LOGO
REAL ESTATE
SECURITIES
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
o 1998 was a difficult year for REITs and for the Fund. The Fund's return
was a negative 21.2%; the Wilshire Real Estate Securities Index declined by
17.4%.
o As the real estate market transitioned from the recovery to the
equilibrium phase, growth and momentum investors concluded the real estate
recovery was over and exited the REIT sector. This change in sentiment, and
the speed at which these investors exited the market, led to price declines
more severe than the changes in the underlying fundamentals warranted.
o The price declines experienced by the REITs in 1998 only make sense if
there is going to be a serious real estate recession in 1999, combining
substantial overbuilding with weakened demand caused by a general economic
recession.
o On the contrary, our research indicates that 1999 and 2000 should be
years of favorable real estate fundamentals, with most markets at
equilibrium and strong (8% to 11%) earnings growth for the real estate
companies.
o Over the longer term, now that REIT stock prices have returned to levels
that are close to net asset values, REITs should resume their traditional
role of offering high current yields, consistent moderate growth, and lower
volatility than the general stock market.
o As a result, we believe now is the time to be an aggressive buyer of
REITs.
<PAGE>
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment in Class A Shares*
January 3, 1995-December 31, 1998
CHART HERE
10000
10142
10638
11274
11819
12021
12551
13317
15684
16207
16764
19044
19136
18858
17996
15058
15150
$10,000 invested in the Real Estate Securities Fund Class A Shares at inception
on January 3, 1995 was worth $15,150 on December 31, 1998.
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the maximum 4.50%
sales charge were reflected, the quoted performance would be lower. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results. See additional performance information on
page 11.
1
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
The Flag Investors Real Estate Securities Fund seeks total return, with a
significant income component, by investing in a diversified portfolio of REITs
and real-estate operating companies.
The sub advisor and portfolio manager--ABKB LaSalle Securities Limited--has
more than a dozen professionals dedicated solely to investing in public
real-estate securities. Its management team brings direct operating experience
in property development, management, investment and finance, as well as more
than a decade of successful real estate portfolio management experience, to its
efforts on behalf of your Fund.
FUND PERFORMANCE
The Flag Investors Real Estate Securities Fund's performance since its
inception in 1995 is presented below.
TOTAL RETURN PERFORMANCE*
<TABLE>
<CAPTION>
Class A Class B Wilshire Real
For the periods ended 12/31/98 Shares Shares Estate Index
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year -20.8% -21.4% -17.4%
....................................................................................
Since Inception (1/3/95) 10.8% 10.0% 11.3%
....................................................................................
</TABLE>
Source: ABKB/LaSalle Securities; Wilshire Associates
* These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. Past performance is
not an indicator of future results.
On December 31, 1998, the net asset value (NAV) was $11.64 per Class A
share and $11.60 per Class B share. In addition, 12 monthly dividends and one
capital gains distribution were paid in 1998, totaling $0.93 per Class A share
and $0.81 per Class B share.
1998 was an unusual and disappointing year for REIT stocks. While REIT
earnings were up a record 15%, their stocks were down 23%. Investors
(particularly non-real estate growth and momentum investors) abandoned the
sector in 1998 because of concerns about overbuilding, reduced demand for space,
and lower earnings growth in 1999. In our view, all of these concerns were
overblown.
The results for your portfolio were also disappointing, on both an absolute
and relative basis. This primarily was a result of our emphasis on the larger,
higher growth companies, many of which were predominantly owned by the broad
market investors who abandoned the sector in 1998.
2
<PAGE>
MARKET COMMENTARY
While 1998 was the best year ever for REIT earnings growth, it turned into
the worst year since 1974 for REIT price performance, and the worst year ever in
performance relative to the broad market. In our view, 1998's poor performance
was due to four principal factors:
o The continuing bull market for large cap and high tech stocks drew
broad-market investors away from REITs, which are normally viewed as small
cap companies and defensive stocks. Most money that remained defensive went
to the tried-and-true utility sector. The larger real estate mutual funds
were selling REITs to meet redemptions virtually the entire year.
o Regulatory changes derailed the high-growth paired-share REITs and, in
the process, created tremendous confusion and uncertainty regarding the
regulatory environment for REITs. Many investors inappropriately
interpreted the regulatory changes as having negative economic implications
for the overall REIT industry.
o Cyclical concerns arose that real estate companies would repeat the
development excesses of earlier real estate boom and bust cycles, or chase
acquisitions for their own sake. Cap rate declines early in the year made
growth by acquisition much more difficult.
o Later in the year, concerns surfaced that lack of capital would keep many
companies from executing their growth plans (with only limited
understanding that restricted capital would itself reduce potential
cyclical excesses). In addition, there were concerns that an economic
recession in 1999 would cause lower occupancies and rents.
RELATIVE VALUATION
Strong fundamental results combined with poor price performance has created
a situation where relative REIT valuations are extraordinarily attractive.
REIT VALUATION VS. S&P 500
At 12/31/97 At 12/31/98
------------------ -------------------
For the periods ended 12/31/98 S&P 500 REITS S&P 500 REITS
- --------------------------------------------------------------------------------
Forward Multiple 20.0x 11.8x 23.9x 8.9x
................................................................................
Forward Earnings Growth Est. 7.8% 19.9% 4.3% 12.4%
Source: ABKB/LaSalle Securities
Note: Earnings growth for REITS is weighted average FFO/share growth.
3
<PAGE>
A 15% earnings gain, coupled with a performance disadvantage of more than
40% compared to the S&P 500, has created the deepest valuation discount for the
real estate sector we have ever seen.
LINE CHART
S&P 500 REIT REIT/
Multiple Composite S&P
-------- --------- -----
1986 Ql 86 14.61 14.00 0.96
Q2 86 15.20 14.85 0.98
Q3 14.02 15.14 1.08
Q4 14.68 14.97 1.02
1987 Ql 87 17.26 16.28 0.94
Q2 87 17.52 16.66 0.95
Q3 17.26 15.03 0.87
Q4 12.61 12.78 1.01
1988 Ql 88 12.51 13.51 1.08
Q2 88 12.18 13.53 1.11
Q3 11.61 13.52 1.16
Q4 11.34 14.14 1.25
1989 Ql 89 11.52 13.96 1.21
Q2 89 12.18 14.60 1.20
Q3 13.53 14.47 1.07
Q4 13.67 14.52 1.06
1990 Ql 90 13.54 13.61 1.01
Q2 90 14.32 13.37 0.93
Q3 12.24 10.52 0.86
Q4 13.34 12.06 0.90
1991 Ql 91 15.47 12.80 0.83
Q2 91 15.96 12.32 0.77
Q3 17.01 12.98 0.76
Q4 18.79 14.64 0.78
1992 Ql 92 17.86 12.96 0.73
Q2 92 17.44 12.95 0.74
Q3 17.55 13.78 0.79
Q4 17.68 13.98 0.79
1993 Ql 93 17.89 15.30 0.86
Q2 93 17.33 14.35 0.83
Q3 16.9 14.74 0.87
Q4 16.37 12.54 0.77
1994 Ql 94 15.2 12.28 0.81
Q2 94 14.69 12.08 0.82
Q3 14.78 11.43 0.77
Q4 13.92 11.30 0.81
1995 Ql 95 13.92 10.87 0.78
Q2 95 14.5 11.10 0.77
Q3 15.07 11.22 0.74
Q4 15.88 11.36 0.72
1996 Ql 96 15.36 11.27 0.73
Q2 96 15.62 11.40 0.73
Q3 15.5 11.78 0.76
Q4 17.4 13.70 0.79
1997 Ql 97 16.11 12.55 0.78
Q2 97 18.83 12.91 0.69
Q3 20.15 13.65 0.68
Q4 20.9 13.11 0.63
1988 Ql 98 21.60 12.20 0.56
Q2 98 21.98 10.30 0.47
Q3 19.94 9.90 0.50
Q4 23.87 8.90 0.37
12-Year Average 15.40 13.27 0.88
Source: Goldman Sachs.
<PAGE>
LETTER TO SHAREHOLDERS(CONTINUED)
- --------------------------------------------------------------------------------
Broad market investors continue to drive the largest S&P companies and
certain super-growth stories to unprecedented levels of valuation, while REIT
multiples are at the lowest level in the past 12 years.
REIT FFO VS. S&P
The large spread between REIT Funds From Operation multiples and S&P 500 PE
multiples has developed since early 1997. Even if the multiples for the two
groups remain stable from this point, REITS should outperform due to their
superior near term growth rate. In fact, while it is impossible to predict the
month when sentiment toward REITS will change, we believe that it will. If REITs
continue to turn in stable growth in 1999, these companies should expect to
rally later in the year.
REAL ESTATE FUNDAMENTALS
For most segments of the real estate business, the past several years have
been a period of cyclical recovery from the depression levels of the early
1990s. While most property types and markets have now moved into equilibrium, it
appears that a dynamic equilibrium will continue for some time; we do not
anticipate a significant deterioration in fundamentals in the foreseeable
future.
The OFFICE market is now in balance nationally, with properties in select
Central Business Districts in the best position to increase their cash flows and
4
<PAGE>
PRIVATE REAL ESTATE RETURNS
Average Last Next
Returns 3 Years 3 Years
- --------------------------------------------------------------------------------
Office 15.5% 10%-12%
................................................................................
Industrial 15.3% 9%-11%
................................................................................
Apartment 12.5% 9%-11%
................................................................................
Lodging 27.0% 10%-14%
................................................................................
Mall Retail 6.2% 5%-7%
................................................................................
Strip Retail 8.9% 7%-9%
................................................................................
Source: LaSalle Advisors Investment Research
values. There may be some excess building in certain suburban submarkets, but
this overbuilding is mostly in markets with strong secular employment growth,
and should not cause significant declines in rents and occupancies. The recent
real estate capital markets' disarray has helped limit new supply going forward.
Office demand is likely to be reasonable but not record-breaking. Taking
supply and demand into account, we expect market rents to rise with inflation,
which will often result in above-inflation increases in Net Operating Income,
since a number of properties still have significant built in growth as leases
roll over.
The INDUSTRIAL market continues in equilibrium. Although we expect supply
to slightly outpace absorption in 1999, we anticipate that market rental growth
will equal inflation.
1998 was a good year in terms of fundamentals in the retail industry.
Consumer confidence was robust and retail sales growth outpaced inflation. The
pace of new supply of product slowed and the market moved towards equilibrium,
reversing a trend of increasing over-supply which has persisted for the last
several years. These positive indicators translated into solid internal growth
for many properties, which enjoyed increases in occupancy and rising rental
rates.
Stability continued to be the theme in the APARTMENT industry in 1998.
Properties maintained strong internal operating results due to both revenue
gains in excess of inflation and lower or flat operating expenses. Occupancies
were high across the nation as well, with strong demand growth despite a booming
single-family market.
5
<PAGE>
Stability should continue in the apartment sector, with solid demographic
growth assured for a number of years. Despite supply concerns in some markets,
most markets will be in equilibrium. In addition, we expect new supply to be
sensitive to expected demand, as capital is constrained in the public debt and
equity markets. Internal growth should exceed inflation, and occupancies should
remain stable.
The LODGING business has been in flux over the last year or so, with
mergers and structural changes creating a new competitive environment with new
strong--and not so strong--lodging owners and operators. These changes have
overshadowed the excellent operating results achieved in 1998. Although we may
see some reductions in occupancies and in the growth of room rates, the best
earnings potential continues to be upscale and luxury hotels in the major
central business districts, where demand is strong and supply constrained.
NET ASSET VALUE AND COMPANY VALUE
Reits are, at their core, a collection of tangible assets with value as a
portfolio of properties. At various times in a real estate cycle, public
companies will trade at significant differences to their Net Asset Value (NAV).
We expect this difference will ordinarily be at a moderate premium of 5% to 15%
to account for the organizational value of public ownership. At the beginning of
1998, valuations were at or beyond the high end of this range. Today many
companies are trading at or below their Navs.
- --------------------------------------------------------------------------------
NAV PREMIUMS/DISCOUNTS AT 12/97 AND 12/98
ADJUSTED EBITDA CAP RATES
NAV Premium/Discount Adj. EBITDA
Sector 12/31/97 12/31/98 Cap Rate 12/98
- --------------------------------------------------------------------------------
Hotel 2.0% -37.4% 10.8%
................................................................................
Office/Industrial 18.9% -10.7% 8.7%
................................................................................
UNIVERSE 15.9% -10.2% 8.8%
................................................................................
Retail 18.9% -7.8% 9.0%
................................................................................
Self Storage 25.6% -6.0% 9.4%
................................................................................
Diversified 27.4% -4.6% 8.1%
................................................................................
Residential 12.7% -0.2% 8.7%
................................................................................
Note: Adjusted EBIDTA (Earnings Before Interest, Depreciation, Taxes, and
Amortization - and After Cap Ex and G&A Expense) is a proxy for the returns
received from property by a direct owner.
6
<PAGE>
PERSPECTIVE ON 1999
While the pain of 1998 will be remembered for a long time, conditions are
favorable and many companies are well positioned for a period of superior
relative performance:
o To date, the real estate industry has shown much more financial
discipline than in earlier markets. Development today requires far more
capital and pre-leasing than in the past; the public companies that have
money are coming to realize the need for consistent, sustainable earnings
growth.
o With continuing capital constraints, the strongest and most liquid
companies will increase their advantage.
o The structural problems of 1998 appear to be behind us. There is unlikely
to be new negative legislation or broad criticism of the industry in the
next year or two.
o Almost all property sectors and regions are in a healthy equilibrium.
While there could be sporadic oversupply situations in cities like Seattle,
Las Vegas, or Houston, the effects on occupancies and rents are expected to
be moderate and short lived.
o With investment sentiment negative and relative valuation at a historical
low, the prospect of further relative underperformance seems remote.
INVESTMENT STRATEGY
At year end the Fund's assets were allocated as follows:
[PIE CHART]
Apartments 20%
Diversified/Other 25%
Factory Outlets2%
Office/Industrial 29%
Retail 3%
Self-Storage 7%
Regional Malls 2%
Hotels 12%
Health Care 0%
7
<PAGE>
LETTER TO SHAREHOLDERS(CONCLUDED)
- --------------------------------------------------------------------------------
As we position our portfolios for 1999 and beyond, we continue to look at
the real estate companies as both collections of assets and as operating
entities with managements which can have a significant impact on the value of
these assets. With real estate markets now in equilibrium and access to capital
more restricted, relative performance becomes more closely aligned with existing
property performance and management operating capabilities and less driven by
the aggressive capital market and acquisition strategies which have been the
hallmark of many companies over the last three years.
We anticipate a moderating but still positive economy in 1999. We know that
there will be a time when the economy will go into recession and/or the broad
stock market will decline, and that these events will have some impact on the
operations of the REITs' properties and their ability to raise capital. In the
past, it has been these difficult times that have allowed the best companies to
position themselves for the best future growth.
These anticipated conditions lead us to the following strategic focus:
o We are increasing our focus on the best managed, more conservatively
financed companies. Quality is cheaper today than it has been in several
years.
o We are generally avoiding companies with significant dependence on
acquisitions or access to equity capital to generate competitive returns.
We expect access to equity to remain fairly limited for the foreseeable
future.
o We prefer companies with strong growth potential from existing assets.
While we continue to invest in select companies with development
capabilities, the risk profile of development-oriented companies has
increased.
o We are increasing our investment in lower risk assets and markets. This
includes product types less vulnerable to a downturn in the economy (e.g.
neighborhood shopping centers, net-lease owners, manufactured homes) and
markets with below average supply risk.
8
<PAGE>
In general, we continue to find attractive investment opportunities in all
of the major property sectors. Based on current valuation levels, with the
exception of the lodging sector, the differences in valuations among the various
property sectors appear fairly modest.
We continue to have a bias in favor of the office and apartment sectors.
Many of the better office and apartment companies underperformed in 1998 and now
appear more attractive than usual. The retail and industrial companies had
strong relative performance in 1998 and now appear slightly less attractive.
While valuation levels are clearly cheapest in the lodging sector, we are
taking a cautious stance toward the sector due to its high risk. Our strategy is
to continue to focus on the companies owning upscale, full service hotels in the
best Central Business Districts.
With most sectors and regions in balance, our key criteria will be the
abilities and expectations of individual companies, and relative valuations.
Although 1998 was a difficult year for holders of real estate stocks, we
believe that the period of relative underperformance of these stocks is near an
end. Going forward they should provide a haven of solid current return and
consistent earnings growth in a market that is likely to become increasingly
volatile.
We are positioning the Fund's investments to offer such a haven, and we
appreciate your continued interest and support.
Very truly yours,
/s/ William K. Morrill, Jr. /s/ Keith R. Pauley /s/ James A. Ulmer III
- ---------------------------- ------------------------ ----------------------
William K. Morrill, Jr. Keith R. Pauley James A. Ulmer III
President Executive Vice President Vice President
January 20, 1999
9
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
DIVIDEND DECLARATION
1998 Year-End Dividend
The Board of Directors has declared a year-end per share distribution
payable on December 11, 1998 to shareholders of record on December 5, 1998.
Class A Class B Institutional
Shares Shares Shares
Long-term capital gains .. $.23 $.23 $.23
----- ----- -----
Dividends for Calendar 1998
Total dividends declared for calendar 1998 are as follows:
Class A Class B Institutional
Shares Shares Shares
Income ................... $ .60 $.48 $.636
Long-term capital gains .. .33 .33 .33
----- ---- -----
Total distributions ...... $ .93 $.81 $.966
Shareholders who have elected to participate in the Fund's dividend
reinvestment plan have received their distribution in additional shares of the
Fund. If you are not currently a plan participant but would like to have your
dividends reinvesting at net asset value, please contact your investment
representative or the Fund at 1-800-553-8080.
10
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on January
3, 1995 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses. The graph for the Fund's Class A Shares reflects the
impact of the currently effective 4.50% maximum sales charge. The graph for the
Fund's Class B Shares, reflects the impact of a 3.00% contingent deferred sales
charge, which is the applicable sales charge for the represented time period.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the indices shown are not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of this index would
have had to own the securities that it represent. Acquiring these securities
would require a considerable amount of money and would incur expenses that are
not reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the
SEC calculation includes the impact of the currently effective maximum sales
charge. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed. Past performance is not an indicator of future results.
11
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION (CONTINUED)
Change in Value of a $10,000 Investment in Class A Shares*
January 3, 1995-December 31, 1998
Flag Investors Real Estate Security Fund $14,468
Wilshire Real Estate Securities Indes $15,613
GRAPH CHART
1/95 9550 10000
3/95 9686 10210
6/95 10159 10649
9/95 10767 11150
12/95 11287 11551
3/96 11480 12036
6/96 11987 12602
6/96 12718 13345
12/96 14978 15801
3/97 15478 16085
6/97 16010 16825
9/97 18187 18945
12/97 18275 18907
3/98 18009 18765
6/98 17186 17904
9/98 14380 15763
12/908 14468 15613
Average Annual Total Return1
Periods Ended 12/31/98 1 Year 5 Years Since Inception2
- --------------------------------------------------------------------------------
Class A Shares (24.39)% --% 9.69%
................................................................................
1 These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% maximum sales charge. Past
performance is not an indicator of future results.
2 January 3, 1995.
12
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION (CONTINUED)
Change in Value of a $10,000 Investment in Class B Shares*
January 3, 1995-December 31, 1998
Flag Investors Real Estate Security Fund $14,408
Wilshire Real Estate Securities Indes $15,613
GRAPH CHART
1/95 10000 10000
3/95 10125 10210
6/95 10602 10649
9/95 11218 11150
12/95 11740 11551
3/96 11911 12036
6/96 12418 12602
9/96 13147 13345
12/96 15457 15801
3/97 15943 16085
6/97 16467 16825
9/97 18678 18945
12/97 18421 18907
3/98 18126 18765
6/98 17696 17904
9/98 14371 15763
12/98 14408 15613
Average Annual Total Return1
Periods Ended 12/31/98 1 Year 5 Years Since Inception2
- --------------------------------------------------------------------------------
Class B Shares (25.43)% --% 9.58%
................................................................................
1 These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's applicable sales charge. Past performance
is not an indicator of future results.
2 January 3, 1995.
13
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION (CONTINUED)
Change in Value of a $10,000 Investment in Institutional Shares*
March 31, 1997-December 31, 1998
Flag Investors Real Estate Security Fund $9,431
Wilshire Real Estate Securities Indes $9,717
LINE CHART
3/97 10000 10000
6/97 10374 10469
9/97 11820 11791
12/97 11884 11767
3/98 18424 11679
6/98 11188 11143
9/98 14670 9810
12/98 9431 9717
Average Annual Total Return1
Periods Ended 12/31/98 1 Year 5 Years Since Inception2
- --------------------------------------------------------------------------------
Institutional Shares (20.64)% --% (3.29)%
................................................................................
1 These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
2 March 31, 1997.
14
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS DECEMBER 31, 1998
PERCENT UNREALIZED
MARKET MARKET OF NET GAIN/
SHARES SECURITY PRICE VALUE ASSETS (LOSS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK - 97.4%
REAL ESTATE OPERATING CO. -
HEALTHCARE: 0.4%
12,050 Crestline Capital Corp. $14.62 $ 176,231 0.4% $ (7,908)
----------- ---- -----------
REAL ESTATE OPERATING CO. - HOTELS AND
HOSPITALITY: 8.4%
130,983 Host Marriott Corp.* 13.81 1,809,210 4.4 (313,263)
108,800 Sunterra Corporation* 15.00 1,632,000 3.9 (144,205)
20,500 Meristar Hotels & Resorts, Inc.* 2.62 53,812 0.1 (69,018)
----------- ---- -----------
3,495,022 8.4 (526,486)
REAL ESTATE OPERATING CO. - OTHER: 6.0%
38,500 Capital Trust - Class A 6.00 231,000 0.6 (192,164)
25,200 Corrections Corp. of America* 17.63 444,150 1.1 (125,526)
32,016 Reckson Service Industries, Inc. 4.13 132,066 0.3 (88,810)
48,600 Vornado Realty Trust 33.75 1,640,250 4.0 381,791
----------- ---- -----------
2,447,466 6.0 (24,709)
REIT APARTMENTS: 18.2%
43,000 Apartment Investment &
Management Co. 37.19 1,599,062 3.9 196,922
77,085 AvalonBay Communities, Inc. 34.25 2,640,161 6.4 233,042
16,104 Camden Property Trust 26.00 418,704 1.0 (55,323)
30,750 Equity Residential Properties Trust 40.44 1,243,453 3.0 43,735
9,600 Irvine Apartment Communities 31.88 306,000 0.7 50,698
34,652 Post Properties, Inc. 38.44 1,331,955 3.2 82,882
----------- ---- -----------
7,539,335 18.2 551,956
REIT DIVERSIFIED/OTHER: 11.8%
50,000 Beacon Capital Partners+ 15.88 793,750 1.9 (206,250)
97,400 Catellus Development Corp.* 14.31 1,394,038 3.4 (414,608)
35,400 Crescent Real Estate Equities Co. 23.00 814,200 2.0 (464,163)
118,744 Northstar Capital Partners*+ 15.88 1,885,061 4.5 (500,819)
2,430 Vornado Operating Inc. 8.06 19,592 0.0 4,538
----------- ---- -----------
4,906,641 11.8 (1,581,302)
REIT HOTELS: 7.2%
36,348 Meristar Hospitality Corp 18.56 674,710 1.6 (374,467)
104,401 Patriot American Hospitality, Inc. 6.00 626,406 1.5 (1,492,618)
75,600 Starwood Lodging Trust 22.69 1,715,175 4.1 (1,454,257)
----------- ---- -----------
3,016,291 7.2 (3,321,342)
15
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS(CONCLUDED) DECEMBER 31, 1998
PERCENT UNREALIZED
MARKET MARKET OF NET GAIN/
SHARES SECURITY PRICE VALUE ASSETS (LOSS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REIT INDUSTRIAL: 2.5%
36,700 Weeks Corp. $28.19 $1,034,481 2.5% $ (21,709)
----------- ---- -----------
REIT MANUFACTURED HOUSING: 1.4%
16,800 Commercial Assets Inc. 6.06 101,850 0.2 (14,490)
14,200 Sun Communities, Inc. 38.41 494,338 1.2 30,007
----------- ---- -----------
596,188 1.4 15,517
REIT OFFICE/INDUSTRIAL: 26.9%
44,900 Boston Properties, Inc. 30.50 1,369,450 3.3 (121,407)
63,200 Duke Realty Investments Inc. 23.25 1,469,400 3.6 229,206
96,679 Equity Office Properties Trust 24.00 2,320,317 5.6 (200,563)
57,300 Mack-Cali Realty Corp. 30.88 1,769,138 4.3 (287,766)
11,000 PS Business Parks Inc. 23.88 262,625 0.6 (5,500)
66,700 Reckson Associates 22.19 1,479,906 3.6 55,808
18,000 Sl Green Realty Corp. 21.63 389,250 0.9 (13,493)
60,000 Spieker Properties, Inc. 34.63 2,077,500 5.0 215,410
----------- ---- -----------
11,137,586 26.9 (128,305)
REIT RETAIL FACTORY OUTLETS: 2.3%
27,200 Chelsea GCA Realty, Inc. 35.63 969,000 2.3 111,524
----------- ---- -----------
REIT RETAIL FREESTANDING: 1.1%
32,900 Commercial Net Lease Realty 13.25 435,925 1.1 (63,098)
----------- ---- -----------
REIT RETAIL/NEIGHBORHOOD AND
COMMUNITY CENTERS: 2.2%
51,800 Developers Diversified Realty 17.75 919,450 2.2 78,731
----------- ---- -----------
REIT RETAIL REGIONAL MALLS: 2.3%
15,400 Macerich Company 25.63 394,625 1.0 (26,969)
20,000 Rouse Company 27.50 550,000 1.3 (16,476)
----------- ---- -----------
944,625 2.3 (43,445)
REIT SELF STORAGE: 6.7%
52,500 Public Storage, Inc. 27.06 1,420,781 3.4 64,849
41,600 Storage USA, Inc. 32.31 1,344,200 3.3 (83,347)
----------- ---- -----------
2,764,981 6.7 (18,498)
16
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
PERCENT UNREALIZED
MARKET MARKET OF NET GAIN/
SHARES SECURITY PRICE VALUE ASSETS (LOSS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL COMMON STOCK
(Cost $45,362,296) $40,383,222 97.4% $(4,979,074)
----------- ---- -----------
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 2.3%
- --------------------------------------------------------------------------------
$ 953 Goldman Sachs & Co.,
4.50% dated 12/31/98,
to be repurchased on 1/4/99,
collateralized by U.S. Treasury Bond
with a market value of $972,509
(Cost $953,000) 953,000 2.3
----------- -----
TOTAL INVESTMENTS--99.7%
(Cost $46,315,296)** 41,336,222 99.7
OTHER ASSETS IN EXCESS OF LIABILITIES--0.3% 125,712 0.3
----------- -----
TOTAL NET ASSETS--100.0% $41,461,934 100.0%
=========== =====
NET ASSET VALUE AND REDEMPTION PRICE PER:
CLASS A SHARE
($33,239,325 / 2,856,524 shares outstanding) $11.64
======
CLASS B SHARE
($7,640,726 / 658,457 shares outstanding) $11.60***
======
INSTITUTIONAL SHARE
($581,883 / 49,564 shares outstanding) $11.74
======
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($11.64 / 0.955) $12.19
======
CLASS B SHARE $11.60
======
INSTITUTIONAL SHARE $11.74
======
</TABLE>
- ------------------
*Non-income producing security.
** Aggregate cost for federal tax purposes was $45,647,506.
***Redemption value is $11.14 following a maximum 4% contingent deferred sales
charge.
+Securities are fair valued by management see Note 1.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Dividends ................................................... $ 2,647,020
Interest .................................................... 36,463
------------
Total income ........................................... 2,683,483
------------
Expenses:
Investment advisory fee ..................................... 315,817
Distribution fee ............................................ 189,562
Professional fees ........................................... 102,740
Transfer agent fee .......................................... 49,118
Registration fees ........................................... 45,755
Accounting fee .............................................. 41,142
Organization ................................................ 28,328
Shareholder Reporting fees .................................. 26,542
Custodian fees .............................................. 15,719
Miscellaneous ............................................... 3,204
Directors' fee .............................................. 2,230
------------
Total expenses ......................................... 820,157
Less:Fees waived ............................................ (144,382)
------------
Net expenses ........................................... 675,775
------------
Net investment income ....................................... 2,007,708
------------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions ................ 981,839
Change in unrealized appreciation/depreciation of investments (14,660,156)
------------
Net loss on investments ..................................... (13,678,317)
------------
Net decrease in net assets resulting from operations ........... $(11,670,609)
============
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended December 31,
- -------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ............................. $ 2,007,708 $ 1,467,633
Net realized gain from security transactions ...... 981,839 1,997,900
Change in unrealized appreciation/
depreciation of investments ..................... (14,660,156) 4,596,911
------------ ------------
Net increase/(decrease) in net assets resulting
from operations ................................. (11,670,609) 8,062,444
------------ ------------
Distributions to Shareholders from:
Net investment income:
Class A Shares .................................. (1,296,479) (1,271,684)
Class B Shares .................................. (249,595) (238,106)
Institutional Shares ............................ (24,043) (1,925)
------------ ------------
Net realized capital gains:
Class A Shares .................................. (1,218,097) (1,205,375)
Class B Shares .................................. (295,348) (274,879)
Institutional Shares ............................ (23,198) (8,516)
------------ ------------
Return of capital:
Class A Shares .................................. (103,847) --
Class B Shares .................................. (21,830) --
Institutional Shares ............................ (1,944) --
------------ ------------
Total distributions ............................... (3,234,381) (3,000,485)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares ...................... 15,886,815 22,600,633
Value of shares issued in reinvestment of dividends 2,740,207 2,621,448
Cost of shares repurchased ........................ (14,115,495) (3,539,713)
------------ ------------
Increase in net assets derived from
capital share transactions ...................... 4,511,527 21,682,368
------------ ------------
Total increase/(decrease) in net assets ........... (10,393,463) 26,744,327
Net Assets:
Beginning of period ............................... 51,855,397 25,111,070
------------ ------------
End of period ..................................... $ 41,461,934 $ 51,855,397
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
For the For the Period
Year Ended For the Years January 3, 1995 1
December 31, Ended December 31, through December 31,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............... $ 15.78 $ 13.89 $ 11.20 $ 10.00
---------- ---------- ---------- ---------
Income from Investment Operations:
Net investment income ................................ 0.58 0.52 0.61 0.56
Net realized and unrealized gain/(loss) on investments (3.79) 2.44 2.90 1.21
---------- ---------- ---------- ---------
Total from Investment Operations ..................... (3.21) 2.96 3.51 1.77
---------- ---------- ---------- ---------
Less Distributions:
Distributions from net investment income ............. (0.46) (0.60) (0.58) (0.49)2
Distributions from net realized capital gains ........ (0.43) (0.47) (0.22) (0.05)
Return of capital .................................... (0.04) -- (0.02) (0.03)2
---------- ---------- ---------- ---------
Total distributions .................................. (0.93) (1.07) (0.82) (0.57)
---------- ---------- ---------- ---------
Net asset value at end of period ..................... $ 11.64 $ 15.78 $ 13.89 $ 11.20
========== ========== ========== =========
Total Return3 ........................................... (20.82)% 22.01% 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses4 ............................................ 1.25% 1.25% 1.25% 1.25% 6,7
Net investment income5 ............................... 4.28% 3.87% 5.29% 6.09% 6,7
Supplemental Data:
Net assets at end of period (000) .................... $ 33,239 $ 41,773 $ 19,816 $ 7,171
Portfolio turnover rate .............................. 24% 35% 23% 28%
</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 1.55%, 1.58%, 2.28% and 3.25% (annualized)for
the years ended December 31, 1998, 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 3.98%, 3.54%, 4.26% and
3.89% (annualized) for the years ended December 31, 1998, 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 have been based on average daily net assets. Prior to that date
they were based on average monthly net assets. Under the prior method, the
ratio of expenses to average net assets was 1.19% and the ratio of net
investment income to average net assets was 5.95%.
SEE NOTES TO FINANCIAL STATEMENTS.
20 & 21
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
For the For the Period
For the Years Year Ended January 3, 1995 1
Ended December 31, December 31, through December 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............... $ 15.71 $13.84 $ 11.18 10.00
--------- --------- --------- ---------
Income from Investment Operations:
Net investment income ................................ 0.47 0.42 0.52 0.50
Net realized and unrealized gain/(loss) on investments (3.77) 2.42 2.89 1.20
--------- --------- --------- ---------
Total from Investment Operations ..................... (3.30) 2.84 3.41 1.70
--------- --------- --------- ---------
Less Distributions:
Dividends from net investment income ................. (0.34) (0.50) (0.51) (0.42)2
Distributions from net realized capital gains ........ (0.43) (0.47) (0.22) (0.05)
Return of capital .................................... (0.04) -- (0.02) (0.05)2
--------- --------- --------- ---------
Total distributions .................................. (0.81) (0.97) (0.75) (0.52)
--------- --------- --------- ---------
Net asset value at end of period ..................... $ 11.60 $ 15.71 $ 13.84 $ 11.18
========= ========= ========= =========
Total Return3 ........................................... (21.39)% 21.11% 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses4 ............................................ 2.00% 2.00% 2.00% 2.00% 6,7
Net investment income5 ............................... 3.48% 3.12% 4.46% 5.39% 6,7
Supplemental Data:
Net assets at end of period (000) .................... $ 7,641 $ 9,799 $ 5,295 $ 3,016
Portfolio turnover rate .............................. 24% 35% 23% 28%
</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 2.30%, 2.33%, 3.03% and 4.05% (annualized)
for the years ended December 31, 1998, 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 3.18%, 2.79%, 3.43% and
3.09% (annualized) for the years ended December 31, 1998, 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%.
SEE NOTES TO FINANCIAL STATEMENTS.
22 & 23
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the For the Period
Year Ended March 31, 19971
December 31, through December 31,
- --------------------------------------------------------------------
1998 1997
Per Share Operating Performance:
Net asset value at beginning
of period ..................... $ 15.91 $ 14.19
------- -------
Income from Investment Operations:
Net investment income ........... 0.58 0.47
Net realized and unrealized
gain/(loss) on investments .... (3.78) 2.14
------- -------
Total from Investment Operations (3.20) 2.61
------- -------
Less Distributions:
Dividends from net investment
income ........................ (0.50) (0.42)
Distributions from net realized
capital gains ................. (0.43) (0.47)
Return of capital ............... (0.04) --
------- -------
Total distributions ............. (0.97) (0.89)
------- -------
Net asset value at end of period ... $ 11.74 $ 15.91
======= =======
Total Return ....................... (20.64)% 18.84%
Ratios to Average Daily Net Assets:
Expenses2 ....................... 1.00% 1.00%4
Net investment income3 .......... 4.73% 4.30%4
Supplemental Data:
Net assets at end of period (000) $ 582 $ 288
Portfolio turnover rate ......... 24% 35%4
- ------------------
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 1.28% and 1.39% (annualized) for the year
ended December 31, 1998 and for the period ended December 31, 1997,
respectively.
3 Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 4.45% and 3.73%
(annualized) for the year ended December 31, 1998 and for the period ended
December 31, 1997, respectively.
4 Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<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 began operation January 3, 1995, and Institutional Shares,
which began operations 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 have neither a
sales charge nor a distribution fee.
When preparing the Fund's financial statements in accordance with generally
accepted accounting principles, management makes estimates and assumptions.
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. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost. When
a market quotation is unavailable, the Investment Advisor determines a
fair value using procedures that the Board of Directors establishes and
monitors. At December 31, 1998, there were two Board valued securities
collectively valued at $2,678,811, representing 6.46% of net assets of
the Fund.
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
25
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- concluded
broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement requires that the
collateral's market value, including any accrued interest, exceed the
broker's repurchase obligation. 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
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
began 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 may consist 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.
26
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor. 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. For
the year ended December 31, 1998, ICC's advisory fee was $315,817 of which
$15,525 was payable at the end of the period.
ICC has agreed to waive a portion of its fee and reimburse expenses so that
the Fund's total operating 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. ICC waived fees of $144,382 for the year ended December 31, 1998.
ICC also provides accounting services to the Fund for which the Fund pays
ICC an annual fee that is calculated daily and paid monthly based on the Fund's
average daily net assets. For the year ended December 31, 1998, ICC's fee was
$41,142 of which $3,194 was payable at the end of the period.
ICC also provides transfer agency services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the year
ended December 31, 1998, ICC's fee was $49,118 of which $10,510 was payable at
the end of the period.
Certain officers and directors of the Fund are also officers or directors
of ICC.
ABKB/LaSalle Securities Limited Partnership ("ABKB/LaSalle") is the Fund's
sub-advisor. As compensation for its sub-advisory services, ICC pays ABKBLaSalle
a 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.
Bankers Trust Corporation has provided custody services to the Fund since
September 22, 1997.For the year ended December 31, 1998, custody fees amounted
to $15,719 of which $4,775 was payable at the end of the period.
27
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- concluded
ICC Distributors, Inc., a member of the Forum Group of companies, provides
distribution services to the Fund for which the Fund pays ICC Distributors an
annual fee pursuant to Rule 12b-1, that is calculated daily and paid monthly at
the following annual rates:0.25% of the Class A Shares' average daily net assets
and 1.00% of the Class B Shares average daily net assets. The fees for Class B
Shares include a 0.25% shareholder servicing fee. 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.
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, 1998 was $407 and the accrued liability was $1,342.
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
Class 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, 1998 Dec. 31, 1997
------------- ---------------
Shares sold ................................ 913,519 1,256,866
Shares issued to shareholders on
reinvestment of dividends ............... 173,588 146,244
Shares redeemed ............................ (878,163) (182,922)
------------ ------------
Net increase in shares outstanding ......... 208,944 1,220,188
============ ============
Proceeds from sale of shares ............... $ 12,447,914 $ 18,297,796
Value of reinvested dividends .............. 2,258,875 2,192,511
Cost of shares redeemed .................... (11,380,062) (2,675,100)
------------ ------------
Net increase from capital share transactions $ 3,326,727 $ 17,815,207
============ ============
28
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 3 -- concluded
Class B Shares
-----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------- --------------
Shares sold .................................... 189,158 272,248
Shares issued to shareholders on
reinvestment of dividends ................... 34,739 28,690
Shares redeemed ................................ (188,973) (60,099)
----------- -----------
Net increase in shares outstanding ............. 34,924 240,839
=========== ===========
Proceeds from sale of shares ................... $ 2,735,502 $ 4,002,637
Value of reinvested dividends .................. 449,966 428,928
Cost of shares redeemed ........................ (2,520,889) (864,613)
----------- -----------
Net increase from capital share transactions ... $ 664,579 $ 3,566,952
=========== ===========
Institutional Shares
-------------------------------
For the For the
Year Ended Period Ended
Dec. 31, 1998 Dec. 31, 1997
------------- --------------
Shares sold ....................................... 47,072 18,118
Shares issued to shareholders on
reinvestment of dividends ...................... 2,477 1
Shares redeemed ................................... (18,105) --
--------- ---------
Net increase in shares outstanding ................ 31,444 18,119
========= =========
Proceeds from sale of shares ...................... $ 703,400 $ 300,200
Value of reinvested dividends ..................... 31,366 9
Cost of shares redeemed ........................... (214,544) --
--------- ---------
Net increase from capital share transactions ...... $ 520,222 $ 300,209
========= =========
29
<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 $14,161,492 and sales of investment securities aggregated $11,716,062
for the year ended December 31, 1998.
For Federal income tax purposes, the tax cost of investments held at
December 31, 1998 was $45,647,506. At December 31, 1998, aggregate gross
unrealized appreciation for all securities in which there is an excess of value
over tax cost was $1,780,650, and aggregate gross unrealized depreciation for
all securities in which there is an excess of tax cost over value was
$6,759,724.
NOTE 5--Net Assets
On December 31, 1998, net assets consisted of:
Paid-in capital:
Class A Shares ...................................... $ 36,710,121
Class B Shares ...................................... 8,239,179
Institutional Shares ................................ 823,918
Accumulated net realized gain from security transactions 667,790
Unrealized depreciation of investments ................. (4,979,074)
------------
$ 41,461,934
============
30
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Flag Investors Real Estate Securities Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Flag Investors Real Estate Securities Fund, Inc. (the "Fund") at December 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
February 5, 1999
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
FOR THE TAX YEAR ENDED DECEMBER 31, 1998
We are providing this information as required by the Internal Revenue
Code. The amounts shown may differ from those elsewhere in this report because
of differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $1,536,643 from
long-term capital gains; of which $1,056,390 was subject to the 20% rate gains
category.
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<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
RICHARD T. HALE
Chairman
JAMES J. CUNNANE
Director
JOSEPH R. HARDIMAN
Director
LOUIS E. LEVY
Director
EUGENE J. MCDONALD
Director
REBECCA W. RIMEL
Director
TRUMAN T. SEMANS
Director
CARL W. VOGT, ESQ.
Director
WILLIAM K. MORRILL, JR.
President
KEITH R. PAULEY
Executive Vice President
JAMES A. ULMER III
VICE PRESIDENT
JOSEPH A. FINELLI
Treasurer
AMY M. OLMERT
Secretary
SCOTT J. LIOTTA
Assistant Secretary
INVESTMENT OBJECTIVE
A mutual fund designed to seek total return primarily through investments in
equity securities of companies that are principally engaged in the real estate
industry.
32
<PAGE>
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
<PAGE>
LOGO
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Communications Fund
Flag Investors Real Estate Securities Fund
Balanced
Flag Investors Value Builder Fund
Fixed Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Money Market
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
