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LOGO
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(CLASS A AND CLASS B SHARES)
PROSPECTUS & APPLICATION -- MAY 1, 1997
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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 your securities dealer or the Fund's
transfer agent. 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, 1997 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.
TABLE OF CONTENTS
Fee Table ........................................................... 1
Financial Highlights ................................................ 2
Investment Program .................................................. 3
Risk Factors ........................................................ 4
Investment Restrictions ............................................. 4
How to Invest in the Fund ........................................... 5
How to Redeem Shares ................................................ 8
Telephone Transactions .............................................. 9
Dividends and Taxes ................................................. 10
Management of the Fund .............................................. 10
Investment Advisor and Sub-Advisor .................................. 10
Distributor ......................................................... 11
Custodian, Transfer Agent and
Accounting Services ................................................ 12
Performance Information ............................................. 12
General Information ................................................. 13
Application ......................................................... A-1
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 GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
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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
----------------- ----------------
<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
(as a percentage of offering price) ............................................ None None
Maximum Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, whichever is lower) .................................... 0.50%* 4.00%**
ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ............................................ 0.04%*** 0.04%***
12b-1 Fees ...................................................................... 0.25% 0.75%
Other Expenses (including a .25% shareholder servicing fee for Class B Shares) .. 0.96% 1.21%****
----------------- ----------------
Total Fund Operating Expenses (net of fee waivers) .............................. 1.25%*** 2.00%***
================= ================
</TABLE>
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* 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 upon
redemption. (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, Management Fees would be .65% of the Fund's
average daily net assets and Total Fund Operating Expenses would be 1.86%
of the Class A Shares' average daily net assets and 2.61% 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 services provided and expenses incurred in maintaining shareholder
accounts, responding to shareholder inquiries, and providing information on
their investments.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- ---------- ----------- ----------- ------------
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:*
Class A Shares ............................................ $57 $83 $111 $189
Class B Shares ............................................ $60 $93 $128 $196**
</TABLE>
<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
---------- ----------- ----------- ------------
Class B Shares ........................................ $20 $63 $108 $196**
</TABLE>
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* Absent fee waivers, 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.
<PAGE>
THE EXPENSES AND 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 that institution. The Expenses and Example appearing
in the foregoing table have been restated to reflect current, rather than
historical, fees.
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 Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD Rules").
1
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FINANCIAL HIGHLIGHTS
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The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by Coopers
& Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the fiscal year ended December 31, 1996 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 fiscal year ended December 31, 1996, which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------- -------------------------------------
For the Period For the Period
For the January 3, 1995+ For the January 3, 1995+
Year Ended through Year Ended through
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning
of period .................. $ 11.20 $10.00 $11.18 $10.00
----------------- ----------------- ----------------- -----------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 0.61 0.56 0.52 0.50
Net realized and unrealized
gain on investments ........ 2.90 1.21 2.89 1.20
----------------- ----------------- ----------------- -----------------
Total from Investment
Operations ................. 3.51 1.77 3.41 1.70
----------------- ----------------- ----------------- -----------------
LESS DISTRIBUTIONS:
Dividends from net investment
income ..................... (0.58) (0.49)(1) (0.51) (0.42)(1)
Distributions from net
realized short-term gains .. (0.07) (0.05) (0.07) (0.05)
Distributions from net
realized long-term gains ... (0.15) -- (0.15) --
Return of capital ........... (0.02) (0.03)(1) (0.02) (0.05)(1)
----------------- ----------------- ----------------- -----------------
Total distributions ......... (0.82) (0.57) (0.75) (0.52)
----------------- ----------------- ----------------- -----------------
Net asset value at end of
period ..................... $ 13.89 $11.20 $13.84 $11.18
================= ================= ================= =================
TOTAL RETURN(2) ................ 32.70% 18.19% 31.67% 17.40%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses .................... 1.25%(3) 1.25%(3,4,5) 2.00%(3) 2.00%(3,4,5)
Net investment income ....... 5.29%(6) 6.09%(4,5,6) 4.46%(6) 5.39%(4,5,6)
SUPPLEMENTAL DATA:
Net assets at end of year
(000) ...................... $19,816 $7,171 $5,295 $3,016
Portfolio turnover rate ..... 23% 28% 23% 28%
Average commissions per share $ 0.07(7) -- $ 0.07(7) --
</TABLE>
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+ Commencement of operations.
(1) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees and the reimbursement of expenses, the
ratio of expenses to average daily net assets would have been 2.28% and
3.25% (annualized) for Class A Shares and 3.03% and 4.05% (annualized) for
Class B Shares for the year ended December 31, 1996 and the period ended
December 31, 1995, respectively.
(4) Annualized.
(5) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date they
were based on average monthly net assets. Under the prior method, the ratio
of expenses to average net assets was 1.19% for the Class A Shares and 1.90%
for the Class B Shares and the ratio of net investment income to average net
assets was 5.95% for the Class A Shares and 5.25% for the Class B Shares.
(6) Without the waiver of advisory fees and the reimbursement of expenses, the
ratio of net investment income to average daily net assets would have been
4.26% and 3.89% (annualized) for Class A Shares and 3.43% and 3.09%
(annualized) for Class B Shares for the year ended December 31, 1996 and
the period ended December 31, 1995, respectively.
(7) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commissions rate per share charged to the Fund on
purchases and sales of investments during the period.
2
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<PAGE>
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INVESTMENT PROGRAM
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. This investment objective is a fundamental policy of
the Fund and cannot be changed without shareholder approval.
Under normal conditions at least 65% of the Fund's total assets will be
invested in the equity securities of companies principally engaged in the real
estate industry. A company is "principally engaged" in the real estate industry
if (i) it derives at least 50% of its revenues or profits from the ownership,
construction, management, financing or sale of residential, commercial or
industrial real estate or (ii) it has at least 50% of the fair 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 that 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. 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 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 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. By investing in REITs
indirectly through the Fund, a shareholder 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. The Fund's investment advisor and
sub-advisor (collectively, the "Advisors") currently anticipate that investments
outside the real estate industry will be primarily in securities of companies
whose products and services are related to the real estate industry. They may
include manufacturers and distributors of building supplies, financial
institutions that 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
the time of purchase, in the top two categories by a national rating agency or
determined to be of comparable quality by the Fund's investment advisor or sub-
advisor at the time of purchase and other long- and short-term debt instruments
that 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
3
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<PAGE>
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market in these securities may affect their value. 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 creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Default by or bankruptcy proceedings with respect to 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.
WHEN-ISSUED SECURITIES
The Fund may purchase securities, at the current market value of the
securities, on a forward commitment or when-issued basis. A segregated account
of the Fund consisting of cash or other liquid 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. While the Fund will purchase securities on a
forward commitment or 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. The value of securities so purchased or sold is subject to
market fluctuation and no interest accrues to the purchaser during this period.
RISK FACTORS
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Because the Fund invests primarily in the real estate industry, its
investments may be subject to certain risks. These risks include: declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, demographic trends and variations in rental income.
Generally, increases in interest rates will decrease the value of high yielding
securities and increase the costs of obtaining financing, which could directly
and indirectly decrease the value of the Fund's investments. The Fund's share
price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than the 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."
<PAGE>
INVESTMENT RESTRICTIONS
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The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal regulatory limitations. The
following investment restrictions numbered 1 and 2 are matters of fundamental
policy and may not be changed without shareholder approval. Investment
restriction number 3 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
4
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<PAGE>
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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); or
3) 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.
HOW TO INVEST IN THE FUND
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Class A and Class B Shares may be purchased from the Fund's distributor (the
"Distributor"), through any securities dealer that is authorized to distribute
the Fund's shares ("Participating Dealers") or through any financial institution
that is authorized to service shareholder accounts ("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, 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.
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 and
distribution fee 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.
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 the Distributor and the Advisors. Orders for purchases of shares
are accepted on any day on which the New York Stock Exchange is open for
business (a "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 the Distributor or a Participating Dealer or
Shareholder Servicing Agent must be in accordance with such entity's payment
procedures. The Distributor may, in its sole discretion, refuse to accept any
purchase order.
The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing its
share of the Fund's assets, deducting all liabilities attributable to
that 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 Advisors 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 that 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
5
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<PAGE>
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.
OFFERING PRICE
Shares may be purchased from the Distributor, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge that is calculated as a percentage of the Offering
Price, and for Class B Shares is net asset value.
CLASS A SHARES
The sales charge on Class A Shares, which decreases as the amount of purchase
increases, is shown in the following table.
<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------------ Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
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<S> <C> <C> <C>
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*
- ------------------------------------------------------------------------------
</TABLE>
* 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 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
Class A shares of other Flag Investors funds with the same sales charge and
purchases of Class A shares of Flag Investors Short-Intermediate Income Fund,
Inc. (formerly, 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 the Distributor, 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. Class A 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.
<PAGE>
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 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 the
Distributor 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.
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
6
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<PAGE>
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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 Class A 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 that 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 the Distributor, the Fund's
sub-advisor, Participating Dealers and their respective affiliates.
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 the
Distributor or a Participating Dealer or Shareholder Servicing Agent.
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. In addition, no charge is
assessed on redemptions of Class B Shares derived from reinvestment of dividends
or capital gains distributions.
In determining whether the contingent deferred sales charge is applicable to
a redemption, the calculation is made in the manner that results in the lowest
possible rate. Therefore, it is assumed that the redemption is first of any
Class B Shares in the shareholder's account that represent reinvested dividends
and distributions and second of Class B Shares held the longest during the
six-year period. The amount of the contingent deferred sales charge, if any,
will vary depending on the number of years from the time of payment for the
purchase of Class B Shares until the redemption of such shares (the "holding
period"). For purposes of determining this holding period, all payments during a
month are aggregated and deemed to have been made on the first day of the month.
The following table sets forth the rates of the contingent deferred sales
charge.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
- -----------------------------------------------------------------------------
<S> <C>
First ...................... 4.0%
Second ..................... 4.0%
Third ...................... 3.0%
Fourth ..................... 3.0%
Fifth ...................... 2.0%
Sixth ...................... 1.0%
Thereafter ................. None*
- -----------------------------------------------------------------------------
</TABLE>
* 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.
<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 the
Distributor or a Participating Dealer or Shareholder Servicing Agent.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class that
have the same sales load structure. Shares issued pursuant to this offer will
not be
7
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<PAGE>
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subject to the sales charges described above or any other charge. In addition,
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, 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 the Distributor 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. Class A 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 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
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. Unless the shareholder elects otherwise, all income dividends and
net capital gains distributions, if any, will be reinvested in additional Fund
shares of the same class at net asset value (without a sales charge).
Shareholders may elect to terminate automatic reinvestment by giving written
notice to the Transfer Agent (at the address listed on the inside back cover of
this Prospectus), 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.
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 the Transfer Agent for additional
information.
<PAGE>
HOW TO REDEEM SHARES
- -----------------------------------------------------------------------------
Shareholders may redeem all or part of their investment on any Business Day
by transmitting a redemption order through the Distributor, 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
8
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<PAGE>
- -----------------------------------------------------------------------------
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 following
documents:
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.
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.
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 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 on the inside back cover of this Prospectus. Telephone
transaction privileges are automatic. Shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value (less any applicable contingent deferred sales charge on
redemptions) as determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. 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
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<PAGE>
- -------------------------------------------------------------------------------
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.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of the Fund or
its shareholders and the discussion here is not intended as a substitute for
careful tax planning. Accordingly, shareholders are advised to consult their tax
advisors regarding specific questions as to federal, state, and local income
taxes. The Statement of Additional Information sets forth further information
concerning taxes.
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.
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.
The sale, exchange, or redemption of Fund shares is a taxable event for the
shareholder.
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. A majority of the Directors are not affiliated with the Advisors
or the Distributor.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Richard T. Hale Chairman William K. Morrill, Jr. President
Truman T. Semans Director Keith R. Pauley Executive Vice
Charles W. Cole, Jr. Director President
James J. Cunnane Director Edward J. Veilleux Vice President
Robert S. Killebrew, Jr. Director Gary V. Fearnow Vice President
John F. Kroeger Director Scott J. Liotta Vice President and
Louis E. Levy Director Secretary
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Laurie D. Collidge Assistant
Carl W. Vogt Director Secretary
</TABLE>
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
- ------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and ABKB/LaSalle Securities Limited Partnership
("ABKB/LaSalle" or the "Sub-Advisor") is the Fund's sub-advisor. ICC is the
investment advisor to other mutual funds in the Flag Investors family of funds
and Alex. Brown Cash Reserve Fund, Inc., which funds had approximately $5.7
billion of net assets as of December 31, 1996. ABKB/LaSalle is a registered
investment advisor and together with its affiliates had, as of December 31,
1996, approximately $2.3 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 securities since 1985,
10
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<PAGE>
- ------------------------------------------------------------------------------
although it had not previously acted as investment advisor or sub-advisor to a
mutual fund. ABKB/LaSalle currently provides sub-advisory services to three
mutual funds which had approximately $71 million of combined net assets as of
December 31, 1996.
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 the Distributor, provided that
compensation to the Distributor 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 fiscal year ended December 31,
1996, ICC waived all advisory fees and reimbursed expenses of $61,823. In
addition, from its own resources, ICC paid ABKB/LaSalle a sub-advisory fee
(net of fee waivers) equal to .02% of the Fund's average daily net assets.
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 nine corporations, each of which is owned by one of
the following persons: Jonathan E. Bortz; Daniel W. Cummings; Wade W. Judge;
William K. Morrill, Jr.; Stuart L. Scott; Robert C. Spoerri; Lynn C. Thurber;
Earl E. Webb; and Robert F. Works.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
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 17
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or its predecessors since 1986.
Keith R. Pauley, Senior Vice President of ABKB/LaSalle, has over 11 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
DISTRIBUTOR
- -------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") acts as
distributor of the Fund's shares. Alex. Brown is an investment banking firm that
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 agreements with certain financial
institutions, such as banks, to provide shareholder services, pursuant to which
Alex. Brown will allocate up to all of its distribution fee as compensation for
such 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. Amounts allocated to
Participating Dealers and Shareholder Servicing Agents may
11
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<PAGE>
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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 distribution services for the Class A Shares
for the period ended December 31, 1996, 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, 1996, 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 is less than the payments received, the unexpended portion 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.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------
Investment Company Capital Corp. 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,
1996, ICC received a fee equal to .12% of the Fund's average daily net assets.
(See the Statement of Additional Information.) PNC Bank, National Association, a
national banking association, acts as custodian of the Fund's assets.
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.
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 that monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual funds
such as Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund. 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.
12
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<PAGE>
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GENERAL INFORMATION
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Fund is an open-end diversified management investment company
incorporated under the laws of the State of Maryland on May 2, 1994 and is
authorized to issue 15 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 Fund has another class of shares in
addition to the shares offered hereby: "Flag Investors Real Estate Securities
Fund Institutional Shares." Additional information concerning the Fund's
Institutional Shares may be obtained by calling Alex. Brown at (800) 767-FLAG.
Different classes of the Fund may be offered to certain investors and holders of
such shares may be entitled to certain exchange privileges not offered to Class
A or Class B Shares. All classes of the Fund share a common investment
objective, portfolio of investments and advisory fee, but to the extent the
classes have different distribution/service fees or sales load structures, the
net asset value per share of the classes may differ at times.
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.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Shares should contact the
Transfer Agent at (800) 553-8080, the Fund at (800) 767-FLAG, or any
Participating Dealer or Shareholder Servicing Agent, as appropriate.
13
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<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
NEW ACCOUNT APPLICATION
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Make check payable to "Flag Investors Real Estate Securities FOR ASSISTANCE IN COMPLETING THIS APPLICATION PLEASE CALL:
Fund, Inc." and mail with this Application to: 1-800-553-8080, MONDAY THROUGH FRIDAY, 8:30 A.M. TO 5:30 P.M.
(EASTERN TIME).
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663 TO OPEN AN IRA ACCOUNT, PLEASE CALL 1-800-767-3524 FOR AN
Attn: Flag Investors Real Estate Securities Fund, Inc. 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. The Fund reserves the right not to accept checks for more than $50,000 that are not certified or bank checks.
</TABLE>
----------------------------------------
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
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- -----------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ---------------------------------- ------------------------------
Date of Trust Tax ID Number
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- -----------------------------------------------------------------------------
For the Benefit of
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>
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)
-------------------------------------------------------
List the Account numbers of other Flag Investors Funds (except Class B
shares) that you or your immediate family already own that qualify for
reduced sales charges.
FUND NAME ACCOUNT NO. OWNER'S NAME RELATIONSHIP
-------- ----------- ------------ ------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
--------------------
DISTRIBUTION OPTIONS
--------------------
Please check the appropriate boxes. If none of the options are 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.
A-1
<PAGE>
-----------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
-----------------------------------
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $______ in Class A Shares or $_________ in Class B Shares for me, on a
monthly or quarterly basis, on or about the 20th of each month or if quarterly,
the 20th of January, April, July and October, and to draw a bank draft in
payment of the investment against my checking account. (Bank drafts may be drawn
on commercial banks only.)
MINIMUM INITIAL INVESTMENT: $250 PER CLASS
SUBSEQUENT INVESTMENTS (CHECK ONE): [ ] Monthly ($100 MINIMUM PER CLASS)
[ ] Quarterly ($250 MINIMUM PER CLASS) ------------------------------
PLEASE ATTACH A VOIDED CHECK.
------------------------------
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------- -------------------------------------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------------------ -------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature Date
(if joint acct., both must sign)
</TABLE>
<PAGE>
-------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
-------------------------------------
[ ] Beginning the month of_____________ , 19___ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $______ from Class A Shares and/or $_______ from Class B Shares that
I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000 per class.)
FREQUENCY (CHECK ONE): [ ] Monthly [ ] Quarterly (January, April, July
and October)
----------------------
TELEPHONE TRANSACTIONS
----------------------
I UNDERSTAND THAT I WILL AUTOMATICALLY HAVE TELEPHONE REDEMPTION PRIVILEGES (FOR
AMOUNTS UP TO $50,000) AND TELEPHONE EXCHANGE PRIVILEGES (WITH RESPECT TO OTHER
FLAG INVESTORS FUNDS) UNLESS I MARK ONE OR BOTH OF THE BOXES BELOW:
NO, I/WE DO NOT WANT: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a predesignated bank account, please
provide the following information:
<TABLE>
<S> <C>
Bank: ______________________________________________________ Bank Account No. ___________________________________________
Address:______________________________________________________ Bank Account Name:___________________________________________
______________________________________________________
</TABLE>
- ------------------------------------ SIGNATURE AND TAXPAYER CERTIFICATION
- ------------------------------------
- -------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE FUND MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE U.S. TREASURY 31% OF ANY
TAXABLE DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND REDEMPTION PROCEEDS PAID TO
ANY INDIVIDUAL OR CERTAIN OTHER NON-CORPORATE SHAREHOLDERS WHO FAIL TO PROVIDE
THE INFORMATION AND/OR CERTIFICATIONS REQUIRED BELOW. THIS BACKUP WITHHOLDING IS
NOT AN ADDITIONAL TAX, AND ANY AMOUNTS WITHHELD MAY BE CREDITED AGAINST THE
SHAREHOLDER'S ULTIMATE U.S. TAX LIABILITY.
<PAGE>
BY SIGNING THIS APPLICATION, I HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT
THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT AND THAT AS REQUIRED
BY FEDERAL LAW: (PLEASE CHECK APPLICABLE BOXES)
[ ] U.S. CITIZEN/TAXPAYER:
[ ] I CERTIFY THAT (1) THE NUMBER SHOWN ABOVE ON THIS FORM IS THE CORRECT
SOCIAL SECURITY NUMBER OR TAX ID NUMBER AND (2) I AM NOT SUBJECT TO ANY
BACKUP WITHHOLDING EITHER BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING,
OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS")
THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT
ALL INTEREST OR DIVIDENDS, OR (C) THE IRS HAS NOTIFIED ME THAT I AM NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
[ ] IF NO TAX ID NUMBER OR SOCIAL SECURITY NUMBER HAS BEEN PROVIDED ABOVE, I
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TAX ID NUMBER OR A SOCIAL SECURITY NUMBER, AND I
UNDERSTAND THAT IF I DO NOT PROVIDE EITHER NUMBER TO THE TRANSFER AGENT
WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I FAIL TO FURNISH MY
CORRECT SOCIAL SECURITY NUMBER OR TAX ID NUMBER, I MAY BE SUBJECT TO A
PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9. YOU MAY REQUEST
SUCH FORM BY CALLING THE TRANSFER AGENT AT 800-553-8080).
[ ] NON-U.S. CITIZEN/TAXPAYER:
INDICATED COUNTRY OF RESIDENCE FOR TAX PURPOSES: _________________________
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM NOT A U.S. CITIZEN OR
RESIDENT AND I AM AN EXEMPT FOREIGN PERSON AS DEFINED BY THE INTERNAL
REVENUE SERVICE.
[END OF BOX]
================================================================================
I have received a copy of the Fund's prospectus dated May 1, 1997. 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.
- -------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
[END OF BOX]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
____________________________________________________ ________________________________________________________________
Signature Date Signature (if joint acct., both must sign) Date
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
FOR DEALER USE ONLY
- --------------------
<TABLE>
<S> <C>
Dealer's Name: ___________________________________ Dealer Code: ____________________________________________________
Dealer's Address:___________________________________ Branch Code: ____________________________________________________
___________________________________
Representative ___________________________________ Rep. No.: _____________________________________________________
</TABLE>
A-2
<PAGE>
- ------------------------------------------------------------------------------
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(Class A and Class B Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ABKB/LaSALLE ALEX. BROWN & SONS INCORPORATED
SECURITIES LIMITED PARTNERSHIP One South Street
100 East Pratt Street Baltimore, Maryland 21202
Baltimore, Maryland 21202 1-800-767-FLAG
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080
Fund Counsel
Custodian MORGAN, LEWIS & BOCKIUS LLP
PNC BANK, NATIONAL ASSOCIATION 2000 One Logan Square
Airport Business Park Philadelphia, Pennsylvania 19103
200 Stevens Drive
Lester, Pennsylvania 19113
- ------------------------------------------------------------------------------
<PAGE>
________________________________________________________________________________
LOGO
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(INSTITUTIONAL SHARES)
PROSPECTUS & APPLICATION -- MAY 1, 1997
- --------------------------------------------------------------------------------
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.
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through your securities dealer or the Fund's transfer agent and may be
purchased only by eligible institutions or by clients of investment advisory
affiliates of Alex. Brown & Sons Incorporated. (See "How to Invest in
Institutional Shares.")
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, 1997 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.
TABLE OF CONTENTS
Fee Table ....................................................... 1
Financial Highlights ............................................ 2
Investment Program .............................................. 3
Risk Factors .................................................... 4
Investment Restrictions ......................................... 4
How to Invest in Institutional Shares ........................... 5
How to Redeem Institutional Shares .............................. 6
Telephone Transactions .......................................... 6
Dividends and Taxes ............................................. 7
Management of the Fund .......................................... 7
Investment Advisor and Sub-Advisor .............................. 8
Distributor ..................................................... 8
Custodian, Transfer Agent and Accounting Services ................ 9
Performance Information ......................................... 9
General Information ............................................. 9
Application ..................................................... A-1
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 GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
________________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
FEE TABLE
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............. None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) .. None
Maximum Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) ................................................. None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ...................................................... 0.04%*
12b-1 Fees ................................................................................ None
Other Expenses ............................................................................ 0.96%
----
Total Fund Operating Expenses (net of fee waivers) ........................................ 1.00%*
====
</TABLE>
- ------
* 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 1.00% of the Institutional Shares'
average daily net assets. Absent fee waivers, Management Fees would be .65% of
the Fund's average daily net assets and Total Fund Operating Expenses would be
1.61% of the Institutional Shares' average daily net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE: 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
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:* ...................................... $10 $32 $55 $122
</TABLE>
- ------
* Absent fee waivers, expenses would be higher.
THE EXPENSES AND 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 Institutional Shares through a financial institution may be
charged separate fees by that institution. (For more complete descriptions of
the various costs and expenses, see "How to Invest in Institutional Shares,"
"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
Class A Shares, another class of shares offered by the Fund, less 12b-1 fees of
.25%, and have been restated to reflect current, rather than historical, fees.
1
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Fund has offered the Institutional Shares only since January 20, 1997.
However, the Fund has offered Class A Shares since January 3, 1995. Historical
financial information about the Fund is not fully applicable to the
Institutional Shares because the expenses paid by the Fund in the past differ
from those the Institutional Shares will incur. (See "Fee Table.") Nevertheless,
historical information about the Fund may be useful to investors if they take
into account the differences in expenses. Accordingly, the financial highlights
included in this table have been derived from the Fund's financial statements
for the Class A Shares for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the fiscal year ended December 31, 1996 and the report
thereon of Coopers & Lybrand L.L.P. are included in the Statement of Additional
Information. Additional performance information for the Fund's Class A Shares is
contained in the Fund's Annual Report for the fiscal year ended December 31,
1996 which can be obtained at no charge by calling the Fund at (800) 767-FLAG.
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------
For the Period
For the January 3, 1995+
Year Ended through
December 31, 1996 December 31, 1995
------------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period .......... $ 11.20 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................... 0.61 0.56
Net realized and unrealized gain on
investments .................................. 2.90 1.21
------- ------
Total from Investment Operations ................ 3.51 1.77
------- ------
Less Distributions:
Dividends from net investment income ............ (0.58) (0.49)(1)
Distributions from net realized short-term
gains ........................................ (0.07) (0.05)
Distributions from net realized long-term gains.. (0.15) --
Return of capital ............................... (0.02) (0.03)(1)
------- ------
Total distributions ............................. (0.82) (0.57)
------- ------
Net asset value at end of period ................ $ 13.89 $11.20
======= ======
TOTAL RETURN(2) .................................. 32.70% 18.19%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses ........................................ 1.25%(3) 1.25%(3,4,5)
Net investment income ........................... 5.29%(6) 6.09%(4,5,6)
SUPPLEMENTAL DATA:
Net assets at end of period (000) ............... $19,816 $7,171
Portfolio turnover rate ......................... 23% 28%
Average commissions per share ................... $ 0.07(7) --
</TABLE>
- --------------------------------------------------------------------------------
+ Commencement of operations.
(1) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees and the reimbursement of expenses, the
ratio of expenses to average daily net assets would have been 2.28% and
3.25% (annualized) for the year ended December 31, 1996 and the period ended
December 31, 1995, respectively.
(4) Annualized.
(5) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date they
were based on average monthly net assets. Under the prior method, the ratio
of expenses to average net assets was 1.19% and the ratio of net investment
income to average net assets was 5.95%.
(6) Without the waiver of advisory fees and the reimbursement of expenses, the
ratio of net investment income to average daily net assets would have been
4.26% and 3.89% (annualized) for the year ended December 31, 1996 and the
period ended December 31, 1995, respectively.
(7) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
2
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. This investment objective is a fundamental policy of
the Fund and cannot be changed without shareholder approval.
Under normal conditions at least 65% of the Fund's total assets will be
invested in the equity securities of companies principally engaged in the real
estate industry. A company is "principally engaged" in the real estate industry
if (i) it derives at least 50% of its revenues or profits from the ownership,
construction, management, financing or sale of residential, commercial or
industrial real estate or (ii) it has at least 50% of the fair 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 that 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. 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. By
investing in REITs indirectly through the Fund, a shareholder will bear not only
his proportionate share of the expenses of the Fund, but also indirectly,
similar expenses of underlying REITs.
<PAGE>
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. The Fund's investment advisor and
sub-advisor (collectively, the "Advisors") currently anticipate that investments
outside the real estate industry will be primarily in securities of companies
whose products and services are related to the real estate industry. They may
include manufacturers and distributors of building supplies, financial
institutions that 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
the time of purchase, in the top two categories by a national rating agency or
determined to be of comparable quality by the Fund's investment advisor or
sub-advisor at the time of purchase and other long- and short-term debt
instruments that 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 Securi-
3
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
ties 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 in these securities may affect their value. 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 creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Default by or bankruptcy proceedings with respect to 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.
WHEN-ISSUED SECURITIES
The Fund may purchase securities, at the current market value of the
securities, on a forward commitment or when-issued basis. A segregated account
of the Fund consisting of cash or other liquid 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. While the Fund will purchase securities on a
forward commitment or 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. The value of securities so purchased or sold is subject to
market fluctuation and no interest accrues to the purchaser during this period.
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
Because the Fund invests primarily in the real estate industry, its
investments may be subject to certain risks. These risks include: declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, demographic trends and variations in rental income.
Generally, increases in interest rates will decrease the value of high yielding
securities and increase the costs of obtaining financing, which could directly
and indirectly decrease the value of the Fund's investments. The Fund's share
price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than the 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."
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal regulatory limitations. The
following investment restrictions numbered 1 and 2 are matters of fundamental
policy and may not be changed without shareholder approval. Investment
restriction number 3 may be changed by a vote of the majority of the Board of
Directors. The Fund will not:
4
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
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); or
3) 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.
HOW TO INVEST IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counselors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of Alex.
Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") may purchase
Institutional Shares through Alex. Brown, through any securities dealer that is
authorized to distribute Institutional Shares ("Participating Dealers"), or by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price, as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000, except
that the minimum initial investment is $1,000,000 for qualified retirement
plans. There is no minimum for clients of investment advisory affiliates of
Alex. Brown or for subsequent investments. The Fund reserves the right to
suspend the sale of Institutional Shares at any time at the discretion of the
Distributor and the Advisors.
Orders for purchases of Institutional Shares are accepted on any day on which
the New York Stock Exchange is open for business (a "Business Day"). Purchase
orders for Institutional Shares will be executed at a per share purchase price
equal to the net asset value next determined after receipt of the purchase
order. Purchases made through the Distributor or a Participating Dealer must be
in accordance with such entity's payment procedures. The Distributor may, in its
sole discretion, refuse to accept any purchase order.
<PAGE>
The net asset value per share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing its
share of the Fund's assets, deducting all liabilities attributable to that
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 Advisors 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.
PURCHASES BY EXCHANGE
Shareholders of other Flag Investors funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined on
the same day, provided that the exchange request is received prior to 4:00 p.m.
(Eastern Time) 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.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone on any Business Day between the hours
of 8:30 a.m. and 5:30 p.m. (Eastern Time) (See "Telephone Transactions" below)
or by regular or express mail at its address listed on the inside back cover of
this Prospectus.
5
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
The Fund may modify or terminate this offer of exchange at any time on 60
days' prior written notice to shareholders.
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such shares
will not be issued. All purchases of Institutional Shares are confirmed and
credited to the shareholder's account on the Fund's books maintained by the
Transfer Agent or its agents. Shareholders will have the same rights and
ownership with respect to such shares as if certificates had been issued.
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through the Distributor or a
Participating Dealer, or by regular or express mail to the Transfer Agent at its
address listed on the inside back cover of this Prospectus. Shareholders may
also redeem Institutional Shares by telephone (in amounts up to $500,000). (See
"Telephone Transactions" below.) A redemption request is effected at the net
asset value per share next determined after receipt of the order in proper form.
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
Institutional Shares will be made by wire transfer of funds to the shareholder's
bank, or to a Participating Dealer, as appropriate, upon receipt of a duly
authorized redemption request as promptly as feasible and, under most
circumstances, within three Business Days.
<PAGE>
Dividends payable up to the date of the redemption of Institutional Shares
will be paid on the next dividend payable date. If all of the Institutional
Shares in an account have been redeemed on a dividend payment date, the dividend
will be remitted by wire to the shareholder's bank or to a Participating Dealer,
as appropriate.
The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 upon 60 days' written notice.
Institutional Shares will not be redeemed involuntarily as a result of a decline
in account value due to a decline in net asset value alone.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone 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 on the inside back cover of this Prospectus. Telephone
transaction privileges are automatic. Shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value 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. 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
express mail or facsimile. (See "How to Invest in Institutional
Shares--Purchases by Exchange" and "How to Redeem Institutional Shares.")
6
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
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 and net capital
gains distributions, if any, will be reinvested in additional Institutional
Shares at net asset value. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Transfer Agent (at its address
listed on the inside back cover of this Prospectus), 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.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action. No attempt has been made to present a detailed
explanation of the federal, state, or local income tax treatment of the Fund or
its shareholders and the discussion here is not intended as a substitute for
careful tax planning. Accordingly, shareholders are advised to consult their tax
advisors regarding specific questions as to federal, state, and local income
taxes. The Statement of Additional Information sets forth further information
concerning taxes.
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.
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.
<PAGE>
Dividends declared payable to shareholders of record in December of one year,
but paid in January of the following year, will be deemed for tax purposes to
have been paid by the Fund and received by the shareholders on December 31 of
the year in which the dividends were declared.
The sale, exchange, or redemption of Institutional Shares is a taxable event
for the shareholder.
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. A majority of the Directors are not affiliated with the Advisors
or the Distributor.
The Fund's Directors and officers are as follows:
Richard T. Hale Chairman William K. Morrill, Jr. President
Truman T. Semans Director Keith R. Pauley Executive Vice
Charles W. Cole, Jr. Director President
James J. Cunnane Director Edward J. Veilleux Vice President
Robert S. Killebrew, Jr. Director Gary V. Fearnow Vice President
John F. Kroeger Director Scott J. Liotta Vice President
Louis E. Levy Director and Secretary
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Laurie D. Collidge Assistant
Carl W. Vogt Director Secretary
7
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and ABKB/LaSalle Securities Limited Partnership
("ABKB/LaSalle" or the "Sub-Advisor") is the Fund's sub-advisor. ICC is the
investment advisor to other mutual funds in the Flag Investors family of funds
and Alex. Brown Cash Reserve Fund, Inc., which funds had approximately $5.7
billion of net assets as of December 31, 1996. ABKB/LaSalle is a registered
investment advisor and together with its affiliates had, as of December 31,
1996, approximately $2.3 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 securities since 1985, although it had not previously acted as
investment advisor or sub-advisor to a mutual fund. ABKB/LaSalle currently
provides sub-advisory services to three mutual funds which had approximately $71
million of combined net assets as of December 31, 1996.
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 the Distributor, provided that
compensation to the Distributor 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 the Conduct Rules of the National Association of Securities Dealers, Inc.,
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 1.00% of the Institutional Shares' average daily net assets. For the
fiscal year ended December 31, 1996, ICC waived all advisory fees and reimbursed
expenses of $61,823. In addition, from its own resources, ICC paid ABKB/LaSalle
a sub-advisory fee (net of fee waivers) equal to .02% of the Fund's average
daily net assets.
<PAGE>
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 nine corporations, each of which is owned by one of
the following persons: Jonathan E. Bortz; Daniel W. Cummings; Wade W. Judge;
William K. Morrill, Jr.; Stuart L. Scott; Robert C. Spoerri; Lynn C. Thurber;
Earl E. Webb; and Robert F. Works.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
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 17
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or its predecessors since 1986.
Keith R. Pauley, Senior Vice President of ABKB/LaSalle, has over 11 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
DISTRIBUTOR
- --------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") acts as
distributor of the Fund's shares. Alex. Brown is an investment banking firm
that offers a broad range of investment services to individual, institutional,
corporate and municipal clients. It is a wholly-owned subsidiary of Alex. Brown
8
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
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. Alex. Brown receives no compensation for distributing the
Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other than
Fund shareholders.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. 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 fiscal year ended December 31,
1996, ICC received a fee equal to .12% of the Fund's average daily net assets.
(See the Statement of Additional Information.) PNC Bank, National Association, a
national banking association, acts as custodian of the Fund's assets.
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 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 according to
the required standardized calculation. 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.
<PAGE>
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.
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 that monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual funds
such as Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund. 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.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Fund is an open-end diversified management investment company
incorporated under the laws of the State of Maryland on May 2, 1994 and is
authorized to issue 15 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 is
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.
9
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
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 Institutional Shares." The Fund has two
other classes of shares in addition to the shares offered hereby: "Flag
Investors Real Estate Securities Fund Class A Shares" and "Flag Investors Real
Estate Securities Fund Class B Shares." Additional information concerning the
Fund's other classes of shares may be obtained by calling the Distributor at
(800) 767-FLAG. Different classes of the Fund may be offered to certain
investors and holders of such shares may be entitled to certain exchange
privileges not offered to Institutional Shares. All classes of the Fund share a
common investment objective, portfolio of investments and advisory fee, but to
the extent the classes have different distribution/service fees or sales load
structures, the net asset value per share of the classes may differ at times.
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.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact the Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a
Participating Dealer, as appropriate.
10
_______________________________________________________________________________
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SEND COMPLETED APPLICATION BY OVERNIGHT CARRIER TO: FOR ASSISTANCE IN COMPLETING THIS APPLICATION PLEASE CALL: 1-800-553-8080,
Alex. Brown & Sons Incorporated/Flag Investors Funds MONDAY THROUGH FRIDAY, 8:30 A.M. TO 5:30 P.M. (EASTERN TIME).
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Real Estate Securities Fund, Inc.
IF YOU ARE PAYING BY CHECK, MAKE CHECK PAYABLE TO "FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC." AND MAIL WITH THIS
APPLICATION. IF YOU ARE PAYING BY WIRE, SEE INSTRUCTIONS BELOW.
- -----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
-----------------------------------------
NAME ON ACCOUNT MAILING ADDRESS
- --------------------------------------------------------- ---------------------------------------------------------------------
Name of Corporation, Trust or Partnership Name of Individual to Receive Correspondence
- -------------------------------------- ---------------------------------------------------------------------
Tax ID Number Street
[ ] Corporation [ ] Partnership [ ] Trust ---------------------------------------------------------------------
City State Zip
[ ] Non-Profit or Charitable Organization [ ] Other______ ( )
---------------------------------------------------------------------
If a Trust, please provide the following: Daytime Phone
- -----------------------------------------------------------------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
------------------
INITIAL INVESTMENT
------------------
THE MINIMUM INITIAL PURCHASE FOR THE INSTITUTIONAL SHARES OF THE FUND IS $500,000, EXCEPT THAT THE MINIMUM INITIAL PURCHASE IS
$1,000,000 FOR QUALIFIED RETIREMENT PLANS. THERE IS NO MINIMUM FOR CLIENTS OF INVESTMENT ADVISORY AFFILIATES OF ALEX. BROWN.
Indicate the amount to be invested and the method of payment:
______ A. By Mail: Enclosed is a check in the amount of $______ payable to Flag Investors Real Estate Securities Fund, Inc.
______ B. By Wire: A bank wire in the amount of $______has been sent from ________________ ______________________________________
Name of Bank Wire Control Number
WIRE INSTRUCTIONS
Follow the instructions below to arrange for a wire transfer for initial investment:
o Send completed Application by overnight carrier to Alex. Brown & Sons Incorporated/Flag Investors Funds at the address
listed above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7518625
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Real Estate Securities Fund, Inc. -- Institutional Shares
o "For further credit to ____________________________________________."
(Investor's Fund Account Number)
<PAGE>
--------------------
DISTRIBUTION OPTIONS
--------------------
Please check appropriate boxes. If none of the options are selected, all distributions will be reinvested in additional
Institutional Shares of the Fund.
INCOME DIVIDENDS CAPITAL GAINS
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in cash [ ] Paid in cash
----------------------
TELEPHONE TRANSACTIONS
----------------------
I UNDERSTAND THAT I WILL AUTOMATICALLY HAVE TELEPHONE REDEMPTION PRIVILEGES (FOR AMOUNTS UP TO $500,000) AND EXCHANGE PRIVILEGES
(WITH RESPECT TO INSTITUTIONAL SHARES OF OTHER FLAG INVESTORS FUNDS) UNLESS I MARK ONE OR BOTH OF THE BOXES BELOW:
NO, I DO NOT WANT: [ ] Telephone redemption privileges [ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account designated below.
---------------------------------
BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)
---------------------------------
Please attach a blank, voided check to provide account and bank routing information.
- -----------------------------------------------------------------------------------------------------------------------------------
Name of Bank Branch
- -----------------------------------------------------------------------------------------------------------------------------------
Bank Address City/State/Zip
- -----------------------------------------------------------------------------------------------------------------------------------
Name(s) on Account
- -----------------------------------------------------------------------------------------------------------------------------------
Account Number A.B.A. Number
A-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------
ACKNOWLEDGMENT, CERTIFICATE AND SIGNATURE
-----------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE FUND MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE U.S. TREASURY 31% OF ANY TAXABLE DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
REDEMPTION PROCEEDS PAID TO ANY INDIVIDUAL OR CERTAIN OTHER NON-CORPORATE SHAREHOLDERS WHO FAIL TO PROVIDE THE INFORMATION AND/OR
CERTIFICATIONS REQUIRED BELOW. THIS BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX, AND ANY AMOUNTS WITHHELD MAY BE CREDITED AGAINST
THE SHAREHOLDER'S ULTIMATE U.S. TAX LIABILITY.
BY SIGNING THIS APPLICATION, I HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND
CORRECT AND THAT AS REQUIRED BY FEDERAL LAW: (PLEASE CHECK APPLICABLE BOXES)
[ ] U.S. CITIZEN/TAXPAYER:
[ ] I CERTIFY THAT (1) THE NUMBER SHOWN ABOVE ON THIS FORM IS THE CORRECT TAX ID NUMBER AND (2) I AM NOT SUBJECT TO ANY BACKUP
WITHHOLDING EITHER BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE
SERVICE ("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR (C)
THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING.
[ ] IF NO TAX ID NUMBER HAS BEEN PROVIDED ABOVE, I HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS FOR A TAX ID NUMBER, AND I
UNDERSTAND THAT IF I DO NOT PROVIDE SUCH NUMBER TO THE TRANSFER AGENT WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I
FAIL TO FURNISH MY CORRECT TAX ID NUMBER, I MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND
REDEMPTION PROCEEDS. (PLEASE PROVIDE YOUR TAX ID NUMBER ON IRS FORM W-9. YOU MAY REQUEST SUCH FORM BY CALLING THE TRANSFER
AGENT AT 800-553-8080).
[ ] NON-U.S. CITIZEN/TAXPAYER: INDICATED COUNTRY OF RESIDENCE FOR TAX PURPOSES:_________________________________________________
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM NOT A U.S. CITIZEN OR RESIDENT AND I AM AN EXEMPT FOREIGN PERSON AS DEFINED BY THE
INTERNAL REVENUE SERVICE.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated May 1, 1997. 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.
- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED
TO AVOID BACKUP WITHHOLDING.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
- -----------------------------------------------------------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
--------------------------------------------
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS
--------------------------------------------
The following person(s) ("Authorized Person(s)") are currently officers, trustees, general partners or other authorized agents of
the investor. Any _______* of the Authorized Person(s) is, by lawful and appropriate action of the investor, a person entitled to
give instructions regarding purchases and redemptions or make inquiries regarding the Account.
- --------------------------------------------------------- -------------------------------------------------------------------
Name/Title Signature Date
- --------------------------------------------------------- -------------------------------------------------------------------
Name/Title Signature Date
- --------------------------------------------------------- -------------------------------------------------------------------
Name/Title Signature Date
- --------------------------------------------------------- -------------------------------------------------------------------
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that person's signature. Investment Company Capital Corp. ("ICC")
may, without inquiry, act upon the instructions (whether verbal, written, or provided by wire, telecommunication, or any other
process) of any person claiming to be an Authorized Person. Neither ICC nor any entity on behalf of which ICC is acting shall be
liable for any claims or expenses (including legal fees) or for any losses resulting from actions taken upon any instructions
believed to be genuine. ICC may continue to rely on the instructions made by any person claiming to be an Authorized Person until it
is informed through an amended Application that the person is no longer an Authorized Person and it has a reasonable period (not to
exceed one week) to process the amended Application. Provisions of this Application shall be equally Applicable to any successor of
ICC.
* If this space is left blank, any one Authorized Person is authorized to give instructions and make inquiries. Verbal
instructions will be accepted from any one Authorized Person. Written instructions will require signatures of the number of
Authorized Persons indicated in this space.
<PAGE>
------------------------
CERTIFICATE OF AUTHORITY
------------------------
INVESTORS MUST COMPLETE ONE OF THE FOLLOWING TWO CERTIFICATES OF AUTHORITY.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board of Directors or Board of Trustees.)
I _____________________________, Secretary of the above-named investor, do hereby certify that at a meeting on _________________, at
which a quorum was present throughout, the Board of Directors (Board of Trustees) of the investor duly adopted a resolution which is
in full force and effect and in accordance with the investor's charter and by-laws, which resolution did the following: (1)
empowered the officers/trustees executing this Application (or amendment) to do so on behalf of the investor; (2) empowered the
above-named Authorized Person(s) to effect securities transactions for the investor on the terms described above; (3) authorized the
Secretary to certify, from time to time, the names and titles of the officers of the investor and to notify ICC when changes in
officers occur; and (4) authorized the Secretary to certify that such a resolution has been duly adopted and will remain in full
force and effect until ICC receives a duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ______ day of ______, 199__ Secretary _________________________________________________________________________________
The undersigned officer (other than the Secretary) hereby certifies that the foregoing instrument has been signed by the Secretary
of the investor.
- -----------------------------------------------------------------------------------------------------------------------------------
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the investor and that they have done the following under the
authority of the investor's partnership agreement/trust instrument: (1) empowered the general partner/trustee executing this
Application (or amendment) to do so on behalf of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3) authorized the Secretary to certify, from time to time,
the names of the general partners/trustees of the investor and to notify ICC when changes in general partners/trustees occur. This
authorization will remain in full force and effect until ICC receives a further duly-executed certification. (If there are not
enough spaces here for all necessary signatures, complete a separate certificate containing the language of this Certificate B and
attach it to the Application).
- -----------------------------------------------------------------------------------------------------------------------------------
Signature and title Date
- -----------------------------------------------------------------------------------------------------------------------------------
Signature and title Date
A-2
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(Institutional Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ABKB/LaSALLE SECURITIES ALEX. BROWN & SONS INCORPORATED
LIMITED PARTNERSHIP One South Street
100 East Pratt Street Baltimore, Maryland 21202
Baltimore, Maryland 21202 1-800-767-FLAG
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080
Fund Counsel
Custodian MORGAN, LEWIS & BOCKIUS LLP
PNC BANK, NATIONAL ASSOCIATION 2000 One Logan Square
Airport Business Park Philadelphia, Pennsylvania 19103
200 Stevens Drive
Lester, Pennsylvania 19113
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
--------------------------
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
One South 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, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, OR BY CALLING (800) 767-FLAG.
Statement of Additional Information Dated: May 1, 1997
Relating to Prospectuses Dated:
May 1, 1997 for the Class A and Class B Shares
and
the Institutional Shares
<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................................................ 7
5. Management of the Fund.......................................... 9
6. Investment Advisory and Other Services......................... 15
7. Distribution of Fund Shares.................................... 16
8. Brokerage...................................................... 19
9. Capital Stock.................................................. 20
10. Semi-Annual Reports............................................ 21
11. Custodian, Transfer Agent, and 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 three
classes of shares: Flag Investors Real Estate Securities Fund Class A Shares
("Class A Shares"), Flag Investors Real Estate Securities Fund Class B Shares
("Class B Shares") and Flag Investors Real Estate Securities Fund Institutional
Shares ("Institutional Shares"). As used herein, the "Fund" refers to Flag
Investors Real Estate Securities Fund, Inc. and specific references to any class
of the Fund's shares will be made using the name of such class.
Important information concerning the Fund is included in the Fund's
current Prospectuses which may be obtained without charge from the Fund's
distributor (the "Distributor") or from Participating Dealers that offer shares
of the respective classes of the Fund ("Shares") to prospective investors.
Prospectuses for the Class A Shares and the Class B Shares may also be obtained
from Shareholder Servicing Agents. Some of the information required to be in
this Statement of Additional Information is also included in the Fund's current
Prospectuses. To avoid unnecessary repetition, references are made to related
sections of the Prospectuses. In addition, the Prospectuses and this Statement
of Additional Information omit certain information about the Fund and its
business that is contained in the Registration Statement for the Fund and its
Shares filed with the 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. As of the date of this Statement of Additional Information, the
Institutional Shares had not yet commenced operations.
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. Equity
securities include common stock, rights or warrants to purchase common stock,
preferred stock, and securities convertible into common stock. 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 that rely on professional managers to supervise their
investments.
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. 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 that the Fund's investment advisor (the "Advisor") or sub-advisor
(the "Sub-Advisor") (collectively, the "Advisors") 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 that pay no current interest
but are purchased at a deep discount from the amount due at maturity. When held
to maturity, the entire return, which consists of the amortization of discount,
is the difference between the purchase price and the amount due at maturity.
The value of the Fund's investments in debt securities will change as
interest rates fluctuate. When interest rates decline, the values of such
securities generally can be expected to increase and when interest rates rise,
the values of such securities can generally be expected to decrease. The lower
rated and comparable unrated debt securities described above are subject to
greater risks of loss of income and principal than are higher rated fixed-income
securities. The market value of lower rated securities generally tends to
reflect the market's perception of the creditworthiness of the issuer and
short-term
-2-
<PAGE>
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
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 that 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
-3-
<PAGE>
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 that 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 that initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. A purchase of an option involves payment of a premium for the option
without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions are (1) for bona
fide hedging purposes, or (2) for other purposes to the extent that the
aggregate initial margin deposits and premiums do not exceed 5% of the
liquidation value of the Fund's net assets (after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into).
Margins and premiums on bona fide hedging positions are excluded from this 5%
limit. The Advisor reserves the right to comply with such different standard as
may be established by CFTC rules and regulations with respect to the purchase or
sale of futures contracts or options thereon.
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
-4-
<PAGE>
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 that 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 be
comprised of liquid assets. 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, while income
earned by the Fund from its hedging activities generally will be treated as
capital gains.
Other Investment Practices
In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.
Repurchase Agreements. The Fund may enter into repurchase agreements
with financial institutions, such as banks and broker-dealers, deemed to be
creditworthy by the Fund's Board of Directors under criteria established with
the guidance of the Fund's Advisor or Sub-Advisor. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
The value of underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. The
Fund makes payment for such securities only upon physical delivery or evidence
of book entry transfer to the account of a custodian or bank acting as agent.
The underlying securities, which in the case of the Fund must be issued by the
U.S. Treasury, may have maturity dates exceeding one year. The Fund does not
bear the risk of a decline in value of the underlying securities unless the
seller defaults under its repurchase obligation. In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and loss including (a)
possible decline in the value of the underlying security while the Fund seeks to
enforce its rights thereto, (b) possible subnormal levels of income and lack of
access to income during this period and (c) expenses of enforcing its rights.
When-Issued Securities. This practice involves the purchase of debt
obligations on a when-issued basis, in which case delivery and payment normally
take place within 45 days after the date of commitment to purchase. The Fund
will make commitments to purchase obligations on a when-issued basis only with
the intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market fluctuation,
and no interest accrues to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
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.
-5-
<PAGE>
Investment Restrictions
The Fund's investment program is subject to a number of restrictions
that reflect self-imposed standards as well as federal 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 Fund's outstanding shares.
Accordingly, the Fund will not:
1. 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 equaling 5%
or more of the Fund's total assets are outstanding, the Fund will not purchase
securities for investment.
2. 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.
3. Purchase or sell commodities or commodities contracts, provided that
the Fund may invest in financial futures and options on such futures.
4. 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.
5. Issue senior securities, provided that the Fund may invest in
financial futures and options on such futures.
6. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies.
7. Effect short sales of securities.
8. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions).
9. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs or oil, gas or mineral leases.
The following investment restriction may be changed by a vote of the
majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered under the
Investment Company Act, except as permitted by federal law.
-6-
<PAGE>
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The Fund's net asset value per Share is determined daily as of the close
of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time)
each day on which the New York Stock Exchange is open for business (a "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.
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 Class A Shares and
Class B Shares by check and Institutional Shares by wire transfer of funds, as
described in the Prospectuses relating to such Shares. 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 in the Prospectus under "How to
Invest" 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 continue to qualify as a regulated investment
company ("RIC") under Subchapter M of the Code. In order 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
-7-
<PAGE>
other income (including, but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement") and(2) derive less
than 30% of its gross income each taxable year (exclusive of certain gains from
designated hedging transactions that are offset by unrealized losses on
offsetting positions) from gains on the sale or other disposition of any of the
following investments if such investments are held for less than three months
(the "Short-Short Gain Test"): (a) stock or securities (as defined in Section
2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies), and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward 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 that the Fund controls and that 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 that 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) is subject to backup withholding by the Internal Revenue Service for
failure to properly report payments of interest or dividends, or (3) has failed
to certify to the Fund that such shareholder is not subject to backup
withholding.
-8-
<PAGE>
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
of its ordinary income and capital gains net income prior to the end of each
calendar year to avoid liability for excise tax. However, 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 One South Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); Chartered Financial Analyst.
*CHARLES W. COLE, JR., Director (11/11/35)+
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Chairman, Investment Company Capital Corp.
(registered investment advisor); Director, Provident Bankshares
Corporation and Provident Bank of Maryland; Formerly, President and
Chief Executive Officer, Chief Administrative Officer, and Director,
First Maryland Bancorp, The First National Bank of Maryland and First
Omni Bank; Director, York Bank and Trust Company.
-9-
<PAGE>
*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 (registered investment advisor), 1974-1995.
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Director, Investment
Company Capital Corp. (registered investment advisor); Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.
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).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); 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); Director, Central Carolina Bank & Trust
(banking), Key Funds (registered investment companies) and AMBAC
Treasurers Trust (registered investment company).
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); Director, Yellow Corporation (trucking); Formerly, Chairman and
Member, National Transportation Safety Board; Director, National
Railroad Passenger Corporation (Amtrak) and Member, Aviation System
Capacity Advisory Committee (Federal Aviation Administration).
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.
-10-
<PAGE>
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; Vice President, Armata
Financial Corp. (registered broker-dealer); and Executive Vice
President, Investment Company Capital Corp. (registered investment
advisor).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Private
Client Marketing, Alex. Brown & Sons Incorporated.
SCOTT J. LIOTTA, Vice President and Secretary (3/18/65) +
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994-July
1996; Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present. Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company, Inc. (investments), 1980-1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present.
- ---------------------
* Messrs. Hale, Cole, Killebrew and Semans are Directors who are
"interested persons," as defined in the Investment Company Act.
+ Mr. Liotta is Mr. Cole's son-in-law.
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 the Distributor or its affiliates. There are currently twelve
funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Hale serves as Chairman of three funds,
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 Chairman of five funds and as a
Director of five other funds in the Fund Complex. Mr. Cole serves as Chairman of
one fund and as a Director of seven other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as Directors of each fund in the Fund
Complex. Ms. Rimel serves as a Director of ten funds in the Fund Complex. Mr.
Vogt serves as a Director of nine funds in the Fund Complex. Mr. Fearnow serves
as Vice President of ten funds in the Fund Complex. Mr. Veilleux serves as
Executive Vice President of one fund and as Vice President of eleven funds in
the Fund Complex. Mr. Liotta serves as Vice President and Secretary, Mr. Finelli
serves as Treasurer and Ms. Collidge serves as Assistant Secretary of each of
the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, the Distributor in the ordinary course of business.
All such transactions were made on
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<PAGE>
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 the Distributor 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") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his or her
attendance at Board and committee meetings) from each fund in the Fund Complex
for which he or she serves. In addition, the 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, 1996, Non-Interested Directors' fees attributable to the assets of
the Fund totaled approximately $334.
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
December 31, 1996.
-12-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Total Compensation From
the Fund and Fund
Aggregate Compensation Pension or Complex Payable to
From the Fund Payable to Retirement Benefits Directors for the Fiscal
Name of Person, Directors for the Fiscal Accrued as Part Year Ended December 31,
Position Year Ended December 31, 1996 of Fund Expenses 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard T. Hale, Chairman(1) $0 $0 $0
Truman T. Semans, Director(1) $0 $0 $0
Charles W. Cole, Jr., Director(1) $0 $0 $0
James J. Cunnane, Director $114(2) (3) $39,000 for service on 12
Boards in the Fund
Complex
N. Bruce Hannay, Director(4) $7(2) (3) $3,321 for service on 12
Boards in the Fund
Complex
Robert S. Killebrew, Jr., $0 $0 $0
Director(1)
John F. Kroeger, Director $143(2) (3) $49,000 for service on 12
Boards in the Fund
Complex
Louis E. Levy, Director $114(2) (3) $39,000 for service on 12
Boards in the Fund
Complex
Eugene J. McDonald $114(2) (3) $39,000 for service on 12
Director Boards in the Fund
Complex
Rebecca W. Rimel, Director $138(2) (3) $39,000 for service on 6
Boards in the Fund
Complex(5)
Carl W. Vogt, Director(6) $137(2) (3) $39,000 for service on 5
Boards in the Fund
Complex(5)
Harry Woolf(7) $114(2) (3) $39,000 for service on 12
Director Boards in the Fund
Complex
- ------------------
(1) A Director who is an "interested person" as defined in the Investment Company Act.
(2) Of amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald, Vogt and Woolf, and to Ms. Rimel, no
amount was deferred pursuant to the deferred compensation plan.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors,
as described below. The actuarially computed pension expense for the
Fund for the year ended December 31, 1996 was approximately $533.
(4) Retired, effective January 31, 1996, and is now deceased.
(5) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from each fund for which they serve as a Director.
(6) Elected to the Board on January 30, 1996.
(7) Retired on December 31, 1996.
</TABLE>
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
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<PAGE>
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. Mr. Kroeger has qualified but has not
received benefits. The Fund has one Participant, a Director who retired on
December 31, 1996 who qualified for the Retirement Plan by serving fourteen
years as a Director in the Fund Complex and who will be paid a quarterly fee of
$4,875 by the Fund Complex for the rest of his life. Another Participant who
retired on January 31, 1996 and died on June 2, 1996 was paid fees of $8,090 by
the Fund Complex under the Retirement Plan in the fiscal year ended December 31,
1996. Such fee is allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1 year;
and for Mr. Vogt, 1 year.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ----------------- -------------------------------------------------------------------
Chairman of Audit Committee Other Participants
----------------------------- ---------------------
<S> <C> <C>
6 years $ 4,900 $ 3,900
7 years $ 9,800 $ 7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director 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. Messrs. Cunnane, Kroeger, Levy, McDonald and Vogt
and Ms. Rimel have each executed a Deferred Compensation Agreement. Currently,
the deferring Directors may select various Flag Investors and Alex. Brown Cash
Reserve 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 ten
years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
applies to the personal investing activities of all directors and officers of
the Fund, as well as to designated officers, directors and employees of the
Advisors and the Distributor. As described below, the Code of Ethics imposes
significant restrictions on the Advisor'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 covered employees of the Advisors,
certain directors or officers of the Distributor, and all Fund Directors who are
"interested persons", preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases that 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
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<PAGE>
initial public offering, a prohibition from profiting on short-term trading in
securities and special preclearance of the acquisition of securities in private
placements. Furthermore, the Code of Ethics provides for trading "blackout
periods" that prohibit trading by investment personnel and certain other
employees within periods of trading by the Fund in the same security. Officers,
directors and employees of the Advisors and the Distributor may comply with
codes instituted by those entities so long as they contain similar requirements
and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
The shareholders of the Fund have approved an Investment Advisory
Agreement between the Fund and Investment Company Corp. ("ICC" or the "Advisor")
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, a registered investment advisor, is a wholly owned
subsidiary of Alex. Brown Financial Corporation and an indirect subsidiary of
Alex. Brown Incorporated. ABKB/LaSalle, a Maryland limited partnership, is a
registered investment advisor that 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.)
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 following annual rates based
upon the Fund's average daily net assets: 0.65% of the first $100 million, 0.55%
of the next $100 million, 0.50% of the next $100 million and 0.45% of that
portion 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 following annual rates based upon the Fund's
average daily net assets: 0.40% of the first $100 million, 0.35% of the next
$100 million, 0.30% of the next $100 million and 0.25% of that portion over $300
million.
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
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<PAGE>
Agreement and the Sub-Advisory Agreement were most recently approved by the
Board of Directors in the foregoing manner on September 30, 1996. 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 fiscal year
ended December 31, 1996, and the period from January 3, 1995 (commencement of
operations) through December 31, 1995, ICC waived all fees due it ($106,045 and
$38,795) and reimbursed expenses of $61,823 and $91,068. Absent such fee waivers
and reimbursements, the Fund's Total Operating Expenses would have been 2.28%
and 3.25% of the Class A Shares' average daily net assets and 3.03% and 4.05% of
the Class B Shares' average daily net assets. As compensation for sub-advisory
services for the fiscal year ended December 31, 1996, ICC paid ABKB/LaSalle,
from its own resources, sub-advisory fees of $3,163 (net of fee waivers). For
the period from January 3, 1995 (commencement of operations) through December
31, 1995, 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
and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor")
serves as the exclusive distributor of the Fund's Shares pursuant to three
separate Distribution Agreements, one for each class of the Fund's shares
(collectively, the "Distribution Agreements").
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 and 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
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 fiscal year ended
December 31, 1996 and the period from January 3, 1995 (commencement of
operations) through December 31, 1995, Alex. Brown received from the Fund
distribution fees in the amounts of $31,554 and $9,662.
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
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<PAGE>
investment representatives and to Participating Dealers. As compensation for
providing distribution services for the Class B Shares for the fiscal year ended
December 31, 1996 and 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 $27,697 and $21,264. In return for the
distribution fees, Alex. Brown paid the distribution-related expenses of the
Fund including one or more of the following: advertising expenses; printing and
mailing of prospectuses to other than current shareholders; compensation to
dealers and sales personnel; and interest, carrying or other financing charges.
In addition, with respect to the Class B Shares, Alex. Brown receives a
shareholder servicing fee at an annual rate of .25% of the average daily net
assets of the Class B Shares. (See the Prospectus.) For the fiscal year ended
December 31, 1996 and the period from January 3, 1995 (commencement of
operations) through December 31, 1995, such shareholder servicing fees totaled
$9,232 and $5,316.
Alex. Brown receives no compensation for distributing the Institutional
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 two separate Plans of
Distribution, one for the Class A Shares and one for the Class B Shares
(collectively, 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, in the case of Class A and Class B Shares, 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 Class A and Class B
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 30, 1996.
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 related Distribution Agreement without the approval of the shareholders of
the class. The Plans may be terminated at any time and the Class A and Class B
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 manner at any time. The Class A and Class B
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 Class A and
Class B 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.
-17-
<PAGE>
In addition, with respect to the Class A Shares and the Class B Shares,
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.
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 fiscal year ended December 31, 1996 and the period ended
December 31, 1995, Alex. Brown received sales commissions on the Class A Shares
of $224,818 and $137,648 and from such amount retained $152,214 and $124,915.
During the same periods, Alex. Brown received contingent deferred sales loads on
the Class B Shares of $57,368 and $116,236 and retained all of this amount.
The Institutional Distribution Agreement was approved by the Fund's
Board of Directors on December 18, 1996. It has an initial term of two years and
will remain in effect from year to year thereafter, if 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 at a meeting called for
such purpose. It may be terminated at any time upon sixty days' written notice,
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 Institutional Shares (as
defined under Capital Stock). The Institutional Distribution Agreement and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
The Fund pays all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside
-18-
<PAGE>
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.
8. BROKERAGE
The Advisors 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, 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.
The Advisors' primary consideration in effecting securities transactions
is to obtain best price and execution of orders on an overall basis. As
described below, however, the Advisors may, in their discretion, effect agency
transactions with broker-dealers that furnish statistical, research or other
information or services that 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 the Advisors 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 the
Advisors 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. The Advisors are of the opinion that because
the material must be analyzed and reviewed by their staff, its receipt does not
tend to reduce expenses, but may be beneficial in supplementing the Advisors'
research and analysis. Therefore, it may tend to benefit the Fund by improving
the Advisors' investment advice. The Advisors' policy is to pay a broker-dealer
higher commissions for particular transactions than might be charged if a
different broker-dealer had been chosen when, in ICC's or ABKB/LaSalle's
opinion, this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, the
Advisors 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.
-19-
<PAGE>
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 the Board adopted certain
policies and procedures incorporating the standards of Rule 17e-1 under the
Investment Company Act which requires that the commissions paid 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 fiscal year ended December 31, 1996 and the period ended
December 31, 1995, Alex. Brown directed $16,906,535 and $11,298,553 of
transactions to broker-dealers and paid $34,640 and $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 amounts of $480
and $1,988, which represented 1.39% and 7.73% of the Fund's aggregate brokerage
commissions and which were paid on transactions that represented 1.35% and 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) that
the Fund has acquired during its most recent fiscal year.
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 that
it seeks to purchase or sell.
9. CAPITAL STOCK
The Fund is authorized to issue 15 million Shares of common stock, par
value $.001 per share. The Board of Directors may increase or decrease the
number of authorized shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time. The
Fund currently has one Series and the Board has designated three classes of
Shares: "Flag Investors Real Estate Securities Fund Class A Shares," "Flag
Investors Real Estate Securities Fund Class B Shares" and "Flag Investors Real
Estate Securities Fund Institutional 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 any applicable service
-20-
<PAGE>
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. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent auditors.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank") 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. 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 fiscal year ended December 31, 1996,
such fees totaled $15,522. As compensation for providing accounting services,
ICC receives an annual fee, calculated daily and paid monthly as shown below.
Average Net Assets Incremental Annual Accounting Fee
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
-21-
<PAGE>
In addition, the Fund reimburses ICC for certain out-of-pocket expenses
incurred in connection with ICC's provision of acocunting services under the
Master Services Agreement.
As compensation for providing accounting services to the Fund for the
fiscal year ended December 31, 1996, ICC received fees of $19,225.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P.
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:
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-,5-, or 10-year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1-, 5- or 10-year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five-, and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement (or the later commencement of
operations of the series or class). In calculating the ending redeemable value
for the Class A Shares, the maximum sales load (4.5%) is deducted from the
initial $1,000 payment and all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. In calculating the
performance of the Class B Shares, the applicable contingent deferred sales
charge (4.0% for the one-year period, 2.0% for the five-year period and no sales
charge thereafter) is deducted from the ending redeemable value and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the Prospectus on the reinvestment dates during
the period. "T" in the formula above is calculated by finding the average annual
compounded
-22-
<PAGE>
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 Institutional
Shares are sold without a sales load.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 payment for the periods
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Inception Through
December 31, 1996 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ending Average Ending Average
Class Redeemable Annual Total Redeemable Annual Total
Value Return Value Return
- ---------------------------------------------------------------------------------------------------------------------
Class A $1,267.27 26.73% $1,497.80 22.44%
January 3, 1995 +
- ---------------------------------------------------------------------------------------------------------------------
Class B $ 1,282.61 28.26% $1,505.74 22.78%
January 3, 1995 +
- ---------------------------------------------------------------------------------------------------------------------
Institutional * N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Inception Date.
* Institutional Shares were not offered in any period ended December 31,
1996.
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. The
Fund will, however, disclose the maximum sales charges and will also disclose
that the performance data do not reflect sales charges and that inclusion of
sales charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC rules, and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
Yield Calculations
The yield of the Fund is calculated by dividing the net investment
income per Share earned by the Fund during a 30-day (or one month) period by the
maximum offering price per share on the last day of the period and annualizing
the result on a semiannual basis by adding one to the quotient, raising the sum
to the power of six, subtracting one from the result and then doubling the
difference. The Fund's yield
-23-
<PAGE>
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, 1996 was 3.84% for the Class A Shares and 3.30%
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 that, 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. The Fund's portfolio
turnover rate was 23% for the fiscal year ended December 31, 1996 and 28% for
the period ended December 31, 1995.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following shareholders owned of record or beneficially 5% or more
of the Fund's total outstanding Shares, as of April 15, 1997:
T. Rowe Price, Trustee 7.81%
Alex. Brown & Sons Inc. Plan 100460
Flag Investors Telephone Income (Attn. Asset Records)
P.O. Box 17215
Baltimore, MD 21297-0354
Alex. Brown & Sons Incorporated 71%*
One South Street
Baltimore, MD 21202
----------
* As of such date, Alex. Brown owned beneficially less than 1%
of such shares.
Directors and officers as a group owned 2.05% of the Fund's total
outstanding Shares, as of April 15, 1997.
-24-
<PAGE>
15. FINANCIAL STATEMENTS
See next page.
-25-
<PAGE>
ABrown FI Real Estate Fund AR
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1996
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON STOCKS: 98.2%
Real Estate Investment Trusts: 90.7%
Apartments: 26.1%
30,400 Avalon Properties, Inc. $28.75 $ 874,000 3.5% $ 246,346
20,800 Bay Apartment Communities, Inc. 36.00 748,800 3.0 289,828
8,700 Columbus Realty Trust 22.75 197,925 0.8 11,640
16,300 Equity Residential Properties Trust 41.25 672,375 2.7 197,340
32,300 Evans Withycombe Residential, Inc. 21.00 678,300 2.7 17,941
23,000 Irvine Apartment Communities, Inc. 25.00 575,000 2.3 95,506
35,400 Merry Land & Investment
Company, Inc. 21.50 761,100 3.0 14,164
21,400 Oasis Residential, Inc. 22.75 486,850 1.9 14,344
20,500 Post Properties, Inc. 40.25 825,125 3.3 153,959
47,000 United Dominion Realty Trust 15.50 728,500 2.9 65,051
---------- ---- ----------
6,547,975 26.1 1,106,119
Factory Outlets: 2.6%
18,700 Chelsea GCA Realty, Inc. 34.63 647,488 2.6 124,168
---------- ---- ----------
Health Care: 5.9%
18,000 Health Care Property Investors, Inc. 35.00 630,000 2.5 31,254
35,100 Nationwide Health Properties, Inc. 24.25 851,175 3.4 145,733
---------- ---- ----------
1,481,175 5.9 176,987
Hotels: 11.4%
24,600 FelCor Suite Hotels, Inc. 35.38 870,225 3.5 150,043
26,100 Patriot American Hospitality, Inc. 43.13 1,125,563 4.5 397,357
15,600 Starwood Lodging Trust 55.13 859,950 3.4 316,053
---------- ---- ----------
2,855,738 11.4 863,453
Manufactured Housing: 4.4%
25,500 Manufactured Home
Communities, Inc. 23.25 592,875 2.4 133,249
14,800 Sun Communities, Inc. 34.50 510,600 2.0 133,571
---------- ---- ----------
1,103,475 4.4 266,820
Office/Industrial: 18.4%
14,200 Arden Realty Group, Inc. 27.75 394,050 1.6 70,235
6,400 Beacon Properties Corporation 36.63 234,400 0.9 68,403
5,900 Cali Realty Corporation 30.88 182,162 0.7 22,015
</TABLE>
-26-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
Real Estate Investment Trusts (concluded)
Office/Industrial (concluded)
8,700 CarrAmerica Realty Corporation $29.25 $ 254,475 1.0% $ 34,423
22,400 Duke Realty Investments, Inc. 38.50 862,400 3.4 190,448
34,900 Highwoods Properties, Inc. 33.75 1,177,874 4.7 234,436
25,200 Spieker Properties, Inc. 36.00 907,200 3.6 295,527
18,600 Weeks Corporation 33.25 618,450 2.5 156,344
---------- ---- ----------
4,631,011 18.4 1,071,831
Regional Malls: 6.6%
4,800 Macerich Company 26.13 125,400 0.5 16,699
26,268 Simon DeBartolo Group, Inc. 31.00 814,308 3.2 191,137
56,800 Taubman Centers, Inc. 12.88 731,300 2.9 155,399
---------- ---- ----------
1,671,008 6.6 363,235
Retail/Neighborhood and
Community Centers: 9.7%
17,500 Developers Diversified
Realty Corp. 37.13 649,688 2.6 125,420
18,000 Federal Realty Investment Trust 27.13 488,250 1.9 96,076
14,150 Kimco Realty Corporation 34.88 493,481 2.0 111,244
7,900 Regency Realty Corporation 26.25 207,375 0.8 74,855
11,600 Vornado Realty Trust 52.50 609,000 2.4 182,629
---------- ---- ----------
2,447,794 9.7 590,224
Self-Storage: 5.6%
19,300 Public Storage, Inc. 31.00 598,300 2.4 175,932
10,400 Shurgard Storage Centers,
Inc.--Class A 29.63 308,100 1.3 39,246
12,800 Storage USA, Inc. 37.63 481,600 1.9 66,644
---------- ---- ----------
1,388,000 5.6 281,822
Real Estate Operating Companies: 7.5%
Hotels: 6.5%
29,100 CapStar Hotel Company* 19.63 571,088 2.3 46,379
47,400 Host Marriott Corp.* 16.00 758,400 3.0 113,663
4,000 Interstate Hotels Corporation* 28.25 113,000 0.5 12,669
11,900 Red Roof Inns, Inc.* 15.50 184,450 0.7 (4,392)
---------- ---- ----------
1,626,938 6.5 168,319
</TABLE>
-27-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (concluded)
Real Estate Operating Companies (concluded)
Regional Malls: 1.0%
8,400 The Rouse Company $31.75 $ 266,700 1.0% $ 71,193
----------- ----- ---------
Total Investment in Securities
(Cost $19,583,131)** 24,667,302 98.2 5,084,171
Other Assets in Excess of Liabilities, Net 443,768 1.8
----------- -----
Net Assets $25,111,070 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($19,816,307 / 1,427,132 shares outstanding) $13.89
======
Class B Share
($5,294,763 / 382,694 shares outstanding) $13.84***
======
Maximum Offering Price Per:
Class A Share
($13.89 / .955) $14.54
======
Class B Share $13.84
======
</TABLE>
* Non-income producing security.
** Aggregate cost for federal tax purposes was $19,508,529.
*** Redemption value is $13.29 following a maximum 4% contingent deferred sales
charge.
See Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
Dec. 31,
- --------------------------------------------------------------------------------
1996
Investment Income (Note 1):
Dividends $1,051,673
Interest 12,788
----------
Total income 1,064,461
----------
Expenses:
Investment advisory fee (Note 2) 106,045
Distribution fees (Note 2) 68,483
Registration fees 47,454
Legal 35,482
Printing and postage 34,446
Audit 29,367
Custodian fees 20,692
Accounting fee (Note 2) 19,225
Organizational expense (Note 1) 18,699
Transfer agent fees (Note 2) 15,522
Miscellaneous 3,573
Directors' fees 334
Insurance 176
----------
Total expenses 399,498
Less:Fees waived and expenses reimbursed (Note 2) (167,868)
----------
Net expenses 231,630
----------
Net investment income 832,831
----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 489,391
Change in unrealized appreciation or depreciation of investments 4,266,134
----------
Net gain on investments 4,755,525
----------
Net increase in net assets resulting from operations $5,588,356
==========
See Notes to Financial Statements.
-29-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- -------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 832,831 $ 353,419
Net realized gain from security transactions 489,391 47,282
Change in unrealized appreciation or
depreciation of investments 4,266,134 818,037
----------- -----------
Net increase in net assets resulting from operations 5,588,356 1,218,738
----------- -----------
Distributions to Shareholders from:
Net investment income:
Class A Shares (600,459) (185,238)(2)
Class B Shares (158,265) (92,558)(2)
Short-term capital gains:
Class A Shares (100,111) (27,959)
Class B Shares (26,298) (11,617)
Long-term capital gains:
Class A Shares (214,377) --
Class B Shares (56,352) --
Return of capital:
Class A Shares (21,539) (31,299)(2)
Class B Shares (5,650) (15,293)(2)
----------- -----------
Total distributions (1,183,051) (363,964)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 10,892,733 9,712,132
Value of shares issued in reinvestment of dividends 974,878 246,856
Cost of shares repurchased (1,349,523) (726,085)
----------- -----------
Increase in net assets derived from
capital share transactions 10,518,088 9,232,903
----------- -----------
Total increase in net assets 14,923,393 10,087,677
Net Assets:
Beginning of period 10,187,677 100,000(3)
----------- -----------
End of period $25,111,070 $10,187,677
=========== ===========
</TABLE>
(1) Commencement of operations.
(2) Distributions have been reclassified to reflect the actual return of
capital amounts for 1995.
(3) On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of
Alex. Brown & Sons Incorporated for $100,000.
See Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 11.20 $10.00
------- ------
Income from Investment Operations:
Net investment income 0.61 0.56
Net realized and unrealized gain
on investments 2.90 1.21
------- ------
Total from Investment Operations 3.51 1.77
------- ------
Less Distributions:
Dividends from net investment income (0.58) (0.49)(2)
Distributions from net realized short-term gains (0.07) (0.05)
Distributions from net realized long-term gains (0.15) --
Return of capital (0.02) (0.03)(2)
------- ------
Total distributions (0.82) (0.57)
------- ------
Net asset value at end of period $ 13.89 $11.20
======= ======
Total Return(3) 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses 1.25%(4) 1.25%(4,5,6)
Net investment income 5.29%(7) 6.09%(5,6,7)
Supplemental Data:
Net assets at end of period (000) $19,816 $7,171
Portfolio turnover rate 23% 28%
Average commissions per share $ 0.07(8) --
(1) Commencement of operations.
(2) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of expenses to average daily net assets would have been 2.28% and
3.25% (annualized) for the year ended December 31, 1996 and the period
ended December 31, 1995, respectively.
(5) Annualized.
(6) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date they
were based on average monthly net assets. Under the prior method, the ratio
of expenses to average net assets was 1.19% and the ratio of net investment
income to average net assets was 5.95%.
(7) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of net investment income to average daily net assets would
have been 4.26% and 3.89% (annualized) for the year ended December 31, 1996
and the period ended December 31, 1995, respectively.
(8) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
-31-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class B Shares
(For a share outstanding throughout each period)
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $11.18 $10.00
------ ------
Income from Investment Operations:
Net investment income 0.52 0.50
Net realized and unrealized gain
on investments 2.89 1.20
------ ------
Total from Investment Operations 3.41 1.70
------ ------
Less Distributions:
Dividends from net investment income (0.51) (0.42)(2)
Distributions from net realized short-term gains (0.07) (0.05)
Distributions from net realized long-term gains (0.15) --
Return of capital (0.02) (0.05)(2)
------ ------
Total distributions (0.75) (0.52)
------ ------
Net asset value at end of period $13.84 $11.18
====== ======
Total Return(3) 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses 2.00%(4) 2.00%(4,5,6)
Net investment income 4.46%(7) 5.39%(5,6,7)
Supplemental Data:
Net assets at end of period (000) $5,295 $3,016
Portfolio turnover rate 23% 28%
Average commissions per share $ 0.07(8) --
(1) Commencement of operations.
(2) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note
2), the ratio of expenses to average daily net assets would have been
3.03% and 4.05% (annualized) for the year ended December 31, 1996 and
the period ended December 31, 1995, respectively.
(5) Annualized.
(6) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date
they were based on average monthly net assets. Under the prior method,
the ratio of expenses to average net assets was 1.90% and the ratio of net
investment income to average net assets was 5.25%.
(7) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of net investment income to average daily net assets would have
been 3.43% and 3.09% (annualized) for the year ended December 31, 1996 and
the period ended December 31, 1995, respectively.
(8) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund
on purchases and sales of investments during the period.
See Notes to Financial Statements.
-32-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--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 Class A Shares and Class B
Shares have different sales charges and distribution fees, and the Class B
Shares have a contingent deferred sales charge.
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 contingent 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. Significant
accounting policies are as follows:
A. 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.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in
a segregated account until maturity of the repurchase agreement.
The agreement ensures that the market value of the collateral,
including accrued interest thereon, is sufficient in the event of
default. If the counterparty defaults and the value of the
collateral declines or if the counterparty enters into an
insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.
C. 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.
-33-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
D. 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.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates
and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., 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 following annual rates based upon the Fund's
average daily net assets: 0.65% of the first $100 million, 0.55% of the next
$100 million, 0.50% of the next $100 million and 0.45% of that portion in excess
of $300 million.
As compensation for its services, ABKB/LaSallereceives a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly at the
following annual rates based upon the Fund's average daily net assets: 0.40% of
the first $100 million, 0.35% of the next $100 million, 0.30% of the next $100
million and 0.25% of that portion in excess of $300 million.
-34-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 2--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 year ended December 31, 1996, ICC waived
fees of $106,045 and reimbursed expenses of $61,823.
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 $19,225 for accounting services for the year ended December
31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly. ICC received $15,522 for
transfer agent services for the year ended December 31, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated 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 year ended December 31,
1996, distribution fees aggregated $68,483, of which $31,554 was attributable to
the Class A Shares and $36,929 was attributable to the Class B Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through December 31, 1996 was $533, and
the accrued liability was approximately $867.
-35-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 10 million shares of $.001 par
value capital stock (7 million Class A, 2 million Class B and 1 million
undesignated). Transactions in shares of the Fund were as follows:
Class A Shares
------------------------------
For the For the Period
Year Ended Jan. 3, 1995* to
Dec. 31, 1996 Dec. 31, 1995
------------- ----------------
Shares sold 807,325 655,079
Shares issued to shareholders on
reinvestment of dividends 63,818 16,704
Shares redeemed (84,104) (41,690)
---------- ----------
Net increase in shares outstanding 787,039 630,093
========== ==========
Proceeds from sale of shares $9,428,874 $6,763,257
Value of reinvested dividends 787,477 178,010
Cost of shares redeemed (1,047,300) (439,765)
---------- ----------
Net increase from capital share transactions $9,169,051 $6,501,502
========== ==========
Class B Shares
------------------------------
For the For the Period
Year Ended Jan. 3, 1995* to
Dec. 31, 1996 Dec. 31, 1995
------------- ----------------
Shares sold 124,181 290,349
Shares issued to shareholders on
reinvestment of dividends 15,254 6,473
Shares redeemed (26,509) (27,054)
---------- ----------
Net increase in shares outstanding 112,926 269,768
========== ==========
Proceeds from sale of shares $1,463,859 $2,948,875
Value of reinvested dividends 187,401 68,846
Cost of shares redeemed (302,223) (286,320)
---------- ----------
Net increase from capital share transactions $1,349,037 $2,731,401
========== ==========
*Commencement of operations.
-36-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term
obligations, aggregated $13,781,802 and $3,606,961, respectively, for the year
ended December 31, 1996.
On December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $5,163,165
and aggregate gross unrealized depreciation of all securities in which there was
an excess of tax cost over value was $4,392.
NOTE 5--Net Assets
On December 31, 1996, net assets consisted of:
Paid-in capital:
Class A Shares $15,693,112
Class B Shares 4,058,303
Undistributed net investment income 275,484
Unrealized appreciation of investments 5,084,171
-----------
$25,111,070
===========
-37-
<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, 1996 and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended and financial
highlights for each of the respective periods presented. 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, 1996, 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, 1996 and the
results of its operations for the year then ended, the changes in its net assets
and its financial highlights for each of the respective periods in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Philadelphia, Pennsylvania
February 4, 1997
-38-
<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 - Debt rated AAA by S&P has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong. Debt rated AA
has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree. Debt rated A has strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt 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
