<PAGE> 1
Supplement dated May 31, 1995
to
Prospectus dated January 3, 1995
of
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(Class A and Class B Shares)
The Prospectus dated January 3, 1995 of Flag Investors Real Estate Securities
Fund, Inc. is amended and supplemented by the following unaudited financial
highlights for the period from January 3, 1995 (commencement of operations)
through April 30, 1995.
Financial Highlights (Unaudited)
(For a share outstanding throughout the period)
For the Period January 3, 1995* through April 30, 1995
Class A Shares Class B Shares
-------------- --------------
Per Share Operating Performance:
Net asset value at beginning of period $10.00 $10.00
--------- ---------
Income from Investment Operations:
Net investment income 0.18 0.17
Net realized and unrealized loss
on investments (0.16) (0.17)
--------- ---------
Total from Investment Operations 0.02 0.00
Less Distributions:
Dividends from net investment income (0.09) (0.08)
--------- ---------
Net asset value at end of period $9.93 $9.92
========= =========
Total Return ** 0.22%(1) (0.01)%(1)
Ratios to Average Net Assets:
Expenses 1.25%(1,2) 2.00%(1,2)
Net investment income 5.71%(1,3) 5.28%(1,3)
Supplemental Data:
Net assets at end of period(000) $2,601.00 $2,114.00
Portfolio turnover rate 5.00% 5.00%
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*Commencement of Operations.
**Total Return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charges.
1 Annualized.
2 Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 4.29% (annualized) for Class A Shares and 5.03%
(annualized) for Class B Shares.
3 Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 2.67% (annualized) for Class A Shares and
2.24%(annualized) for Class B Shares.
<PAGE> 2
LOGO
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(CLASS A AND CLASS B SHARES)
This mutual fund (the "Fund") is designed to seek total return primarily
through investments in equity securities of companies that are principally
engaged in the real estate industry.
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated January 3, 1995 has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by calling the Fund at (800) 767-FLAG.
Shares of the Fund are available through Alex. Brown & Sons Incorporated
("Alex. Brown"), as well as through Participating Dealers and Shareholder
Servicing Agents. This Prospectus relates to Class A and Class B Shares of
the Fund. The separate classes provide investors with alternatives as to
sales load and fund expenses. (See "How to Invest in the Fund.")
No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or its distributor.
This prospectus does not constitute an offering by the fund or by its
distributor in any jurisdiction in which such offering may not lawfully be
made.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 3, 1995
PROSPECTUS
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4
Flag Investors
Real Estate Securities Fund, Inc.
(Class A and Class B Shares)
135 East Baltimore Street
Baltimore, Maryland 21202
Table of Contents
-----------------
Page
1. Fee Table.................................................................2
2. Investment Program........................................................3
3. Risk Factors..............................................................6
4. Investment Restrictions...................................................7
5. How to Invest in the Fund.................................................8
6. How to Redeem Shares.....................................................15
7. Telephone Transactions...................................................17
8. Dividends and Taxes......................................................17
9. Management of the Fund...................................................19
10. Investment Advisor and Sub-Advisor.......................................19
11. Distributor..............................................................22
12. Custodian, Transfer Agent, Accounting Services...........................23
13. Performance Information..................................................23
14. General Information......................................................25
Appendix.................................................................A1
1
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1. Fee Table
...............................................................................
Shareholder Transaction Expenses:
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
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Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............... 4.50%* None
Maximum Sales Charge Imposed on
Reinvested Dividends............................... None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds,
whichever is lower)............................... None* 4.00%**
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Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average daily net assets)
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Management Fees (net of fee waivers)................ .55%*** .55%***
12b-1 Fees.......................................... .25% .75%
Other Expenses (including a .25% shareholder
servicing fee for Class B Shares).................. .45% .70%****
----- -----
Total Fund Operating Expenses (net of fee waivers).. 1.25%*** 2.00%***
===== =====
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* Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge, however, a contingent deferred sales charge of .50%
will be imposed on such purchases in the event of redemption within 24
months following such purchase. (See "How to Invest in the Fund--Offering
Price.")
** A declining contingent deferred sales charge will be imposed on
redemptions of Class B Shares made within six years of purchase. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Invest in the Fund -- Class B Shares.")
*** The Fund's investment advisor currently intends to waive its fee or to
reimburse the Fund on a voluntary basis to the extent required so that
Total Fund Operating Expenses do not exceed 1.25% of the Class A Shares'
average daily net assets and 2.00% of the Class B Shares' average daily
net assets. Absent fee waivers, Management Fees would be .65% of the
Fund's average daily net assets and Total Fund Operating Expenses would be
1.35% of the Class A Shares' average daily net assets and 2.10% of the
Class B Shares' average daily net assets.
**** A portion of the shareholder servicing fee is allocated to member firms
of the National Association of Securities Dealers, Inc. and qualified banks
for continued personal service by such members to investors in Class B
Shares, such as responding to shareholder inquiries, quoting net asset
values, providing current marketing materials and attending to other
shareholder matters.
Example:
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the
end of each time period:* 1 year 3 years
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Class A Shares.................................... $57 $84
Class B Shares.................................... $61 $95
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* Absent fee waivers for the one and three year periods, expenses would be
$58 and $87, respectively, for the Class A Shares and $62 and $98,
respectively, for the Class B Shares.
2
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You would pay the following expenses
on the same investment, assuming
no redemption:* 1 year 3 years
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Class B Shares.................................... $21 $65
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* Absent fee waivers for the 1 and 3 year periods, expenses for the Class B
Shares would be $22 and $68, respectively.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases shares of either class through a financial institution
may be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
Fund -- Offering Price", "Investment Advisor and Sub-Advisor" and
"Distributor.") Neither class of shares has been offered prior to the date
of this Prospectus. Accordingly, the Other Expenses appearing in the table
above are based on the Fund's estimated amounts for the current fiscal year
ending May 31, 1995.
The rules of the SEC require that the maximum sales charge be reflected
in the above table. However, certain investors may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund -- Class A
Shares.")
Due to the continuous nature of Rule 12b-1 fees, long-term shareholders
of the Fund may pay more than the equivalent of the maximum front-end sales
charges permitted by the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD Rules").
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2. Investment Program
...............................................................................
Investment Objectives and Policies
The investment objective of the Fund is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. This investment objective is a fundamental policy
of the Fund and cannot be changed without shareholder approval.
Under normal conditions at least 65% of the Fund's total assets will be
invested in the equity securities of companies principally engaged in the
real estate industry. A company is "principally engaged" in the real estate
industry if (i) it derives at least 50% of its revenues or profits from the
ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
3
<PAGE> 7
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
real estate investment trusts ("REITs"), master limited partnerships that
invest in interests in real estate and which are traded on a national
securities exchange; real estate brokers or developers; and companies with
substantial real estate holdings, such as paper and lumber producers. A
shareholder in the Fund should realize that by investing in master limited
partnerships through the Fund, he will indirectly bear his proportionate
share of the operating expenses of the underlying master limited partnership,
in addition to the similar expenses of the Fund. Equity securities include
common stock, rights or warrants to purchase common stock, preferred stock,
and securities convertible into common stock. The Fund may invest up to 10%
of its total assets in securities of foreign real estate companies.
The Fund may invest in securities of REITs. REITs pool investors' funds
for investment primarily in income producing real estate or real estate
related loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unitholders
at least 95% of its taxable income for each taxable year. Generally, REITs
can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and
derive their income primarily from rents and capital gains from appreciation
realized through property sales. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from
interest payments. Hybrid REITs combine the characteristics of both Equity
and Mortgage REITs. A shareholder in the Fund should realize that by
investing in REITs indirectly through the Fund, he will bear not only his
proportionate share of the expenses of the Fund, but also indirectly, similar
expenses of underlying REITs.
Under normal conditions the portfolio may invest up to 35% of its total
assets in securities of companies outside the real estate industry and
nonconvertible debt securities such as bonds. Investment Company Capital
Corp. ("ICC"), the Fund's investment advisor, and ABKB/LaSalle Securities
Limited Partnership ("ABKB/LaSalle"), the Fund's sub-advisor, currently
anticipate that investments outside the real estate industry will be
primarily in securities of companies whose products and services are related
to the real estate industry. They may include manufacturers and distributors
of building supplies, financial institutions which make or service mortgages
and companies whose real estate assets are substantial relative to their
stock market valuations, such as retailers and railroads. The Fund may invest
up to 5% of its net assets in zero coupon or other original issue discount
securities. The debt securities purchased by the Fund will be of investment
grade or better quality (i.e., of a quality equivalent to the ratings Baa or
better of Moody's Investors Service, Inc. ("Moody's") or BBB or better of
4
<PAGE> 8
Standard & Poor's Corporation ("S&P")). While classified as "investment
grade," securities rated Baa by Moody's or BBB by S&P have speculative
characteristics.
For temporary defensive purposes the Fund may invest up to 100% of its
assets in short-term money market instruments consisting of securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, repurchase
agreements, certificates of deposit and bankers' acceptances issued by banks or
savings and loan associations having net assets of at least $500 million as of
the end of their most recent fiscal year, high-grade commercial paper rated, at
time of purchase, in the top two categories by a national rating agency or
determined to be of comparable quality by ICC or ABKB/LaSalle at the time of
purchase and other long- and short-term debt instruments which are rated A or
higher by S&P or Moody's at the time of purchase, and may hold a portion of its
assets in cash. The Fund has the ability to invest in warrants, futures
contracts and options, but has no intention to do so during the coming year.
...............................................................................
Repurchase Agreements
The Fund may agree to purchase U.S. Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury securities include Treasury bills, Treasury notes, Treasury bonds and
Separate Trading of Registered Interest and Principal of Securities ("STRIPS"),
all of which are direct obligations of the U.S. Government and are supported by
the full faith and credit of the United States. The Fund will enter into
repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. Default by the seller may,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, the Fund may be delayed or limited in its ability to sell the
collateral.
...............................................................................
When-Issued Securities
The Fund may purchase securities on a when-issued basis, which means that
delivery and payment for such securities normally take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on a when-issued security are fixed at the
time the purchase commitment is entered into, although no interest on such
security accrues to the Fund prior to payment and delivery. A segregated account
of the Fund consisting of cash, cash equivalents or U.S. Government securities
or other high quality liquid debt securities equal at all times to
5
<PAGE> 9
the amount of the when-issued commitments will be established and maintained
by the Fund at the Fund's custodian. Additional cash or liquid debt securities
will be added to the account when necessary. While the Fund will purchase
securities on a when-issued basis only with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date if it
is deemed advisable to limit the effects of adverse market action. The
securities so purchased or sold are subject to market fluctuation so, at the
time of delivery of the securities, their value may be more or less than the
purchase or sale price.
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3. Risk Factors
Because the Fund invests primarily in the real estate industry, its
investments may be subject to certain risks. These risks include: declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, demographic trends and variations in rental income.
Generally, increases in interest rates will decrease the value of high yielding
securities and increase the costs of obtaining financing, which could directly
and indirectly decrease the value of the Fund's investments. The Fund's share
price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than his original cost.
Because the Fund may invest in REITs, it may also be subject to certain
risks associated with the direct investments of the REITs. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while Mortgage REITs may be affected by the quality of credit extended. Equity
and Mortgage REITs are dependent upon management skill, have limited
diversification and are subject to the risks of financing projects. Such REITs
are also subject to heavy cash flow dependency, defaults by borrowers, self
liquidation and the possibility of failing to qualify for tax-free pass-through
of income under the Internal Revenue Code of 1986, as amended or failing to
maintain their exemptions from registration under the Investment Company Act of
1940.
Investing in securities issued by foreign corporations involves
considerations and possible risks not typically associated with investing in
securities issued by domestic corporations. The values of foreign investments
are affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are
incurred in connection with conversions between various currencies. In addition,
foreign brokerage commissions are generally higher than in the United States,
and foreign securities markets may be less liquid, more volatile and less
6
<PAGE> 10
subject to governmental supervision than in the United States. Investments in
foreign countries could be affected by other factors not present in the United
States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards, potential difficulties in enforcing
contractual obligations and the possibility of extended settlement periods. For
additional risk disclosure see "Repurchase Agreements" and "When - Issued
Securities."
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4. Investment Restrictions
The Fund's investment program is subject to a number of restrictions
which reflect both self imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 through 3 below are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the outstanding shares. The vote of a majority of the
outstanding shares of the Fund means the lesser of: (i) 67% or more of the
shares present at a shareholder meeting at which the holders of more than 50%
of the shares are present or represented or (ii) more than 50% of the
outstanding shares of the Fund. Investment restriction number 4 may be
changed by a vote of the majority of the Board of Directors. The Fund will
not:
1) With respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in the securities of any one issuer, except
the U.S. Government, its agencies and instrumentalities;
2) Concentrate 25% or more of its total assets in securities of issuers in any
one industry, except that the Fund will concentrate in the real estate
industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an issuer);
3) Borrow money except as a temporary measure to facilitate settlements and
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
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; or
4) Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven days.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
7
<PAGE> 11
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5. How to Invest in the Fund
Class A and Class B Shares may be purchased from Alex. Brown, 135 East
Baltimore Street, Baltimore, Maryland 21202, through any securities dealer which
has entered into a dealer agreement with Alex. Brown ("Participating Dealers")
or through any financial institution which has entered into a Shareholder
Servicing Agreement with the Fund ("Shareholder Servicing Agents").
Participating Dealers or Shareholder Servicing Agents and their investment
representatives may receive different levels of compensation depending on which
class of shares they sell.
The Class A and Class B alternatives permit an investor to choose the method
of purchasing shares that is more beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the combination of sales charge, distribution fee
and contingent deferred sales charge on Class A Shares is more favorable than
the combination of distribution/service fees and contingent deferred sales
charge on Class B Shares. In almost all cases, investors planning to purchase
$100,000 or more of Fund shares will pay lower aggregate charges and expenses by
purchasing Class A Shares. Accordingly, the Fund will not accept purchases for
Class B Shares in excess of $100,000 per account. (See "Fee Table.")
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag Investors
fund or class is $500 and the minimum initial investment for participants in the
Fund's Automatic Investing Plan is $250. Each subsequent investment must be at
least $100 per class, except that the minimum subsequent investment in the
Fund's Automatic Investing Plan is $250 for quarterly investments and $100 for
monthly investments. (See "Purchases through Automatic Investing Plan" below.)
There is no minimum investment requirement for qualified retirement plans (i.e.
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts. Orders for purchases of
shares are accepted on any day on which the New York Stock Exchange is open for
business ("Business Day"). Purchase orders for shares will be executed at a per
share purchase price equal to the net asset value next determined after receipt
of the purchase order plus any applicable front-end sales charge (the "Offering
Price") on the date such net asset value is determined (the "Purchase Date").
Payment of the purchase price for shares is due no later than five Business Days
from the Purchase Date. Alex. Brown may, in its sole discretion, refuse to
accept any purchase order.
8
<PAGE> 12
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by valuing
all assets held by the Fund, deducting liabilities attributable to all shares
and any liabilities attributable to the specific class, and dividing the
resulting amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities will be given their market value where feasible.
Portfolio securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Advisor to be over-the-counter, are valued at the quoted bid prices provided by
principal market makers. If a portfolio security is traded on a national
exchange on the valuation date, the last quoted sale price will generally be
used. Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established from time to time and monitored by the Fund's Board of
Directors. Such procedures may include the use of an independent pricing service
which uses prices based upon yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions. Debt obligations with maturities of 60 days or less
will be valued at amortized cost, which constitutes fair value as determined by
the Fund's Board of Directors. Because of differences between the classes of
shares in distribution fees, the net asset value per share of the classes will
differ at times.
...............................................................................
Offering Price
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge which is calculated as a percentage of the Offering
Price, and for Class B Shares is net asset value.
...............................................................................
Class A Shares
The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown below:
Sales Charge
as % of Dealer
---------------------- Retention
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
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Less than $ 50,000................. 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999................. 3.50% 3.63% 3.00%
$ 100,000 - $249,999................. 2.50% 2.56% 2.00%
$ 250,000 - $499,999................. 2.00% 2.04% 1.50%
$ 500,000 - $999,999................. 1.50% 1.52% 1.25%
$1,000,000 and over................. None* None* None*
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* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
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<PAGE> 13
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges as set forth in the table above, through a right of accumulation.
In addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Class A Shares and purchases of
shares of other Flag Investors funds with the same sales charge, purchases of
shares of Flag Investors Intermediate-Term Income Fund, Inc. and Flag Investors
Maryland Intermediate Tax Free Income Fund, Inc., and purchases of Flag
Investors Class D shares. The applicable sales charge will be determined based
on the total of (a) the shareholder's current purchase plus (b) an amount equal
to the then current net asset value or cost, whichever is higher, of all Class A
Shares and of all Flag Investors shares described above held by the shareholder.
To obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a Participating
Dealer or Shareholder Servicing Agent, as applicable, with sufficient
information to verify that the shareholder has such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
The term "purchase" refers to an individual purchase by a single purchaser,
or to concurrent purchases, which will be aggregated by a purchaser, the
purchaser's spouse and their children under the age of 21 years purchasing
shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest not less than $50,000 within a 13-month period in Class A Shares. Each
purchase of shares under a Letter of Intent will be made at the Offering Price
applicable at the time of such purchase to the full amount indicated in the
Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Letter of Intent is 5% of the full amount. Shares purchased with the
first 5% of the full amount will be held in escrow (while remaining registered
in the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
invested. Such escrowed shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has been
purchased, the escrowed shares will be released. To the extent that an investor
purchases more than the dollar amount indicated on the Letter of Intent and
qualifies for a further reduction in sales charge, the sales charge will be
adjusted for the entire amount purchased at the end of the 13-month period. The
difference in sales charge will be used to purchase additional Class A Shares at
the then current Offering Price
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<PAGE> 14
applicable to the aggregate amount of all purchases in the 13-month period. An
investor who wishes to enter into a Letter of Intent in conjunction with an
investment in Class A Shares may do so by completing the appropriate section of
the Application Form attached to this Prospectus.
No sales charge will be payable at the time of purchase on investments of $1
million or more of Class A Shares. However, a contingent deferred sales charge
will be imposed on such investments in the event of a redemption within 24
months following the purchase, at the rate of .50% on the lesser of the value of
the Class A Shares redeemed or the total cost of such shares. No contingent
deferred sales charge will be imposed on purchases of $3 million or more of
Class A Shares redeemed within 24 months of purchase if the Participating Dealer
and Alex. Brown have entered into an agreement under which the Participating
Dealer agrees to return any payments received on the sale of such shares. In
determining whether a contingent deferred sales charge is payable, and, if so,
the amount of the charge, it is assumed that Class A Shares not subject to such
charge are the first redeemed followed by other Class A Shares held for the
longest period of time.
Class A Shares may also be purchased through a Systematic Purchase Plan. An
investor who wishes to take advantage of such a plan should contact Alex. Brown
or a Participating Dealer or Shareholder Servicing Agent.
The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing shares on
behalf of their fiduciary and advisory clients, provided such clients have paid
an account management fee for these services; (ii) qualified retirement plans
with assets of $1 million or more; (iii) participants in a Flag Investors fund
payroll savings plan program; (iv) investors who have redeemed Class A Shares,
or shares of any other mutual fund in the Flag Investors family of funds with
the same sales charges, in an amount that is not more than the total redemption
proceeds, provided that the purchase is within 90 days after the redemption; and
(v) Directors of the Fund, and directors and employees (and their immediate
families) of Alex. Brown, ABKB/LaSalle, Participating Dealers and their
respective affiliates. In addition, investors who have redeemed shares of Flag
Investors Intermediate-Term Income Fund, Inc. and Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc. may purchase Class A Shares at net asset
value, in an amount that is not more than the total redemption proceeds,
provided that they held the shares of such funds for more than 24 months prior
to redemption and that the purchase is within 90 days after the redemption.
11
<PAGE> 15
...............................................................................
Class B Shares
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class B
Shares redeemed within six years of purchase. The charge is assessed on an
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. Accordingly, the contingent
deferred sales charge will not be applied to dollar amounts representing an
increase in the net asset values above the initial purchase price of the shares
being redeemed. In addition, no charge is assessed on redemptions of Class B
Shares derived from reinvestment of dividends or capital gains distributions.
In determining whether the contingent deferred sales charge is applicable to
a redemption, the calculation is made in the manner that results in the lowest
possible rate. Therefore, it is assumed that the redemption is first of any
Class B Shares in the shareholder's account that represent reinvested dividends
and distributions and second of Class B Shares held the longest during the six
year period. The amount of the contingent deferred sales charge, if any, will
vary depending on the number of years from the time of payment for the purchase
of Class B Shares until the redemption of such shares (the "holding period").
For purposes of determining this holding period, all payments during a month are
aggregated and deemed to have been made on the first day of the month. The
following table sets forth the rates of the contingent deferred sales charge.
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
- -------------------------------------------------------------------------------
First......................................... 4.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 3.0%
Fifth......................................... 2.0%
Sixth......................................... 1.0%
Thereafter.................................... None*
- -------------------------------------------------------------------------------
* As described more fully below, Class B Shares automatically convert to
Class A Shares six years after the beginning of the calendar month in which
the purchase order is accepted.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
death or initial determination of disability (as defined in the Internal Revenue
Code of 1986, as amended) of a shareholder; (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
12
<PAGE> 16
the age of 70 1/2; or (iii) to the extent that shares redeemed have been
withdrawn from a Systematic Withdrawal Plan, up to a maximum amount of 12% per
year from a shareholder account based on the value of the account at the time
the Plan is established, provided however that all dividends and distributions
are reinvested in Class B Shares. The waiver with respect to (i) above is only
applicable in cases where the shareholder account is registered (a) in the name
of an individual person, (b) as a joint tenancy with rights of survivorship, (c)
as community property or (d) in the name of a minor child under the Uniform
Gifts or Uniform Transfers to Minors Act. A shareholder, or his or her
representative, must notify the Fund's transfer agent (the "Transfer Agent")
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. For information on the imposition and waiver of the
contingent deferred sales charge, contact the Transfer Agent at (800) 553-8080.
AUTOMATIC CONVERSION TO CLASS A SHARES. Six years after the beginning of the
calendar month in which the purchase order for Class B Shares is accepted, such
Class B Shares will automatically convert to Class A Shares and will no longer
be subject to the higher distribution and service fees. Such conversion will be
on the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The conversion is not a
taxable event to the shareholder.
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account will
be considered to be held in a separate sub-account. Each time any Class B Shares
in the shareholder's account (other than those in the sub-account) convert to
Class A Shares, an equal pro rata portion of the Class B Shares in the
sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan. An
investor who wishes to take advantage of such a plan should contact Alex. Brown
or a Participating Dealer or Shareholder Servicing Agent.
...............................................................................
Purchases by Exchange
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class.
Except as provided below, shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of Flag Investors Intermediate-Term Income Fund, Inc. and Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc. may exchange into
Class A Shares upon payment of the difference in sales charges, as applicable,
13
<PAGE> 17
except the exchange will be made at net asset value if the shares of such funds
have been held for more than 24 months. Shareholders of Flag Investors Cash
Reserve Prime Class A Shares may exchange into Class A Shares upon payment of
the difference in sales charges, as applicable, or into Class B Shares at net
asset value, subject to any applicable contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from shares of
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon a
redemption of any such shares.
The net asset value of shares purchased and redeemed in an exchange request
received on a Business Day will be determined on the same day, provided that the
exchange request is received prior to 4:00 p.m. (Eastern Time). Exchange
requests received after 4:00 p.m. (Eastern Time) will be effected on the next
Business Day.
Shareholders of any mutual fund not affiliated with the Fund, who have paid
a sales charge, may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to Alex. Brown or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the payment
of a sales charge and the source of such proceeds. Shares issued pursuant to
this offer will not be subject to the sales charges described above or any other
charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.)
The shares of such funds purchased by exchange will be offered in compliance
with all applicable state securities laws. The exchange privilege may be
exercised only in those states where the class of shares of such other funds may
legally be sold. Investors should receive and read the applicable prospectus
prior to tendering shares for exchange. The Fund may modify or terminate these
offers of exchange at any time on 60 days' prior written notice to shareholders
and the exchange offers set forth herein are expressly subject to modification
or termination.
14
<PAGE> 18
...............................................................................
Purchases Through Automatic Investing Plan
Shareholders may purchase either Class A Shares or Class B Shares regularly
by means of an Automatic Investing Plan with a pre-authorized check drawn on
their checking accounts. Under this plan, the shareholder may elect to have a
specified amount invested monthly or quarterly in either Class A Shares or Class
B Shares. The amount specified by the shareholder will be withdrawn from the
shareholder's checking account using the pre-authorized check. This amount will
be invested in the class of shares selected by the shareholder at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by the
Fund or the shareholder upon 30 days' prior written notice to the other party. A
shareholder who wishes to enroll in the Automatic Investing Plan or who wishes
to obtain additional purchase information may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
- -------------------------------------------------------------------------------
6. How to Redeem Shares
Shareholders may redeem any or all of their shares on any Business Day by
transmitting a redemption order through Alex. Brown, a Participating Dealer, a
Shareholder Servicing Agent or by regular or express mail to the Transfer Agent.
Shareholders may also redeem shares of either class by telephone (in amounts up
to $50,000). (See "Telephone Transactions" below.) A redemption order is
effected at the net asset value per share (reduced by any applicable contingent
deferred sales charge) next determined after receipt of the order (or, if stock
certificates have been issued for the shares to be redeemed, after the tender of
the stock certificate for redemption). Redemption orders received after 4:00
p.m. (Eastern Time) will be effected at the net asset value next determined on
the following Business Day. Payment for redeemed shares will be made by check
and will be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with a
Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact names
in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation, a
15
<PAGE> 19
trust company, broker, dealer, credit union (if authorized under state law),
securities exchange or association, clearing agency, or savings association;
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of the redemption of shares will be paid on
the next dividend payable date. If all of the shares in a shareholder's account
have been redeemed on a dividend payable date, the dividend will be remitted by
check to the shareholder.
The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 upon 60 days' notice. Shares
will not be redeemed involuntarily as a result of a decline in account value due
to a decline in net asset value alone.
...............................................................................
Systematic Withdrawal Plan
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed monthly
or quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and to the extent necessary, from share redemptions
(which would be a return of principal and, if reflecting a gain, would be
taxable). If redemptions continue, a shareholder's account may eventually be
exhausted. Because share purchases include a sales charge that will not be
recovered at the time of redemption, a shareholder should not have a withdrawal
plan in effect at the same time he is making recurring purchases of shares. In
addition, Class B Shares may be subject to a contingent deferred sales charge
upon redemption. (See "How to Invest in the Fund -- Class B Shares.") A
shareholder who wishes to participate in the Fund's Systematic Withdrawal Plan
may do so by completing the appropriate section of the Application Form attached
to this Prospectus.
16
<PAGE> 20
- -------------------------------------------------------------------------------
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent, Accounting Services." Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value (less any applicable contingent deferred sales charge on
redemptions) as determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. Neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that either of them reasonably
believes to be genuine. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone transactions. In
such event, requests should be made by regular or express mail. Shares held in
certificate form may not be exchanged or redeemed by telephone. (See "How to
Invest in the Fund--Purchases by Exchange" and "How to Redeem Shares.")
- -------------------------------------------------------------------------------
8. Dividends and Taxes
...............................................................................
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of its
net investment company taxable income (including net short-term capital gains)
in the form of monthly dividends. The Fund also intends to distribute to
shareholders any net capital gains (the excess of net long-term capital gains
over net short-term capital losses) on an annual basis.
17
<PAGE> 21
Unless the shareholder elects otherwise, all income dividends (consisting of
dividend and interest income and the excess, if any, of net short-term capital
gains over net long-term capital losses) and net capital gains distributions, if
any, will be reinvested in additional Fund shares at net asset value. However,
shareholders may elect to terminate automatic reinvestment by giving written
notice to the Transfer Agent (see "Custodian, Transfer Agent, Accounting
Services"), either directly or through their Participating Dealer or Shareholder
Servicing Agent, at least five days before the next date on which dividends or
distributions will be paid.
...............................................................................
Taxes
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial, or
administrative action. The following is only a general summary of certain
federal income tax considerations affecting the Fund and its shareholders. No
attempt is made to present a detailed explanation of the federal, state, or
local tax treatment of the Fund or its shareholders. Accordingly, shareholders
are urged to consult their tax advisers regarding specific questions as to
federal, state, and local taxes.
...............................................................................
Tax Treatment of the Fund
The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended, so
that the Fund will be relieved of federal income tax on net investment company
taxable income and net capital gains distributed to its shareholders. In
addition, the Fund expects to make sufficient distributions prior to the end of
each calendar year to avoid liability for federal excise tax.
...............................................................................
Tax Treatment of Dividends and Distributions
Dividends from the Fund's net investment company taxable income are taxable
to its shareholders as ordinary income (whether received in cash or in
additional shares) to the extent of the Fund's earnings and profits.
Distributions of net capital gains that are designated by the Fund as capital
gains dividends are taxable to shareholders as long-term capital gains,
regardless of how long shareholders have held their shares and regardless of
whether the distributions are received in cash or in additional shares. The Fund
makes annual reports to shareholders describing the federal income tax status of
all distributions.
18
<PAGE> 22
Dividends declared payable to shareholders of record in December of one
year, but paid in January of the following year, will be deemed for tax
purposes to have been paid by the Fund and received by the shareholders on
December 31 of the year in which the dividends were declared.
The sale, exchange, or redemption of shares is a taxable transaction to
the shareholder.
- -------------------------------------------------------------------------------
9. Management of the Fund
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers and to ICC and ABKB/LaSalle. Two Directors and all of
the officers of the Fund are officers or employees of Alex. Brown, ICC or
ABKB/LaSalle. The other Directors of the Fund have no affiliation with Alex.
Brown, ICC or ABKB/LaSalle.
The Fund's Directors and officers are as follows:
<TABLE>
<S> <C> <C> <C>
*Richard T. Hale Chairman Harry Woolf Director
*Truman T. Semans Director William K. Morrill, Jr. President
James J. Cunnane Director Keith R. Pauley Executive Vice President
Alonzo G. Decker, Jr. Director Edward J. Veilleux Vice President
N. Bruce Hannay Director Gary V. Fearnow Vice President
John F. Kroeger Director Brian C. Nelson Vice President and Secretary
Louis E. Levy Director Diana M. Ellis Treasurer
Eugene J. McDonald Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ----------
* Messrs. Hale and Semans are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").
- -------------------------------------------------------------------------------
10. Investment Advisor and Sub-Advisor
Investment Company Capital Corp. is the Fund's investment advisor and
ABKB/LaSalle Securities Limited Partnership is the Fund's Sub-Advisor. ICC is
the investment advisor to, and Alex. Brown acts as distributor for, other mutual
funds in the Flag Investors family of funds and Alex. Brown Cash Reserve Fund,
Inc., which funds had approximately $3.2 billion of net assets as of November
30, 1994. The address of ICC is 135 East Baltimore Street, Baltimore, Maryland
21202. ABKB/LaSalle is a registered investment advisor and together with its
affiliates had, as of November 30, 1994, approximately $550 million in real
estate securities under management, almost all of which is in domestic real
estate securities. ABKB/LaSalle was formed on November 1, 1994 to acquire the
real estate securities investment advisory business of Alex. Brown Kleinwort
Benson Realty Advisors Corporation ("ABKB"). ABKB/LaSalle, together with its
predecessors, has provided investment advice to pension funds and other
19
<PAGE> 23
institutional investors with respect to investments in real estate securities
since 1985, although it has not previously acted as investment advisor or
sub-advisor to a mutual fund. The address of ABKB/LaSalle is 100 East Pratt
Street, Baltimore, Maryland 21202.
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to ABKB/LaSalle certain of its duties,
provided that ICC continues to supervise the performance of ABKB/LaSalle and
report thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABKB/LaSalle is responsible for decisions to buy and
sell securities for the Fund, for broker-dealer selection, and for negotiation
of commission rates under standards established and periodically reviewed by the
Board of Directors. The Board has established procedures under which
ABKB/LaSalle may allocate transactions to Alex. Brown, provided that
compensation to Alex. Brown on each transaction is reasonable and fair compared
to the commission, fee or other remuneration received or to be received by other
broker-dealers in connection with comparable transactions involving similar
securities during a comparable period of time. In addition, consistent with NASD
Rules, and subject to seeking the most favorable price and execution available
and such other policies as the Board may determine, ABKB/LaSalle may consider
services in connection with the sale of shares as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
As compensation for its services, ICC will receive a fee from the Fund,
calculated daily and paid monthly, at the annual rate of .65% of the first $100
million of the Fund's average daily net assets, .55% of the next $100 million of
the Fund's average daily net assets, .50% of the next $100 million of the Fund's
average daily net assets, and .45% of the Fund's average daily net assets
exceeding $300 million. As compensation for its services, ABKB/LaSalle will
receive a fee from ICC, payable from its advisory fee, calculated daily and paid
monthly, at the annual rate of .40% of the first $100 million of the Fund's
average daily net assets, .35% of the next $100 million of the Fund's average
daily net assets, .30% of the next $100 million of the Fund's average daily net
assets, and .25% of the Fund's average daily net assets over $300 million. ICC
and ABKB/LaSalle currently intend to waive, on a voluntary basis, their annual
fees to the extent necessary so that the Fund's annual expenses do not exceed
1.25% of the Class A Shares' average daily net assets and 2.00% of the Class B
Shares' average daily net assets.
ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ABKB/LaSalle, a Maryland limited partnership, is one of several entities through
which LaSalle Partners Limited Partnership ("LaSalle Partners") and its
affiliates conduct real estate investment advisory and related businesses.
ABKB/LaSalle is controlled indirectly by DEL-LPL Limited Partnership, a Delaware
limited partnership, whose general partners are M.G. Rose and eight
corporations, each of which is owned by one of the following persons: Kenneth M.
Campia; Daniel W. Cummings; Steven A. Hulce; Wade W. Judge; J. Marshall Peck;
Stuart L. Scott; Robert C. Spoerri; and Robert F. Works.
20
<PAGE> 24
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
...............................................................................
Portfolio Managers
William K. Morrill, Jr., the Fund's President, and Keith R. Pauley, the
Fund's Executive Vice President, will share primary responsibility for
managing the Fund's assets from its inception.
William K. Morrill, Jr., Managing Director of ABKB/LaSalle, has nearly 15
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or its predecessors since 1985.
Keith R. Pauley, Senior Vice President of ABKB/LaSalle, has over nine
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or its predecessors since 1986.
PAST PERFORMANCE OF ABKB, A PREDECESSOR OF ABKB/LASALLE(1)
DISCRETIONARY DOMESTIC REAL ESTATE
SECURITIES ACCOUNTS
Wilshire
Total R.E.
Return(1) Index(2)
--------- --------
2/85-12/85 3.63%* 10.41%*
1986 29.37% 20.43%
1987 (2.27)% (7.79)%
1988 13.44% 24.23%
1989 10.44% 2.30%
1990 (18.69)% (33.60)%
1991 34.98% 19.97%
1992 16.60% 7.83%
1993 17.48% 15.24%
1/94-9/94 3.27%* 1.90%*
2/85-9/94 10.25% 4.83%
* Aggregate.
(1) The performance results described above are based on a dollar weighted
composite of all discretionary, fee-paying domestic real estate securities
accounts that were advised by ABKB with investment objectives and policies
substantially similar to those of the Fund. ABKB/LaSalle was formed on
November 1, 1994 and has no prior operating history. The same investment
advisory personnel who have previously managed ABKB's real estate accounts
serve as the portfolio managers for the Fund. Unlike the private accounts
whose performance is shown above, the Fund may invest up to 10% of its
assets in securities of foreign real estate companies but has no present
intention to do so. The Fund's portfolio managers advised each of these
private accounts during all periods shown. The composites are calculated in
accordance with AIMR standards. The results are net of the private account
advisory fees and assume the reinvestment of dividends. As of September 30,
1994, ABKB had $3 billion in real estate assets under management with $500
million in this style, all of which is represented in these results.
(2) The Wilshire Real Estate Index is an unmanaged index of real estate
investment trusts and real estate operating companies and is widely
recognized as an indicator of the performance of the real estate securities
market.
THESE RESULTS ARE UNAUDITED.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS
INDICATIVE OF FUTURE PERFORMANCE.
21
<PAGE> 25
- -------------------------------------------------------------------------------
11. Distributor
Alex. Brown acts as distributor of the Class A Shares and the Class B
Shares. Alex. Brown is an investment banking firm which offers a broad range of
investment services to individual, institutional, corporate and municipal
clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated, which has
engaged directly and through subsidiaries and affiliates in the investment
business since 1800. Alex. Brown is a member of the New York Stock Exchange and
other leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has 19 offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.
The Fund has adopted two separate Distribution Agreements and related Plans
of Distribution, one with respect to the Class A Shares and one with respect to
the Class B Shares (the "Plans"), pursuant to Rule 12b-1 under the 1940 Act. In
addition, the Fund may enter into Shareholder Servicing Agreements with certain
financial institutions, such as banks, to act as Shareholder Servicing Agents,
pursuant to which Alex. Brown will allocate a portion of its distribution fee as
compensation for such financial institutions' ongoing shareholder services. Such
financial institutions may impose separate fees in connection with these
services and investors should review this Prospectus in conjunction with any
such institution's fee schedule. In addition, financial institutions may be
required to register as dealers pursuant to state securities laws. Amounts
allocated to Participating Dealers and Shareholder Servicing Agents may not
exceed amounts payable to Alex. Brown under the Plans with respect to shares
held by or on behalf of customers of such entity.
Under the Class A Plan, Alex. Brown will receive a distribution fee, paid
monthly, at an annual rate equal to .25% of the Class A Shares' average daily
net assets.
Under the Class B Plan, Alex. Brown will receive a distribution fee, paid
monthly, at an annual rate equal to .75% of the Class B Shares' average daily
net assets. In addition, Alex. Brown will receive a shareholder servicing fee,
paid monthly, at an annual rate equal to .25% of the Class B Shares' average
daily net assets. The distribution fee will be used to compensate Alex. Brown
for its services and expenses in distributing the Class B Shares. The
shareholder servicing fee will be used to compensate Alex. Brown, Participating
Dealers and Shareholder Servicing Agents for services provided and expenses
incurred in maintaining shareholder accounts, responding to shareholder
inquiries and providing information on their investments.
22
<PAGE> 26
Payments under the Plans are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution services
to the Fund in connection with the sale of the Class A Shares is less than .25%
of the average daily net assets of the Class A Shares or in connection with the
sale of the Class B Shares is less than .75% of the average daily net assets of
the Class B Shares for any period, the unexpended portion of the distribution
fees may be retained as profit by Alex. Brown. Alex. Brown will from time to
time and from its own resources pay or allow additional discounts or promotional
incentives in the form of cash or other compensation (including merchandise or
travel) to Participating Dealers.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore, Maryland
21202.
- -------------------------------------------------------------------------------
12. Custodian, Transfer Agent, Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment Company
Capital Corp., 135 East Baltimore Street, Baltimore Maryland 21202 (telephone:
(800) 553-8080) is the Fund's transfer and dividend disbursing agent. ICC also
provides accounting services to the Fund. As compensation for such accounting
services, ICC receives from the Fund an annual fee equal to $13,000, plus a
percentage of the Fund's average daily net assets in excess of $10 million at a
maximum rate of .100% of net assets and declining at various asset levels to a
minimum rate of .001% on net assets of $1 billion or more. (See the Statement of
Additional Information.) ICC also serves as the Fund's investment advisor.
- -------------------------------------------------------------------------------
13. Performance Information
From time to time, the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
relevant indices. Any quotations of yield of the Fund will be determined by
dividing the net investment income earned by the Fund during a 30 day period by
the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. All advertisements of performance
will show the average annual total return, net of the Fund's maximum sales
charge imposed on Class A Shares or including the contingent deferred sales
charge imposed on Class B Shares redeemed at the end of the specified period
covered by the total return figure, over one, five and ten
23
<PAGE> 27
year periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value, net of the maximum sales charge and other fees
according to the required standardized calculation. During its first year of
operation, the Fund may, in lieu of annualizing its total return, use an
aggregate total return calculated in the same manner. The standardized
calculation is required by the SEC to provide consistency and comparability
in investment company advertising and is not equivalent to a yield
calculation.
If the Fund compares its performance to other funds or to relevant indices,
such as the Wilshire Real Estate Index, the Fund's performance will be stated in
the same terms in which such comparative data and indices are stated, which is
normally total return rather than yield. For these purposes, the performance of
the Fund, as well as the performance of such investment companies or indices,
may not reflect sales charges, which, if reflected, would reduce performance
results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual funds
such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, BARRON'S, INVESTOR'S DAILY,
IBC/DONOGHUE'S MONEY FUND REPORT and THE WALL STREET JOURNAL.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund. Shareholders
should remember that performance is generally a function of the type and quality
of instruments held by the Fund, operating expenses and market conditions. Any
fees charged by banks with respect to customer accounts through which Fund
shares may be purchased, although not included in calculations of performance,
will reduce performance results.
Although expenses for Class B Shares may be higher than those for Class A
Shares, the performance of Class B Shares may be higher than the performance of
Class A Shares after giving effect to the impact of the sales charges and
distribution/service fees applicable to each class of shares.
24
<PAGE> 28
- -------------------------------------------------------------------------------
14. General Information
...............................................................................
Description of Shares
The Fund was incorporated under the laws of the State of Maryland on May 2,
1994 and is authorized to issue 10 million shares of capital stock, par value of
$.001 per share, all of which shares are designated common stock. Each share has
one vote and shall be entitled to dividends and distributions when and if
declared by the Fund. In the event of liquidation or dissolution of the Fund,
each share would be entitled to its pro rata portion of the Fund's assets after
all debts and expenses have been paid.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in
a separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated: Flag Investors
Real Estate Securities Fund Class A Shares and Flag Investors Real Estate
Securities Fund Class B Shares. The Board has no present intention of
establishing any additional series of the Fund. Both classes of the Fund share a
common investment objective, portfolio of investments and advisory fee, but the
classes may have different distribution/service fees or sales load structures.
...............................................................................
Annual Meetings
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund retain
the right, under certain circumstances to request that a meeting of shareholders
be held for the purpose of considering the removal of a Director from office,
and if such a request is made, the Fund will assist with the shareholder
communications in connection with the meeting.
...............................................................................
Reports
The Fund furnishes shareholders with quarterly reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants, Coopers & Lybrand
L.L.P.
...............................................................................
Shareholder Inquiries
Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown at (800) 767-FLAG, or any
Participating Dealer or Shareholder Servicing Agent, as appropriate.
25
<PAGE> 29
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<PAGE> 30
- -------------------------------------------------------------------------------
Appendix
The following descriptions or ratings have been published by Standard &
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's").
...............................................................................
Description of Commercial Paper Ratings
S&P--Commercial paper rated A by S&P is regarded 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 an "overwhelming degree" of credit protection. Those rated
A-1 reflect a "very strong" degree of safety regarding timely payment. Those
rated A-2 reflect a safety regarding timely payment but not as high as A-1.
MOODY'S--Commercial paper issues rated Prime-1 by Moody's are judged by
Moody's to be of the highest quality on the basis of relative repayment
capacity.
...............................................................................
Description of Corporate Bond Ratings
S&P--Securities rated AAA by S&P have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong. Securities
rated AA have a very strong capacity to pay interest and repay principal and
differ from the higher rated issues only in small degree. Securities rated A
have strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than securities in higher rated categories. Securities
rated BBB are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit 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 securities in this
category than for securities in higher rated categories.
MOODY'S--Bonds which are rated Aaa by Moody's are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
refered to as "gilt edge." Interest payments are protected by a large or by an
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. Bonds
which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A1
<PAGE> 31
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Bonds which are
rated A possess many favorable investment attributes and are to be considered as
upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future. Bonds which are rated Baa
are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
A2
<PAGE> 32
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<PAGE> 33
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<PAGE> 34
==============================================================================
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
NEW ACCOUNT APPLICATION
- ------------------------------------------------------------------------------
Make check payable to "Flag Investors For assistance in completing this
Real Estate Securities Fund, Inc." application please call:
and mail with this application to: 1-800-553-8080 8:30 a.m. to 5:30
p.m., Eastern Time, Monday-Friday.
Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426 To open an IRA account, call
Attn: Flag Investors Real Estate 1-800-767-3524 to request a
Securities Fund, Inc. special IRA application.
I wish to purchase the following class of shares of the Fund, in the amount
indicated below: Please check the applicable box and indicate amount of
purchase.
/ / Class A Shares (4.5% maximum initial sales charge) in the amount of
$______________
/ / Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $_______________
The minimum initial purchase for each class of shares is $2,000, except that
the minimum initial purchase for shareholders of any other Flag Investors Fund
or class is $500 and the minimum initial purchase for participants in the Fund's
Automatic Investing Plan is $250 per class. Each subsequent purchase requires a
$100 minimum per class, except that the minimum subsequent purchase under the
Fund's Automatic Investing Plan is $250 for quarterly purchases and $100 for
monthly purchases. The maximum investment in Class B Shares is $100,000 per
account. The Fund reserves the right not to accept checks for more than $50,000
that are not certified or bank checks.
- ------------------------------------------------------------------------------
Your Account Registration (Please Print)
Existing Account No., if any:___________
<TABLE>
<CAPTION>
<S> <C>
Individual or Joint Tenant Gifts to Minors
- ------------------------------------------ -----------------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)
- ------------------------------------------ -----------------------------------------------------
Social Security Number Minor's Name (only one)
- ------------------------------------------ -----------------------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor
under the _______________Uniform Gifts to Minors Act
State of Residence
Corporations, Trusts, Partnerships, etc. Your Mailing Address
- ------------------------------------------ ------------------------------------------------------
Name of Corporation, Trust or Partnership Street
- ------------------------------------------ ------------------------------------------------------
Tax ID Number Date of Trust City State Zip
( )
- ------------------------------------------ -------------------------------------------------------
Name of Trustees Daytime Phone
(if to be included in the Registration)
- ------------------------------------------
For the Benefit of
</TABLE>
<PAGE> 35
- ------------------------------------------------------------------------------
Letter of Intent -- Class A Shares only (Optional)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Class A Shares as shown below, in an aggregate
amount at least equal to:
Class A Shares [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Right of Accumulation -- Class A Shares and Class D Shares only (Optional)
[ ] I already own shares of the Fund(s) set forth below to be applied for a
reduced sales charge. List the Account numbers of other Funds that you or your
immediate family (spouse and children under 21) already own that qualify for
reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
=============================================================================
<PAGE> 36
=============================================================================
Distribution Options
Please check appropriate boxes. If none of the options are elected, all
distributions will be reinvested in additional shares of the same class of the
Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
- -----------------------------------------------------------------------------
Automatic Investing Plan (Optional)
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $__________ in Class A Shares or $____________ in Class B Shares for me,
on a monthly or quarterly basis, on or about the 20th of each month or if
quarterly, the 20th of January, April, July and October, and to draw a bank
draft in payment of the investment against my checking account. (Bank drafts may
be drawn on commercial banks only.)
Minimum Initial Investment: $250 per class
Subsequent Investments (check one):
[ ] Monthly ($100 minimum per class)
[ ] Quarterly ($250 minimum per class) Please attach a voided check.
- ------------------------------------ ---------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------ ---------------------------------
Existing Flag Investors Fund Depositor's Signature Date
Account No., if any (if joint acct., both must sign)
- ----------------------------------------------------------------------------
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of______ , 19__ please send me checks on a monthly or
quarterly basis, as indicated below, in the amount of (complete as applicable)
$_______, from Class A Shares and/or $__________ from Class B Shares that I own,
payable to the account registration address as shown above. (Participation
requires minimum account value of $10,000 per class.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
- ----------------------------------------------------------------------------
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below.
No, I/we do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the addess of record.
If you would prefer redemptions mailed to a predesignated bank account,
please provide the following information:
Bank:________________________________ Bank Account No:_________________
Address:_____________________________ Bank Account Name:_______________
_____________________________
<PAGE> 37
- -----------------------------------------------------------------------------
Signature and Taxpayer Certification
I have received a copy of the Fund's prospectus dated January 3, 1995.
Unless the box below is checked, I certify under penalties of perjury, (1)
that the number shown on this form is my correct taxpayer identification
number and (2) that I am not subject to backup withholding as a result of a
failure to report all interest or dividends, or the Internal Revenue Service
has notified me that I am no longer subject to backup withholding. [ ] Check
here if you are subject to backup withholding. If a non-resident alien, please
indicate country of residence:__________________________________________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- --------------------------------- --------------------------------------
Signature Date Signature (if joint acct., Date
both must sign)
- ----------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name:_____________________ Dealer Code:________________________
Dealer's Address:__________________ Branch Code:________________________
___________________
Representative:____________________ Rep. No.____________________________
============================================================================
<PAGE> 38
STATEMENT OF ADDITIONAL INFORMATION
-------------------------------
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(Class A and Class B Shares)
135 E. Baltimore Street
Baltimore, Maryland 21202
-------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING ALEX. BROWN & SONS INCORPORATED, 135
EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202, OR
BY CALLING (800) 767-FLAG.
Statement of Additional Information Dated: January 3, 1995
As Amended through August 4, 1995
Relating to Prospectus Dated: January 3, 1995
<PAGE> 39
TABLE OF CONTENTS
Page
----
1. General Information and History....................... 1
2. Investment Objective and Policies........................ 1
3. Valuation of Shares and Redemption....................... 7
4. Federal Tax Treatment of Dividends and
Distributions.......................................... 8
5. Management of the Fund................................... 10
6. Investment Advisory and Other Services................... 12
7. Distribution of Fund Shares.............................. 14
8. Brokerage................................................ 16
9. Capital Stock............................................ 17
10. Quarterly Reports........................................ 18
11. Custodian, Transfer Agent, Accounting Services .......... 18
12. Independent Accountants ................................. 19
13. Performance Information.................................. 19
14. Control Persons and Principal Holders of
Securities............................................. 21
15. Financial Statements..................................... 21
<PAGE> 40
1. GENERAL INFORMATION AND HISTORY
Flag Investors Real Estate Securities Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of
the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The Fund
currently offers two classes of shares: Flag Investors Real Estate
Securities Fund Class A Shares and Flag Investors Real Estate Securities Fund
Class B Shares. As used herein, the "Fund" refers to Flag Investors Real
Estate Securities Fund, Inc. and specific references to either 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 current Prospectus
which may be obtained without charge from Alex. Brown & Sons Incorporated
("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 767-FLAG) or from Participating Dealers that offer shares
of the respective classes of the Fund ("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 Prospectus. To avoid unnecessary
repetition, references are made to related sections of the Prospectus. In
addition, the Prospectus and this Statement of Additional Information omit
certain information about the Fund and its business that is contained in the
Registration Statement respecting the Fund and its Shares filed with the SEC.
Copies of the Registration Statement as filed, including such omitted items,
may be obtained from the SEC by paying the charges prescribed under its rules
and regulations.
The Fund was incorporated under the laws of the State of Maryland on May
2, 1994. 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.
Under a license agreement dated August 23, 1994 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. As described in the Prospectus, the Fund will
attempt to achieve its objective by investing primarily in equity securities
of companies that are principally engaged in the real estate industry. There
can be no assurance that the Fund's investment objective will be achieved.
Real Estate Investment Trusts
Real estate investment trusts ("REITs") pool investors' funds for
investment primarily in income producing commercial real estate or real
estate related loans. A REIT is not taxed on income distributed to
shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it
distribute to its shareholders at least 95% of its taxable income (other than
net capital gains) for each taxable year.
REITs can generally be classified as follows:
1
<PAGE> 41
- Equity REITs, which invest the majority of their assets directly in
real property and derive their income primarily from rents. Equity
REITs can also realize capital gains by selling properties that
have appreciated in value.
- Mortgage REITs, which invest the majority of their assets in real
estate mortgages and derive their income primarily from interest
payments.
- Hybrid REITs, which combine the characteristics of both equity
REITs and mortgage REITs.
REITs are like closed-end investment companies in that they are essentially
holding companies which rely on professional managers to supervise their
investments. A shareholder in the Fund should realize that by investing in
REITs indirectly through the Fund, he will bear not only his proportionate
share of the expenses of the Fund, but also, indirectly, similar expenses of
underlying REITs.
Master Limited Partnerships
The Fund intends to invest in partnership units of real estate companies
organized as master limited partnerships whose ownership interests are
publicly traded. For federal income tax purposes, an entity treated as a
partnership is not itself a taxpaying entity. Instead, each partner in a
partnership is required to take into account in computing his income tax
liability his allocable share of the income, gain, loss, deductions and
credits of the partnership. Master limited partnerships often own several
properties or businesses which are related to real estate development or are
themselves heavily invested in real estate. Generally, a master limited
partnership is operated under the supervision of one or more managing general
partners. As in the case of REITs, a shareholder in the Fund will indirectly
bear his proportionate share of the operating expenses of the underlying
master limited partnerships in addition to the similar expenses of the Fund.
The Fund will invest only in partnership units of master limited partnerships
that are traded on a national securities exchange.
Debt Securities
Up to 35% of the Fund's total assets may be invested in debt securities
(which do not include for purposes of this investment policy convertible debt
securities which the Advisor or Sub-Advisor believes have attractive equity
characteristics). The Fund may invest in debt securities rated BBB or better
by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, of comparable quality
as determined by the Advisor or Sub-Advisor. In choosing debt securities for
purchase by the Fund, the Advisor will employ the same analytical and
valuation techniques utilized in managing the equity portion of the Fund's
portfolio (see "Investment Advisory and Other Services") and will invest in
debt securities only of companies that satisfy the Advisor's or Sub-Advisor's
investment criteria.
Certain of the debt securities in which the Fund may invest may be zero
coupon or other original issue discount securities which pay no current
interest but are purchased at a deep discount from the amount due at
maturity. When held to maturity, the entire return, which consists of the
amortization of discount, is the difference between the purchase price and
the amount due at maturity.
The value of the Fund's investments in debt securities will change as
interest rates fluctuate. When interest rates decline, the values of such
securities generally can be expected to increase and when interest rates
rise, the values of such securities can generally be expected to decrease.
The lower-rated and comparable unrated debt securities described above are
subject to greater risks of loss of income and principal than are higher-
rated fixed income securities. The market value of lower-rated securities
generally tends to reflect the market's perception of the creditworthiness of
2
<PAGE> 42
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general
levels of interest rates.
Risks of Investment in Real Estate Securities
Even though the Fund will not invest in real estate directly, it may be
subject to risks similar to those associated with the direct ownership of
real estate because of its policy of concentrating in the securities of
companies in the real estate industry. These include declines in the value
of real estate, risks related to general and local economic conditions,
dependency on management skill, heavy cash flow dependency, possible lack of
availability of long-term mortgage funds, overbuilding, extended vacancies of
properties, decreased occupancy rates and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and
the appeal of properties to tenants and changes in interest rates.
The risks of ownership of partnership units of master limited
partnerships include those related to changes in economic conditions or
changes in real estate and specific property values. One added risk of
master limited partnerships is that they do not allow for election of
independent directors or trustees to oversee the policies of the partnership.
Rather, they rely on a general partner to exercise fiduciary responsi-
bilities.
In addition to these risks, equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while mortgage
REITs may be affected by the quality of any credit extended. Further, equity
and mortgage REITs are dependent upon management skills and generally are not
diversified. Equity and mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, equity
and mortgage REITs could possibly fail to qualify for tax free pass-through
of income under the Internal Revenue Code of 1986, as amended (the "Code") or
to maintain their exemptions from registration under the Investment Company
Act. The above factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to the REIT. In the event of a default by a
borrower or lessee, the REIT may experience delays in enforcing its rights as
a mortgagee or lessor and may incur substantial costs associated with
protecting its investments.
Money Market Securities
From time to time the Fund may purchase high quality short-term debt
securities, commonly known as money market securities. These securities
include direct obligations of the U.S. Government which consist of bills,
notes and bonds issued by the U.S. Treasury. Obligations issued by agencies
of the U.S. Government, while not direct obligations of the U.S. Government,
are either backed by the full faith and credit of the U.S. or are guaranteed
by the U.S. Treasury or supported by the issuing agencies' right to borrow
from the U.S. Treasury.
The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity.
Certificates of deposit are issued by banks and savings and loan institutions
in exchange for the deposit of funds and normally can be traded in the
secondary market, prior to maturity. Time deposits are non-negotiable
receipts issued by a bank in exchange for the deposit of funds. Time
deposits earn a specified rate of interest over a definite period of time;
however time deposits cannot be traded in the secondary market. Bankers'
acceptances are bills of exchange or time drafts drawn on and accepted by a
commercial bank. Bankers' acceptances are used by corporations to finance
the shipment and storage of goods and furnish dollar exchange. Maturities
are generally six months or less.
3
<PAGE> 43
The commercial paper which may be purchased includes variable amount
master demand notes which may or may not be backed by bank letters of credit.
These notes permit the investment of fluctuating amounts at varying market
rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon
a stated short-term interest rate index. Both the lender and the borrower
have the right to reduce the amount of outstanding indebtedness at any time.
There is no secondary market for the notes. It is not generally contemplated
that such instruments will be traded. Variable or floating rate instruments
bear interest at a rate which varies with changes in market rates. The
holder of an instrument with a demand feature may tender the instrument back
to the issuer at par prior to maturity. A variable amount master demand note
is issued pursuant to a written agreement between the issuer and the holder,
its amount may be increased by the holder or decreased by the holder or
issuer, it is payable on demand, and the rate of interest varies based upon
an agreed formula. The quality of the underlying credit must, in the opinion
of the Advisor or Sub-Advisor, be equivalent to the ratings applicable to
permitted investments for the Fund. The Advisor or Sub-Advisor will monitor
on an ongoing basis the earning power, cash flow, and liquidity ratios of the
issuers of such instruments and will similarly monitor the ability of an
issuer of a demand instrument to pay principal and interest on demand.
Futures Contracts and Options on Futures Contracts
The Fund may buy or sell financial futures contracts or purchase options
on such futures as a hedge against anticipated interest rate changes. A
futures contract sale creates an obligation by the Fund, as seller, to
deliver the specified type of financial instrument called for in the contract
at a specified future time for a specified price or, in "cash settlement"
futures contracts, to pay to (or receive from) the buyer in cash the
difference between the price in the futures contract and the market price of
the instrument on the specified date, if the market price is higher (or
lower, as the case may be). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right for the premium paid to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put).
The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission ("CFTC")
with which the Fund must comply in order not to be deemed a commodity pool
operator within the meaning and intent of the Commodity Exchange Act and the
regulations promulgated thereunder.
Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial
intermediary as security for its obligations an amount of cash or other
specified debt securities which initially is 1% to 5% of the face amount of
the contract and which thereafter fluctuates on a periodic basis as the value
of the contract fluctuates. A purchase of an option involves payment of a
premium for the option without any further obligation on the part of the
Fund.
Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions are (1) for
bona fide hedging purposes, or (2) for other purposes to the extent that the
aggregate initial margin deposits and premiums do not exceed 5% of the
liquidation value of the Fund's net assets (after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into). Margins and premiums on bona fide hedging positions are excluded from
this 5% limit. The Advisor reserves the right to comply with such different
standard as may be established by CFTC rules and regulations with respect to
the purchase or sale of futures contracts or options thereon.
4
<PAGE> 44
The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value
of the Fund's position. In addition, futures and futures option markets may
not be liquid in all circumstances. As a result, in volatile markets, the
Fund may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated
use of these contracts should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in the value of
such position. The Fund will establish a segregated account to cover its
positions in options and futures transactions. These segregated accounts
will be maintained with the Fund's custodian and will contain liquid assets
such as cash, U.S. Government securities, or other high grade debt
obligations. The ability of the Fund to hedge successfully will depend on
the Advisor's ability to forecast pertinent market movements, which cannot be
assured. Finally, the daily deposit requirements in futures contracts create
an ongoing greater potential financial risk than do options purchased by the
Fund, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce net asset value. Income
earned by the Fund from its hedging activities generally will be treated as
capital gains.
Other Investment Practices
In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.
Repurchase Agreements. The Fund may enter into repurchase agreements
with financial institutions, such as banks and broker-dealers, deemed to be
creditworthy by the Fund's Board of Directors under criteria established with
the guidance of the Fund's Advisor or Sub-Advisor. A repurchase agreement is
a short-term investment in which the purchaser (i.e., the Fund) acquires
ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days
from the date of purchase, thereby determining the yield during the
purchaser's holding period. The value of underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Fund makes payment for such securities
only upon physical delivery or evidence of book entry transfer to the account
of a custodian or bank acting as agent. The underlying securities, which in
the case of the Fund must be issued by the U.S. Treasury, 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 subnormal levels of income and lack
of access to income during this period and (c) expenses of enforcing its
rights.
When-Issued Securities. This practice involves the purchase of debt
obligations on a when-issued basis, in which case delivery and payment
normally take place within 45 days after the date of commitment to purchase.
The Fund will make commitments to purchase obligations on a when-issued basis
only with the intention of actually acquiring the securities, but may sell
them before the settlement date. The when-issued securities are subject to
market fluctuation, and no interest accrues to the purchaser during this
period. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the purchaser enters into the
commitment. Purchasing obligations on a when-issued basis is a form of
leveraging and can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in
the transaction itself. In that case there could be an unrealized loss at
the time of delivery.
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<PAGE> 45
Segregated accounts will be established with the Fund's custodian and
will maintain liquid assets in an amount at least equal in value to the
Fund's commitments to purchase when-issued securities. If the value of these
assets declines, the Fund will place additional liquid assets in the account
on a daily basis so that the value of the assets in the account is equal to
the amount of such commitments.
Investment Restrictions
The Fund's investment program is subject to a number of restrictions
which reflect self-imposed standards as well as federal and state regulatory
limitations. The restrictions recited below are in addition to those
described in the Fund's prospectus, 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. Invest in real estate, real estate limited partnership interests or
mortgages on real estate, provided that the Fund may invest in marketable
securities of companies that invest in real estate, real estate investment
trusts and exchange-traded master limited partnerships and may purchase
securities secured or otherwise supported by interests in real estate.
2. Purchase or sell commodities or commodities contracts, provided
that the Fund may invest in financial futures and options on such futures.
3. 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.
4. Issue senior securities, provided that the Fund may invest in
financial futures and options on such futures.
5. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies.
6. Effect short sales of securities.
7. Purchase securities on margin (but the Fund may obtain such short-
term credits as may be necessary for the clearance of transactions).
8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs or oil, gas or mineral
leases.
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years.
2. Invest in shares of any other investment company registered under
the Investment Company Act, other than in connection with a merger,
consolidation, reorganization or acquisition of assets.
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<PAGE> 46
3. Purchase or retain the securities of any issuer if to the knowledge
of the Fund any officer or Director of the Fund or its investment advisor
owns beneficially more than .5% of the outstanding securities of such issuer
and together they own beneficially more than 5% of the securities of such
issuer.
4. Invest in companies for the purpose of exercising management or
control.
5. Purchase warrants if as a result more than 2% of the value of the
Fund's total assets would be invested in warrants which are not listed on a
recognized stock exchange, or more than 5% of the Fund's total assets would
be invested in warrants regardless of whether listed on such exchange.
6. Invest more than 10% of its net assets in illiquid securities
(defined as securities that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the Fund is carrying
the securities), including 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). In
addition, to comply with certain state requirements, the Fund will not invest
more than 15% of its net assets in restricted securities including restricted
securities eligible for resale pursuant to Rule 144A under the Securities
Act.
7. Invest in puts, calls, straddles or spreads, or any combination
thereof, except that the Fund may buy or sell financial futures contracts or
purchase options on such futures in accordance with its investment objectives
and policies.
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
anticipates that its annual portfolio turnover rate will not exceed 100%.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The Fund's net asset value per Share is determined once daily as of 4:00
p.m. (Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business
on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per share of a class is calculated by valuing all assets
held by the Fund, deducting liabilities attributable to all shares and any
liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities will be given their market value where
feasible. Portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed by the Advisor to be over-the-counter, are valued at the quoted bid
prices provided by principal market makers. If a portfolio security is
traded primarily on a national exchange on the valuation date, the last
quoted sale price will generally be used. Securities or other assets for
which market quotations are not readily available are valued at their fair
market value as determined in good faith under procedures established from
time to time and monitored by the Fund's Board of Directors. Such procedures
may include (i) the use of an independent pricing service which uses prices
7
<PAGE> 47
based upon yields or prices of securities of comparable quality, coupon,
maturity and type, (ii) indications as to values from dealers, and (iii)
general market conditions. Debt obligations with maturities of 60 days or
less will be valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check as
described in the Prospectus. 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 securities from the portfolio of the Fund in lieu of cash, in conformity
with applicable rules of the SEC, the Fund will make such distributions in
kind. If Shares are redeemed in kind, the redeeming Shareholder will incur
brokerage costs in later converting the assets into cash. The method of
valuing portfolio securities is described under "Valuation of Shares" and
such valuation will be made as of the same time the redemption price is
determined. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectus is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes
or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
The Fund expects to qualify as a regulated investment company under
Subchapter M of the Code. However, to qualify as a regulated investment
company for any taxable year, the Fund must (1) derive at least 90% of its
gross income from dividends, interest, certain payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies and other income (including, but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies (the
"Income Requirement") and (2) derive less than 30% of its gross income each
taxable year (exclusive of certain gains from designated hedging transactions
that are offset by unrealized losses on offsetting positions) from gains on
the sale or other disposition of any of the following investments if such
investments are held for less than three months (the "Short-Short Gain
Test"): (a) stock or securities (as defined in Section 2(a)(36) of the
Investment Company Act); (b) options, futures or forward contracts (other
than options, futures, or forward contracts on foreign currencies), and (c)
foreign currencies (or options, futures, or forward contracts on foreign
currencies) but only if such currencies (or options, futures, or forward
8
<PAGE> 48
contracts on foreign currencies) are not directly related to the regulated
investment company's principal business of investing in stock or securities
(or options and futures with respect to stocks or securities). The Short-
Short Gain Test will not prevent the Fund from disposing of investments at a
loss, since the recognition of a loss before the expiration of the three-
month holding period is disregarded.
In addition, at the close of each quarter of the Fund's taxable year,
(1) at least 50% of the value of its assets must consist of cash and cash
items, U.S. government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has not
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and (2) no more than 25% of
the value of its total assets may be invested in the securities of any one
issuer (other than U.S. government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses (the "Asset Diversification Test"). Generally,
the Fund will not lose its status as a regulated investment company if it
fails to meet the Asset Diversification Test solely as a result of a
fluctuation in value of portfolio assets not attributable to a purchase.
Under Subchapter M of the Code, the Fund is exempt from federal income
tax on its taxable net investment income and net capital gains which it
distributes to shareholders, provided generally that it distributes at least
90% of its investment company taxable income (net investment income and the
excess of net short-term capital gains over net long-term capital loss) for
the year (the "Distribution Requirement") and complies with the other
requirements of the Code described above. The Distribution Requirement for
any year may be waived if a regulated investment company establishes to the
satisfaction of the Internal Revenue Service that it is unable to satisfy the
Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax (discussed below).
If capital gain distributions have been made with respect to Shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions. Any gain or loss recognized on a sale or redemption of Shares
of the Fund by a shareholder who is not a dealer in securities generally will
be treated as a long-term capital gain or loss if the Shares have been held
for more than twelve months and otherwise generally will be treated as a
short-term capital gain or loss.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at
regular corporate rates without any deduction for distributions to
shareholders, and such distributions generally will be taxable as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits. However, in the case of corporate shareholders, such distributions
generally will be eligible for the 70% dividends received deduction for
"qualifying dividends."
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who
(1) has provided the Fund either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the Internal
Revenue Service for failure to properly report payments of interest or
dividends, or (3) who has failed to certify to the Fund that such shareholder
is not subject to backup withholding.
The Code imposes a nondeductible 4% excise tax on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the calendar year plus 98% of their capital
gains net income for the one-year period ending on October 31 of such
calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, an investment company is
treated as having distributed any amount on which it is subject to income tax
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<PAGE> 49
for any taxable year ending in such calendar year. The Fund intends to make
sufficient distributions of its ordinary income and capital gains net income
prior to the end of each calendar year to avoid liability for excise tax.
However, shareholders should note that the Fund may in certain circumstances
be required to liquidate portfolio investments in order to make sufficient
distributions to avoid excise tax liability, and, in addition, that the
liquidation of such investments in such circumstances may affect the ability
of the Fund to satisfy the Short-Short Gain Test.
The Fund's investments in partnership units of master limited
partnerships, which are taxable as partnerships, will generally not produce
income of a type required for qualification as a regulated investment company
as discussed above. Holders of partnership units of such master limited
partnerships are required to take into account their allocable share of each
item of the partnership's income and loss in computing their individual tax
liabilities. Further, each such item of income generally retains the same
tax attributes in the hands of the unitholder as it has in the hands of the
partnership. Accordingly, items of income derived from such master limited
partnership units generally will not qualify as "interest" or "dividends" and
if the aggregate of such income and any other nonqualifying income of the
Fund exceeds 10% of the Fund's gross income, the Fund would not be eligible
for the special tax treatment afforded regulated investment companies. As a
result, the Fund intends to limit its investments in partnership units of
master limited partnerships.
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 advisers as to the consequences of these and other state
and local tax rules affecting an investment in the Fund and also as to the
application of the rules set forth above to a shareholder's particular
circumstances.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund 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 135 East
Baltimore Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman
Managing Director, Alex. Brown & Sons Incorporated; Former Director,
Flag Investors Management Corp. (registered investment advisor) and
Armata Financial Corp. (registered broker-dealer); Chartered
Financial Analyst.
*TRUMAN T. SEMANS, Director
Managing Director, Alex. Brown & Sons Incorporated; Formerly
Director, Flag Investors Management Corp. (registered Investment
advisor) and Vice Chairman, Alex. Brown & Sons Incorporated.
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JAMES J. CUNNANE, Director
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (a merchant banking firm), 1993-
Present; Formerly, Senior Vice-President and Chief Financial
Officer, General Dynamics Corporation (defense)(1989-1993) and
Director, The Arch Fund (mutual fund).
ALONZO G. DECKER, JR., Director
The Black & Decker Corp., 701 E. Joppa Road, Towson, Maryland 21286.
Honorary Chairman of the Board and Chairman of the Executive
Committee, The Black & Decker Corp. (power tool manufacturing).
N. BRUCE HANNAY, Director
201 Condon Lane, Port Ludlow, Washington 98365. Consultant, SRI
International (nonprofit consulting organization), 1988 to Present;
Director, Plenum Publishing Corp.; Formerly Director, Rohm & Haas
Company (diversified chemicals) and General Signal Corp. (control
equipment & systems).
JOHN F. KROEGER, Director
P.O. Box 464, Swan Road-Martingham, St. Michaels, Maryland 21663.
Director/Trustee, AIM Funds; Formerly Consultant, Wendell & Stockel
Associates, Inc. (consulting firm) and General Manager, Shell Oil
Company.
LOUIS E. LEVY, Director
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (banking and finance); Chairman of the
Quality Control Inquiry Committee, American Institute of CPAs;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director
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).
HARRY WOOLF, Director
Institute for Advanced Study, South Olden Lane, Princeton, New
Jersey 08540. Professor-at-Large, Emeritus, Institute for Advanced
Study; Director, Merrill Lynch Cluster C Funds (registered
investment companies), ATL and Spacelabs Medical Corp. (medical
equipment) and Family Health International (nonprofit research and
education); Trustee, Reed College (education); Formerly, Trustee,
Rockefeller Foundation.
WILLIAM K. MORRILL, JR., President
Managing Director, ABKB/LaSalle Securities Limited Partnership, 100
East Pratt Street, Baltimore, Maryland 21202. Portfolio Manager
with ABKB/LaSalle or its predecessors since 1985.
KEITH R. PAULEY, Executive Vice President
Senior Vice-President, ABKB/LaSalle Securities Limited Partnership,
100 East Pratt Street, Baltimore, Maryland 21202. Portfolio Manager
with ABKB/LaSalle or its predecessors since 1986.
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EDWARD J. VEILLEUX, Vice President
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); and Vice
President, Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial
Corp. (registered broker-dealer).
DIANA M. ELLIS, Treasurer
Manager, Portfolio Accounting Department, Investment Company Capital
Corp., 1993-present, Mutual Fund Accounting Department, Alex. Brown
& Sons Incorporated, 1991-1993. Former Accounting Manager,
Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary
Portfolio Accounting Department, Investment Company Capital
Corp., 1993-present, Asset Management Department, Alex. Brown
& Sons Incorporated, June 1991-1993; Prior thereto, Student
1989-1991.
- --------------
* Messrs. Hale and Semans are Directors who are "interested persons", as
defined in the Investment Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised
or distributed by Alex. Brown or its affiliates.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business.
All such transactions were made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
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 Alex. Brown may be considered to have received remuneration
indirectly. As compensation for his services as Director, each Director who
is not an "interested person" of the Fund (as defined in the Investment
Company Act) (a "Non-Interested Director") receives an aggregate annual fee
(plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he
serves. Payment of such fees and expenses are allocated among all such funds
described above in direct proportion to their relative net assets.
6. INVESTMENT ADVISORY AND OTHER SERVICES
The shareholders of the Fund have approved an Investment Advisory
Agreement between the Fund and Investment Company Corp. ("ICC") and a Sub-
Advisory Agreement among the Fund, ICC and ABKB/LaSalle Securities Limited
Partnership. ("ABKB LaSalle"), both of which contracts are described in
greater detail below. ICC, the investment advisor, is a wholly owned
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<PAGE> 52
subsidiary of Alex. Brown & Sons Incorporated ("Alex. Brown"), the Fund's
distributor. ICC is also the investment advisor to Flag Investors Value
Builder Fund, Inc., Alex. Brown Cash Reserve Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Flag
Investors Quality Growth Fund, Inc., Flag Investors Intermediate-Term Income
Fund, Inc., Flag Investors Telephone Income Fund, Inc. and Flag Investors
Maryland Intermediate Tax Free Income Fund, Inc., which are also distributed
by Alex. Brown. ABKB/LaSalle is a registered investment advisor and together
with its affiliates had, as of November 30, 1994 approximately $550 million
in real estate securities under management, almost all of which is in
domestic real estate securities. ABKB/LaSalle, a Maryland limited
partnership, was formed on November 1, 1994 to acquire the real estate
securities investment advisory business of Alex. Brown Kleinwort Benson
Realty Advisors Corporation. ABKB/LaSalle is one of several entities through
which LaSalle Partners Limited Partnership ("LaSalle Partners") and its
affiliates conducts real estate investment advisory and related business.
ABKB/LaSalle is controlled indirectly by DEL-LPL Limited Partnership, a
Delaware limited partnership, whose general partners are M.G. Rose and eight
corporations, each of which is owned by one of the following persons:
Kenneth M. Campia; Daniel W. Cummings; Steven A. Hulce; Wade W. Judge; J.
Marshall Peck; Stuart L. Scott; Robert C. Spoerri; and Robert F. Works. The
address of ABKB/LaSalle is 100 East Pratt Street, Baltimore, Maryland 21202.
Under the Investment Advisory Agreement, ICC has agreed to obtain and
evaluate economic, statistical and financial information and to formulate and
implement investment policies for the Fund. ICC has delegated this latter
responsibility to ABKB/LaSalle. Any investment program undertaken by ICC or
ABKB/LaSalle will at all times be subject to policies and control of the
Fund's Board of Directors. ICC will provide the Fund with office space for
managing its affairs, with the services of required executive personnel and
with certain clerical and bookkeeping services and facilities. These
services are provided by ICC without reimbursement by the Fund for any costs.
Neither ICC nor ABKB/LaSalle shall be liable to the Fund or its shareholders
for any act or omission by ICC or ABKB/LaSalle or any losses sustained by the
Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty. The services of ICC
and ABKB/LaSalle to the Fund are not exclusive and ICC and ABKB/LaSalle are
free to render similar services to others.
As compensation for its services, ICC is entitled to receive a fee from
the Fund, calculated daily and paid monthly, at the annual rate of .65% of
the first $100 million of the Fund's average daily net assets, .55% of the
next $100 million of the Fund's average daily net assets, .50% of the next
$100 million of the Fund's average daily net assets, and .45% of the Fund's
average daily net assets exceeding $300 million. As compensation for its
services, ABKB/LaSalle is entitled to receive a fee from ICC, payable from
its advisory fee, calculated daily and paid monthly, at the annual rate of
.40% of the first $100 million of the Fund's average daily net assets, .35%
of the next $100 million of the Fund's average daily net assets, .30% of the
next $100 million of the Fund's average daily net assets, and .25% of the
Fund's average daily net assets over $300 million.
ICC has agreed to reduce its aggregate fees on a monthly basis for any
fiscal year to the extent required so that the amount of the ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the
Fund's Shares are registered or qualified for sale as such limitations may be
raised or lowered from time to time. Currently, the most restrictive of such
expense limitations requires ICC to reduce its fees to the extent required so
that ordinary expenses of the Fund (excluding brokerage commissions,
interest, taxes, and extraordinary expenses such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not
exceed 2.5% of the first $30 million of the Fund's average daily net assets,
2.0% of the next $70 million of the Fund's average daily net assets and 1.5%
of the Fund's average daily net assets in excess of $100 million. In
addition, if required to do so by any applicable state securities laws or
regulations, ICC will reimburse the Fund to the extent required to prevent
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<PAGE> 53
the expense limitations of any state law or regulation from being exceeded.
ABKB/LaSalle has agreed to reduce its aggregate fees for any fiscal year in
an amount proportionate to the amount by which ICC's fees may be reduced as
described above.
Each of the Investment Advisory Agreement and the Sub-Advisory Agreement
has an initial term of two years and will continue in effect from year to
year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the Non-
Interested Directors who have no direct or indirect financial interest in
such agreements, by votes cast in person at a meeting called for such
purpose, and by a vote of a majority of the outstanding Shares. The Fund or
ICC may terminate the Investment Advisory Agreement on sixty days' written
notice without penalty. The Investment Advisory Agreement will terminate
automatically in the event of assignment. The Sub-Advisory Agreement has
similar termination provisions.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
The Distribution Agreements provide that Alex. Brown has the exclusive
right to distribute the related class of Flag Investors Real Estate
Securities Fund Shares either directly or through other broker-dealers. The
Distribution Agreements further provide that Alex. Brown will: (a) solicit
and receive orders for the purchase of Shares; (b) accept or reject such
orders on behalf of the Fund in accordance with the Fund's currently
effective prospectus and transmit such orders as are accepted to the Fund's
transfer agent as promptly as possible; (c) receive requests for redemptions
and transmit such redemption requests to the Fund's transfer agent as
promptly as possible; and (d) respond to inquiries from shareholders
concerning the status of their accounts and the operations of the Fund.
Alex. Brown has not undertaken to sell any specific number of Shares. The
Distribution Agreement further provides that, in connection with the
distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are
not exclusive, and Alex. Brown is free to provide similar services to others.
Alex. Brown shall not be liable to the Fund or its shareholders for any act
or omission by Alex. Brown 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.
Alex. Brown and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker-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.
As compensation for providing distribution as described above, Alex.
Brown receives an annual fee, paid monthly, equal to .25% of the Class A
Shares' average daily net assets and .75% of the Class B Shares' average
daily net assets. Alex. Brown expects to allocate most of its annual fee to
its investment representatives and up to all of its fee to broker-dealers who
enter into Sub-Distribution Agreements with Alex. Brown. In addition, with
respect to the Class B Shares, Alex. Brown receives a shareholder servicing
fee at any annual rate of .25% of the average daily net assets of the Class B
Shares. (See the Prospectus.)
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that 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 (the "Plans"). Under the
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<PAGE> 54
Plans, the Fund pays a fee to Alex. Brown for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreements,
and Alex. Brown is authorized to make payments out of its fee to its
investment representatives and to participating broker-dealers. Each
Distribution Agreement has an initial term of two years and the Distribution
Agreement and the Distribution Plan encompassed therein will remain in effect
from year to year as specifically approved at least annually by the Fund's
Board of Directors and by the affirmative vote of a majority of the Non-
Interested 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 and the
Distribution Agreements may be terminated at any time upon sixty days'
notice, in either case without penalty, by the vote of a majority of the
Fund's Non-Interested Directors or by a vote of a majority of the outstanding
Shares (as defined under "Capital Stock"). Any Sub-Distribution Agreement
may be terminated in the same manner at any time. The Distribution
Agreements and any Sub-Distribution Agreements shall automatically terminate
in the event of assignment.
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 Alex. Brown pursuant to the Distribution
Agreements and to broker-dealers pursuant to Sub-Distribution Agreements.
Such reports will 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 Non-Interested Directors will be committed to the
discretion of the Non-Interested Directors then in office.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. Although banking laws and regulations prohibit banks
from distributing shares of open-end investment companies such as the Fund,
according to interpretations by various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit
or restrict the activities of the Shareholder Servicing Agents in connection
with the Shareholder Servicing Agreements, the Fund may be required to alter
materially or discontinue its arrangements with the Shareholder Servicing
Agents. Such financial institutions may impose separate fees in connection
with these services and investors should review this Prospectus in
conjunction with any such institution's fee schedule. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
under the Plans. Payments under the Plan are made as described above
regardless of Alex. Brown's actual cost of providing distribution services
and may be used to pay Alex. Brown's overhead expenses. If the cost of
providing distribution services to the Fund in connection with the sale of
the Class A Shares is less than .25% of the Class A Shares' average daily net
assets for any period or in connection with the Class B Shares is less than
.75% of the Class B Shares' average daily net assets for any period, the
unexpended portion of the distribution fees may be retained by Alex. Brown.
The Plans do not provide for any charges to the Fund for excess amounts
expended by Alex. Brown and, if either Plan is terminated in accordance with
its terms, the obligation of the Fund to make payments to Alex. Brown
pursuant to the Plan will cease and the Fund will not be required to make any
payments past the date the related Distribution Agreement terminates.
15
<PAGE> 55
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 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 Non-Interested Directors,
and of independent accountants, in connection with any matter relating to the
Fund; a portion of 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 Alex. Brown, ICC or ABKB/LaSalle.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ICC and ABKB/LaSalle are responsible for decisions to buy and sell
securities for the Fund, for the broker-dealer selection and for negotiation
of commission rates. Purchases and sales of securities on a securities
exchange are effected through broker-dealers who charge a commission for
their services. ICC and ABKB/LaSalle may direct purchase and sale orders to
any broker-dealer, including, to the extent and in the manner permitted by
applicable law, Alex. Brown.
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 Alex. Brown in any transaction in which Alex. Brown acts as a principal;
that is, an order will not be placed with Alex. Brown if execution of the
trade involves Alex. Brown serving as a principal with respect to any part of
the Fund's order, nor will the Fund buy or sell over-the-counter securities
with Alex. Brown acting as market maker.
If Alex. Brown is 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.
ICC's and ABKB/LaSalle's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, ICC and ABKB/LaSalle may, in their
16
<PAGE> 56
discretion, effect agency transactions with broker-dealers that furnish
statistical, research or other information or services which are deemed by
ICC or ABKB/LaSalle to be beneficial to the Fund's investment program.
Certain research services furnished by broker-dealers may be useful to ICC
and ABKB/LaSalle with clients other than the Fund. Similarly, any research
services received by ICC or ABKB/LaSalle through placement of portfolio
transactions of other clients may be of value to ICC and ABKB/LaSalle in
fulfilling their obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to
ICC or ABKB/LaSalle by a broker-dealer. ICC and ABKB/LaSalle are 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 ICC's and ABKB/LaSalle's research and analysis. Therefore, it
may tend to benefit the Fund by improving ICC's and ABKB/LaSalle's investment
advice. ICC's and ABKB/LaSalle'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 ICC's or ABKB/LaSalle'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, ICC and
ABKB/LaSalle are also authorized to pay broker-dealers other than Alex. Brown
higher commissions on brokerage transactions for the Fund in order to secure
research and investment services described above. The allocation of orders
among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board of Directors. 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.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of
time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABKB/LaSalle to
furnish reports and to maintain records in connection with such reviews. The
Distribution Agreement between Alex. Brown and the Fund does not provide for
any reduction in the distribution fee to be received by Alex. Brown from the
Fund as a result of profits resulting from brokerage commissions on
transactions of the Fund effected through Alex. Brown.
ICC and ABKB/LaSalle each manage 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 ICC or ABKB/LaSalle. ICC and ABKB/LaSalle 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.
9. CAPITAL STOCK
The Fund is authorized to issue 10 million Shares of common stock, par
value $.001 per share. The Board of Directors may increase or decrease the
number of authorized shares without shareholder approval.
17
<PAGE> 57
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time.
The Fund currently has one Series and the Board has designated two classes of
Shares. In the event separate series are established, all Shares of the
Fund, regardless of series or class, would have equal rights with respect to
voting, except that with respect to any matter affecting the rights of the
holders of a particular series or class, the holders of each series or class
would vote separately. In general, each such series would be managed
separately and shareholders of each series would have an undivided interest
in the net assets of that series. For tax purposes, the series would be
treated as separate entities. Generally, each class of Shares issued by a
particular series would be identical to every other class and expenses of the
Fund (other than 12b-1 fees) are prorated between all classes of a series
based upon the relative net assets of each class. Any matters affecting any
class exclusively would be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. The issued
and outstanding Shares are fully paid and non-assessable. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its portion
of the Fund's assets (or the assets allocated to a separate series of shares
if there is more than one series) after all debts and expenses have been
paid.
As used in this Statement of Additional Information the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50%
of the outstanding Shares.
10. QUARTERLY REPORTS
The Fund furnishes shareholders with quarterly reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The
annual financial statements are audited by the Fund's independent
accountants.
11. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been
retained to act as custodian of the Fund's investments. PNC Bank receives
such compensation from the Fund for its services as Custodian as may be
agreed to from time to time by PNC Bank and the Fund.
Investment Company Capital Corp. ("ICC"), 135 East Baltimore Street,
Baltimore, Maryland 21202, has been retained to act as transfer and dividend
disbursing agent and to provide certain accounting services for the Fund
under a Master Services Agreement between the Fund and ICC. As compensation
for providing the transfer and dividend disbursing agency services, the Fund
pays ICC up to $10.50 per account plus reimbursement for out-of-pocket
expenses incurred in connection therewith. As compensation for the
accounting services, ICC will receive an annual fee, calculated and paid
monthly as shown below.
18
<PAGE> 58
Average Net Assets Accounting Services Fee
------------------ -----------------------
$ 0- $ 10,000,000 $13,000(fixed fee)
$ 10,000,001- $ 20,000,000 .100%
$ 20,000,001- $ 30,000,000 .080%
$ 30,000,001- $ 40,000,000 .060%
$ 40,000,001- $ 50,000,000 .050%
$ 50,000,001- $ 60,000,000 .040%
$ 60,000,001- $ 70,000,000 .030%
$ 70,000,001- $ 99,999,999 .020%
$100,000,001- $ 500,000,000 .015%
$500,000,001- $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following out-of-pocket
expenses incurred in connection with ICC's provision of accounting services
under the Master Services Agreement: express delivery services, independent
pricing and storage.
ICC also serves as the Fund's investment advisor. See "Investment
Advisory and Other Services."
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Coopers &
Lybrand. Coopers & Lybrand, L.L.P. has offices at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103.
13. PERFORMANCE INFORMATION
The Fund may compare its performance to other funds or to relevant
indices, such as the Wilshire Real Estate Index, the NAREIT Equity Index, the
S&P 500, the Russell 2000, the S&P Utilities Index and the Lehman Brothers Fixed
Income Index.
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 or averages in advertisements or in certain
reports to shareholders, performance will generally be stated both in terms
of total return and in terms of yield. However, the Fund may also from time
to time state the performance of the Fund solely in terms of total return.
Total Return Calculations
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where:P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
19
<PAGE> 59
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the Fund's registration statement. In calculating the
ending redeemable value, the maximum sales load (for the Class A Shares, 4.5%
and for the Class B Shares, 4.0% for the one year period, 2.0% for the five
year period and no sales charge thereafter) is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. "T" in the formula above is calculated
by finding the average annual compounded rate of return over the period that
would equate an assumed initial payment of $1,000 to the ending redeemable
value. Any sales loads that might in the future be made applicable at the
time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth
above to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., CDA/Weisenberger or
Morningstar Inc., 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 (as distinguished from the
computation required by the SEC where the $1,000 payment is reduced by sales
charges before being invested in Shares). 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.
Yield Calculations
The yield of the Fund is calculated by dividing the net investment
income per Share earned by the Fund during a 30-day (or one month) period by
the maximum offering price per share on the last day of the period and
annualizing the result on a semiannual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. The Fund's yield calculations for the Class A
Shares assume a maximum front end sales charge of 4.50%. The Fund's net
investment income per Share earned during the period is based on the average
daily number of Shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements.
Except as noted below, for the purpose of determining net investment
income earned during the period, interest earned on debt obligations held by
the Fund is calculated by computing the yield to maturity of each obligation
based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month,
or, with respect to obligations purchased during the month, based on the
purchase price (plus actual accrued interest), dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including
actual accrued interest) in order to determine the interest income on the
20
<PAGE> 60
obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset value per
share. Undeclared earned income is net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be and is declared as a dividend shortly thereafter.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 20, 1994, Alex. Brown Financial Corp. owned of record and
beneficially 100% of the Fund's total outstanding Shares.
As of December 20, 1994, Directors and officers as a group owned less
than 1% of the Fund's total outstanding Shares.
15. FINANCIAL STATEMENTS
(See next page)
21
<PAGE> 61
FLAG INVESTORS REAL ESTATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
as of December 31, 1994
Assets:
Cash $ 92,681
Deferred Organizational Costs (Note 2) 139,230
----------
Total Assets $ 231,911
Liabilities:
Accrued Expenses 131,911
-----------
Net Assets $ 100,000
===========
Net Asset Value and Redemption Price
Per Class A share applicable to 10,000
Class A shares outstanding (Note 1, 3) $ 10.00
===========
Initial Offering Price Per Class A Share,
Including 4.50% sales charge $ 10.47
===========
Initial Offering Price Per Class B Share $ 10.00
===========
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
1. Flag Investors Real Estate Securities Fund, Inc. (the "Fund") was
organized as a Maryland corporation on May 2, 1994, and has had no
operation since that date, except for matters relating to the Fund's
organization and registration under the Investment Company Act of 1940
and the Securities Act of 1933 and the sale of an aggregate of 10,000
Class A shares ("initial shares") of the Fund to Alex. Brown Financial
Corp.
2. Costs incurred by the Fund in connection with its organization,
registration and the initial public offering of shares have been
deferred and will be amortized on a straight-line basis over a period
not exceeding sixty months from the date on which the Fund commences
operations. In the event that any of the initial shares are redeemed
during such period, the proceeds will be reduced by unamortized
organization costs in the same proportion as the number of initial
shares being redeemed bears to the number of initial shares outstanding
at the time of redemption.
3. The Fund is currently authorized to issue ten million shares of common
stock, $.001 par value per share.
4. The Fund has entered into an Investment Advisory Agreement with
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown &
Sons Incorporated ("Alex. Brown"), and a Distribution Agreement and
Distribution Plan with Alex. Brown. (See "Investment Advisory" and
"Other Services" and "Distribution of Fund Shares" in the Prospectus and
Statement of Additional Information.)
22
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
_____
To the Shareholder and Board of
Directors of Flag Investors
Real Estate Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Flag Investors Real Estate Securities Fund, Inc. as of December 31, 1994. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement.
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 statement referred to above presents
fairly, in all material respects, the financial position of Flag Investors
Real Estate Securities Fund, Inc., as of December 31, 1994, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
July 20, 1995
23
<PAGE> 63
Statement of Operations (Unaudited)
For the Period January 3, 1995* through April 30, 1995
INVESTMENT INCOME (Note A):
Dividends $ 66,745
Interest 7,113
----------
Total income 73,858
----------
EXPENSES:
Legal 8,383
Audit 6,986
Investment advisory fee (Note B) 6,724
Distribution fees (Note B) 5,866
Registration fees 5,198
Custodian fees 4,192
Accounting fee (Note B) 3,633
Printing and postage 2,655
Transfer agent fees (Note B) 1,775
Miscellaneous 1,577
Organizational expense (Note A) 559
Directors' fees 336
----------
Total expenses 47,884
Less: Fees waived (31,630)
----------
Net expenses 16,254
Net investment income 57,604
----------
NET REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS:
Net realized loss from security transactions (821)
Change in unrealized depreciation of investments (54,641)
----------
Net realized and unrealized loss on investments (55,462)
----------
NET INCEASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,142
==========
- -------------------------------------------------------------
*Commencement of Operations.
See accompanying Notes to Financial Statements.
<PAGE> 64
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
- -------------------------------------------------------------------------------
Financial Highlights (Unaudited)
(For a share outstanding throughout the period)
For the Period January 3, 1995* through April 30, 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 0.18 0.17
Net realized and unrealized loss
on investments (0.16) (0.17)
-------- ---------
Total from Investment Operations 0.02 0.00
Less Distributions:
Dividends from net investment income (0.09) (0.08)
-------- ---------
Net asset value at end of period $9.93 $9.92
======== =========
Total Return ** 0.22%(1) (0.01)%(1)
Ratios to Average Net Assets:
Expenses 1.25%(1,2) 2.00%(1,2)
Net investment income 5.71%(1,3) 5.28%(1,3)
Supplemental Data:
Net assets at end of period(000) $2,601.00 $2,114.00
Portfolio turnover rate 5.00% 5.00%
- -------------------------------------------------------------------------------
*Commencement of Operations.
**Total Return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charges.
1 Annualized
2 Without the waiver of advisory fees(Note B), the ratio of expenses to average
net assets would have been 4.29% (annualized) for Class A Shares and 5.03%
(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 2.67% (annualized) for Class A
Shares and 2.24% (annualized) for Class B Shares.
See accompanying Notes to Financial Statements.
<PAGE> 65
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Period
January 3, 1995*
through
April 30, 1995
(Unaudited)
----------
INCREASE /(DECREASE)
IN NET ASSETS:
Operations:
Net investment income $57,604
Net realized loss from
security transactions (821)
Change in unrealized
depreciation of investments (54,641)
----------
Net increase in net assets
resulting from operations 2,142
----------
DISTRIBUTIONS TO SHARE-
HOLDERS FROM
Net investment income:
Class A shares (22,225)
Class B shares (14,124)
----------
Total distributions (36,349)
----------
CAPITAL SHARE
TRANSACTIONS
(NOTE C):
Proceeds from sale of shares 4,627,651
Value of shares issued in
reinvestment of dividends 21,679
Cost of shares
repurchased (172)
Increase in net assets
derived from capital ----------
share transactions 4,649,158
Total increase in ----------
net assets 4,614,951
NET ASSETS:
Beginning of period 100,000**
----------
End of period $4,714,951
----------
- -------------------------------------------------------------------------------
*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.
<PAGE> 66
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.
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 as to made requisite distributions to the shareholders which 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.
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.
<PAGE> 67
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.
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 April 30, 1995, ICC waived fees of $31,630.
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 $3,633 for accounting services for the
period ended April 30, 1995.
As compensation for its transfer agent services, ICC receives from the
Fund a per account fee, calculated and paid monthly. ICC received $1,775
for transfer agent services for the period ended April 30, 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 .25% of the Class A Shares' average daily net assets
and .75% of the Class B Shares' average daily net assets. In addition,
with respect to the Class B Shares, Alex. Brown receives a shareholder
servicing fee, paid monthly, at an annual rate equal to .25% of the Class
B Shares' average daily net assets. For the period ended April 30, 1995,
such fees aggregated $5,866 of which $1,560 and $4,306 was attributable to
the Class A Shares and Class B Shares, respectively.
<PAGE> 68
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 10
million shares of $.001 par value common stock. Transactions in shares of
the Fund were as follows:
Class A Class B
---------- ----------
Shares sold 250,599 212,479
Shares issued to
shareholders on reinvestment
of dividends 1,532 644
Shares redeemed (11) (7)
---------- ----------
Net increase in shares
outstanding 252,120 213,116
========== ==========
Proceeds from sale of shares $2,504,031 $2,123,620
Value of reinvested dividends 15,272 6,407
Cost of shares redeemed (106) (66)
---------- ----------
Net increase from capital
share transactions $2,519,197 $2,129,961
========== ==========
D. INVESTMENT TRANSACTIONS - Purchase and sales of investment securities,
other than short-term obligations, aggregated $4,702,223 and $169,629
respectively, for the period ended April 30, 1995.
At April 30, 1995 aggregated gross unrealized appreciation for all
securities in which there is an excess of value of tax cost was $52,322
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $106,963.
E. NET ASSETS - At April 30, 1995, net assets consisted of:
Paid in capital:
Flag Investors Class A $ 2,619,197
Flag Investors Class B 2,129,961
Undistributed net investment
income 20,434
Unrealized depreciation on investments (54,641)
-----------
$ 4,714,951
===========
