
Distribution and/or Service (12b-1) Fees .................................... None
Other Expenses .............................................................. 0.10%
----
Total Annual Fund Operating Expenses ........................................ 0.84%
====
</TABLE>
Example:
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in Institutional Shares for the
time periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares .......... $85 $264 $454 $985
</TABLE>
<PAGE>
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
Investment Objective, Policies, and
Risk Considerations
The Fund seeks to maximize total return through a combination of long-term
growth of capital and current income by investing primarily in a portfolio of
common stocks and corporate bonds.
The Advisors are responsible for managing the Fund's investments. (Refer
to the section on Investment Advisor and Sub-Advisor.) In selecting investments
for the Fund, the Advisors determine the relative percentages of assets to be
invested in common stocks and bonds based on their judgment as to general market
and economic conditions, trends in yields and interest rates, and changes in
fiscal and monetary policy. Under normal market conditions, between 40% and 75%
of the Fund's assets will be invested in common stocks and at least 25% of the
Fund's assets will be invested in bonds.
In selecting common stocks for the Fund's portfolio, the Advisors use a
"flexible value" approach. With this approach, they try to find common stocks
that are undervalued in the marketplace based on such characteristics as
earnings, cash flow, or asset values. In evaluating a stock's potential, they
also consider other factors such as earnings growth, industry position, and the
strength of management. The Advisors' strategy gives them the flexibility to
purchase traditional value stocks as well as the stocks of high growth rate
companies. While the Fund does not limit its investment to issuers in a
particular capitalization range, the Advisors currently focus on securities of
larger companies.
In managing the Fund's bond portfolio, the Advisors invest primarily in
corporate bonds. The Advisors select bonds with a range of maturities based on
their assessment of the relative yields available on securities of different
maturities. The Advisors currently anticipate that the average maturity of the
bonds in the Fund's portfolio will be between two and ten years. In general, the
corporate bonds held by the Fund will be investment grade bonds. However, the
Fund also invests, to a limited extent, in non-investment grade bonds.
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run, stocks can be more volatile than other types of
3
<PAGE>
securities. Stock prices are sensitive to developments affecting particular
companies and to general economic conditions that affect particular industry
sectors or the securities markets as a whole. Bonds are subject to interest rate
and credit risk. The value of the Fund's bond portfolio can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates. The magnitude of these increases and decreases will
generally be larger if the Fund holds securities with longer maturities. It is
also possible that the issuer of a bond may be unable to make principal and
interest payments when due. Whether or not the Fund benefits from the allocation
of assets between common stocks and bonds will depend on the Advisors' success
in assessing economic trends and their impact on financial assets.
To reduce the Fund's risk under adverse market conditions, the Advisors
may make temporary defensive investments 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. While engaged in a temporary
defensive strategy, the Fund may not achieve its investment objective. The
Advisors would follow such a strategy only if they believed the risk of loss in
pursuing the Fund's primary investment strategies outweighed the opportunity for
gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. The net asset value per share of
the Fund is determined at the close of regular trading on the New York Stock
Exchange on each day the Exchange is open for business. While regular trading
ordinarily closes at 4:00 p.m. (Eastern Time), it could be earlier on a day
before a holiday. Contact the Transfer Agent to determine whether the Fund will
close early before a particular holiday. The net asset value per share is
calculated by subtracting the liabilities attributable to the Institutional
Shares from their proportionate share of the Fund's assets and dividing the
result by the number of outstanding Institutional Shares.
In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its "fair value" using procedures
approved by the Fund's Board of Directors.
You may buy or redeem Institutional Shares on any day the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that day,
the price you pay or receive will be based on the next Business Day's net asset
value per share.
The following sections describe how to buy and redeem Institutional
Shares.
<PAGE>
HOW TO BUY INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
You may buy Institutional Shares if you are any of the following:
o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution or a qualified retirement plan other than a
defined contribution plan).
o A defined contribution plan with assets of at least $75 million.
o An investment advisory affiliate of DB Alex. Brown LLC or the Flag
Investors family of funds purchasing shares for the accounts of your
investment advisory clients.
You may buy Institutional Shares through your securities dealer or through
any financial institution that is authorized to act as a shareholder servicing
agent. Contact them for details on how to enter and pay for your order. You may
also buy Institutional Shares by sending your check (along with a completed
Application Form) directly to the Fund.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $500,000.
The following are exceptions to this minimum:
o There is no minimum initial investment for investment advisory
affiliates of DB Alex. Brown LLC or the Flag Investors family of funds
purchasing shares for the accounts of their investment advisory
clients.
o There is no minimum initial investment for defined contribution plans
with assets of at least $75 million.
4
<PAGE>
o The minimum initial investment for all other qualified retirement plans
is $1 million.
There are no minimums for subsequent investments.
Purchases by Exchange
You may exchange Institutional shares of any other Flag Investors fund for
an equal dollar amount of Institutional Shares of the Fund up to four times a
year. The Fund may modify or terminate this offer of exchange upon 60 days'
notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
HOW TO REDEEM INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
You may redeem Institutional Shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If your shares are in an account with
the Fund, you may also redeem them by contacting the Transfer Agent by mail or
(if you are redeeming less than $500,000) by telephone. You will be paid for
redeemed shares by wire transfer of funds to your securities dealer, servicing
agent or bank upon receipt of a duly authorized redemption request as promptly
as feasible and, under most circumstances, within three Business Days.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $500,000 or exchange them for Institutional shares of
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges, but you may
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that either reasonably believes to be genuine.
Your telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of quarterly dividends and to distribute
net capital gains at least annually.
Dividend Reinvestment
Unless you elect otherwise, all income and capital gains distributions
will be reinvested in additional Institutional Shares at net asset value. You
may elect to receive your distributions in cash or to have your
5
<PAGE>
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer, or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive may be subject to federal, state and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. However, distributions by the Fund to retirement
plans that qualify for tax-exempt treatment under U.S. tax laws will not be
taxable until withdrawn from the plan. Each sale or exchange of the Fund's
shares is generally a taxable event, except for a sale or exchange by a
retirement plan that qualifies for tax-exempt treatment under U.S. tax laws.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICCC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the
"Sub-Advisor") is the Fund's sub-advisor. ICCC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and Deutsche Banc Alex.
Brown Cash Reserve Fund, Inc. These funds, together with the Fund, had
approximately $12 billion of net assets as of June 30, 2000.
The Advisor is an indirect, wholly owned subsidiary of Deutsche Bank AG.
Deutsche Bank 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.
ABIM is a registered investment advisor with approximately $10.4 billion
under management as of June 30, 2000. ABIM is a limited partnership affiliated
with the Advisor. Buppert, Behrens & Owen, Inc., a company organized and owned
by three employees of ABIM, owns a 49% limited partnership interest and a 1%
general partnership interest in ABIM. DB Alex. Brown LLC owns the remaining 50%
general partnership interest in ABIM.
ICCC is responsible for supervising and managing all of the Fund's
operations, including overseeing the performance of ABIM. ABIM is responsible
for decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates.
As compensation for its services for the fiscal year ended March 31, 2000,
ICCC received from the Fund a fee equal to 0.74% of the Fund's average daily net
assets. ICCC compensates ABIM out of its advisory fee. ICCC also may provide
significant compensation to securities dealers and servicing agents for
distribution, administrative and promotional services.
Portfolio Manager
Mr. Hobart C. Buppert, II has managed the Fund since its inception with
primary responsibility for managing the Fund's assets since July 31, 1997. Prior
to July 31, 1997, he shared that responsibility.
Mr. Buppert has 28 years of investment experience. He has been a Vice
President of ABIM since 1980. Prior to joining ABIM, he worked as a Portfolio
Manager for T. Rowe Price Associates from 1976 to 1980 and as a Portfolio
Manager and Research Analyst for the Equitable Trust Company from 1972 to 1976.
Mr. Buppert received his B.A. and M.B.A. degrees from Loyola College in 1970
and 1974, respectively. He is a member of the Baltimore Security Analysts
Society and the Financial Analysts Federation.
6
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Fund's financial performance since it began operations. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP whose report, along
with the Fund's financial statements, are included in the Fund's Annual Report,
which is available upon request.
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Institutional Shares
-------------------------------------------------------------------------
For the Period
November 2, 1995(1)
For the Years Ended March 31, Through
2000 1999 1998 1997 March 31, 1996
-------- -------- --------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......... $ 24.36 $ 22.26 $ 17.27 $ 14.77 $ 13.89
-------- -------- -------- ------- -------
Income From Investment Operations:
Net investment income .......................... 0.55 0.63 0.51 0.41 0.13
Net realized and unrealized gain/(loss) on
investments ................................... (0.21) 2.41 5.25 2.53 1.17
-------- -------- -------- ------- -------
Total from investment operations ............... 0.34 3.04 5.76 2.94 1.30
-------- -------- -------- ------- -------
Less Distributions:
Net investment income and short-term
capital gains ................................. (0.81) (0.61) (0.51) (0.38) (0.10)
Net realized long-term capital gains ........... (0.44) (0.33) (0.26) (0.06) (0.32)
-------- -------- -------- ------- -------
Total distributions ............................ (1.25) (0.94) (0.77) (0.44) (0.42)
-------- -------- -------- ------- -------
Net asset value at end of period ............... $ 23.45 $ 24.36 $ 22.26 $ 17.27 $ 14.77
======== ======== ======== ======= =======
Total Return ...................................... 1.36% 14.20% 34.08% 20.24% 21.12%
Ratios to Average Net Assets:
Expenses ....................................... 0.84% 0.87% 0.89% 1.02% 1.03%(2)
Net investment income .......................... 2.32% 2.88% 2.75% 2.83% 2.89%(2)
Supplemental Data:
Net assets at end of period (000) .............. $160,991 $144,995 $103,817 $34,771 $11,768
Portfolio turnover rate ........................ 26% 10% 7% 13% 15%
</TABLE>
-----------
(1) Commencement of operations.
(2) Annualized.
7
<PAGE>
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor
ALEX. BROWN INVESTMENT MANAGEMENT
One South Street
Baltimore, Maryland 21202
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Distributor
ICC DISTRIBUTORS, INC.
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, Maryland 21201
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
Flag Investors o P.O. Box 515 o Baltimore, MD 21203 o (800) 767-FLAG
www.flaginvestors.com
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 1-202-942-8090 to find out about the operation of the Public
Reference Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-6600 VBIPRS (8/00)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------------------
FLAG INVESTORS VALUE BUILDER FUND, INC.
One South Street
Baltimore, Maryland 21202
-----------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH A PROSPECTUS. THE
AUDITED FINANCIAL STATEMENTS FOR THE FUND
ARE INCLUDED IN THE FUND'S ANNUAL REPORT,
WHICH HAS BEEN FILED ELECTRONICALLY WITH
THE SECURITIES AND EXCHANGE COMMISSION
AND IS INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. A
COPY OF EACH PROSPECTUS AND THE ANNUAL
REPORT MAY BE OBTAINED WITHOUT CHARGE
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, 2000,
relating to the Prospectuses Dated August 1, 2000 for:
Flag Investors Class A Shares, Flag Investors Class B Shares,
Flag Investors C Shares and Flag Investors Institutional Shares
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY...............................................1
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS........................1
Covered Call Options...................................................2
Convertible Securities.................................................4
Non-Investment Grade Securities........................................4
Other Investments......................................................5
Repurchase Agreements..................................................5
Foreign Investment Risk Considerations.................................5
Illiquid Securities....................................................6
Investment Restrictions................................................6
VALUATION OF SHARES AND REDEMPTION............................................7
Valuation of Shares....................................................7
Redemption.............................................................8
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS .........................8
Qualification as a Regulated Investment Company........................8
Fund Distributions.....................................................9
Sale or Exchange of Fund Shares.......................................10
Federal Excise Tax; Miscellaneous Considerations......................10
State and Local Tax Considerations....................................11
MANAGEMENT OF THE FUND.......................................................11
Directors and Officers..............................................11
Code of Ethics......................................................17
INVESTMENT ADVISORY AND OTHER SERVICES.......................................17
DISTRIBUTION OF FUND SHARES..................................................18
General Information..........................................................21
BROKERAGE....................................................................22
CAPITAL STOCK................................................................24
SEMI-ANNUAL REPORTS and annual reports.......................................25
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES............................25
INDEPENDENT ACCOUNTANTS......................................................26
LEGAL MATTERS................................................................26
PERFORMANCE INFORMATION......................................................26
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................27
FINANCIAL STATEMENTS.........................................................27
APPENDIX A...................................................................28
<PAGE>
GENERAL INFORMATION AND HISTORY
Flag Investors Value Builder Fund, Inc. (the "Fund") is an open-end
diversified management investment company. 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 oClass C
Shareso); 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 Fundss.s distributor
(the oDistributoro) or from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement for the Fund and its Shares filed with
the Securities and Exchange Commission (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 (the "Securities Act"),
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 (predecessor to DB Alex. Brown LLC), 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.
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective is to maximize total return through a
combination of long-term growth of capital and current income. The Fund seeks to
achieve this objective through a policy of diversified investments in equity and
debt securities. 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.
Page 1
<PAGE>
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 assessment of the Fund's investment advisor (the
"Advisor") and the sub-advisor (the "Sub-Advisor") (the "Advisors") as to the
relative yields available on securities of different maturities. It is currently
anticipated that the average maturity of the fixed-income securities in the
Fund's portfolio will be between two and ten years under normal market
conditions. In general, non-convertible corporate debt obligations held in the
Fund's portfolio will be rated, at the time of purchase, BBB or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or, if unrated by S&P or Moody's, determined to be of
comparable quality by the Advisors under criteria approved by the Board of
Directors. Investment grade securities (securities rated BBB or higher by S&P or
Baa or higher by Moody's) are generally thought to provide the highest credit
quality and the smallest risk of default. Securities rated BBB by S&P or Baa by
Moody's have speculative characteristics. Up to 10% of the Fund's assets may be
invested in lower quality non-convertible corporate 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 its 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 may be written when the Advisors, believe the security
should be held for the long-term but expect 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.
Page 2
<PAGE>
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 ("OCC"),
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 OCC 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 OCC 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
OCC 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 OCC 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.)
Page 3
<PAGE>
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 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
Page 4
<PAGE>
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.
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. 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
Depositary Receipts and other securities, which are traded in the United States
and represent interests in foreign issuers. The Advisors may also invest up to
10% of the Fund's assets in securities of foreign companies, and in debt and
equity securities issued by foreign corporate and government issuers and which
are not traded in the United States when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Foreign investments involve substantial and different risks
which should be carefully considered by any potential investor. Such investments
are usually not denominated in dollars so changes in the value of the dollar
relative to other currencies will affect the value of foreign investments. In
general, less information is publicly available about foreign companies than is
available about companies in the United States. Most foreign companies are not
subject to uniform audit and financial reporting standards, practices and
requirements comparable to those in the United States. In most foreign markets
volume and liquidity are less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on foreign stock exchanges are generally higher than the negotiated commissions
on United States exchanges. There is generally less government supervision and
regulation of foreign stock exchanges, brokers, and companies than 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.
Page 5
<PAGE>
Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries. The dividends and interest payable on certain of the
Fund's foreign portfolio securities may be subject to foreign withholding taxes,
thus reducing the net amount available for distribution to the Fund's
shareholders.
Illiquid Securities
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, but that can be offered and sold to
qualified institutional buyers under Rule 144A under the Securities 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;
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;
Page 6
<PAGE>
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 then 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
(excluding restricted securities eligible for resale pursuant to Rule
144A under the Securities Act , 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.
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, each day on which the New York Stock Exchange is
open for business (a "Business Day"). The New York Stock Exchange is open for
business on all weekdays except for the following holidays (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. 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 olate dayo agreements are intended to permit shareholders
placing orders with third parties to place orders up to the same time as other
shareholders.
Page 7
<PAGE>
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem shares in cash.
However, if the Board of Directors determines that it would be in the best
interests of the remaining shareholders 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 oValuation of Shareso and such valuation will be made as of the
same time the redemption price is determined. The Fund 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.
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 Prospectuses. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here and in the Fund's Prospectuses is not intended as a
substitute for careful tax planning. For example, under certain specified
circumstances, state income tax laws may exempt from taxation distributions of a
regulated investment company to the extent that such distributions are derived
from interest on federal obligations. Investors are urged to consult with their
tax advisor regarding whether such exemption is available.
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.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund generally must, among other things, (a) derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, and certain other related income,
including, generally, certain gains from options, futures and forward contracts;
and (b) diversify its holdings so that, at the end of each fiscal quarter of the
Fund's taxable year, (i) at least 50% of the market value of the Fund's total
assets is represented by cash and cash items, United States Government
securities, securities of other RICs, and other securities, with such other
securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
that the Fund controls and which are engaged in the same, similar, or related
trades or business. For purposes of the 90% gross income requirement described
above, foreign currency gains that are not directly related to the Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities) may be excluded from income that qualifies
under the 90% requirement.
In addition to the requirements described previously, in order to
qualify as a RIC, the Fund must distribute at least 90% of its investment
company taxable 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, but determined without regard to the deduction for
dividends paid) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If the Fund meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
Page 8
<PAGE>
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, such
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to 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 that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the 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 (including certain holding period limitations). All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
Ordinarily, investors should include all dividends as income in the
year of payment. However, dividends declared payable to shareholders of record
in December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been received by the shareholder and paid by the
Fund in the year in which the dividends were declared.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxed on the
entire amount of the dividend or distribution received, even though some or all
of the amount distributed may have been realized by the Fund prior to the
investor's purchase.
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<PAGE>
The Fund will provide an annual statement to shareholders describing
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.
The Fund may invest in complex securities. These investments may be
subject to numerous special and complex tax rules. These rules could affect
whether gains or losses recognized by the Fund are treated as ordinary income or
capital gain, accelerate the recognition of income to the Fund and/or defer the
Fund's ability to recognize losses. In turn, those rules may affect the amount,
timing or character of the income distributed to you by the Fund.
Sale or Exchange of Fund Shares
The sale or exchange of a Share is a taxable event for the shareholder.
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 the 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 the 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 distributions payable to any shareholder who
(1) has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations
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 on 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.
Non-U.S. investors in the Fund may be subject to U.S. withholding and
estate tax and are encouraged to consult their tax advisor prior to investing in
the Fund.
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<PAGE>
State and Local Tax Considerations
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
Many states grant tax-free status to dividends paid to you from
interest earned on direct obligations of the U.S. government, subject in some
states to minimum investment requirements that must be met by a fund. Investment
in Government National Mortgage Association or Fannie Mae securities, banker's
acceptances, commercial paper and repurchase agreements collateralized by U.S.
government securities do not generally qualify for such tax-free treatment. The
rules on exclusion of this income are different for corporate shareholders.
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) and
Director and President of Virginia Hot Springs Inc. (property
management). Formerly, Managing Director and Vice Chairman, Alex. Brown
Incorporated (now DB Alex. Brown LLC); Director, Investment Company
Capital Corp. (registered investment advisor) 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
(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, 1985-1989.
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<PAGE>
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management; Director and President,
Investment Company Capital Corp. (registered investment advisor).
Director or President, Deutsche Asset Management Mutual Funds
(registered investment companies). Chartered Financial Analyst.
Formerly, Director, ISI Family of Funds (registered investment
companies).
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), November 1998-January 1999;
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 DB
Alex. Brown LLC), 1985-1987; General Partner, Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC), 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
investment companies). Formerly, Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants,
1992-1998, 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).
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<PAGE>
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, Investment Company Administration LLC, President, Trustee,
Trust for Investment Managers (registered investment company) and
President, Director, First Fund Distributors, Inc. (registered
broker-dealer); Director, The Germany Fund, Inc., The New Germany Fund
Inc., The Central European Equity Fund, Inc., and Vice President,
Professionally Managed Portfolios and Advisors Series Trust (registered
investment companies). Formerly, President, Guinness Flight Investment
Funds, Inc. (registered investment companies); and President, The
Wadsworth Group (registered investment advisor).
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);
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); Interim President of Williams College; Member,
Aviation System Capacity Advisory Committee (Federal Aviation
Administration); and Director, Flag Investors Family of Funds
(registered investment companies).
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management; Formerly, Vice President and
Department Head, BT Alex. Brown Incorporated, (now DB Alex. Brown LLC),
1998-1999 and Senior Manager, Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management; Formerly, Vice President, BT Alex.
Brown Incorporated, (now DB Alex. Brown LLC), 1997-1999 and Senior
Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP),
1992-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management; Formerly Principal, BT Alex. Brown
Incorporated, (now DB Alex. Brown LLC), 1998-1999 and Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
---------------------
* Messrs. Semans and Hale are directors who are "interested persons," as defined
in the Investment Company Act.
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<PAGE>
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by Investment Company Capital Corporation ("ICCC") or its affiliates. There are
currently 23 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 18 other funds in the Fund Complex.
Mr. Hale serves as Chairman of three funds and as Director of 20 funds in the
Fund Complex. Ms. Rimel and 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 22 of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer,
Ms. Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, of
each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, DB Alex. Brown LLC 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 ICCC 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 Investment Company 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, 2000, Independent Directors' fees (including
fees paid to the Fund's President) attributable to the assets of the Fund
totaled $47,638.
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<PAGE>
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
March 31, 2000.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Compensation From Total Compensation from the
the Fund Payable to Pension or Retirement Fund and Fund Complex Payable
Name of Person, Directors for the Fiscal Benefits Accrued as Part to Directors for the Fiscal
Position Year Ended March 31, 2000 of Fund Expenses Year Ended March 31, 2000(1)
-------------------------- ----------------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Truman T. Semans(2) $0 $0 $0
Chairman
Richard T. Hale(2) $0 $0 $0
Director
James J. Cunnane(6) $1,806(3) $ (4) $19,500 for service
Director on 12 Boards
Joseph R. Hardiman $3,455 $ (4) $39,000 for service
Director on 12 Boards
Louis E. Levy $4,341 $ (4) $49,000 for service
Director on 12 Boards
Eugene J. McDonald $4,341(3) $ (4) $49,000 for service
Director on 12 Boards
Rebecca W. Rimel $3,459(3) $ (4) $39,000 for service
Director on 125 Boards
Carl W. Vogt(7) $3,455(3) $ (4) $39,000 for service
Director on 12 Boards
Richard R. Burt(8) $1,649(3) $ (4) $19,500 for service
Director on 8 Boards
Robert H. Wadsworth(8) $1,649(3) $ (4) $19,500 for service
Director on 8 Boards
</TABLE>
--------------------------------
(1) Prior to September 28, 1999, the Fund Complex consisted of 12 funds and
included the four funds in the ISI Family of Funds
(2) A Director who is an "interested person" as defined in the Investment
Company Act.
(3) Of amounts payable to Ms. Rimel and Messrs. Cunnane, McDonald, Vogt, Burt,
and Wadsworth $3,459, $1,806, $4,341, $3,455, $1,649, and $1,649
respectively, was deferred pursuant to a deferred compensation plan.
(4) 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, 2000 was approximately $21,568.
(5) Ms. Rimel received (prior to her appointment or election as Director to all
of the funds in the Fund Complex) proportionately higher compensation from
each fund for which she served as Director.
(6) Retired, effective October 7, 1999.
(7) Retired as Fund Director, effective October 7, 1999. Currently, President
of the Fund.
(8) Elected to the Fund's board effective October 7, 1999.
Page 15
<PAGE>
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Administrator or its
respective affiliates (the "Directors' Retirement Plan") and a Retirement Plan
for a former Director serving as the Fund's President (collectively, the
"Retirement Plans"). After completion of six years of service, each participant
in the Retirement Plans 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 he or she serves. The Retirement Plans are
unfunded and unvested. The Fund currently has two participants in the Directors'
Retirement Plan, a Director who retired effective December 31, 1994 and another
Director who retired effective December 31, 1996, each of whom qualified for the
Retirement Plan by serving thirteen years and fourteen years, respectively, as
Directors in the Fund Complex and who 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, 1999 are as follows: for Ms. Rimel, 4 years; for Mr. Levy, 5 years;
for Mr. McDonald, 7 years; for Mr. Vogt, 4 years; for Mr. Hardiman, 1 year and
for Mr. Burt and Mr. Wadsworth, 0 years.
<TABLE>
<CAPTION>
Estimated Annual Benefits Payable By Fund Complex Upon Retirement
-----------------------------------------------------------------
Chairmen of Audit and Executive
Years of Service Committees Other Participants
---------------- ------------------------------- ------------------
<S> <C> <C>
6 years $ 4,900 $ 3,900
7 years $ 9,800 $ 7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director and the President of the Fund who receive 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, Vogt, Burt,
Wadsworth, and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors and the President may select from among
various Flag Investors funds and the Deutsche Banc Alex. Brown Cash Reserve
Fund, Inc. in which all or part of their deferral account shall be deemed to be
invested. Distributions from the deferring Directors' and the President's
deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.
Page 16
<PAGE>
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 Fund's Code permits
access persons to engage in personal trading provided that the access persons
comply with the provisions of the advisor's, sub-advisor's or distributor's
Codes of Ethics, as applicable, and requires that each of these Codes be
approved by the Board of Directors. In addition, the Fund's Code contains
reporting requirements applicable to disinterested Directors of the Fund. The
Fund's advisor, Investment Company Capital Corporation ("ICCC" or the
"Advisor"), and sub-advisor, Alex. Brown Investment Management ("ABIM" or the
"Sub-Advisor") and the Fund's Distributor, ICC Distributors, Inc. ("ICC
Distributors"), have adopted Codes of Ethics pursuant to Rule 17j-1 under the
Investment Company Act. The Codes of Ethics permit access persons to invest in
securities that may be purchased or held by the Fund for their own accounts, but
require compliance with the Codes' preclearance requirements. In addition, the
Codes provide for trading "blackout periods" that prohibit trading by access
persons within periods of trading by the Fund in the same security, subject to
certain exceptions. The Codes also prohibit short term trading profits and
personal investment in initial public offerings. The Codes require prior
approval with respect to purchases of securities in private placements.
These codes of ethics are on public file with, and are available from,
the SEC.
INVESTMENT ADVISORY AND OTHER SERVICES
ICCC, the investment advisor, is an indirect subsidiary of Deutsche
Bank AG. 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. DB Alex. Brown LLC owns the remaining 50% general partnership interest in
ABIM. ICCC also serves as investment advisor and ABIM serves as sub-advisor to
other funds in the Flag Investors family of funds
Under the Investment Advisory Agreement, ICCC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. ICCC has delegated this responsibility to
ABIM, provided that ICCC continues to supervise the performance of ABIM and
report thereon to the Fund's Board of Directors. Any investment program
undertaken by ICCC or ABIM will at all times be subject to policies and control
of the Fund's Board of Directors. ICCC 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 ICCC without reimbursement by the Fund for any costs. Neither
ICCC nor ABIM shall be liable to the Fund or its shareholders for any act or
omission by ICCC 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 ICCC and ABIM to the Fund are not
exclusive and ICCC and ABIM are free to render similar services to others.
As compensation for its services, the Fund pays ICCC 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 in excess of $200 million. As compensation for its services, ABIM is
entitled to receive a fee from ICCC, 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 ICCC 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.
Page 17
<PAGE>
Advisory fees paid by the Fund to ICCC and sub-advisory fees paid by
ICCC to ABIM for the last three fiscal years were as follows:
Year Ended March 31,
--------------------
Fees Paid to: 2000 1999 1998
------------- ---- ---- ----
ICCC $7,107,396 $5,619,259 $3,769,264
ABIM $5,116,599 $4,056,393 $2,735,069
ICCC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICCC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors") serves as the exclusive
distributor of the Fund's Shares pursuant to a Distribution Agreement 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 duties or obligations under the
Distribution Agreement or by reason of the reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60
daysss. 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 oCapital Stocko) or
upon 60 daysss. 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.
Page 18
<PAGE>
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 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. Currently, banking laws and regulations do not prohibit a
financial holding company affiliate from acting as distributor or Shareholder
Servicing Agent or in other capacities for investment companies. 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 and Class
C Shares, ICC Distributors receives an annual fee, paid monthly, equal to 0.75%
of their respective average daily net assets. 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 their respective average daily net assets.
(See the Prospectus.) ICC Distributors receives no compensation for distributing
the Institutional Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
Fee 2000 1999 1998
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fee $2,819,356(1) $2,095,410(1) $1,318,534(2)
Class B Shareholder Servicing Fee $ 307,098(1) $ 206,332(1) $ 96,025(3)
Class C Shareholder Servicing Fee $ 72,454 $ 19,316 N/A
</TABLE>
-------------
(1) Fees received by ICC Distributors.
(2) Of this amount, Alex. Brown & Sons, 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, & Sons, 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.
Page 19
<PAGE>
Pursuant to Rule 12b-1 under the Investment Company Act, investment
companies may pay distribution expenses, directly or indirectly, only pursuant
to a plan adopted by the investment company's board of directors and approved by
its shareholders. The Fund has adopted a Plan of Distribution for each of its
classes of Shares (except the Institutional Shares) (the "Plans"). Under each
Plan, the Fund pays a fee to ICC Distributors for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreement, and
ICC Distributors is authorized to make payments out of its fee to Participating
Dealers and Shareholder Servicing Agents. The Plans will remain in effect from
year to year, as specifically approved (a) at least annually by the Fund's Board
of Directors and (b) by the affirmative vote of a majority of the Independent
Directors, by votes cast in person at a meeting called for such purpose.
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 Distributorsss. actual cost of providing distribution services and may be
used to pay ICC Distributorsss. overhead expenses. If the cost of providing
distribution services to the Class A Shares is less than 0.25% of the Class A
Shares' average daily net assets for any period or if the cost of providing
distribution services to the Class B Shares and the Class C Shares is less than
0.75% of the classes'. respective average daily net assets for any period, the
unexpended portion of the distribution fees may be retained by ICC Distributors.
The Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if any of the Plans is terminated in accordance with
its terms, the obligation of the Fund to make payments to ICC Distributors
pursuant to such Plan will cease and the Fund will not be required to make any
payments past the date the Distribution Agreement terminates with respect to
that class. In return for payments received pursuant to the Plans, ICC
Distributors pays the distribution-related expenses of the Fund including one or
more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges.
Page 20
<PAGE>
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,
---------------------------
2000 1999 1998
---- ---- ----
Class Received Retained Received Retained Received Retained
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $1,100,345 $0(1) $1,159,313(1) $0(1) $1,547,315(2) $1,308,006(4)
Class B Contingent
Deferred Sales Charge $1,183,806 $0(1) $1,607,852(1) $0(1) $1,498,689(3) $1,128,132(5)
Class C Contingent
Deferred Sales Charge $ 206,990 $0(1) $ 159,062(1) $0(1) N/A N/A
</TABLE>
-------------
(1) By ICC Distributors.
(2) Of this amount, Alex. Brown & Sons, 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 & Sons, 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 & Sons retained $130,006 and ICC
Distributors retained $0.
(5) Of sales charges received, Alex. Brown & Sons retained $418,559 and ICC
Distributors retained $709,573.
Page 21
<PAGE>
The Fund will pay all costs associated with its organization and
registration under the Securities Act and the Investment Company Act. Except as
described elsewhere, the Fund pays or causes to be paid all continuing expenses
of the Fund, including, without limitation: investment advisory and distribution
fees; the charges and expenses of any registrar, any custodian or depository
appointed by the Fund for the safekeeping of cash, portfolio securities and
other property, and any transfer, dividend or accounting agent or agents
appointed by the Fund; brokers' commissions chargeable to the Fund in connection
with portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing of certificates representing Shares; all costs and
expenses in connection with the registration and maintenance of registration of
the Fund and its Shares with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs and
expenses of printing, including typesetting and distributing prospectuses and
statements of additional information of the Fund and supplements thereto to the
Fund's shareholders; all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory board
or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Independent Directors, and
of independent auditors, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of the Fund's operation unless otherwise explicitly assumed by ICC Distributors,
ICCC or ABIM.
The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.
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 ICCC. 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.
Page 22
<PAGE>
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. The foregoing policy under which the Fund
may pay higher commissions to certain broker-dealers in the case of agency
transactions, does not apply to transactions effected on a principal basis. In
addition, consistent with NASD Rules, and subject to seeking the most favorable
price and execution available and such other policies as the Board may
determine, ABIM may consider services in connection with the sale of shares as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Fund.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions 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 ICCC 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.
Page 23
<PAGE>
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
Fiscal Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
Transactions Directed $0 $0 $80,647,030
Commissions Paid $0 $0 $ 174,443
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of March 31, 2000, the
Fund held a 6.08% repurchase agreement issued by Goldman Sachs & Co. valued at
$15,032,853. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
CAPITAL STOCK
The Fund is authorized to issue 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 Institutional Shares are offered
only to certain eligible institutions, to certain qualified retirement plans and
to investment advisory affiliates of DB Alex. Brown LLC or the Flag Investors
family of funds on behalf of their clients. 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. Each such series would be
managed separately and shareholders of each series would have an undivided
interest in the net assets of that series. For tax purposes, the series would be
treated as separate entities. Generally, each class of Shares issued by a
particular series would be identical to every other class and expenses of the
Fund (other than 12b-1 and any applicable service fees) are prorated between all
classes of a series based upon the relative net assets of each class. Any
matters affecting any class exclusively will be voted on by the holders of such
class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
Page 24
<PAGE>
SEMI-ANNUAL REPORTS AND ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports and 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.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust"), 130 Liberty Street, New York,
New York 10006, 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, 2000, Bankers Trust was paid $84,889 as compensation for
providing custody services to the Fund. Investment Company Capital Corp., One
South Street, Baltimore, Maryland 21202, has been retained to act as transfer
and dividend disbursing agent. As compensation for providing these services, the
Fund pays ICCC up to $16.68 per account per year, plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended March 31, 2000 such fees totaled $439,923.
ICCC also provides certain accounting services to the Fund. As
compensation for these services, ICCC receives an annual fee, calculated daily
and paid monthly as shown below.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 0.100%
$20,000,000 - $30,000,000 0.080%
$30,000,000 - $40,000,000 0.060%
$40,000,000 - $50,000,000 0.050%
$50,000,000 - $60,000,000 0.040%
$60,000,000 - $70,000,000 0.030%
$70,000,000 - $100,000,000 0.020%
$100,000,000 - $500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%
For the fiscal year ended March 31, 2000, ICCC received accounting fees
of $138,553.
In addition, the Fund will reimburse ICCC for the following out of
pocket expenses incurred in connection with ICCC's performance of its services
under the Master Services Agreement: express delivery service, independent
pricing and storage.
Page 25
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5-, or 10-year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- or 10-year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover 1-, 5-, and 10-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date the Fund (or the
later commencement of operations of a Series or class) commenced operations.
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, 2000 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Five Year Period Ended
March 31, 2000 March 31, 2000 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 $ 956 (4.45)% $2,250 17.61% $2,919 14.73%
6/15/92*
Class B $ 953 (4.66)% $2,247 17.58% $2,448 18.56%
1/3/95*
Class C $ 993 (.69)% N/A N/A $1,119 5.86%
4/8/98*
Institutional $1,014 1.36% N/A N/A $2,029 17.40%
11/2/95*
</TABLE>
-----------
* Inception Date
Page 26
<PAGE>
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper, Inc. or CDA Investment Technologies Inc., or with the
performance of the Lehman Government Corporate Bond Index, the Consumer Price
Index, the return on 90-day U.S. Treasury bills, the Standard and Poor's 500
Stock Index or the Dow Jones Industrial Average, the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges. The Fund will, however, disclose the maximum
sales charges and will also disclose that the performance data do not reflect
sales charges and that inclusion of sales charges would reduce the performance
quoted. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under SEC rules,
and all advertisements containing performance data will include a legend
disclosing that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund's portfolio
turnover rate in fiscal year 2000 was 26% and in fiscal year 1999 was 10%.
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
July 5, 2000:
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage of Ownership
---------------- -------- ------------ -----------------------
<S> <C> <C> <C>
Bankers Trust Corp & Affil 401K |X| |X| 8.15% 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 Cust |X| |X| 7.92% of Institutional Shares
FBO Calvert School Pension Plan
766 Old Hammonds Ferry Road
Linthicum, MD 21090
Mercantile Safe Dep & Tr Co Cust |X| 9.37% of Institutional Shares
FBO Calvert School
AB Flag Value A/C #1166032
766 Hammonds Ferry Road
Linthicum, MD 21090-1317
DB Alex. Brown LLC |X| 8.72% of Institutional Shares
FBO 250-10788-16
P.O. Box 1346
Baltimore, MD 21203
Banc of America Securities LLC |X| 19.34% of Institutional Shares
116-00036-10
CA5-522-15-13
600 Montgomery Street
San Francisco, CA 94111-2702
DB Alex. Brown Incorporated |X| 5.08%
FBO 201-13465-13
P.O. Box 1346
Baltimore, MD 21203
</TABLE>
As of July 5, 2000, Directors and officers as a group beneficially
owned an aggregate of less than 1% of the Fund's total outstanding shares.
FINANCIAL STATEMENTS
The financial statements for the Fund for the fiscal year ended March
31, 2000 are incorporated herein by reference to the Fund's Annual Report dated
March 31, 2000.
Page 27
<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 oextremely strongo safety characteristics. Those rated A-1
reflect a ostrongo 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 (Y) The highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong.
AA (Y) 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 (Y) 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 (Y) 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 (Y) 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 (Y) 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 (Y) 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.
Page 28
<PAGE>
Moody's Bond Ratings
Aaa (Y) 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 (Y) 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 (Y) 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 (Y) 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 (Y) 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 (Y) 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 (Y) Of poor standing. May be in default or there may be present elements of
danger with respect to principal or interest.
Ca (Y) Speculative in a high degree. Often in default or have other marked
shortcomings.
C (Y) 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.
Page 29
