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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.
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.")
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 May 1, 1996 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.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
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 May 1, 1996
PROSPECTUS
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LOGO
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FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(Class A and Class B Shares)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
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Page
1. Fee Table ....................................... 2
2. Financial Highlights ............................ 3
3. Investment Program .............................. 4
4. Risk Factors .................................... 7
5. Investment Restrictions ......................... 8
6. How to Invest in the Fund ....................... 9
7. How to Redeem Shares ............................ 17
8. Telephone Transactions .......................... 18
9. Dividends and Taxes ............................. 19
10. Management of the Fund .......................... 21
11. Investment Advisor and Sub-Advisor .............. 21
12. Distributor ..................................... 23
13. Custodian, Transfer Agent, Accounting Services .. 24
14. Performance Information ......................... 25
15. General Information ............................. 26
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. Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
1
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1. FEE TABLE
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Shareholder Transaction Expenses:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
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<S> <C> <C>
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) .. 0.50%* 4.00%**
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Annual Fund Operating Expenses (net of fee waivers and reimbursements):
(as a percentage of average daily net assets)
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Management Fees (net of fee waivers and reimbursements) ...... .00%*** .00%***
12b-1 Fees ................................................... .25% .75%
Other Expenses (including a .25% shareholder
servicing fee for Class B Shares) .......................... 1.00% 1.25%****
----- -----
Total Fund Operating Expenses (net of fee waivers and
reimbursements) ............................................ 1.25%*** 2.00%***
===== =====
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</TABLE>
* Purchases of $1 million or more of Class A Shares by persons not
otherwise eligible for sales load waivers are not subject to an initial
sales charge, however, a contingent deferred sales charge of .50% may be
imposed on such purchases. (See "How to Invest in the Fund -- Class A
Shares.")
** 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 and reimbursements, Management Fees would
be .65% of the Fund's average daily net assets and Total Fund Operating
Expenses would be 3.25% of the Class A Shares' average daily net assets
and 4.05% 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 5 years 10 years
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Class A Shares ................................. $57 $84 $113 $199
Class B Shares ................................. $61 $95 $133 $213**
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</TABLE>
*The Example is based on Total Fund Operating Expenses, net of fee waivers
and reimbursements. Absent such fee waivers and reimbursements, expenses
would be higher.
**Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of Class
B expenses and four years of Class A expenses.
2
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on the
same investment, assuming no redemption:* 1 year 3 years 5 years 10 years
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Class B Shares ............................. $21 $65 $113 $213**
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</TABLE>
* The Example is based on Total Fund Operating Expenses, net of fee waivers
and reimbursements. Absent such fee waivers and reimbursements, expenses
would be higher.
**Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of Class
B expenses and four years of Class A expenses.
THE 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.") The Expenses and Example appearing in the table above are
based on the Fund's expenses for the fiscal year ended December 31, 1995
which, net of fee waivers, were 1.25% of the Class A Shares' average daily
net assets and 2.00% of the Class B Shares' average daily net assets.
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. FINANCIAL HIGHLIGHTS
The financial highlights included in this table are a part of the Fund's
financial statements for the period indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements
and financial highlights for the period ended December 31, 1995 and the
report thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information is contained in
the Fund's Annual Report for the period ended December 31, 1995, which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.
3
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(For a share outstanding throughout the period)*
<TABLE>
<CAPTION>
For the Period
January 3, 1995**
through
December 31, 1995
----------------------
Class A Class B
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<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period .......................... $ 10.00 $ 10.00
------- -------
Income from Investment Operations:
Net investment income .............. 0.56 0.50
Net realized and unrealized gain on
investments ..................... 1.21 1.20
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Total from Investment Operations . 1.77 1.70
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Less Distributions:
Dividends from net investment income (0.52) (0.47)
Distributions from short-term
capital gains ................... (0.05) (0.05)
------- -------
Total distributions ................ (0.57) (0.52)
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Net asset value at end of period ... $ 11.20 $ 11.18
======= =======
Total Return (Aggregate) ............. 18.19% 17.40%
Ratios to Average Net Assets:
Expenses(2) ........................ 1.19%(1) 1.90%(1)
Net investment income(3) ........... 5.95%(1) 5.25%(1)
Suplemental Data:
Net assets at end of period (000) .. $ 7,171 $ 3,016
Portfolio turnover rate ............ 28% 28%
</TABLE>
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* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 3.25% (annualized) for Class A Shares and 4.05%
(annualized) for Class B Shares.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 3.98% (annualized) for Class A
Shares and 3.09% (annualized) for Class B Shares.
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3. INVESTMENT PROGRAM
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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
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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
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. By
investing in master limited partnerships through the Fund, shareholders
indirectly bear a 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 (collectively,
the "Advisors"), currently anticipate that investments outside the real
estate industry will be primarily in securities of companies whose products
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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 Standard & Poor's Ratings Group ("S&P")).
While classified as "investment grade," securities rated Baa by Moody's or
BBB by S&P have speculative characteristics. The ratings categories of S&P
and Moody's are described more fully in the Appendix to the Statement of
Additional Information.
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.
Subject to the Fund's overall investment limitations on investing in
illiquid securities and restricted securities, the Fund may purchase Rule
144A Securities. Rule 144A Securities are restricted securities in that they
have not been registered under the Securities Act of 1933, but they may be
traded between certain qualified institutional investors, including
investment companies. The presence or absence of a secondary market may
affect the value of the Rule 144A Securities. The Fund's Board of Directors
has established guidelines and procedures to be utilized to determine the
liquidity of such securities.
...............................................................................
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.
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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 Advisors. 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.
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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
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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4. 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
7
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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 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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5. 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
8
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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.
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6. 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"). Shares of either class may also be purchased by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price (including any applicable front-end sales
charge), to the address shown on the Application Form. Participating Dealers
or Shareholder Servicing Agents and their investment representatives may
receive different levels of compensation depending on which class of shares
they sell.
9
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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 under 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.
The Fund reserves the right to suspend the sale of shares at any time at the
discretion of Alex. Brown and the Advisors. 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"). Purchases
made by mail must be accompanied by payment of the Offering Price. Purchases
made through Alex. Brown or a Participating Dealer or Shareholder Servicing
Agent must be in accordance with such entity's payment procedures. Alex. Brown
may, in its sole discretion, refuse to accept any purchase order.
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 all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
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amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities are 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 is generally 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 are 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/service fees, the net asset value per
share of the classes differs at times.
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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.
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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.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
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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 and purchases of Class A shares of Flag Investors Intermediate-
Term Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free
Income Fund, Inc. (the "Intermediate Funds"). 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 and any Flag Investors Class D shares 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 at least $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 on
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. 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 may be imposed on such investments in the event of a redemption within
24 months following the purchase, at the rate of .50% on the
12
<PAGE>
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
shares not subject to such charge are the first redeemed followed by other
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 Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors may
be charged a fee if they effect transactions in Fund Shares through a broker
or agent); (ii) qualified retirement plans; (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, or who have redeemed Class A
shares of the Intermediate Funds which they had held for at least 24 months
prior to redemption, 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) current or retired Directors of the Fund and directors and employees
(and their immediate families) of Alex. Brown, ABKB/LaSalle, Participating
Dealers and their respective affiliates.
- --------------------------------------------------------------------------------
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.
13
<PAGE>
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; or (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 the age of 70 1/2. 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.
14
<PAGE>
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.
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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 that
have the same sales load structure. 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 Class A shares of the Intermediate
Funds may exchange into Class A Shares upon payment of the difference in
sales charges, as applicable, 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 thereafter to
any applicable contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from 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,
15
<PAGE>
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time) or the close of the New York Stock Exchange, whichever is earlier.
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 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.
- --------------------------------------------------------------------------------
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 will be withdrawn from the shareholder's
checking account using the pre-authorized check and 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.
- --------------------------------------------------------------------------------
PURCHASES THROUGH DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares
16
<PAGE>
of the same class. A shareholder who wishes to enroll in the Dividend
Reinvestment Plan should check the appropriate box on the Application Form or
call (800) 553-8080 for additional information.
Alternately, shareholders may have their distributions invested in shares
of other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call (800) 553-8080 for additional
information.
Reinvestments of distributions will be effected without a sales charge.
- --------------------------------------------------------------------------------
7. HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investment 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 certificates for redemption).
Redemption orders received after 4:00 p.m. (Eastern Time) or the close of the
New York Stock Exchange, whichever is earlier, 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 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.
17
<PAGE>
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.
- --------------------------------------------------------------------------------
8. 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
18
<PAGE>
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. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, 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.")
- --------------------------------------------------------------------------------
9. 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.
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
19
<PAGE>
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. Only
a portion of the dividends paid by the Fund is expected to qualify for the
dividends received deduction available to corporate shareholders. The Fund
makes annual reports to shareholders describing the federal income tax status
of all distributions.
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.
20
<PAGE>
The sale, exchange, or redemption of shares is a taxable transaction for the
shareholder.
- --------------------------------------------------------------------------------
10. 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. Four 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>
<CAPTION>
<S> <C> <C> <C>
*Richard T. Hale Chairman Carl W. Vogt Director
*Truman T. Semans Director Harry Woolf Director
*Charles W. Cole, Jr. Director William K. Morrill, Jr. President
James J. Cunnane Director Keith R. Pauley Executive Vice President
*Robert S. Killebrew, Jr. Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Brian C. Nelson Vice President and Secretary
Eugene J. McDonald Director Joseph A. Finelli Treasurer
*Rebecca W. Rimel Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ----------
* Messrs. Hale, Semans, Cole and Killebrew are, and Ms. Rimel may be,
"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").
- --------------------------------------------------------------------------------
11. 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 $4.6 billion of net assets
as of December 31, 1995. 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 December 31, 1995, approximately
$ 1.3 billion 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/LaSalle,
together with its predecessors, has provided investment advice to pension funds
and other institutional investors with respect to investments in real estate
21
<PAGE>
securities since 1985, although it had 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.
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. For the period ended
December 31, 1995, ICC waived all advisory fees and reimbursed expenses of
$91,068. For the same period ABKB/LaSalle waived all sub-advisory fees.
ICC is an indirect subsidiary of Alex. Brown Incorporated. ABKB/LaSalle, a
Maryland limited partnership, is one of several entities through which LaSalle
Partners Limited Partnership 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 twelve corporations, each of which is owned by one of
the following persons: Jonathon E. Bortz; Kenneth M. Campia; Daniel W. Cummings;
Wade W. Judge; William K. Morrill, Jr.; Marshall Peck; Stuart L. Scott; Robert
C. Spoerri; Walter F. Terry, III; Lynn C. Thurber; Earl E. Webb; and Robert F.
Works.
22
<PAGE>
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, have shared primary responsibility for
managing the Fund's assets from its inception.
William K. Morrill, Jr., Managing Director of ABKB/LaSalle, has nearly 16
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or is predecessors since 1986.
Keith R. Pauley, Senior Vice President of ABKB/LaSalle, has over ten years
of investment experience and has been a portfolio manager with ABKB/LaSalle
or its predecessors since 1986.
- --------------------------------------------------------------------------------
12. 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 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
23
<PAGE>
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 entities.
As compensation for providing disribution services for the Class A Shares
for the period ended December 31, 1995, Alex. Brown received a distribution
fee equal to .25% of the Class A Shares' average daily net assets.
As compensation for providing distribution and shareholder services for
the Class B Shares for the period ended December 31, 1995, Alex. Brown
received a distribution fee equal to .75% of the Class B Shares' average
daily net assets and a shareholder servicing fee equal to .25% of the Class B
Shares' average daily net assets. The distribution fee is used to compensate
Alex. Brown for its services and expenses in distributing the Class B Shares.
The shareholder servicing fee is 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.
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.
- --------------------------------------------------------------------------------
13. 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)
24
<PAGE>
is the Fund's transfer and dividend disbursing agent. ICC also provides
accounting services to the Fund. As compensation for such accounting services
for the period ended December 31, 1995, ICC received a fee equal to .20%
(annualized) of the Fund's average daily net assets. (See the Statement of
Additional Information.) ICC also serves as the Fund's investment advisor.
- --------------------------------------------------------------------------------
14. 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
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, its 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
25
<PAGE>
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.
- --------------------------------------------------------------------------------
15. 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 fiscal year
end of the Fund is December 31.
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 and, accordingly, performance may differ.
26
<PAGE>
- --------------------------------------------------------------------------------
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 semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
- --------------------------------------------------------------------------------
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
- --------------------------------------------------------------------------------
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.
27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Real Estate
Securities Fund, Inc." and mail with this application to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Real Estate Securities Fund, Inc.
For assistance in completing this application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 for an IRA information
kit.
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: _______________
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the __________________ Uniform Gifts to Minors Act
State of Residence
<PAGE>
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
_______________________________________________________________________________
Name of Corporation, Trust or Partnership
_______________________________________ ______________________________________
Tax ID Number Date of Trust
_______________________________________________________________________________
Name of Trustees (If to be included in the Registration)
_______________________________________________________________________________
For the Benefit of
MAILING ADDRESS
_______________________________________________________________________________
Street
_______________________________________________________________________________
City State Zip
( )
_______________________________________________________________________________
Daytime Phone
_______________________________________________________________________________
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:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
_______________________________________________________________________________
RIGHT OF ACCUMULATION -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors 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>
DISTRIBUTION OPTIONS
Please check the appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the same class of
the Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
_______________________________________________________________________________
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)
_________________________________________________
Bank Name
_________________________________________________
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
_________________________________________________
Depositor's Signature Date
_________________________________________________
Depositor's Signature Date
(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)
_______________________________________________________________________________
<PAGE>
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 address 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:________________________
________________________________________________________________________________
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated May 1, 1996. 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 Date
(if joint acct., both must sign)
_______________________________________________________________________________
For Dealer Use Only
Dealer's Name: _______________ Dealer Code: ______________________
Dealer's Address:_______________ Branch Code: ______________________
_______________
Representative: _______________ Rep. No. ______________________
<PAGE>
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: May 1, 1996
Relating to Prospectus Dated: May 1, 1996
<PAGE>
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........................ 14
7. Distribution of Fund Shares................................... 16
8. Brokerage..................................................... 19
9. Capital Stock................................................. 20
10. Reports....................................................... 21
11. Custodian, Transfer Agent, Accounting Services ............... 21
12. Independent Accountants ...................................... 22
13. Performance Information....................................... 22
14. Control Persons and Principal Holders of
Securities.................................................. 24
15. Financial Statements.......................................... 24
16. Appendix..................................................... A-1
<PAGE>
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. The Fund commenced operations on
January 3, 1995.
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.
-1-
<PAGE>
REITs can generally be classified as follows:
- 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. Investors in REITs indirectly through the Fund, will bear not only
a 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 Ratings Group ("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. (See the Appendix to this Statement of Additional
Information for a description of the ratings categories of S&P and Moody's.) 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.
-2-
<PAGE>
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 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 responsibilities.
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
-3-
<PAGE>
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.
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).
-4-
<PAGE>
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.
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
-5-
<PAGE>
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.
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.
-6-
<PAGE>
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.
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 or calls 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.
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 are 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 is generally 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
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<PAGE>
Directors. Such procedures may include (i) the use of an independent pricing
service which uses prices 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 are 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 ("RIC")
under Subchapter M of the Code. However, to qualify as a RIC 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,
-8-
<PAGE>
futures, or forward contracts on foreign currencies) are not directly related to
the RIC'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 RICs, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of 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
RICs), or in two or more issuers which the Fund controls and which are engaged
in the same or similar trades or businesses or related trades or businesses (the
"Asset Diversification Test"). Generally, the Fund will not lose its status as a
RIC if it fails to meet the Asset Diversification Test solely as a result of a
fluctuation in value of portfolio assets not attributable to a purchase.
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 RIC establishes to the satisfaction of the Internal Revenue Service that it is
unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for federal excise tax
(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 RIC, 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 RICs that do not
distribute in each calendar year an amount equal to 98% of their ordinary income
for the calendar year plus 98% of their capital 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, a RIC will include in the amount distributed any amount taxed to the
RIC as investment company taxable income or capital gains for any taxable year
ending in such calendar year. The Fund intends to make sufficient distributions
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<PAGE>
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 RIC 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 RICs. 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 RICs often differ from the rules for federal income taxation
described above. Shareholders are urged to consult their tax advisors as to the
consequences of these and other state and local tax rules affecting an
investment in the Fund 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, their respective
dates of birth and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is 135 East Baltimore Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst.
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst.
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<PAGE>
*CHARLES W. COLE, JR., Director (11/11/35)
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Director, Provident Bankshares Corporation and
Provident Bank of Maryland; Formerly, President, Chief Executive
Officer, Chief Administrative Officer, and Director, First Maryland
Bancorp, The First National Bank of Maryland and First Omni Bank.
Formerly, Director, York Bank and Trust Company.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice President and Chief Financial Officer, General Dynamics Corporation
(defense)(1989-1993) and Director, The Arch Fund (registered investment
company).
*ROBERT S. KILLEBREW, JR., Director (4/9/39)
Managing Director, Alex. Brown & Sons Incorporated; Certified Financial
Analyst and Investment Advisor; Formerly, Senior Portfolio Manager,
Brown Asset Management, a division of Alex. Brown & Sons Incorporated
(registered investment advisor), 1974-1995.
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds; Formerly, Consultant, Wendell & Stockel Associates, Inc.
(consulting firm) and General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (banking and finance); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care).
*REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103-7017; President and Chief Executive
Officer, The Pew Charitable Trusts; Director and Executive Vice
President, The Glenmede Trust Company; Formerly, Executive Director, The
Pew Charitable Trusts.
CARL W. VOGT, Director (4/20/36)
Fulbright and Jaworski L.L.P., 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P.
(law); Formerly, Chairman, National Transportation Safety Board;
Director, National Railroad Passenger Corporation (Amtrak) and Member,
Aviation System Capacity Advisory Committee (Federal Aviation
Administration).
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HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, ATL and Spacelabs Medical Corp. (medical equipment) and Family
Health International (non-profit research and education); Trustee, Reed
College (education); Director, Research America (non-profit medical
research); Formerly, Trustee, Rockefeller Foundation; and Director,
Merrill Lynch Cluster C Funds (registered investment companies).
WILLIAM K. MORRILL, JR., President (6/2/37)
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 (9/27/63)
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.
EDWARD J. VEILLEUX, Vice President (8/26/43)
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 (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer).
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September 1995-Present.
Formerly, Vice President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company, Inc., 1980-August 1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student 1989-1991.
- ----------
* Messrs. Hale, Semans, Cole and Killebrew are, and Ms. Rimel may be,
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.
There are currently 12 funds in the Flag Investors/ISI Funds and Alex.
Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hale serves
as President and Director of one fund and as a Director of each of the other
funds in the Fund Complex. Mr. Semans serves as a Director of eight funds in the
Fund Complex. Mr. Cole serves as a Director of four funds in the Fund Complex.
Messrs. Cunnane, Kroeger, Levy, McDonald and Woolf serve as Directors of each
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fund in the Fund Complex. Ms. Rimel serves as a Director of six funds in the
Fund Complex. Mr. Vogt serves as a Director of five funds in the Fund Complex.
Mr. Fearnow serves as Vice President of 10 funds in the Fund Complex. Mr.
Veilleux serves as Executive Vice President of one fund and as Vice President of
11 funds in the Fund Complex. Mr. Nelson serves as Vice President and Secretary,
Mr. Finelli serves as Treasurer and Ms. DePrine serves as Assistant Secretary,
respectively, of each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, 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 or her 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") and Ms. Rimel, receives an aggregate annual fee (plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
his or her attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he or she
serves. In addition, the Chairman of the Fund Complex's Audit Committee receives
an aggregate annual fee from the Fund Complex. Payment of such fees and expenses
is allocated among all such funds described above in direct proportion to their
relative net assets.
For the fiscal year ended December 31, 1995, Directors' fees
attributable to the assets of the Fund totalled approximately $1,142. The
following table shows aggregate compensation paid to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, in the fiscal year
ended December 31, 1995.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------
Total Compensation From the Fund
Aggregate Compensation From the and Fund Complex Paid to
Name of Person, Fund for the Fiscal Year Ended Directors for the Fiscal Year Ended
Position December 31, 1995 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Richard T. Hale, Chairman $0 $0
*Truman T. Semans, Director $0 $0
*Charles W. Cole, Jr., Director $0 $0
James J. Cunnane, Director $56.48(1) $39,000 for service on 13
Boards in the Fund Complex(2)
N. Bruce Hannay, Director** $56.48(1) $39,000 for service on 13
Boards in the Fund Complex(2)
*Robert S. Killebrew, Jr., $0 $0
Director
John F. Kroeger, Director $64.91(1) $44,425 for service on 13
Boards in the Fund Complex(2)
Louis E. Levy, Director $56.48(1) $39,000 for service on 13
Boards in the Fund Complex(2)
Eugene J. McDonald $56.48(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
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<PAGE>
*Rebecca W. Rimel, Director $48.93(1) $19,500 for service on 5
Boards in the Fund Complex(3)
Carl W. Vogt, Director N/A(4) N/A(4)
Harry Woolf $56.48(1) $39,000 for service on 13
Director Boards in the Fund Complex(2)
</TABLE>
- ----------
* A Director who is or, in the case of Ms. Rimel, may be, an "interested
person" as defined in the Investment Company Act.
** Retired, effective January 31, 1996.
1 Of amounts received by Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and
Woolf, no amount was deferred pursuant to the deferred compensation plan.
2 One of these funds ceased operations on May 17, 1995.
3 Ms. Rimel was elected to a sixth Board on April 10, 1996.
4 Elected to the Board on January 30, 1996.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by the Participant in his or her
last year of service. Upon retirement, each Participant will receive annually
10% of such fee for each year that he or she served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by the
Participant in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which he or she serves. The Retirement Plan is
unfunded and unvested. Messrs. Kroeger and Woolf have qualified but have not yet
received benefits. The Fund has one Participant, a Director who retired January
31, 1996, who has qualified for the Retirement Plan and who will be paid a
quarterly fee of $4,875 by the Fund Complex for the rest of his life. Such fee
is allocated to each fund in the Fund Complex based upon the relative net assets
of such fund to the Fund Complex.
Beginning in December, 1994, any Director who receives fees from the
Fund is permitted to defer a minimum of 50%, or up to all, of his or her annual
compensation pursuant to a Deferred Compensation Plan. Mssrs. Cunnane, Hannay,
Kroeger, Levy, McDonald, Vogt and Woolf and Ms. Rimel have each executed a
Deferred Compensation Agreement. Currently, the deferring Directors may select
various Flag and Alex. Brown Funds in which all or part of their deferral
account shall be deemed to be invested. Distributions from the deferring
Directors' deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of five years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act. The Code of Ethics significantly
restricts the personal investing activities of all employees of ICC and the
directors and officers of Alex. Brown. As described below, the Code of Ethics
imposes additional, more onerous, restrictions on the Fund's investment
personnel, including the portfolio managers and employees who execute or help
execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of ICC, any director or
officer of Alex. Brown, and all Directors, preclear personal securities
investments (with certain exceptions, such as non-volitional purchases or
purchases which are part of an automatic dividend reinvestment plan). The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and preclearance of the
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<PAGE>
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security.
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 subsidiary of Alex.
Brown Financial Corporation and an indirect subsidiary of Alex. Brown
Incorporated. 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
Intermediate-Term Income Fund, Inc., Flag Investors Telephone Income Fund, Inc.,
Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. and Flag
Investors Equity Partners Fund, Inc. which are distributed by Alex. Brown & Sons
Incorporated ("Alex. Brown"), the Fund's distributor. ABKB/LaSalle is a
registered investment advisor and together with its affiliates had, as of
December 31, 1995 approximately $1.3 billion 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. (See "Investment Advisor and
Sub-Advisor" in the Prospectus.) 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
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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 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 Investment Advisory Agreement and the
Sub-Advisory Agreement were most recently approved by the Board of Directors in
the foregoing manner on September 25, 1995. 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. For
investment advisory services for the period from January 3, 1995 (commencement
of operations) through December 31, 1995, ICC waived all fees due it ($38,795)
and reimbursed expenses of $91,068. Absent such fee waivers and reimbursements,
the Fund's Total Operating Expenses would have been 3.25% of the Class A Shares'
average daily net assets and 4.05% of the Class B Shares' average daily net
assets. During the same period, ABKB/LaSalle waived all sub-advisory fees.
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 Agreements further provide 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
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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 services for the Class A
Shares as described above, Alex. Brown receives an annual fee, calculated and
paid monthly, equal to .25% of the Class A Shares' average daily net assets.
Alex. Brown expects to allocate a substantial portion of its annual fee to its
investment representatives and to Participating Dealers. As compensation for
providing distribution services for the Class A Shares for the period from
January 3, 1995 (commencement of operations) through December 31, 1995, Alex.
Brown received from the Fund distribution fees in the amount of $9,662 and from
such fees paid $8,529 to its investment representatives and $1,133 to
Participating Dealers as compensation.
As compensation for providing distribution services for the Class B
Shares as described above, Alex. Brown receives an annual fee equal to .75% of
the Class B Shares' average daily net assets. Alex. Brown expects to retain the
entire distribution fee as reimbursement for front-end payments to its
investment representatives and to Participating Dealers. As compensation for
providing distribution services for the Class B Shares for the period from
January 3, 1995 (commencement of operations) through December 31, 1995, Alex.
Brown received from the Fund distribution fees in the amount of $21,264 and from
such fees paid $418 to Participating Dealers as compensation. 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.) For the period from January 3, 1995 (commencement
of operations) through December 31, 1995, such shareholder servicing fees
totalled $5,316.
In the fiscal period ended December 31, 1995, Alex. Brown incurred
expenses of $ 0 for advertising and $1,136 for printing and mailing prospectuses
to prospective investors in Class A and Class B Shares.
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 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. The Distribution Agreements, including the Plans and
forms of Sub-Distribution Agreements, were most recently approved by the Fund's
Board of Directors, including a majority of the Non-Interested Directors, on
September 25, 1995.
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 Agreements 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 class of Shares (as defined under
"Capital Stock"). Any Sub-Distribution Agreement may be terminated in the same
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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 the Prospectus and this Statement of
Additional Information 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. 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.
In the period ended December 31, 1995, Alex. Brown received sales
commissions on the Class A Shares of $137,648 and from such amount retained
$124,915. During the same period, Alex. Brown received contingent deferred sales
loads on the Class B Shares of $116,236 and from such amount retained $105,661.
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
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<PAGE>
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 certified public 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
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
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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.
During the period ended December 31, 1995, Alex. Brown directed
$11,298,553 of transactions to broker-dealers and paid $25,703 to broker-dealers
in related commissions because of research services provided. In the same
period, the Fund paid Alex. Brown brokerage commissions in the aggregate amount
of $1,988, which represented 7.73% of the Fund's aggregate brokerage commissions
and which were paid on transactions that represented 8.96% of the aggregate
dollar amount of transactions that incurred commissions paid by the Fund. The
Fund is required to identify any securities of its "regular brokers or dealers"
(as such term is defined in the Investment Company Act) which the Fund has
acquired during its most recent fiscal year. As of December 31, 1995, the Fund
held a 5.70% repurchase agreement issued by Goldman Sachs & Co. valued at
$347,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
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.
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<PAGE>
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 and
service fees) are prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class exclusively
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. REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent auditors.
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, serves as the Fund's transfer and dividend disbursing
agent and provides certain accounting services under a Master Services Agreement
between the Fund and ICC. As compensation for providing transfer and dividend
disbursing services, ICC receives from the Fund up to $10.62 per account per
year plus reimbursement for out-of-pocket expenses incurred in connection
therewith. For the period ended December 31, 1995, such fees totalled $19,350.
As compensation for providing accounting services, ICC receives an annual fee,
calculated and paid monthly as shown below.
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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 reimburses 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.
As compensation for providing accounting services to the Fund for the
period ended December 31, 1995, ICC received fees of $12,360.
ICC also serves as the Fund's investment advisor. See "Investment
Advisory and Other Services."
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. 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
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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
$1,000payment made at the beginning of the 1, 5 or 10 year
periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover 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.
Calculated according to SEC rules, for the period from the effectiveness
of the Fund's registration statement on January 3, 1995 through the fiscal
period ended December 31, 1995, the ending redeemable value of a hypothetical
$1,000 payment for the Class A Shares was $1,129, resulting in an aggregate
total return for such shares equal to 12.87%.
Calculated according to SEC rules, for the period from the effectiveness
of the Fund's registration statement on January 3, 1995 through the fiscal
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period ended December 31, 1995, the ending redeemable value of a hypothetical
$1,000 payment for the Class B Shares was $1,134, resulting in an aggregate
total return for such shares equal to 13.40%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from the
effectiveness of the Fund's registration statement on January 3, 1995 through
the fiscal period ended December 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in Class A Shares or Class B Shares was $11,819
resulting in an aggregate total return for such shares equal to 18.19%.
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.
Calculated in the manner described above, the Fund's yield for the 30
day period ended December 31, 1995 was 5.64% for the Class A Shares and 5.13%
for the Class B Shares.
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 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.
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. For the period ended
December 31, 1995, the Fund's portfolio turnover rate was 28%.
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14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 2, 1996, the following shareholders owned of record or
beneficially 5% or more of the Fund's total outstanding Shares of either class.
Class A Shares
T. Rowe Price, tr. 15.32%
Alex. Brown & Sons Inc. Plan 100460
ATTN: Asset Recon
P.O. Box 17215
Baltimore, MD 21203-7215
Alex. Brown & Sons Incorporated 5.43%*
FBO 201-60812-14
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Incorporated 68.71%*
135 East Baltimore Street
Baltimore, MD 21202
Class B Shares
Alex. Brown & Sons Incorporated 86.31%*
135 East Baltimore Street
Baltimore, MD 21202
- ----------
* As of such date, Alex. Brown owned beneficially less than 1% of such
shares.
As of April 2, 1996, Directors and officers as a group owned less than
1% of the Fund's total outstanding Shares.
15. FINANCIAL STATEMENTS
See next page.
-25-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets December 31, 1995
<TABLE>
<CAPTION>
Market Percent
No. of Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
Common Stock: 95.6%
Real Estate Investment Trusts: 94.5%
Apartments: 31.0%
<S> <C> <C> <C> <C> <C>
18,200 Avalon Properties Inc. $ 355,762 $21.50 $391,300 3.9% $ 35,538
11,900 Bay Apartment Communities 236,718 24.25 288,575 2.8 51,857
11,100 Equity Residential Property Trust 309,273 30.63 339,938 3.3 30,665
16,200 Evans Withycomb Residential 319,599 21.50 348,300 3.4 28,701
14,800 Merry Land & Investment Co. 306,749 23.63 349,650 3.4 42,901
14,100 Oasis Residential Inc. 313,184 22.75 320,775 3.2 7,591
10,100 Post Properties Inc. 306,666 31.88 321,937 3.2 15,271
15,300 Security Capital Pacific Trust 270,859 19.75 302,175 3.0 31,316
14,600 Southwest Property Trust 178,624 13.50 197,100 1.9 18,476
19,700 United Dominion Realty Trust 271,724 15.00 295,500 2.9 23,776
---------- ---------- ---- --------
2,869,158 3,155,250 31.0 286,092
Diversified: 0.4%
1,700 Colonial Properties Trust 40,710 25.50 43,350 0.4 2,640
---------- ---------- ---- --------
Factory Outlets: 3.0%
10,300 Chelsea GCA Realty Inc. 276,551 30.00 309,000 3.0 32,449
---------- ---------- ---- --------
Health Care: 7.6%
10,600 Health Care Properties
Investment Inc. 325,024 35.13 372,325 3.7 47,301
9,400 Nationwide Health Properties Inc. 350,027 42.00 394,800 3.9 44,773
---------- ---------- --------
675,051 767,125 7.6 92,074
Hotels: 5.2%
8,900 Felcor Suite Hotels 246,907 27.75 246,975 2.4 68
7,400 Patriot American Hospitality 181,381 25.75 190,550 1.9 9,169
3,000 Starwood Lodging Trust 82,600 29.75 89,250 0.9 6,650
---------- ---------- ---- --------
510,888 526,775 5.2 15,887
Mobile Homes: 5.3%
13,000 Manufactured Home Communities 224,090 17.50 227,500 2.2 3,410
4,000 ROC Communities Inc. 85,603 24.00 96,000 1.0 10,397
8,100 Sun Communities Inc. 189,821 26.38 213,637 2.1 23,816
---------- ---------- ---- --------
499,514 537,137 5.3 37,623
</TABLE>
-26-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets (continued) December 31, 1995
<TABLE>
<CAPTION>
Market Percent
No. of Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
<S> <C> <C> <C> <C> <C>
Real Estate Investment Trusts (continued)
Office/Industrial/Self-storage: 19.7%
3,300 Cali Realty Corporation $ 64,245 $21.88 $ 72,187 0.7% $ 7,942
9,200 Duke Realty Investments Inc. 258,183 32.38 288,650 2.8 30,467
10,300 Highwood Properties Inc. 231,968 28.25 290,975 2.8 59,007
13,700 Security Capital Industries 223,585 17.50 239,750 2.4 16,165
8,200 Shurgard Storage Centers--
Class A 194,423 27.00 221,400 2.2 26,977
12,600 Spieker Properties 266,992 25.13 316,575 3.1 49,583
10,200 Storage USA Inc. 292,530 32.63 332,775 3.3 40,245
9,700 Weeks Corp. 218,377 25.13 243,713 2.4 25,336
---------- ---------- ---- --------
1,750,303 2,006,025 19.7 255,722
Regional Malls: 9.3%
11,300 DeBartolo Realty Corp. 158,622 13.00 146,900 1.4 (11,722)
6,400 JP Realty Inc. 129,198 21.88 140,000 1.4 10,802
11,500 Simon Property Group Inc. 278,664 24.38 280,313 2.8 1,649
24,600 Taubman Centers Inc. 236,545 10.00 246,000 2.4 9,455
6,400 Urban Shopping Centers Inc. 132,492 21.38 136,800 1.3 4,308
---------- ---------- ---- --------
935,521 950,013 9.3 14,492
Retail: 13.0%
9,100 Developers Diversified
Realty Corp. 261,921 30.00 273,000 2.7 11,079
10,300 Federal Realty Investment Trust 218,820 22.75 234,325 2.3 15,505
6,450 Kimco Realty Corp. 166,125 27.25 175,763 1.7 9,638
5,600 Regency Realty Corp. 94,405 17.25 96,600 0.9 2,195
7,500 Vornado Realty Trust 264,925 37.50 281,250 2.8 16,325
7,000 Weingarten Realty Investment 248,255 38.00 266,000 2.6 17,745
---------- ---------- ---- --------
1,254,451 1,326,938 13.0 72,487
Real Estate Operating Companies: 1.1%
Hotels: 1.1%
600 Bristol Hotel Company 12,300 24.38 14,625 0.1 2,325
7,600 Host Marriott Corp. 94,454 13.25 100,700 1.0 6,246
---------- ---------- ---- --------
106,754 115,325 1.1 8,571
Total Common Stocks 8,918,901 9,736,938 95.6 818,037
---------- ---------- ---- --------
</TABLE>
-27-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Net Assets (concluded) December 31, 1995
<TABLE>
<CAPTION>
Market Percent
Par Market Value of Net
(000) Security Cost Price (Note A) Assets
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT: 3.4%
$347 Goldman Sachs & Co., 5.70%
Dated 12/29/95, to be
repurchased on 1/2/96,
collateralized by U.S.
Treasury Notes with
market value of $354,780. $ 347,000 100 $ 347,000 3.4%
---------- --- ----------- -----
Total Investment in Securities 9,265,901* 10,083,938 99.0
Other Assets in Excess of Liabilities, Net 103,739 1.0
----------- -----
Net Assets $10,187,677 100.0%
=========== =====
Net Asset Value Per:
Class A Share
($7,171,372 / 640,093 shares outstanding) $11.20(1)
======
Class B Share
($3,016,305 / 269,768 shares outstanding) $11.18(2)
======
Maximum Offering Price Per:
Class A Share
($11.20 / .955) $11.73
======
Class B Share $11.18
======
</TABLE>
* Also aggregate cost for federal tax purposes.
1 Redemption value is $11.20.
2 Redemption value is $10.73 after 4.00% maximum contingent deferred sales
charge.
See accompanying Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Operations For the Period January 3, 1995*
through December 31, 1995
Investment income (Note A):
Dividends $ 429,814
Interest 12,833
-----------
Total income 442,647
EXPENSES:
Investment advisory fee (note b) 38,795
Distribution fees (Note B) 30,926
Legal 30,020
Audit 23,766
Transfer agent fees (Note B) 19,350
Registration fees 17,683
Organizational expense (Note A) 17,683
Custodian fees 16,500
Accounting fee (Note B) 12,360
Printing and postage 9,032
Miscellaneous 1,834
Directors' fees 1,142
-----------
Total expenses 219,091
Less: Fees waived and expenses reimbursed (Note B) (129,863)
-----------
Net expenses 89,228
-----------
Net investment income 353,419
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 47,282
Change in unrealized appreciation of investments 818,037
-----------
Net realized and unrealized gain on investments 865,319
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,218,738
==========
*Commencement of operations.
See accompanying Notes to Financial Statements.
-29-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Statement of Changes in Net Assets
For the Period
January 3, 1995*
through
December 31, 1995
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 353,419
Net realized gain from security transactions 47,282
Change in unrealized appreciation of investments 818,037
-------------
Net increase in net assets resulting
from operations 1,218,738
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares (216,537)
Class B Shares (107,851)
Short-term capital gains:
Class A Shares (27,959)
Class B Shares (11,617)
-------------
Total distributions (363,964)
-------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 9,712,132
Value of shares issued in reinvestment of dividends 246,856
Cost of shares repurchased (726,085)
-------------
Increase in net assets derived from
capital share transactions 9,232,903
-------------
Total increase in net assets 10,087,677
NET ASSETS:
Beginning of period 100,000**
End of period $10,187,677
=============
* Commencement of operations.
** On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of Alex.
Brown & Sons Incorporated for $100,000.
See accompanying Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Financial Highlights
(For a share outstanding throughout the period)*
For the Period January 3, 1995**
through December 31, 1995
Class A Class B
Per Share Operating Performance:
Net asset value at beginning of period $10.00 $10.00
Income from Investment Operations:
Net investment income 0.56 0.50
Net realized and unrealized gain
on investments 1.21 1.20
------ ------
Total from Investment Operations 1.77 1.70
------ ------
Less Distributions:
Dividends from net investment income (0.52) (0.47)
Distributions from short-term capital gains (0.05) (0.05)
------ ------
Total distributions (0.57) (0.52)
------ ------
Net asset value at end of period $11.20 $11.18
------ ------
Total Return (Aggregate) 18.19% 17.40%
Ratios to Average Net Assets:
Expenses(2) 1.19%(1) 1.90%(1)
Net investment income(3) 5.95%(1) 5.25%(1)
Supplemental Data:
Net assets at end of period (000) $7,171 $3,016
Portfolio turnover rate 28% 28%
**Computed based upon average shares outstanding.
**Commencement of operations.
1 Annualized.
2 Without the waiver of advisory fees (Note B), the ratio of expenses to average
net assets would have been 3.25% (annualized) for Class A Shares and 4.05%
(annualized) for Class B Shares.
3 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 3.89% (annualized) for Class A
Shares and 3.09% (annualized) for Class B Shares.
See accompanying Notes to Financial Statements.
-31-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Notes to Financial Statements
A. Significant Accounting Policies - Flag Investors Real Estate Securities Fund,
Inc. (the "Fund") was organized as a Maryland Corporation on May 2,
1994 and commenced operations January 3, 1995. The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company designed to seek total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies followed by the Fund.
Security Valuation - Portfolio securities are valued on the basis of their
last sale price. In the event that there are no sales or the security is not
listed, it is valued at its latest bid quotation. Short-term obligations with
maturities of 60 days or less are valued at amortized cost.
Repurchase Agreements - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at no less than the repurchase price. The agreement is
conditional upon the collateral being deposited under the Federal Reserve
book-entry system.
Federal Income Tax - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
Other - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Costs incurred by the Fund in connection with its organization, registration
and the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.
A portion of the dividend income recorded by the Fund is from Real Estate
Investment Trusts ("REITs"). For tax purposes, a portion of these dividends
consists of capital gains and return of capital. For financial reporting
purposes, these dividends are recorded as dividend income, and the investment
in the REIT is reported at market value. For the period ended December 31,
1995, no return of capital portion of such distribution has been determined
due to the lack of notification from the REITs held by the Fund.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex.
Brown & Sons Incorporated ("Alex. Brown"), serves as the Fund's
investment advisor and ABKB/LaSalle Securities Limited Partnership is the
Fund's sub-advisor. As compensation for its advisory services, ICC receives
from the Fund an annual fee, calculated daily and paid monthly, at the annual
rate of 0.65% of the first $100 million of the Fund's average daily net
assets; 0.55% of the next $100 million of the Fund's average daily net
assets; 0.50% of the next $100 million of the Funds average daily net assets;
and 0.45% of the Fund's average daily net assets exceeding $300 million.
-32-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Notes to Financial Statements (concluded)
ICC has agreed to reduce its aggregate fees attributable to the Fund or make
payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder
of any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain
expenses at no more than 1.25% of the Fund's average daily net assets for
Class A Shares and 2.00% for Class B Shares. For the period ended December
31, 1995, ICC waived fees of $38,795 and reimbursed expenses of $91,068.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $12,360 for accounting services for the period ended
December 31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated daily and paid monthly. ICC received $19,350 for
transfer agent services for the period ended December 31, 1995.
As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to 0.25% of the average daily net assets for Class A Shares and
1.00% (includes 0.25% shareholder servicing fee) of the average daily net
assets for Class B Shares. For the period ended December 31, 1995,
distribution fees aggregated $30,926, of which $9,662 was attributable to the
Class A Shares and $21,264 was attributable to the Class B Shares.
C. Capital Share Transactions - The Fund is authorized to issue up to 10 million
shares of common stock (7 million Class A, 2 million Class B and 1 million
undesignated), par value $.001 per share. Transactions in shares of the Fund
were as follows:
For the Period
January 3, 1995*
to December 31, 1995
Class A Class B
Shares sold 655,079 290,349
Shares issued to
shareholders on
reinvestment of
dividends 16,704 6,473
Shares redeemed (41,690) (27,054)
Net increase in shares
outstanding 630,093 269,768
Proceeds from sale
of shares $6,763,257 $2,948,875
Value of reinvested
dividends 178,010 68,846
Cost of shares
redeemed (439,765) (286,320)
Net increase from
capital share
transactions $6,501,502 $2,731,401
*Commencement of operations.
D. Investment Transactions - Purchases and sales of investment securities, other
than short-term obligations, aggregated $10,766,776 and $1,895,157,
respectively, for the period ended December 31, 1995.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $829,759
and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value was $11,722.
E. Net Assets - At December 31, 1995, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $ 6,601,502
Flag Investors Class B Shares 2,731,401
Undistributed net investment
income 29,031
Accumulated net realized
gains from security
transactions 7,706
Unrealized appreciation
of investments 818,037
$10,187,677
-33-
<PAGE>
FLAG INVESTORS
REAL ESTATE SECURITIES FUND
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Real Estate Securities Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors Real
Estate Securities Fund, Inc. as of December 31, 1995 and the related statements
of operations and changes in net assets and financial highlights for the period
January 3, 1995 (commencement of operations) through December 31, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards required that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1995,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Flag
Investors Real Estate Securities Fund, Inc. as of December 31, 1995 and the
results of its operations and the changes in its net assets and its financial
highlights for the period January 3, 1995 (commencement of operations) through
December 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Philadelphia, Pennsylvania
February 2, 1996
-34-
<PAGE>
Appendix
The following descriptions or ratings have been published by Standard &
Poor's Ratings Group ("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 - Services 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 highest 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
referred to as "gilt edged." 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.
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 risk 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 some time 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.
A-1
