Flag Investors
Family of Funds
GROWTH
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
EQUITY INCOME
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
BALANCED
Flag Investors Value Builder Fund
INCOME
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
TAX-FREE INCOME
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate
Tax-Free Income Fund
CURRENT INCOME
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
Alex. Brown & Sons
Incorporated
FLAG
INVESTORS
REAL ESTATE
SECURITIES
FUND
Annual Report
December 31, 1995
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Dear Shareholders:
We are pleased to submit to you the first annual report for Flag
Investors Real Estate Securities Fund.
The Fund provides investors with a vehicle to invest in a portfolio
of real estate companies that are well-diversified by property type,
geographical region and management style. The Fund has a total return
orientation. It attempts to invest in publicly traded real estate
companies--primarily Real Estate Investment Trusts (REITs) and real estate
operating companies--that can provide attractive current yields and the
potential for capital appreciation.
We strive to achieve the Fund's investment objectives by employing
a value-oriented investment approach. We use in-depth fundamental analyses to
identify property sectors and companies that we believe are selling below
their intrinsic values.
FUND PERFORMANCE
The Fund commenced operations on January 3, 1995, with a net asset
value (NAV) of $10.00 per share. On December 31, 1995, the NAV was $11.20 for
a Class A Share and $11.18 for a Class B Share. In addition, commencing in
March, ten monthly dividends and one capital gains distribution were paid in
1995, totaling $0.569 per Class A Share and $0.517 per Class B Share.
As shown in the following chart, the Fund outperformed the Wilshire
Real Estate Securities Index, a widely used barometer of the real estate
sector, for the period ended December 31, 1995.
While the Fund's returns were substantially lower than the average
of the S&P 500 and the Dow Jones Industrial Average in 1995, we consider
ourselves real estate investors and feel that the Wilshire Real Estate
Securities Index is a more appropriate benchmark for this Fund.
PERFORMANCE COMPARISONS*
For the year ended December 31, 1995
Flag Investors Wilshire Real
Real Estate Estate Securities
Securities Fund Index
Class A Shares 18.2% 13.7%
Class B Shares 17.4% 13.7%
*These figures assume the reinvestment of dividends and capital gains
distributions but exclude the impact of any sales charge. The Wilshire Real
Estate Securities Index is an unmanaged index that is a widely recognized
indicator of performance in the real estate sector. Past performance is not an
indicator of future results. Please review the Additional Performance
Information on page 4.
MARKET COMMENTARY
Real estate securities ended 1995 on a positive note with a
broad-based rally in December. The December rally followed an up and down
year that we believe provided excellent opportunities for long-term
investments in a portfolio of real estate companies.
Operating results for the REITs in your Fund's portfolio were
excellent, with funds from operations (real estate operating income minus
interest expense and corporate overhead) up over 12.4% in 1995. Even with the
December rally, valuation levels remain well below their peak in March 1993.
The overall appreciation in REIT prices was roughly in line with the overall
increase in REIT funds from operations. Thus, REITs began and ended 1995 at
roughly the same reasonable earnings multiple.
The REIT industry's best represented property types (retail and
residential)generated the worst performance in 1995. Retail and residential
properties, which together comprised 63% of the National Association of Real
Estate Investment Trusts (NAREIT) Equity Index at the beginning of 1995,
posted total returns of 5.1% and 12.0%, respectively.
1
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
REIT Industry Sectors
* Retail Sector
The poor performance of the retail REITs reflects growing investor
concern about high levels of new construction activity and the continued poor
performance of many retailers, particularly regional discount department
stores and virtually all types of apparel retailers. Within the retail
sector, there was a handful of companies that performed reasonably well and a
number of companies that performed poorly. The larger companies, with access
to capital and strong management teams, have been able to continue to grow
their earnings through accretive acquisitions, helping to offset limited
prospects for internally generated growth. The stock prices of the smaller
companies and the companies most affected by retailer bankruptcies and store
closures have plummeted, effectively shutting off their access to capital and
their only viable means to material near-term growth in earnings.
* Apartment Sector
The performance of the apartment REITs improved in the fourth
quarter with a total return of 6.6%, offsetting some of the price weakness
from earlier in the year. Investors' sentiment toward the apartment sector
seems to be turning positive in response to a modest decline in projected new
supply and continued strong operating performance by the better quality
operating companies. Several analysts who had been advocating an
underweighting or neutral stance toward the apartment sector have recently
recommended overweighting the sector.
* Office, Self-Storage and Hotels
The strongest property types in 1995 in terms of performance were
office (+38.8%), self-storage (+34.9%), hotels (+30.8%) and companies
focusing on triple net lease properties (+31.6%). However, these four sectors
together accounted for only 13.4% of the NAREIT Equity Index at the beginning
of 1995. The strong performance of these property types reflects both above
average growth in earnings and rising multiples. Many of the companies in
these sectors aggressively expanded their portfolios in 1995 to take
advantage of positive spread investment opportunities, with several companies
more than doubling their market capitalization. These companies have also
benefited from rapidly improving fundamentals.
Capital raising activity slowed in 1995 versus the pace of the
prior three years. During 1995, there was a total of 81 equity offerings,
raising $7.2 billion in new capital. Included in the total were 17 preferred
stock offerings and three privately placed convertible preferred issues.
PORTFOLIO
The composition of the Fund's portfolio is illustrated below.
[PIE CHART USING FOLLOWING PLOT POINTS]
Apartments 31.0% Manufactured Homes 5.3%
Short-term Investments 4.4% Office/Industrial/Self-Storage 19.7%
Hotels 6.3% Health Care 7.6%
Shopping Centers 13.0% Factory Outlets 3.0%
Regional Malls 9.3% Diversified 0.4%
OUTLOOK
We continue to believe that the outlook for the next few years is
quite favorable for both direct real estate and REIT investments. In most
markets, there is no evidence of substantial building, and supply and demand
appear to be in relative balance. This creates an environment in which
occupancies are high, rents can be increased and dividends can grow.
2
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
In terms of company operating performances, we expect continued strong
growth from those companies specializing in apartments, suburban office
buildings, hotels, warehouses and self-storage facilities. We look for more
moderate growth in health care facilities, regional malls and neighborhood and
community shopping centers. Although we are concerned about the health of the
retail sector in general, we believe selected retail real estate companies will
be able to take advantage of the tough times ahead.
We continue to favor the larger companies with more conservative
balance sheets that will be able to raise capital to allow them to take
advantage of the good acquisition and development opportunities that are
currently available.
There continues to be a substantial disparity between yields on
REITs and yields on major stock and bond indices. At the end of December, the
yield on the NAREIT Equity Index was 3.4 times the S&P 500 dividend yield and
1.3 times the yield on ten-year Treasury bonds. These ratios are at the high
end of their historical range.
In summary, we continue to be enthusiastic about the prospects for
the REIT sector and to believe this is an excellent time to invest in REIT
stocks. We thank you for your participation in the Fund.
Sincerely,
/s/ William K. Morrill, Jr. /s/ Keith R. Pauley
William K. Morrill, Jr. Keith R. Pauley
PRESIDENT EXECUTIVE VICE PRESIDENT
January 19, 1996
Dividend Declaration
1995 Year-End Dividend
The Board of Directors has declared a year-end per share
distribution payable on December 28, 1995 to shareholders of record on
December 21, 1995.
Class A Class B
Shares Shares
Income . . . . . . . . . . . . . . . $.032 $.041
Short-term
capital gains . . . . . . . . . . .045 .045
Total distributions . . . . . . $.077 $.086
Dividends for Calendar 1995
Total dividends declared for calendar 1995 are as follows:
Class A Class B
Shares Shares
Income . . . . . . . . . . . . . . . $.524 $.472
Short-term
capital gains. . . . . . . . . . . .045 .045
Total distributions. . . . . . . . . $.569 $.517
Shareholders who have elected to participate in the Fund's dividend
reinvestment plan have received their distribution in additional shares of the
Fund. If you are not currently a plan participant but would like to have your
dividends reinvested at net asset value, please contact your investment
representative or the Fund at 1-800-553-8080.
3
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Additional Performance Information
The shareholder letter included in this report contains statistics
designed to help you evaluate the performance of your Fund's management. To
further assist in this evaluation, the Securities and Exchange Commission
(SEC) requires that we include, on an annual basis, a line graph comparing
the Fund's performance to that of an appropriate market index. This graph
must measure the growth of a $10,000 hypothetical investment from the Fund's
initial public offering through the most recent fiscal year-end and must
reflect the impact of the Fund's total expenses and its currently effective
4.50% maximum sales charge for the Fund's Class A Shares and 4.00% maximum
contingent deferred sales charge for the Fund's Class B Shares.
While these tables are required by SECrules, such comparisons are of
limited utility since the index shown is not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of this index would have
had to own the securities that it represents. Acquiri ng these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The Fund's total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than the original
investment when redeemed.
AGGREGATE TOTAL RETURN--CLASS A*
% Return With
Period ended 12/31/95: Sales Charge (1)
Since Inception (1/3/95) 12.87%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
CLASS A SHARES
(January 3, 1995 - December 31, 1995)
[GRAPH PLOT POINTS]
Flag Investors Wilshire
Real Estate Real Estate
Securities Fund Securities Index
1/95 .......... $ 9,550 $10,000
3/95 .......... $ 9,686 $10,210
6/95 .......... $10,159 $10,649
9/95 .......... $10,767 $11,150
12/95 ......... $11,287 $11,551
(1) Assumes maximum sales charge of 4.50%.
* These figures assume the reinvestment of all dividends and capital gains
distributions. The Wilshire Real Estate Securities Index is an unmanaged
index that is a widely recognized indicator of performance in the real estate
sector. Past performance is not an indicator of future results.
4
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Additional Performance Information (continued)
AGGREGATE TOTAL RETURN--CLASS B*
% Return With
Period ended 12/31/95: CDSC (2)
Since Inception (1/3/95) 13.40%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
CLASS B SHARES
(January 3, 1995 - December 31, 1995)
[GRAPH PLOT POINTS]
Flag Investors Wilshire
Real Estate Real Estate
Securities Fund Securities Index
1/95 .......... $10,000 $10,000
3/95 .......... $10,125 $10,210
6/95 .......... $10,602 $10,649
9/95 .......... $11,218 $11,150
12/95 ......... $11,340 $11,551
(2) Assumes maximum contingent deferred sales charge of 4.00%.
* These figures assume the reinvestment of all dividends and capital gains
distributions. The Wilshire Real Estate Securities Index is an unmanaged
index that is a widely recognized indicator of performance in the real estate
sector. Past performance is not an indicator of future results.
This report is prepared for the general information of
shareholders. It is authorized for distribution to prospective investors only
when preceded or accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors
Funds, including charges and expenses, obtain a prospectus from your
investment representative or directly from the Fund at 1-800-767-FLAG. Read
it carefully before you invest.
5
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets December 31, 1995
<TABLE>
<CAPTION>
Market Percent
No. of Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON STOCK: 95.6%
Real Estate Investment Trusts: 94.5%
Apartments: 31.0%
18,200 Avalon Properties Inc. $ 355,762 $21.50 $ 391,300 3.9% $ 35,538
11,900 Bay Apartment Communities 236,718 24.25 288,575 2.8 51,857
11,100 Equity Residential Property Trust 309,273 30.63 339,938 3.3 30,665
16,200 Evans Withycomb Residential 319,599 21.50 348,300 3.4 28,701
14,800 Merry Land & Investment Co. 306,749 23.63 349,650 3.4 42,901
14,100 Oasis Residential Inc. 313,184 22.75 320,775 3.2 7,591
10,100 Post Properties Inc. 306,666 31.88 321,937 3.2 15,271
15,300 Security Capital Pacific Trust 270,859 19.75 302,175 3.0 31,316
14,600 Southwest Property Trust 178,624 13.50 197,100 1.9 18,476
19,700 United Dominion Realty Trust 271,724 15.00 295,500 2.9 23,776
2,869,158 3,155,250 31.0 286,092
Diversified: 0.4%
1,700 Colonial Properties Trust 40,710 25.50 43,350 0.4 2,640
Factory Outlets: 3.0%
10,300 Chelsea GCARealty Inc. 276,551 30.00 309,000 3.0 32,449
Health Care: 7.6%
10,600 Health Care Properties Investment Inc. 325,024 35.13 372,325 3.7 47,301
9,400 Nationwide Health Properties Inc. 350,027 42.00 394,800 3.9 44,773
675,051 767,125 7.6 92,074
Hotels: 5.2%
8,900 Felcor Suite Hotels 246,907 27.75 246,975 2.4 68
7,400 Patriot American Hospitality 181,381 25.75 190,550 1.9 9,169
3,000 Starwood Lodging Trust 82,600 29.75 89,250 0.9 6,650
510,888 526,775 5.2 15,887
Mobile Homes: 5.3%
13,000 Manufactured Home Communities 224,090 17.50 227,500 2.2 3,410
4,000 ROC Communities Inc. 85,603 24.00 96,000 1.0 10,397
8,100 Sun Communities Inc. 189,821 26.38 213,637 2.1 23,816
499,514 537,137 5.3 37,623
</TABLE>
6
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets (continued) December 31, 1995
<TABLE>
<CAPTION>
Market Percent
No. of Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate Investment Trusts (continued)
Office/Industrial/Self-Storage: 19.7%
3,300 Cali Realty Corporation $ 64,245 $21.88 $ 72,187 0.7% $ 7,942
9,200 Duke Realty Investments Inc. 258,183 32.38 288,650 2.8 30,467
10,300 Highwood Properties Inc. 231,968 28.25 290,975 2.8 59,007
13,700 Security Capital Industries 223,585 17.50 239,750 2.4 16,165
8,200 Shurgard Storage Centers--Class A 194,423 27.00 221,400 2.2 26,977
12,600 Spieker Properties 266,992 25.13 316,575 3.1 49,583
10,200 Storage USAInc. 292,530 32.63 332,775 3.3 40,245
9,700 Weeks Corp. 218,377 25.13 243,713 2.4 25,336
1,750,303 2,006,025 19.7 255,722
Regional Malls: 9.3%
11,300 DeBartolo Realty Corp. 158,622 13.00 146,900 1.4 (11,722)
6,400 JP Realty Inc. 129,198 21.88 140,000 1.4 10,802
11,500 Simon Property Group Inc. 278,664 24.38 280,313 2.8 1,649
24,600 Taubman Centers Inc. 236,545 10.00 246,000 2.4 9,455
6,400 Urban Shopping Centers Inc. 132,492 21.38 136,800 1.3 4,308
935,521 950,013 9.3 14,492
Retail: 13.0%
9,100 Developers Diversified Realty Corp. 261,921 30.00 273,000 2.7 11,079
10,300 Federal Realty Investment Trust 218,820 22.75 234,325 2.3 15,505
6,450 Kimco Realty Corp. 166,125 27.25 175,763 1.7 9,638
5,600 Regency Realty Corp. 94,405 17.25 96,600 0.9 2,195
7,500 Vornado Realty Trust 264,925 37.50 281,250 2.8 16,325
7,000 Weingarten Realty Investment 248,255 38.00 266,000 2.6 17,745
1,254,451 1,326,938 13.0 72,487
Real Estate Operating Companies: 1.1%
Hotels: 1.1%
600 Bristol Hotel Company 12,300 24.38 14,625 0.1 2,325
7,600 Host Marriott Corp. 94,454 13.25 100,700 1.0 6,246
106,754 115,325 1.1 8,571
Total Common Stocks 8,918,901 9,736,938 95.6 818,037
</TABLE>
7
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets (concluded) December 31, 1995
<TABLE>
<CAPTION>
Market Percent
Par Market Value of Net
(000) Security Cost Price (Note A) Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT: 3.4%
$347 Goldman Sachs &Co., 5.70%
Dated 12/29/95, to be repurchased
on 1/2/96, collateralized by
U.S. Treasury Notes with
a market value of $354,780. $ 347,000 100 $ 347,000 3.4%
Total Investment in Securities 9,265,901* 10,083,938 99.0
Other Assets in Excess of Liabilities, Net 103,739 1.0
Net Assets $10,187,677 100.0%
Net Asset Value Per:
Class A Share
($7,171,372 / 640,093 shares outstanding) $11.20(1)
Class B Share
($3,016,305 / 269,768 shares outstanding) $11.18(2)
Maximum Offering Price Per:
Class A Share
($11.20 / .955) $11.73
Class B Share $11.18
</TABLE>
* Also aggregate cost for federal tax purposes.
(1) Redemption value is $11.20.
(2) Redemption value is $10.73 after 4.00% maximum contingent deferred sales
charge.
See accompanying Notes to Financial Statements.
8
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Operations For the Period January 3, 1995*
through December 31, 1995
INVESTMENT INCOME (NOTE A):
Dividends ................................................ $ 429,814
Interest ................................................. 12,833
Total income ........................................... 442,647
EXPENSES:
Investment advisory fee (Note B) ......................... 38,795
Distribution fees (Note B) ............................... 30,926
Legal .................................................... 30,020
Audit .................................................... 23,766
Transfer agent fees (Note B) ............................. 19,350
Registration fees ........................................ 17,683
Organizational expense (Note A) .......................... 17,683
Custodian fees ........................................... 16,500
Accounting fee (Note B) .................................. 12,360
Printing andpostage ...................................... 9,032
Miscellaneous ............................................ 1,834
Directors' fees .......................................... 1,142
Total expenses ......................................... 219,091
Less:Fees waived and expenses reimbursed (Note B) ........ (129,863)
Net expenses ................................................ 89,228
Net investment income .................................... 353,419
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions ............. 47,282
Change in unrealized appreciation of investments ......... 818,037
Net realized and unrealized gain on investments .......... 865,319
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......... $ 1,218,738
- -------------------------------------------------------------------------------
* Commencement of operations.
See accompanying Notes to Financial Statements.
9
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Changes in Net Assets
For the Period
January 3, 1995*
through
December 31, 1995
- -------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income .................................. $ 353,419
Net realized gain from security transactions ........... 47,282
Change in unrealized appreciation of investments ....... 818,037
Net increase in net assets resulting
from operations .................................. 1,218,738
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares ....................................... (216,537)
Class B Shares ....................................... (107,851)
Short-term capital gains:
Class A Shares ....................................... (27,959)
Class B Shares ....................................... (11,617)
Total distributions .................................... (363,964)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares ........................... 9,712,132
Value of shares issued in reinvestment of dividends .... 246,856
Cost of shares repurchased ............................. (726,085)
Increase in net assets derived from
capital share transactions ........................... 9,232,903
Total increase in net assets ....................... 10,087,677
NET ASSETS:
Beginning of period .................................... 100,000**
End of period .......................................... $ 10,187,677
- -------------------------------------------------------------------------------
* Commencement of operations.
** On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of Alex. Brown
& Sons Incorporated for $100,000.
See accompanying Notes to Financial Statements.
10
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Financial Highlights
(For a share outstanding throughout the period)*
For the Period January 3, 1995**
through December 31, 1995
- -------------------------------------------------------------------------------
Class A Class B
- -------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period ........... $ 10.00 $ 10.00
Income from Investment Operations:
Net investment income ............................ 0.56 0.50
Net realized and unrealized gain on investments .. 1.21 1.20
Total from Investment Operations ............. 1.77 1.70
Less Distributions:
Dividends from net investment income ............. (0.52) (0.47)
Distributions from short-term capital gains ...... (0.05) (0.05)
Total distributions .............................. (0.57) (0.52)
Net asset value at end of period ................. $ 11.20 $ 11.18
Total Return (Aggregate) ........................... 18.19% 17.40%
Ratios to Average Net Assets:
Expenses(2)....................................... 1.19%(1) 1.90%(1)
Net investment income(3).......................... 5.95%(1) 5.25%(1)
Supplemental Data:
Net assets at end of period (000) ................ $ 7,171 $ 3,016
Portfolio turnover rate .......................... 28% 28%
* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 3.25% (annualized) for Class A Shares
and 4.05% (annualized) for Class B Shares.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 3.89% (annualized) for Class
A Shares and 3.09% (annualized) for Class B Shares. See accompanying Notes
to Financial Statements.
11
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Real Estate Securities
Fund, Inc. (the "Fund") was organized as a Maryland Corporation on May 2,
1994 and commenced operations January 3, 1995. The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company designed to seek total return primarily through
investments in equity securities of companies that are principally engaged
in the real estate industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The following is a
summary of significant accounting policies followed by the Fund.
SECURITY VALUATION - Portfolio securities are valued on the basis of their
last sale price. In the event that there are no sales or the security is not
listed, it is valued at its latest bid quotation. Short-term obligations
with maturities of 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an
agreed upon date and price. The seller, under a repurchase agreement, will
be required on a daily basis to maintain the value of the securities subject
to the agreement at no less than the repurchase price. The agreement is
conditional upon the collateral being deposited under the Federal Reserve
book-entry system.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Costs incurred by the Fund in connection with its organization, registration
and the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.
A portion of the dividend income recorded by the Fund is from Real Estate
Investment Trusts ("REITs"). For tax purposes, a portion of these dividends
consists of capital gains and return of capital. For financial reporting
purposes, these dividends are recorded as dividend income, and the
investment in the REIT is reported at market value. For the period ended
December 31, 1995, no return of capital portion of such distribution has
been determined due to the lack of notification from the REITs held by the
Fund.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
INVESTMENT COMPANY CAPITAL CORP. ("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor and
ABKB/LaSalle Securities Limited Partnership is the Fund's sub-advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at the annual rate of 0.65% of the
first $100 million of the Fund's average daily net assets; 0.55% of the next
$100 million of the Fund's average daily net assets; 0.50% of the next $100
million of the Fund's average daily net assets; and 0.45% of the Fund's
average daily net assets exceeding $300 million.
12
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Notes to Financial Statements (concluded)
ICC has agreed to reduce its aggregate fees attributable to the Fund or make
payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder
of any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain
expenses at no more than 1.25% of the Fund's average daily net assets for
Class A Shares and 2.00% for Class B Shares. For the period ended December
31, 1995, ICC waived fees of $38,795 and reimbursed expenses of $91,068.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $12,360 for accounting services for the period
ended December 31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly. ICC received $19,350
for transfer agent services for the period ended December 31, 1995.
As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to 0.25% of the average daily net assets for Class A Shares and
1.00% (includes 0.25% shareholder servicing fee) of the average daily net
assets for Class B Shares. For the period ended December 31, 1995,
distribution fees aggregated $30,926, of which $9,662 was attributable to
the Class A Shares and $21,264 was attributable to the Class B Shares.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 10
million shares of common stock (7 million Class A, 2 million Class B and 1
million undesignated), par value $.001 per share. Transactions in shares of
the Fund were as follows:
For the Period
January 3, 1995*
to December 31, 1995
---------------------
Class A Class B
------- -------
Shares sold .......................... 655,079 290,349
Shares issued to
shareholders on
reinvestment of
dividends .......................... 16,704 6,473
Shares redeemed ...................... (41,690) (27,054)
Net increase in shares
outstanding ........................ 630,093 269,768
Proceeds from sale
of shares .......................... $ 6,763,257 $ 2,948,875
Value of reinvested
dividends .......................... 178,010 68,846
Cost of shares
redeemed ........................... (439,765) (286,320)
Net increase from
capital share
transactions ....................... $ 6,501,502 $ 2,731,401
- -------------------------------------------------------------------------------
*Commencement of operations.
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term obligations, aggregated $10,766,776 and $1,895,157,
respectively, for the period ended December 31, 1995.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $829,759
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $11,722.
E. Net Assets - At December 31, 1995, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares ........................... $ 6,601,502
Flag Investors Class B Shares ........................... 2,731,401
Undistributed net investment income ....................... 29,031
Accumulated net realized gains from
security transactions ................................... 7,706
Unrealized appreciation
of investments .......................................... 818,037
$10,187,677
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Flag Investors Real Estate Securities Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Real Estate Securities Fund, Inc. as of December 31, 1995 and the related
statements of operations and changes in net assets and financial highlights for
the period January 3, 1995 (commencement of operations) through December 31,
1995. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Real Estate Securities Fund, Inc. as of December 31, 1995 and the
results of its operations and the changes in its net assets and its financial
highlights for the period January 3, 1995 (commencement of operations) through
December 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Philadelphia, Pennsylvania
February 2, 1996
14
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Directors and Officers
Richard T. Hale William K. Morrill, Jr.
Chairman President
Truman T. Semans Keith R. Pauley
Director Executive Vice President
James J. Cunnane Gary V. Fearnow
Director Vice President
N. Bruce Hannay Edward J. Veilleux
Director Vice President
John F. Kroeger Brian C. Nelson
Director Vice President and Secretary
Louis E. Levy Joseph A. Finelli
Director Treasurer
Eugene J. McDonald Laurie D. DePrine
Director Assistant Secretary
Rebecca W. Rimel
Director
Harry Woolf
Director
Investment Objective
A mutual fund designed to provide a high level of total return primarily
through investments in securities of companies principally engaged in the real
estate industry.
Chairman's Letter
The year 1995 saw the retirement of two of our longtime Directors. We would
like to thank them for their valuable and tireless service over the years.
Chairman's Letter
Alonzo G. Decker, former Chairman and CEO of Black & Decker, was one of our
original Directors, joining the Flag Investors Board in 1984. He served with
distinction, and his wise counsel will be much missed; but we know he will enjoy
having more time to spend on his farm on the Eastern Shore of Maryland.
Bruce Hannay, former Vice President for Patents and Research at Bell Labs,
became a Director at the time we formed the Flag Investors Board in 1984. His
willingness to cross the country four times each year to attend our Board
meetings tells us a great deal about his energy and loyalty. We wish him well in
his retirement in the beautiful State of Washington.
Al and Bruce, we thank you and will miss you.
Sincerely,
Richard T. Hale
15
