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[GRAPHIC OMITTED]
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(Class A and Class B Shares)
Prospectus & Application -- May 1, 1998
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This mutual fund (the "Fund") seeks 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 Flag Investors Class A Shares
("Class A Shares") and Flag Investors Class B Shares ("Class B Shares") of the
Fund. The separate classes provide you with alternatives as to sales load and
Fund expenses. (See "How to Buy Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated May 1, 1998 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
The Fund's Net Asset Value ................. 5
How to Buy Shares .......................... 5
How to Redeem Shares ....................... 7
Telephone Transactions ..................... 8
How to Choose the Class That Is Right
For You ................................. 8
Dealer Compensation ........................ 9
Dividends and Taxes ........................ 9
Management of the Fund ..................... 10
Investment Advisor and Sub-Advisor ......... 10
Distributor ................................ 11
Custodian, Transfer Agent and
Accounting Services ..................... 11
Performance Information .................... 11
General Information ........................ 12
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 .............................. 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) .............................................. 0.32%*** 0.32%***
12b-1 Fees ........................................................................ 0.25% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B Shares) ... 0.68% 0.93%****
------ ------
Total Fund Operating Expenses (net of fee waivers) ................................ 1.25%*** 2.00%***
====== ======
</TABLE>
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* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How to
Buy Shares" and "How to Redeem Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem your Class B Shares within six years of purchase. The amount of the
charge declines in relation to the time you hold your shares. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Redeem 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 0.65% of the Fund's
average daily net assets and Total Fund Operating Expenses would be 1.58%
of the Class A Shares' average daily net assets and 2.33% of the Class B
Shares' average daily net assets.
**** A portion of the shareholder servicing fee is allocated to your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries, and providing you
with information on your investments.
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<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- --------------------------------------------------------- ------ ------- ------- --------
You would pay the following expenses on a $1,000 invest-
ment, 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**
You would pay the following expenses on the same invest-
ment, assuming no redemption:*
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.
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 above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the
Fund. If you purchase shares of either class through a financial institution,
you may be charged separate fees by that institution.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, you may qualify for reduced sales charges or no sales
charge at all. (See "How to Buy Shares.") Due to the continuous nature of Rule
12b-1 fees, you may pay more than the equivalent of the maximum sales charges
permitted by the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD Rules") if you hold your shares for a long time.
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, 1997 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, 1997, 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
--------------------------------------------------
For the Period
For the January 3, 1995(1)
Year Ended December 31, through December 31,
-------------------------- ----------------------
1997 1996 1995
------------ ------------ ----------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period .................................. $ 13.89 $ 11.20 $ 10.00
--------- ------- ---------
Income from Investment Operations:
Net investment income ..................... 0.52 0.61 0.56
Net realized and unrealized gain on
investments ............................. 2.44 2.90 1.21
--------- ------- ---------
Total from Investment Operations .......... 2.96 3.51 1.77
--------- ------- ---------
Less Distributions:
Distributions from net investment
income .................................. (0.60) (0.58) (0.49)(2)
Distributions from net realized
capital gains ........................... (0.47) (0.22) (0.05)
Return of capital ......................... -- (0.02) (0.03)(2)
--------- ------- ---------
Total distributions ....................... (1.07) (0.82) (0.57)
--------- ------- ---------
Net asset value at end of period .......... $ 15.78 $ 13.89 $ 11.20
========= ======= =========
Total Return(3) ............................ 22.01% 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses(4) ............................... 1.25% 1.25% 1.25%(6)(7)
Net investment income(5) .................. 3.87% 5.29% 6.09%(6)(7)
Supplemental Data:
Net assets at end of period (000) ......... $41,773 $19,816 $ 7,171
Portfolio turnover rate ................... 35% 23% 28%
Average commissions per share(8) .......... $0.0479 $0.0475 --
</TABLE>
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<TABLE>
<CAPTION>
Class B Shares
------------------------------------------------
For the Period
For the January 3, 1995(1)
Year Ended December 31, through December 31,
-------------------------- --------------------
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period .................................. $ 13.84 $ 11.18 $ 10.00
--------- --------- --------
Income from Investment Operations:
Net investment income ..................... 0.42 0.52 0.50
Net realized and unrealized gain on
investments ............................. 2.42 2.89 1.20
--------- --------- --------
Total from Investment Operations .......... 2.84 3.41 1.70
--------- --------- --------
Less Distributions:
Distributions from net investment
income .................................. (0.50) (0.51) (0.42)(2)
Distributions from net realized
capital gains ........................... (0.47) (0.22) (0.05)
Return of capital ......................... -- (0.02) (0.05)(2)
---------- ---------- --------
Total distributions ....................... (0.97) (0.75) (0.52)
---------- ---------- --------
Net asset value at end of period .......... $ 15.71 $ 13.84 $ 11.18
========== ========== ========
Total Return(3) ............................ 21.11% 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses(4) ............................... 2.00% 2.00% 2.00%(6)(7)
Net investment income(5) .................. 3.12% 4.46% 5.39%(6)(7)
Supplemental Data:
Net assets at end of period (000) ......... $ 9,799 $ 5,295 $ 3,016
Portfolio turnover rate ................... 35% 23% 28%
Average commissions per share(8) .......... $ 0.0479 $ 0.0475 --
</TABLE>
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(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 the reimbursement of expenses, the
ratio of expenses to average daily net assets would have been 1.58%, 2.28%
and 3.25% (annualized) for Class A Shares and 2.33%, 3.03% and 4.05%
(annualized) for Class B Shares for the years ended December 31, 1997 and
1996 and the period ended December 31, 1995, respectively.
(5) 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
3.54%, 4.26% and 3.89% (annualized) for Class A Shares and 2.79%, 3.43%
and 3.09% (annualized) for Class B Shares for the years ended December 31,
1997 and 1996 and the period ended December 31, 1995, respectively.
(6) Annualized.
(7) Effective January 1, 1996, the Fund's expense and net investment income
ratios are 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.
(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.
2
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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.
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. When the Fund invests in REITs or
master limited partnerships, shareholders indirectly bear a proportionate share
of the operating expenses of the underlying entity, 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.
REITs pool investors' funds for investment primarily in income producing
real estate or real estate related loans or interests. 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.
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.
<PAGE>
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 subadvisor 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 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
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
3
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<PAGE>
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When-Issued Securities
The Fund may purchase securities, at their current market value, 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 choose to sell the securities before the settlement
date. 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 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 cost 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 your 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, as amended (the "1940 Act").
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 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 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.
4
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THE FUND'S NET ASSET VALUE
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The following sections describe how to buy and redeem shares of the Fund.
The price you pay or receive is based on the Fund's net asset value per
share. When you buy Class A Shares, the price you pay may be increased by a
sales charge. When you redeem shares of either class, the price you receive may
be reduced by a sales charge. Read the sections on how to buy shares and how to
redeem shares for details on how and when these charges may or may not be
imposed.
The net asset value per share of each class is determined on each
business day as of the close of trading on the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern Time). It is calculated by subtracting the
liabilities attributable to a class from its proportionate share of the Fund's
assets and dividing the result by the outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ from time to time.
In valuing the Fund's assets, its investments are priced at their market
value which is normally based on current prices but which may be determined
according to "fair value" procedures approved by the Fund's Board of Directors.
You may buy or redeem shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that
day, the price you pay or receive will be based on the next Business Day's net
asset value per share.
<PAGE>
HOW TO BUY SHARES
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You may buy either class of the Fund's shares through your securities
dealer or through any financial institution that is authorized to act as a
shareholder servicing agent. Contact them for details on how to enter and pay
for your order. You may also buy shares by sending your check (along with a
completed Application Form) directly to the Fund. The Application Form, which
includes instructions, is attached to this Prospectus.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your
initial investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments
may be as low as $250. Refer to the section on the Fund's Automatic
Investing Plan for details.
o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
Purchase Price
The price you pay to buy shares will be the Fund's offering price which
is calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule.
Class A Sales
Charge as % of
-------------------------
Offering Net Amount Class B Sales
Amount of Purchase Price Invested Charge
- ------------------------------- ---------- ------------ --------------
Less than $ 50,000 .......... 4.50% 4.71% None
$ 50,000 - $ 99,999.......... 3.50% 3.63% None
$ 100,000 - $249,999 ......... 2.50% 2.56% None
$ 250,000 - $499,999 ......... 2.00% 2.04% None
$ 500,000 - $999,999.......... 1.50% 1.52% None
$1,000,000 and over ........... None None None
Although you do not pay an initial sales charge when you invest
$1,000,000 or more in Class A Shares or when you buy any amount of Class B
Shares, you may have to pay a sales charge when you redeem your shares. Refer
to the section on how to redeem shares for details.
5
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<PAGE>
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The sales charge you pay on your current purchase of Class A Shares may
be reduced under the circumstances listed below.
Rights of Accumulation. If you are also purchasing Class A shares of this
or any other Flag Investors fund or if you already have investments in Class A
or Class D shares, you may combine the value of your purchases with the value
of your existing investments to determine whether you qualify for a reduced
sales charge. (For this purpose your existing investments will be valued at the
higher of cost or current value.) You may also combine your purchases and
investments with those of your spouse and your children under the age of 21 for
this purpose. You must be able to provide sufficient information to verify that
you qualify for this right of accumulation.
Letter of Intent. If you anticipate making additional purchases of Class
A Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to
initially purchase at least 5% of the total. When you make each purchase during
the period, you will pay the sales charge applicable to their combined value.
If, at the end of the 13-month period, the total value of your purchases is
less than the amount you indicated, you will be required to pay the difference
between the sales charges you paid and the sales charges applicable to the
amount you actually did purchase. Some of the shares you own will be redeemed
to pay this difference.
Purchases at Net Asset Value. You may buy Class A Shares without paying a
sales charge under the following circumstances:
1) If you are buying shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your securities dealer or servicing agent if you buy shares in
this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a description of
the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following (or their respective affiliates): the Distributor, the Advisors
and any broker-dealer authorized to sell shares of the Fund.
<PAGE>
Purchases by Exchange
You may exchange shares of any other Flag Investors fund with the same
sales charge structure for an equal dollar amount of Class A or B Shares, as
applicable, without payment of the sales charges described above or any other
charge. If you exchange Class A shares of any Flag Investors fund with a lower
sales charge structure into Class A Shares, you will be charged the difference
in sales charges unless (with the exception of Flag Investors Cash Reserve
Prime Class A Shares) you have owned the shares for at least 24 months. You may
enter both your redemption and purchase orders on the same Business Day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange at any time on 60 days' prior written
notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or
the Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in either class of shares. The amount you decide upon will
be withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions
6
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<PAGE>
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will be reinvested in additional Fund shares at net asset value. You may elect
to receive your distributions in cash or to have your distributions invested in
shares of other Flag Investors funds. To make either of these elections or to
terminate automatic reinvestment, complete the appropriate section of the
attached Application Form or notify the Transfer Agent, your securities dealer
or your servicing agent at least five days before the date on which the next
dividend or distribution will be paid.
Systematic Purchase Plan. You may also purchase either class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem either class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If your shares are in an
account with the Fund, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.
Your securities dealer, your servicing agent or the Transfer Agent may
require the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by
all owners of the shares exactly as their names appear on the account.
2) If you are redeeming more than $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company,
broker, dealer, securities exchange or association, clearing agency,
savings association or (if authorized by state law) credit union.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
4) Any additional documents that may be required if your account is in the
name of a corporation, partnership, trust or fiduciary.
<PAGE>
Redemption Price
The price you receive when you redeem shares will be the net asset value
of the class of shares you are redeeming less any applicable sales charge. The
amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
Sales Charge as a Percentage of the Dollar Amount
Subject to Charge
- --------------------------------------------------
Class A Class B
Years Since Purchase Shares Shares
- ---------------------- ------------ ----------
First ................ 0.50%* 4.00%
Second ............... 0.50%* 4.00%
Third ................ None 3.00%
Fourth ............... None 3.00%
Fifth ................ None 2.00%
Sixth ................ None 1.00%
Thereafter ........... None None
* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1,000,000 or
more.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) The sales charge is applied to the lesser of the cost of the shares or their
current market value.
2) No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
3) If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
4) If you acquired the shares through an exchange of shares of another Flag
Investors fund, the period of time you held the original shares will be
combined with the period of time you held the shares being redeemed to
determine the years since purchase.
Waiver of Sales Charge. You may redeem shares without paying a sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Flag Investors fund
with the same sales charge structure.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If shares are being redeemed in your account following your death or a
determination that you are
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
disabled. This waiver applies only under the following conditions:
(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent or the Transfer Agent that such circumstances exist.
4) If you are redeeming Class A Shares, your original investment was at least
$3,000,000 and your securities dealer has agreed to return to the
Distributor any payments received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares six years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.
Other Redemption Information
If you own Fund shares having a value of at least $10,000, you may
arrange to have some of your shares redeemed monthly or quarterly under the
Fund's Systematic Withdrawal Plan. Each redemption under this plan involves all
the tax and sales charge implications normally associated with Fund
redemptions. Contact your securities dealer, your servicing agent or the
Transfer Agent for information on this plan.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be paid to you by check, whether or not that is the payment
option you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges unless you specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the
time your account is opened and prior to effecting each telephone transaction.
You may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
- --------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy
your shares but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares
and, except in the case of investments of $1,000,000 or more, no sales charge
if you redeem them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six
8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
years of purchase, but the amount of the charge declines the longer you hold
your shares and, at the end of six years, your shares convert to Class A Shares
thus eliminating the higher expenses.
In general, if you intend to invest more than $100,000, your combined
sales charges and expenses are lower with Class A Shares. If you intend to
invest less than $100,000 and expect to hold your shares for more than six
years, your combined sales charges and expenses are lower with Class B Shares.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DEALER COMPENSATION
- --------------------------------------------------------------------------------
Your securities dealer is paid a commission when you buy shares and is
paid a servicing fee for as long as you hold your shares.
Dealer Compensation as a % of
Offering Price
---------------------------------
Amount of Purchase Class A Shares Class B Shares
- -------------------------- ---------------- ---------------
Less than $ 50,000 .. 4.00% 4.00%
$ 50,000 - $ 99,999 .. 3.00% 4.00%
$ 100,000 - $249,999 .. 2.00% 4.00%
$ 250,000 - $499,999 .. 1.50% 4.00%
$ 500,000 - $999,999 .. 1.25% 4.00%
$1,000,000 and over ... * 4.00%
- -------------------------- ---- ----
* Your securities dealer may be paid up to 1.00% of the Offering Price
In addition to the commissions shown above, your securities dealer may be
paid an annual fee equal to 0.25% of the value of your Class A Shares or Class
B Shares for as long as you hold them. The annual fee will begin when you buy
your shares.
<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
affecting the Fund and its shareholders 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 tax treatment of the Fund or its shareholders and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding specific
questions.
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 not pay 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.
You will be taxed on dividends from the Fund's net investment company
taxable income as ordinary income (whether received in cash or in additional
shares) to the extent of the Fund's earnings and profits. Capital gains
distributions from the Fund are classified as either short-term, long-term or
mid-term depending upon how long the Fund held the securities it sold to
generate the gains. You will be taxed on the distributions according to the
category stipulated by the Fund regardless of how long you have held your Fund
shares. Only a portion of the dividends paid by the Fund is expected to qualify
for the dividends received deduction available to corporate shareholders. You
will be advised annually as to 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 you 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
you.
9
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Advisors and to the Distributor. A majority
of the Directors of the Fund are not affiliated with the Advisors or the
Distributor.
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 mutual funds with approximately $6.5 billion of net
assets as of December 31, 1997. In addition to this Fund, these include other
funds in the Flag Investors family of funds and BT Alex. Brown Cash Reserve
Fund, Inc. ABKB/LaSalle is a registered investment advisor and together with
its affiliates had, as of December 31, 1997, approximately $3.1 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.
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. The Board has established procedures
under which ABKB/LaSalle may allocate transactions to certain affiliates,
provided that compensation 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. As compensation for its services
for the fiscal year ended December 31, 1997, ICC received a fee (net of fee
waivers) equal to 0.32% of the Fund's average daily net assets and, for the
same period, ICC paid ABKB/LaSalle a fee (net of fee waivers) equal to 0.20% of
the Fund's average daily net assets.
ICC is an indirect subsidiary of Bankers Trust Corporation. ABKB/LaSalle,
a Maryland limited partnership, is one of several entities through which LaSalle
Partners Incorporated 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.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
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.
10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Mr. Morrill, Managing Director of ABKB/LaSalle, has nearly 18 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
Mr. Pauley, Senior Vice President of ABKB/LaSalle, has over 12 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31, 1997.
ICC Distributors is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. ICC Distributors is not affiliated with either the Advisor or the
Sub-Advisor.
The Fund has adopted a Distribution Agreement and related Plans of
Distribution with respect to the Class A and 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, including certain banks and BT
Alex. Brown Incorporated, to provide shareholder services, pursuant to which the
Distributor may allocate on a proportional basis up to all of its distribution
fee as compensation for such financial institutions' ongoing shareholder
services. Such financial institutions may charge you separately for these
services.
As compensation for providing distribution services for the Class A
Shares for the period from August 31, 1997 through December 31, 1997, the
Distributor received a fee equal to 0.25% (annualized) of the average daily net
assets of the Class A Shares.
As compensation for providing distribution and shareholder services for
the Class B Shares for the period from August 31, 1997 through December 31,
1997, the Distributor received a distribution fee equal to 0.75% (annualized) of
the Class B Shares' average daily net assets and a shareholder servicing fee
equal to 0.25% of the Class B Shares' average daily net assets. The distribution
fee is used to compensate the Distributor for its services and expenses in
distributing the Class B Shares. The shareholder servicing fee is used to
compensate the Distributor, securities dealers and servicing agents for services
provided and expenses incurred in maintaining your account, responding to your
inquiries and providing you with information on your investments.
Payments under the Plans are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services to the Fund is less than the payments received, the Distributor may
retain the unexpended portion of the distribution fee. ICC Distributors or the
Advisor and their respective affiliates may make payments from their own
resources to securities dealers and servicing agents. Payments by the
Distributor may include additional discounts or promotional incentives in the
form of cash or other compensation (including merchandise or travel).
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1997, ICC received a fee equal to 0.09% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust Corporation acts as
custodian of the Fund's assets. (See the Statement of Additional Information.)
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
11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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
compounded 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 publication 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 your bank
with respect to the account through which your shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Description of Shares
The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on May 2, 1994 and is
authorized to issue 15 million shares of capital stock, with a par value of
$.001 per share. Each share has one vote and is 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.
The Board of Directors of the Fund is authorized to establish additional
series of shares of capital stock, each of which would evidence interests in a
separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "Flag Investors
Real Estate Securities Fund Class A Shares" and "Flag Investors Real Estate
Securities Fund Class B Shares." The Board has no present intention of
establishing any additional series of the Fund but the Fund has another class of
shares, "Flag Investors Real Estate Securities Fund Institutional Shares."
Additional information concerning the Fund's Institutional Shares may be
obtained by calling the Fund 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 the classes may have different
distribution/service fees or sales load structures, and accordingly, the net
asset value per share of the classes may differ at times.
<PAGE>
Annual Meetings
The Fund does not expect to hold annual meetings of shareholders unless
required by Maryland law. 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 shareholder communications in
connection with the meeting.
Reports
You will be furnished 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
If you have questions concerning your shares, contact the Fund at (800)
767-FLAG, the Transfer Agent at (800) 553-8080 or your securities dealer or
servicing agent.
12
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<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 ICC DISTRIBUTORS, INC.
SECURITIES LIMITED PARTNERSHIP P.O. Box 7558
100 East Pratt Street Portland, Maine 04101
Baltimore, Maryland 21202
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
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
13
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<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "Flag Investors For assistance in completing this
Real Estate Securities Application please call:
Fund, Inc." and mail with this 1-800-553-8080 Monday through
Application to: Friday, 8:30 a.m. to 5:30 p.m.
Flag Investors Funds (Eastern Time).
P.O. Box 419663
Kansas City, MO 64141-6663 To open an IRA account, please call
Attn: Flag Investors Real Estate 1-800-767-3524 for an IRA
Securities Fund, Inc. 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 $_______
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
____________________ _____________________
Tax ID Number Date of Trust
________________________________________________________
Name of Trustees (If to be included in the Registration)
________________________________________________________
For the Benefit of
<PAGE>
Gifts to Minors
______________________________________________________________________
Custodian's Name (only one allowed by law)
______________________________________________________________________
Minor's Name (only one)
_______________________________ ___________________________________
Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)
under the __________________________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
______________________________________________________________________
Street
______________________________________________________________________
City State Zip
(____)________________________________________________________________
Daytime Phone
Letter of Intent (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 (Optional)
List the Account numbers of other Flag Investors Funds 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.
______________________________ ____________________________________________
Bank Name Depositor's Signature Date
______________________________ ____________________________________________
Existing Flag Investors Fund Depositor's Signature Date
Account No., if any (if joint acct., both must sign)
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of ____________, 19__ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $___________ from Class A Shares and/or $___________ from Class B
Shares that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000 per class.)
Frequency (check one): [ ] Monthly
[ ] Quarterly (January, April, July and October)
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/We do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a predesignated bank account, please
provide the following information:
Bank: Bank Account No.:
---------------------------- ---------------------------
Address: Bank Account Name:
------------------------- ---------------------------
-------------------------
<PAGE>
Signature and Taxpayer Certification
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
your 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
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.
I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid
backup withholding.
- -------------------------------- -------------------------------------------
Signature Date Signature (if joint acct.,
both must sign) Date
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: Dealer Code:
------------------------- ----------------------------
Dealer's Address: Branch Code:
------------------------- ----------------------------
-------------------------
Representative: Rep. No.:
------------------------- ----------------------------
A-2
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
FLAG INVESTORS
REAL ESTATE SECURITIES FUND, INC.
(Institutional Shares)
Prospectus & Application -- May 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks 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, certain qualified retirement plans,
or investment advisory affiliates of BT Alex. Brown Incorporated ("BT Alex.
Brown"). (See "How to Buy Institutional Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated May 1, 1998 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
The Fund's Net Asset Value ................. 5
How to Buy Institutional Shares ............ 5
How to Redeem Institutional Shares ......... 6
Telephone Transactions ..................... 6
Dividends and Taxes ........................ 6
Management of the Fund ..................... 7
Investment Advisor and Sub-Advisor ......... 7
Distributor ................................ 8
Custodian, Transfer Agent and
Accounting Services ..................... 8
Performance Information .................... 8
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>
<S> <C>
Maximum Sales Charge Imposed on Purchases ................................... None
Maximum Sales Charge Imposed on Reinvested Dividends ........................ None
Maximum Deferred Sales Charge ............................................... None
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees (net of fee waivers) ........................................ 0.32%*
12b-1 Fees .................................................................. None
Other Expenses .............................................................. 0.68%
------
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 0.65%
of the Fund's average daily net assets and Total Fund Operating Expenses
would be 1.33% of the Institutional Shares' average daily net assets.
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- ------- -------- --------- --------- ---------
You would pay the following expenses on a $1,000 invest-
ment, 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 above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional Shares.
If you purchase Institutional Shares through a financial institution, you may
be charged separate fees by that institution.
1
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights included in this table have been derived from the
Fund's financial statements for the period indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the fiscal year ended December 31, 1997 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, 1997 which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
March 31, 1997(1)
through
December 31, 1997
------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................ $ 14.19
-------
Income from Investment Operations:
Net investment income ................................. 0.47
Net realized and unrealized gain on
investments ......................................... 2.14
-------
Total from Investment Operations ...................... 2.61
-------
Less Distributions:
Dividends from net investment income .................. (0.42)
Distributions from net realized capital gains ......... (0.47)
--------
Total distributions ................................... (0.89)
--------
Net asset value at end of period ...................... $ 15.91
========
Total Return ........................................... 18.84%
Ratios to Average Daily Net Assets:
Expenses(2)............................................ 1.00%(4)
Net investment income(3)............................... 4.30%(4)
Supplemental Data:
Net assets at end of period (000) ..................... $ 288
Portfolio turnover rate ............................... 35%(4)
Average commissions per share ......................... $0.0479
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.39% (annualized) for the period ended
December 31, 1997.
(3) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 3.91% (annualized) for the period
ended December 31, 1997.
(4) Annualized.
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
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.
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. When the Fund invests in REITs or
master limited partnerships, shareholders indirectly bear a proportionate share
of the operating expenses of the underlying entity, 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.
REITs pool investors' funds for investment primarily in income-producing
real estate or real estate related loans or interests. 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.
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.
<PAGE>
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 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
expose the Fund to possible loss because of adverse market
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
action or delay in connection with the disposition of the underlying
obligations.
When-Issued Securities
The Fund may purchase securities, at their current market value, 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 choose to sell the securities before the settlement
date. 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
- --------------------------------------------------------------------------------
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 cost 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 your 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, as amended.
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 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 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.
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE FUND'S NET ASSET VALUE
- --------------------------------------------------------------------------------
The following sections describe how to buy and redeem shares of the Fund.
The price you pay or receive is based on the Fund's net asset value per
share. The net asset value per share of a class is determined on each business
day as of the close of trading on the New York Stock Exchange (ordinarily 4:00
p.m. Eastern Time). It is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the outstanding shares of the class.
In valuing the Fund's assets, its investments are priced at their market
value which is normally based on current prices but which may be determined
according to "fair value" procedures approved by the Fund's Board of Directors.
You may buy or redeem shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that
day, the price you pay or receive will be based on the next Business Day's net
asset value per share.
HOW TO BUY INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may buy Institutional Shares if you are any of the following:
o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution).
o A qualified retirement plan with assets of at least $75 million.
o An investment advisory affiliate of BT Alex. Brown purchasing shares
for the accounts of your investment advisory clients.
You may buy Institutional Shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy Institutional Shares by sending your check (along with
a completed Application Form) directly to the Fund. The Application Form, which
incudes instructions, is attached to this Prospectus.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
Investment Minimums
If you are an eligible institution, your initial investment must be at
least $500,000. There are no minimum initial investments for qualified
retirement plans or investment advisory affiliates of BT Alex. Brown. There are
no minimums for subsequent investments.
Purchases by Exchange
You may exchange Institutional shares of any other Flag Investors fund
for an equal dollar amount of Institutional Shares of the Fund. The Fund may
modify or terminate this offer of exchange at any time on 60 days' prior
written notice.
<PAGE>
You may request an exchange through your securities dealer or your
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund's Transfer Agent, you may also request an
exchange directly through the Transfer Agent by express mail or telephone.
Other Information
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.
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may redeem your shares through your securities dealer or your
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund, you may also redeem them by contacting
the Transfer Agent by telephone (if you are redeeming less than $500,000). You
will be paid for redeemed shares by wire transfer of funds to your
5
- --------------------------------------------------------------------------------
<PAGE>
REAL ESTATE
- --------------------------------------------------------------------------------
securities dealer, servicing agent or bank upon receipt of a duly authorized
redemption request as promptly as feasible and, under most circumstances,
within three Business Days.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be remitted by wire to your securities dealer, servicing
agent or bank.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $500,000 or exchange them for Institutional Shares of
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges unless you
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the
time your account is opened and prior to effecting each telephone transaction.
You may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by express mail or facsimile. (See "How to Buy
Institutional Shares-Purchases by Exchange" and "How to Redeem Institutional
Shares.")
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 you elect otherwise, all income dividends and net capital gains
distributions, if any, will be reinvested in additional Institutional Shares at
net asset value. You may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent, either directly or through your securities
dealer or servicing agent, at least five days before the next date on which
dividends or distributions will be paid.
<PAGE>
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders 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 tax treatment of the Fund or its shareholders and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding
specific questions. 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 not pay 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.
You will be taxed on dividends from the Fund's net investment company
taxable income as ordinary income (whether received in cash or in additional
shares) to the extent of the Fund's earnings and profits. Capital gains
distributions from the Fund are classified as either short-term, long-term or
mid-term depending upon how long the Fund held the securities
6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
it sold to generate the gains. You will be taxed on the distributions according
to the category stipulated by the Fund regardless of how long you have held
your Fund shares. Only a portion of the dividends paid by the Fund is expected
to qualify for the dividends received deduction available to corporate
shareholders. You will be advised annually as to 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 you in the year in which
the dividends were declared.
The sale, exchange, or redemption of Institutional Shares is a taxable
event for you.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day to day operations of the Fund are delegated to the
Fund's executive officers, to the Advisors and to the Distributor. A majority
of Directors of the Fund are not affiliated with the Advisors or the
Distributor.
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 mutual funds with approximately $6.5 billion of net
assets as of December 31, 1997. In addition to this Fund, these include other
funds in the Flag Investors family of funds and BT Alex. Brown Cash Reserve
Fund, Inc. ABKB/LaSalle is a registered investment advisor and together with
its affiliates had, as of December 31, 1997, approximately $3.1 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.
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. The Board has established procedures
under which ABKB/LaSalle may allocate transactions to certain affiliates,
provided that compensation 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. As
compensation for its services for the fiscal year ended December 31, 1997, ICC
received a fee (net of fee waivers) equal to 0.32% of the Fund's average daily
net assets and, for the same period, ICC paid ABKB/LaSalle a fee (net of fee
waivers) equal to 0.20% of the Fund's average daily net assets.
ICC is an indirect subsidiary of Bankers Trust Corporation. ABKB/LaSalle,
a Maryland limited partnership, is one of several entities through which LaSalle
Partners Limited Incorporated and its
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
affiliates conduct real estate investment advisory and related businesses.
ABKB/LaSalle is controlled indirectly by DEL-LPL Limited Partnership, a
Delaware limited partnership.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
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.
Mr. Morrill, Managing Director of ABKB/LaSalle, has nearly 18 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
Mr. Pauley, Senior Vice President of ABKB/LaSalle, has over 12 years of
investment experience and has been a portfolio manager with ABKB/LaSalle or its
predecessors since 1986.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31, 1997.
ICC Distributors receives no compensation for distributing the Institutional
Shares. ICC Distributors is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc.
ICC Distributors is not affiliated with either the Advisor or the Sub-Advisor.
ICC Distributors bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to other than Fund shareholders. The Advisor or its affiliates may make
payments from their own resources to securities dealers and servicing agents.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1997, ICC received a fee equal to 0.09% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust Corporation, acts
as custodian of the Fund's assets. (See the Statement of Additional
Information.)
<PAGE>
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.
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
8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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 your bank
with respect to the accounts through which your shares may be purchased,
although not included in calculations of performance, will reduce your
performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Description of Shares
The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on May 2, 1994 and is
authorized to issue 15 million shares of capital stock, with a par value of
$.001 per share. Each share has one vote and is 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.
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 Board has no present
intention of establishing any additional series of the Fund but the Fund has two
other classes of shares, "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 Fund 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
advisoryfee, but the classes may have different distribution/ service fees or
sales load structures and, accordingly, the net asset value per share of the
classes may differ at times.
Annual Meetings
The Fund does not expect to hold annual meetings of shareholders unless
required by Maryland law. 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
You will be furnished 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
If you have questions concerning your Institutional Shares, contact the
Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or your
securities dealer or servicing agent.
9
- --------------------------------------------------------------------------------
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Send completed Application by overnight For assistance in completing this
carrier to: Application please call:
Flag Investors Funds 1-800-553-8080, Monday through
330 West 9th Street, First Floor Friday, 8:30 a.m. to
Kansas City, MO 64105 5:30 p.m. (Eastern Time).
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 Name of Individual to Receive
Partnership Correspondence
______________________________________ _____________________________________
Tax ID Number Street
/ / Corporation / / Partnership / / Trust _____________________________________
/ / Non-Profit or Charitable Organization City State Zip
/ / 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
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 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 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 The amount to be invested
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
<PAGE>
Acknowledgment, Certificate and Signature
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 your
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.
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid
backup withholding.
________________________________________________________________________________
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.
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
<PAGE>
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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 ICC DISTRIBUTORS, INC.
LIMITED PARTNERSHIP P.O. Box 7558
100 East Pratt Street Portland, Maine 04101
Baltimore, Maryland 21202
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
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
<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 YOUR
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING THE FUND, ONE SOUTH STREET,
BALTIMORE, MARYLAND 21202, OR BY CALLING (800)
767-FLAG.
Statement of Additional Information Dated: May 1, 1998
Relating to Prospectuses Dated:
May 1, 1998 for the Class A and Class B Shares
and
the Institutional Shares
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
1. General Information and History........................................................................ 1
2. Investment Objective and Policies...................................................................... 1
3. Valuation of Shares and Redemption..................................................................... 6
4. Federal Tax Treatment of Dividends and
Distributions........................................................................................ 7
5. Management of the Fund................................................................................. 9
6. Investment Advisory and Other Services................................................................. 14
7. Distribution of Fund Shares............................................................................ 15
8. Brokerage.............................................................................................. 18
9. Capital Stock.......................................................................................... 19
10. Semi-Annual Reports.................................................................................... 20
11. Custodian, Transfer Agent, and Accounting Services .................................................... 20
12. Independent Accountants ............................................................................... 21
13 Legal Matters...........................................................................................21
14. Performance Information................................................................................ 21
15. Control Persons and Principal Holders of
Securities........................................................................................... 23
16. Financial Statements................................................................................... 23
Appendix.............................................................................................. A-1
</TABLE>
<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 and Shareholder
Servicing Agents that offer shares of the respective classes of the Fund
("Shares") to prospective investors. 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. The Fund began offering Institutional Shares on March 31, 1997.
Under a license agreement dated August 23, 1994 between the Fund and
Alex. Brown Incorporated (now BT 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.
The Fund depends on the smooth functioning of computer systems in almost
every aspect of its business. The Fund could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Fund has asked it service providers whether they expect to have their
computer systems adjusted for the year 2000 transition and received assurances
from each that its system is expected to accommodate the year 2000 without
material adverse consequences to the Fund. The Fund and its shareholders may
experience losses if these assurances prove to be incorrect or if issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Fund does business, experience difficulties as a result
of year 2000 issues.
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. Equity securities include common
-1-
<PAGE>
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.
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
-2-
<PAGE>
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates.
Risks of Investment in Real Estate Securities
Even though the Fund will not invest in real estate directly, it may be
subject to risks similar to those associated with the direct ownership of real
estate because of its policy of concentrating in the securities of companies in
the real estate industry. These include declines in the value of real estate,
risks related to general and local economic conditions, dependency on management
skill, heavy cash flow dependency, possible lack of availability of long-term
mortgage funds, overbuilding, extended vacancies of properties, decreased
occupancy rates and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
limitations on rents, changes in neighborhood values and the appeal of
properties to tenants and changes in interest rates.
The risks of ownership of partnership units of master limited
partnerships include those related to changes in economic conditions or changes
in real estate and specific property values. One added risk of master limited
partnerships is that they do not allow for election of independent directors or
trustees to oversee the policies of the partnership. Rather, they rely on a
general partner to exercise fiduciary responsibilities.
In addition to these risks, equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while mortgage REITs
may be affected by the quality of any credit extended. Further, equity and
mortgage REITs are dependent upon management skills and generally are not
diversified. Equity and mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, equity and
mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Internal Revenue Code of 1986, as amended (the "Code") or to
maintain their exemptions from registration under the Investment Company Act.
The above factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to the REIT. In the event of a default by a borrower or
lessee, the REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.
Money Market Securities
From time to time the Fund may purchase high-quality short-term debt
securities, commonly known as money market securities. These securities include
direct obligations of the U.S. Government which consist of bills, notes and
bonds issued by the U.S. Treasury. Obligations issued by agencies of the U.S.
Government, while not direct obligations of the U.S. Government, are either
backed by the full faith and credit of the U.S. or are guaranteed by the U.S.
Treasury or supported by the issuing agencies' right to borrow from the U.S.
Treasury.
The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market, prior
to maturity. Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Time deposits earn a specified rate of
interest over a definite period of time; however time deposits cannot be traded
in the secondary market. Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods and furnish dollar
exchange. Maturities are generally six months or less.
-3-
<PAGE>
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 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
-4-
<PAGE>
than gains in the value of the Fund's position. In addition, futures and futures
option markets may not be liquid in all circumstances. As a result, in volatile
markets, the Fund may not be able to close out a transaction without incurring
losses substantially greater than the initial deposit. Although the contemplated
use of these contracts should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain 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.
The Fund will establish segregated accounts with its custodian and will
maintain liquid assets in an amount at least equal in value to its 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.
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
-6-
<PAGE>
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,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the NAV computed at
the close of business that day. These "late day" agreements are intended to
permit shareholders placing orders with a third party to place orders up to the
same time as other shareholders.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem shares by check or wire
transfer of funds. 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 "The Fund's Net Asset Value" 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 derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies
and other income
-7-
<PAGE>
(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").
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 eighteen months, mid-term capital gain or loss if the Shares have been
held for more than twelve but less than eighteen months and otherwise generally
will be treated as a short-term capital gain or loss.
Investors purchasing Shares just prior to the ex-dividend date of any
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.
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.
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
-8-
<PAGE>
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.
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 unit holder
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, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); and
Chartered Financial Analyst.
*TRUMAN T. SEMANS, Director (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated); Vice Chairman, Alex. Brown Capital Advisory & Trust
Company and Director, Investment Company Capital Corp. (registered
investment advisor).
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).
-9-
<PAGE>
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 D.P. Mann
Holdings (insurance); Formerly, Director, 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, Pennsylvania 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, ESQ., 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) and American Science &
Engineering (x-ray detection equipment); 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.
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.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown 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.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.
-10-
<PAGE>
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown 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.
- ----------
* Messrs. Hale and Semans are Directors who are "interested
persons," as defined in the Investment Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hale serves as
Chairman of four funds and as a Director of eight funds in the Fund Complex. Mr.
Semans serves as Chairman of five funds and as a Director of six funds in the
Fund Complex. Messrs. Cunnane, Kroeger, Levy and McDonald serve as Directors of
each fund in the Fund Complex. Ms. Rimel and Mr. Vogt serve as Directors of 11
funds in the Fund Complex. Ms. Olmert serves as Secretary, Mr. Finelli serves as
Treasurer and Mr. Liotta 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 BT Alex. Brown in the ordinary course of business.
All such transactions were made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of BT Alex. Brown or the Advisors may be considered to have received
remuneration indirectly. As compensation for his or her services as director,
each Director who is not an "interested person" of the Fund (as defined in the
Investment Company Act) (an "Independent Director") 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, 1997, Independent Directors' fees attributable to
the assets of the Fund totaled approximately $1,542.
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, 1997.
-11-
<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 Accrued as Part Year Ended December 31,
Position Fiscal Year Ended of Fund Expenses 1997
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<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(1,2) $0 $0 $0
James J. Cunnane, Director $234(3) (4) $39,000 for service on 13
Boards in the Fund
Complex
Robert S. Killebrew, Jr., $0 $0 $0
Director (1,2)
John F. Kroeger, Director $294 (4) $49,000 for service on 13
Boards in the Fund
Complex
Louis E. Levy, Director $234(3) (4) $39,000 for service on 13
Boards in the Fund
Complex
Eugene J. McDonald $234(3) (4) $39,000 for service on 13
Director Boards in the Fund
Complex
Rebecca W. Rimel, Director $239(3) (4) $39,000 for service on 11
Boards in the Fund
Complex(5)
Carl W. Vogt, Esq., Director(6) $241(3) (4) $39,000 for service on 11
Boards in the Fund
Complex(5)
</TABLE>
- ----------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired as Director on August 14, 1997.
(3) Of amounts payable to Messrs. Cunnane, Levy, McDonald, Vogt, and to Ms.
Rimel, no amount was deferred pursuant to the deferred compensation
plan.
(4) 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, 1997 was approximately $609.
(5) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve as a director.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by the Participant in his or her
last year of service. Upon retirement, each Participant will receive annually
10% of such fee for each year that he or she served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by the
Participant in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which he or she serves. The Retirement Plan is
unfunded and unvested. Mr. Kroeger has qualified but has not received benefits.
The Fund has one Participant, a Director who retired on December 31, 1996
-12-
<PAGE>
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. 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, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger, 15
years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms. Rimel, 2 years;
and for Mr. Vogt, 2 years.
<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, Levy, McDonald and Vogt and Ms.
Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors and BT 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 any officer, director, or employee of
the Fund or the Advisor preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases that are part of an
automatic dividend reinvestment plan). The foregoing would apply to any officer,
director, or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and 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 of the Advisor within periods of trading
by the Fund in the same security. Trading by investment personnel and certain
other employees of the Advisor would be exempt from this "blackout period"
provided that (1) the market capitalization of a particular security exceeds $2
billion; and (2) orders of the Advisor (including trades of both clients and
covered persons) do not exceed ten percent of the daily average trading volume
of the security for the prior 15 days. 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.
-13-
<PAGE>
6. INVESTMENT ADVISORY AND OTHER SERVICES
On June 17, 1997 the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital 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 are described in greater
detail below. The Investment Advisory and Sub-Advisory Agreements were approved
by a vote of shareholders of the Fund on August 14, 1997. ICC is an indirect
subsidiary of Bankers Trust Corporation. ICC is also the investment advisor to
other funds in the Flag Investors family of funds and BT Alex. Brown Cash
Reserve Fund, Inc. 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
Reality 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
Independent Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, or by
a vote of a majority of the outstanding Shares. The Investment Advisory
Agreement and the Sub-Advisory Agreement were most recently approved by the
Board of Directors in the foregoing manner on September 16, 1997. 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.
Advisory fees paid by the Fund to ICC and sub-advisory fees paid by ICC
to ABKB/LaSalle for the last three fiscal years were as follows:
Fiscal Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
ICC $126,983(1) $0(2) $0(3)
ABKB/LaSalle $80,292(4) $3,163(4) $0(4)
- ----------
1. Net of fee waivers of $128,442.
2. Net of fee waivers of $106,045 and expense reimbursements of $61,823.
3. Net of fee waivers of $38,795 and expense reimbursements of $91,068.
4. Net of fee waivers.
-14-
<PAGE>
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's Custodian. (See "Custodian, Transfer Agent and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the distributor of each class of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997. Prior to
August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown") was distributor
of the Fund's Shares for the same rate of compensation and on substantially the
same terms and conditions as ICC Distributors.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained in
the Distribution Agreement and the Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of its reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on March 27, 1998.
ICC Distributors 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. Any Sub-Distribution Agreement may be terminated in the
same manner as the Distribution Agreement and shall automatically terminate in
the event of assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which ICC Distributors will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor, the Distributor, or their respective
affiliates, will provide compensation out of their own resources for ongoing
shareholder services. Although banking laws
-15-
<PAGE>
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.
As compensation for providing distribution services for the Class A
Shares as described above, ICC Distributors receives an annual fee, calculated
and paid monthly, equal to 0.25% of the Class A Shares' average daily net
assets. ICC Distributors expects to allocate a substantial portion of its annual
fee to Participating Dealers and Shareholder Servicing Agents. As compensation
for providing distribution services for the Class B Shares as described above,
ICC Distributors receives an annual fee equal to 0.75% of the Class B Shares'
average daily net assets. ICC Distributors expects to retain the entire
distribution fee as reimbursement for front-end payments to Participating
Dealers. In addition, with respect to the Class B Shares, ICC Distributors
receives a shareholder servicing fee at an annual rate of 0.25% of the average
daily net assets of the Class B Shares. (See the Prospectus.) ICC Distributors
receives no compensation for distributing the Institutional Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Fee 1997 1996 1995
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fee $134,163(1) $59,251(3) $25,610(3,4)
Class B Shareholder Servicing Fee $ 17,894(2) $ 9,232(3,4) $ 5,316(3,4)
</TABLE>
- -------------
1 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $79,839 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $54,324.
2 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $10,580 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $7,314.
3 Fees received by Alex. Brown, the Fund's distributor for the fiscal
years ended December 31, 1996 and December 31, 1995.
4 For the period from January 3, 1995 (commencement of offering of Class B
Shares) through December 31, 1996.
In return for the distribution fees, ICC Distributors 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.
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 ICC
Distributors for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and ICC Distributors is authorized to make
payments out of its fee to Participating Dealers and Shareholder Servicing
Agents.
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
-16-
<PAGE>
class. The Plans may be terminated at any time by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the outstanding class
of Shares (as defined under "Capital Stock").
During the continuance of the Plans, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plans to ICC Distributors pursuant to the
Distribution Agreement and to 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 Independent Directors will be committed to the
discretion of the Independent Directors then in office.
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors.
The Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if either Plan is terminated in accordance with its
terms, the obligation of the Fund to make payments to ICC Distributors 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.
The Fund's distributor received commissions on the sale of the Flag
Investors Class A Shares and contingent deferred sales loads on the Flag
Investors Class B Shares and retained from such commissions and sales charges
the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Class 1997 1996 1995
----- ---- ---- ----
Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A $264,345(1) $124,308(3) $224,818(5) $152,214(5) $ 57,368(5) $ 57,368(5)
Commissions
Class B $168,550(2) $ 61,341(4) $137,648(5,6) $124,915(5,6) $116,236(5,6) $116,236(5,6)
Contingent
Deferred Sales
Charge
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $197,926 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $66,419.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $97,703 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $70,847.
(3) Of commissions received, Alex. Brown retained $124,308 and ICC Distributors
retained $0, respectively.
(4) Of sales charges received, Alex. Brown retained $61,341 and ICC
Distributors retained $0, respectively.
(5) By Alex. Brown, the Fund's distributor for the fiscal years ended December
31, 1996 and December 31, 1995.
(6) For the period from January 3, 1995 (commencement of offering of Class B
Shares) through December 31, 1996.
General Information
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
-17-
<PAGE>
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the Independent
Directors, and of independent 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 ICC Distributors, 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, its
affiliates and ICC Distributors.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with
affiliates of the Advisors in any transaction in which such an affiliate acts as
a principal, nor will the Fund buy or sell over-the-counter securities with
affiliates of the Advisors acting as market maker.
If affiliates of the Advisors are participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
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 higher
commissions on brokerage transactions than another broker might have charged on
brokerage transactions for the Fund for brokerage or research services. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board of Directors. The foregoing
policy under which the Fund may pay higher commissions to certain broker-dealers
in the case of agency transactions, does not apply to transactions effected on a
principal basis.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through affiliates of the Advisors. At the time of such authorization the Board
adopted certain policies and procedures incorporating the standards of Rule
17e-1
-18-
<PAGE>
under the Investment Company Act which requires that the commissions paid to the
affiliates of the Advisors must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC and
ABKB/LaSalle to furnish reports and to maintain records in connection with such
reviews.
ICC directed transactions to broker-dealers and paid related commissions because
of research services in the following amounts:
Fiscal Year Ended December 31,
------------------------------
1997 1996 1995
----------- ----------- -----------
Transactions Directed $41,151,108 $16,906,535 $11,298,553
Commissions Paid $73,026 $34,640 $25,703
For the period from September 1, 1997 through December 31, 1997, the
Fund paid commissions to BT Alex. Brown and its affiliates in the aggregate
amount of $3,630 which represented 10.76% of the Fund's aggregate brokerage
commissions and which were paid on transactions that represented 4.62% of the
aggregate dollar amount of transactions that incurred commissions paid by the
Fund. For the period from January 1, 1997 through August 31, 1997 and for the
fiscal year ended December 31, 1996, the Fund paid Alex. Brown brokerage
commissions in the aggregate amounts of $1,665 and $480, which represented 4.18%
and 1.39% of the Fund's aggregate brokerage commissions and which were paid on
transactions that represented 4.68% and 1.35% 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. As of December 31, 1997, the Fund held a 6.25%
repurchase agreement issued by Goldman Sachs & Co. valued at $1,225,000. Goldman
Sachs & Co. is a "regular broker or dealer" of the Fund.
ICC and ABKB/LaSalle each manage other investment accounts. It is
possible that, at times, identical securities will be acceptable for the Fund
and one or more of such other accounts; however, the position of each account in
the securities of the same issuer may vary and the length of time that each
account may choose to hold its investment in such securities may likewise vary.
The timing and amount of purchase by each account will also be determined by its
cash position. If the purchase or sale of securities consistent with the
investment policies of the Fund or one or more of these accounts is considered
at or about the same time, transactions in such securities will be allocated
among the accounts in a manner deemed equitable by ICC or ABKB/LaSalle. ICC and
ABKB/LaSalle may combine such transactions, in accordance with applicable laws
and regulations, in order to obtain the best net price and most favorable
execution. Such simultaneous transactions, however, could adversely affect the
ability of the Fund to obtain or dispose of the full amount of a security 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
-19-
<PAGE>
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 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
Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives such compensation from the Fund for
its services as custodian as may be agreed to from time to time by Bankers Trust
and the Fund. For the period from September 22, 1997 to December 31, 1997,
Bankers Trust accrued $4,040 as compensation for providing custody services to
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 $15.62 per account per year plus reimbursement for out-of-pocket expenses
incurred in connection therewith. For the fiscal year ended December 31, 1997,
such fees totaled $33,405. 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 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%
-20-
<PAGE>
In addition, the Fund reimburses ICC for certain out-of-pocket expenses
incurred in connection with ICC's provision of accounting services under the
Master Services Agreement.
As compensation for providing accounting services to the Fund for the
fiscal year ended December 31, 1997, ICC received fees of $36,237.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P.
13. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
14. PERFORMANCE INFORMATION
The Fund may compare its performance to other funds or to relevant
indices, such as the Wilshire Real Estate Index, the NAREIT Equity Index, the
S&P 500, the Russell 2000, the S&P Utilities Index and the Lehman Brothers Fixed
Income Index.
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices or averages in advertisements or in certain reports to
shareholders, performance will generally be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.
Total Return Calculations
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-,
5-, or 10-year periods (or fractional portion
thereof) of a hypothetical $1,000 payment made at
the beginning of the 1-, 5- or 10-year periods.
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 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 rate of
return over the period that would equate an assumed initial payment of $1,000 to
the ending
-21-
<PAGE>
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.
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, 1997 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Inception Through
December 31, 1997 December 31, 1997
------------------- ------------------
Ending Average Ending Average
Class Redeemable Annual Total Redeemable Annual Total
- ----- Value Return Value Return
----- ------ ----- ------
<S> <C> <C> <C> <C>
Class A $1,165.17 16.52% $1,827.87 22.34%
January 3, 1995 +
Class B $1,171.12 17.11% $1,842.10 22.65%
January 3, 1995 +
Institutional N/A N/A $1,188.39 18.84%
March 31, 1997
</TABLE>
+ Inception Date.
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 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, 1997 was 2.97% for the Class A Shares and 2.37%
for the Class B Shares.
-22-
<PAGE>
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 35% for the fiscal year ended December 31, 1997 and 23% for
the fiscal year ended December 31, 1996.
15. 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 17, 1998:
Name and Address % Ownership
---------------- -----------
T Rowe Price TR* 6.75%
Alex Brown & Sons Inc., Plan 100460
Flag Investors Real Estate Sec.
Attn: Asset Recon
P.O. Box 17215
Baltimore, MD 21237-1215
----------
* As of such date, BT Alex. Brown owned beneficially less
than 1% of such shares.
Directors and officers as a group owned less than 1% of the Fund's
total outstanding Shares, as of April 23, 1998.
16. FINANCIAL STATEMENTS
See next page.
-23-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1997
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS: 99.5%
Real Estate Investment Trusts: 89.5%
Apartments: 19.0%
43,000 Apartment Investment &
Management Company $36.75 $ 1,580,250 3.0% $ 178,110
48,400 Avalon Properties, Inc. 30.94 1,497,375 2.9 315,059
42,900 Bay Apartment
Communities, Inc. 39.00 1,673,100 3.2 386,320
9,800 Brandywine Realty Trust 25.13 246,225 0.5 35,840
35,050 Equity Residential
Properties Trust 50.56 1,772,216 3.4 454,325
29,300 Irvine Apartment
Communities, Inc. 31.81 932,106 1.8 277,120
19,900 Oasis Residential, Inc. 22.31 444,019 0.9 (3,833)
42,652 Post Properties, Inc. 40.63 1,732,758 3.3 241,809
---------- ---- ----------
9,878,049 19.0 1,884,750
Factory Outlets: 2.0%
27,200 Chelsea GCA Realty, Inc. 38.19 1,038,700 2.0 181,224
---------- ---- ----------
Hotels: 14.3%
38,300 American General
Hospitality Corp. 26.75 1,024,525 2.0 78,083
35,500 FelCor Suite Hotels, Inc. 35.50 1,260,250 2.4 129,589
83,701 Patriot American Hospitality, Inc. 28.81 2,411,635 4.6 840,465
47,200 Starwood Lodging Trust 57.88 2,731,700 5.3 1,035,079
---------- ---- ----------
7,428,110 14.3 2,083,216
Manufactured Housing: 1.8%
26,200 Sun Communities, Inc. 35.94 941,563 1.8 180,941
---------- ---- ----------
Office/Industrial: 36.5%
46,600 Boston Properties, Inc. 33.06 1,540,712 3.0 84,611
32,900 Commercial Net Lease Realty 17.87 588,087 1.1 89,064
51,600 Crescent Real Estate
Equities Company 39.38 2,031,750 3.9 148,933
97,500 Duke Realty Investments, Inc. 24.25 2,364,375 4.6 625,084
82,479 Equity Office Properties Trust 31.56 2,603,271 5.0 484,630
21,700 First Industrial Realty Trust, Inc. 36.12 783,912 1.5 59,132
11,300 Great Lakes REIT, Inc. 19.44 219,644 0.4 42,959
51,500 Highwoods Properties, Inc. 37.19 1,915,156 3.7 350,874
</TABLE>
-24-
<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 (concluded)
Real Estate Investment Trusts (concluded)
Office/Industrial (concluded)
50,300 Mack-Cali Realty Corporation $41.00 $ 2,062,300 4.0% $ 276,824
40,800 Reckson Associates Realty Corp. 25.38 1,035,300 2.0 62,575
60,000 Spieker Properties, Inc. 42.88 2,572,500 5.0 710,410
36,700 Weeks Corporation 32.00 1,174,400 2.3 118,210
----------- ---- ----------
18,891,408 36.5 3,053,307
Regional Malls: 3.7%
18,200 Macerich Company 28.50 518,700 1.0 24,865
31,068 Simon DeBartolo Group, Inc. 32.69 1,015,535 2.0 160,140
15,000 Trammel Crow Company 25.75 386,250 0.7 123,750
----------- ---- ----------
1,920,485 3.7 308,755
Retail/Neighborhood and Community Centers: 7.5%
25,900 Developers Diversified Realty
Corporation 38.25 990,675 1.9 149,956
34,200 Federal Realty Investment Trust 25.75 880,650 1.7 19,591
43,000 Vornado Realty Trust 46.94 2,018,313 3.9 970,030
----------- ---- ----------
3,889,638 7.5 1,139,577
Self-Storage: 4.7%
52,500 Public Storage, Inc. 29.37 1,542,187 3.0 186,256
23,100 Storage USA, Inc. 39.94 922,556 1.7 109,897
----------- ---- ----------
2,464,743 4.7 296,153
Real Estate Operating Companies: 10.0%
Diversified: 0.8%
35,500 Capital Trust - Class A* 11.25 399,375 0.8 9,362
----------- ---- ----------
Hotels: 5.7%
17,000 CapStar Hotel Company* 34.31 583,312 1.1 (5,313)
120,500 Host Marriott Corp.* 19.63 2,364,813 4.6 362,840
----------- ---- ----------
2,948,125 5.7 357,527
Office/Industrial: 2.6%
67,400 Catellus Development Corporation 20.00 1,348,000 2.6 90,082
----------- ---- ----------
Regional Malls: 0.9%
14,000 The Rouse Company 32.75 458,500 0.9 96,188
----------- ---- ----------
Total Common Stocks
(Cost $41,925,613) 51,606,695 99.5 9,681,082
----------- ---- ----------
</TABLE>
-25-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1997
Market Percent
Par Value of Net
(000) Security (Note 1) Assets
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT: 2.4%
$1,225 Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased at
$1,225,425 on 1/2/98, collateralized by
U.S. Treasury Notes with a market
value of $1,249,772.
(Cost $1,225,000) $ 1,225,000 2.4%
----------- -----
Total Investment in Securities-- 101.9%
(Cost $43,150,613)** 52,831,695 101.9
Liabilities in Excess of Other Assets, Net (976,298) (1.9)
----------- -----
Net Assets $51,855,397 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($41,768,471 / 2,647,320 shares outstanding) $15.78
======
Class B Share
($9,798,616 / 623,533 shares outstanding) $15.71***
======
Institutional Share
($288,310 / 18,119 shares outstanding) $15.91
======
Maximum Offering Price Per:
Class A Share
($15.78 / 0.955) $16.52
======
Class B Share $15.71
======
Institutional Share $15.91
======
- --------
*Non-income producing security.
**Aggregate cost for federal tax purposes was $42,774,543.
***Redemption value is $15.09 following a maximum 4% contingent deferred sales
charge.
See Notes to Financial Statements.
-26-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
------------
1997
- -----------------------------------------------------------------------------------
<S> <C>
Investment Income (Note 1):
Dividends $1,967,342
Interest 45,132
----------
Total income 2,012,474
----------
Expenses:
Investment advisory fee (Note 2) 255,425
Distribution fee (Note 2) 152,057
Legal 69,887
Accounting fee (Note 2) 36,237
Transfer agent fee (Note 2) 33,405
Registration fees 29,577
Printing and postage 28,799
Organizational expense (Note 1) 27,771
Audit 24,771
Custodian fee (Note 2) 13,846
Directors' fees 1,508
----------
Total expenses 673,283
Less: Fees waived (Note 2) (128,442)
----------
Net expenses 544,841
----------
Net investment income 1,467,633
----------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 1,997,900
Change in unrealized appreciation or depreciation of investments 4,596,911
----------
Net gain on investments 6,594,811
----------
Net increase in net assets resulting from operations $8,062,444
==========
</TABLE>
See Notes to Financial Statements.
-27-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 1,467,633 $ 832,831
Net realized gain from security transactions 1,997,900 489,391
Change in unrealized appreciation or
depreciation of investments 4,596,911 4,266,134
----------- -----------
Net increase in net assets resulting from operations 8,062,444 5,588,356
----------- -----------
Distributions to Shareholders from:
Net investment income:
Class A Shares (1,271,684) (600,459)
Class B Shares (238,106) (158,265)
Institutional Shares (1,925) --
Net realized capital gains:
Class A Shares (1,205,375) (314,488)
Class B Shares (274,879) (82,650)
Institutional Shares (8,516) --
Return of capital:
Class A Shares -- (21,539)
Class B Shares -- (5,650)
Institutional Shares -- --
----------- -----------
Total distributions (3,000,485) (1,183,051)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 22,600,633 10,892,733
Value of shares issued in reinvestment of dividends 2,621,448 974,878
Cost of shares repurchased (3,539,713) (1,349,523)
----------- -----------
Increase in net assets derived from
capital share transactions 21,682,368 10,518,088
----------- -----------
Total increase in net assets 26,744,327 14,923,393
Net Assets:
Beginning of year 25,111,070 10,187,677
----------- -----------
End of year $51,855,397 $25,111,070
=========== ===========
</TABLE>
See Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended through
December 31, December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 13.89 $ 11.20 $10.00
------- ------- ------
Income from Investment Operations:
Net investment income 0.52 0.61 0.56
Net realized and unrealized gain
on investments 2.44 2.90 1.21
------- ------- ------
Total from Investment Operations 2.96 3.51 1.77
------- ------- ------
Less Distributions:
Distributions from net investment
income (0.60) (0.58) (0.49)(2)
Distributions from net realized
capital gains (0.47) (0.22) (0.05)
Return of capital -- (0.02) (0.03)(2)
------- ------- ------
Total distributions (1.07) (0.82) (0.57)
------- ------- ------
Net asset value at end of period $ 15.78 $ 13.89 $11.20
======= ======= ======
Total Return(3) 22.01% 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses(4) 1.25% 1.25% 1.25%(6,7)
Net investment income(5) 3.87% 5.29% 6.09%(6,7)
Supplemental Data:
Net assets at end of period (000) $41,773 $19,816 $7,171
Portfolio turnover rate 35% 23% 28%
Average commissions per share(8) $0.0479 $0.0475 --
</TABLE>
- -------
(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 1.58%,
2.28% and 3.25% (annualized) for the years ended December 31, 1997 and 1996
and the period ended December 31, 1995, respectively.
(5) 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 3.54%, 4.26% and 3.89% (annualized) for the years ended December 31,
1997 and 1996 and the period ended December 31, 1995, respectively.
(6) Annualized.
(7) Effective January 1, 1996, the Fund's expense and net investment income
ratios are 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% for the period ended December 31,
1995.
(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.
-29-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class B Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended through
December 31, December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 13.84 $ 11.18 $10.00
------- ------- ------
Income from Investment Operations:
Net investment income 0.42 0.52 0.50
Net realized and unrealized gain
on investments 2.42 2.89 1.20
------- ------- ------
Total from Investment Operations 2.84 3.41 1.70
------- ------- ------
Less Distributions:
Distributions from net investment
income (0.50) (0.51) (0.42)(2)
Distributions from net realized
capital gains (0.47) (0.22) (0.05)
Return of capital -- (0.02) (0.05)(2)
------- ------- ------
Total distributions (0.97) (0.75) (0.52)
------- ------- ------
Net asset value at end of period $ 15.71 $ 13.84 $11.18
======= ======= ======
Total Return(3) 21.11% 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses(4) 2.00% 2.00% 2.00%(6,7)
Net investment income(5) 3.12% 4.46% 5.39%(6,7)
Supplemental Data:
Net assets at end of period (000) $ 9,799 $ 5,295 $3,016
Portfolio turnover rate 35% 23% 28%
Average commissions per share(8) $0.0479 $0.0475 --
</TABLE>
- -------
(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 (Note 2), the ratio of expenses to
average daily net assets would have been 2.33%, 3.03% and 4.05% (annualized)
for the years ended December 31, 1997 and 1996 and the period ended December
31, 1995, respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.79%, 3.43% and 3.09%
(annualized) for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.
(6) Annualized.
(7) Effective January 1, 1996, the Fund's expense and net investment income
ratios are 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% for the period ended December 31,
1995.
(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.
-30-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout the period)
For the Period
March 31, 1997(1)
through December 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $14.19
------
Income from Investment Operations:
Net investment income 0.47
Net realized and unrealized gain
on investments 2.14
------
Total from Investment Operations 2.61
------
Less Distributions:
Distributions from net investment income (0.42)
Distributions from net realized
capital gains (0.47)
------
Total distributions (0.89)
------
Net asset value at end of period $15.91
======
Total Return 18.84%
Ratios to Average Daily Net Assets:
Expenses(2) 1.00%(4)
Net investment income(3) 4.30%(4)
Supplemental Data:
Net assets at end of period (000) $ 288
Portfolio turnover rate 35%(4)
Average commissions per share $ 0.0479
- -------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.39% (annualized) for the period
ended December 31, 1997.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 3.91% (annualized) for
the period ended December 31, 1997.
(4) Annualized.
See Notes to Financial Statements.
-31-
<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"), which was
organized as a Maryland Corporation on May 2, 1994 and commenced operations
January 3, 1995, is registered under the Investment Company Act of 1940 as a
non-diversified open-end investment management company. Its objective is to seek
total return primarily through investments in equity securities of companies
that are principally engaged in the real estate industry.
The Fund consists of three share classes: Class A Shares and Class B
Shares, which both commenced January 3, 1995, and Institutional Shares, which
commenced March 31, 1997.
The Class A and Class B Shares are subject to different sales charges. The
Class A Shares have a 4.50% maximum front-end sales charge and the Class B
Shares have a 4.00% maximum contingent deferred sales charge. In addition, each
class has a different distribution fee. The Institutional Shares do not have a
sales charge or a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at its last bid price in
the over-the-counter market. When a market quotation is unavailable, the
Investment Advisor determines a fair value using procedures that the
Board of Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost. As of
December 31, 1997, there were no Board valued securities.
B. REPURCHASE AGREEMENTS-- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a
-32-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
separate account until the repurchase agreement matures. The agreement
ensures that the collateral's market value, including any accrued
interest, is sufficient if the broker defaults. The Fund's access to the
collateral may be delayed or limited if the broker defaults and the
value of the collateral declines or if the broker enters into an
insolvency proceeding.
C. FEDERAL INCOME TAX -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains,
it will be exempt from most, if not all, federal income and excise
taxes. As a result, the Fund has made no provisions for federal income
taxes.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER --
The Fund uses the trade date to account for security transactions and
the specific identification method for financial reporting and income
tax purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata amortization of premiums and accretion of discounts when
appropriate. Income and common expenses are allocated to each class
based on its respective average net assets. Class specific expenses are
charged directly to each class. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. The Fund has deferred
the costs incurred by its organization and the initial public offering
of shares. These costs are being amortized on the straight-line method
over a five-year period, which began when the Fund commenced operations.
Real Estate Investment Trusts ("REITs") provide the majority of the
dividend income that the Fund records. For income tax purposes, a
portion of these dividends consists of capital gains and return of
capital. For financial reporting purposes, the Fund records these
dividends as dividend income and records the investment in the REIT at
market value.
-33-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust New
York Corporation, is the Fund's investment advisor and ABKB/LaSalle Securities
Limited Partnership ("ABKB/LaSalle") is the Fund's subadvisor. As compensation
for its advisory services, the Fund pays ICC an annual fee based on the Fund's
average daily net assets. This fee is calculated daily and paid monthly at the
following annual rates: 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 the amount over $300
million.
As compensation for its subadvisory services, ICC pays ABKB/LaSalle a fee
from its advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 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 the amount over $300 million.
ICC has voluntarily agreed to waive its aggregate fees so that ordinary
Fund expenses for any fiscal year do not exceed 1.25% of the Class A Shares'
average daily net assets, 2.00% of the Class B Shares' average daily net assets
and 1.00% of the Institutional Shares' average daily net assets. For the year
ended December 31, 1997, ICC waived fees of $128,442.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or subadvisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $36,237 for accounting services for the year ended
December 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $33,405 for
transfer agent services for the year ended December 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's custodian.
From September 22, 1997 to December 31, 1997, the Fund accrued $4,040 in custody
expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), which is not related to ICC, an annual
-34-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
fee that is calculated daily and paid monthly. This fee is paid at an annual
rate equal to 0.25% of the Class A Shares' average daily net assets and 1.00%
(including a 0.25% shareholder servicing fee) of the Class B Shares' average
daily net assets. For the year ended December 31, 1997, distribution fees
aggregated $152,057, of which $80,482 was attributable to the Class A Shares and
$71,575 was attributable to the Class B Shares. Prior to September 1, 1997,
Alex. Brown & Sons Incorporated served as the Fund's distributor for the same
compensation and on substantially the same terms as ICC Distributors and earned
$32,382 for Class A Shares and $29,256 for Class B Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1997 was $609, and the accrued liability was $1,090.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 15 million shares of $.001 par
value capital stock (7 million Class A, 2 million Class B, 5 million
Institutional and 1 million undesignated). Transactions in shares of the Fund
were as follows:
Class A Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 1,256,866 807,325
Shares issued to shareholders on
reinvestment of dividends 146,244 63,818
Shares redeemed (182,922) (84,104)
----------- -----------
Net increase in shares outstanding 1,220,188 787,039
=========== ===========
Proceeds from sale of shares $18,297,796 $ 9,428,874
Value of reinvested dividends 2,192,511 787,477
Cost of shares redeemed (2,675,100) (1,047,300)
----------- -----------
Net increase from capital share transactions $17,815,207 $ 9,169,051
=========== ===========
-35-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 3--concluded
Class B Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 272,248 124,181
Shares issued to shareholders on
reinvestment of dividends 28,690 15,254
Shares redeemed (60,099) (26,509)
---------- ----------
Net increase in shares outstanding 240,839 112,926
========== ==========
Proceeds from sale of shares $4,002,637 $1,463,859
Value of reinvested dividends 428,928 187,401
Cost of shares redeemed (864,613) (302,223)
---------- ----------
Net increase from capital share transactions $3,566,952 $1,349,037
========== ==========
Institutional Shares
For the Period
March 31, 1997(1)
to Dec. 31, 1997
--------------------
Shares sold 18,118
Shares issued to shareholders on
reinvestment of dividends 1
Shares redeemed 0
--------
Net increase in shares outstanding 18,119
========
Proceeds from sale of shares $300,200
Value of reinvested dividends 9
Cost of shares redeemed 0
--------
Net increase from capital share transactions $300,209
========
- -------
(1) Commencement of operations.
On December 31, 1997, one shareholder held 6% of the Fund's shares
outstanding.
-36-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $33,724,551 and sales of investment securities aggregated $13,379,969
for the year ended December 31, 1997.
On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $10,066,289,
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $9,146.
NOTE 5--Net Assets
On December 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $33,508,319
Class B Shares 7,625,255
Institutional Shares 300,209
Undistributed net investment income 376,070
Accumulated net realized gain from security transactions 364,462
Unrealized appreciation of investments 9,681,082
-----------
$51,855,397
===========
NOTE 6--Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Real Estate Securities Fund held a special
meeting for its shareholders on August 14, 1997. During the meeting,
shareholders approved a new Investment Advisory Agreement between the Fund and
ICC and a new Sub-Advisory Agreement among the Fund, ICC and ABKB/LaSalle. The
new agreements are substantially the same as the former agreements. In addition,
shareholders elected the following Directors: James J. Cunnane, Richard T. Hale,
John F. Kroeger, Louis E. Levy, Eugene J. McDonald, Rebecca W. Rimel, Truman T.
Semans and Carl W. Vogt.
-37-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Board of 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., (the "Fund"), as of December 31, 1997 and the
related statement of operations for the year then ended, the statements 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 audits 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, 1997, 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 audits provide 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, 1997 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 presented in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Philadelphia, Pennsylvania
January 29, 1998
-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 "extremely strong" safety characteristics. Those rated
A-1 reflect an "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 - AAA - Highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only to a small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
Moody's- Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments
A-1
<PAGE>
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.
Aa - 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 Aaa securities.
A - 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.
Baa - 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-2
