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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 SECURITIES DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, (800) 767- FLAG.
Statement of Additional Information Dated: May 1, 1999
relating to Prospectuses Dated:
May 1, 1999
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TABLE OF CONTENTS
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1. General Information and History..................................................................... 1
2. Investment Objective and Policies...................................................................... 1
3. Valuation of Shares and Redemption..................................................................... 7
4. Federal Tax Treatment of Dividends and
Distributions........................................................................................ 8
5. Management of the Fund................................................................................. 11
6. Investment Advisory and Other Services................................................................. 15
7. Distribution of Fund Shares............................................................................ 17
8. Brokerage.............................................................................................. 20
9. Capital Stock.......................................................................................... 22
10. Semi-Annual Reports.................................................................................... 22
11. Custodian, Transfer Agent, and Accounting Services .................................................... 22
12. Independent Accountants ............................................................................... 23
13. Legal Matters...........................................................................................23
14. Performance Information................................................................................ 23
15. Control Persons and Principal Holders of
Securities........................................................................................... 25
16. Financial Statements................................................................................... 26
Appendix.............................................................................................. A-1
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1. GENERAL INFORMATION AND HISTORY
Flag Investors Real Estate Securities Fund, Inc. (the "Fund") is an
open-end management investment company. 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")(collectively, the "Shares"). As used herein, the "Fund"
refers to Flag Investors Real Estate Securities Fund, Inc. and specific
references to any class of the Fund's shares will be made using the name of such
class.
Important information concerning the Fund is included in the Fund's
current Prospectuses which may be obtained without charge from the Fund's
distributor (the "Distributor") or from Participating Dealers that offer Shares
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, as amended (the "Securities Act"). The Fund
began 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 & Sons Incorporated (predecessor to BT Alex. Brown Incorporated),
Alex. Brown & Sons Incorporated licenses to the Fund the "Flag Investors" name
and logo but retains the rights to the name and logo, including the right to
permit other investment companies to use them.
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. Equity securities include common stock, rights or
warrants to purchase common stock, preferred stock and securities convertible
into common stock. There can be no assurance that the Fund's investment
objective will be achieved.
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. The Fund may invest up to 10% of
its total assets in securities of foreign real estate companies.
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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.
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 Advisors believe 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
Advisors. While classified as "investment grade," securities rated Baa by
Moody's or BBB by S&P have speculative characteristics. (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 Advisors 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 Advisors' investment criteria.
The Fund may invest up to 5% of its net assets in zero coupon or other
original issue discount securities. These securities 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.
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The value of the Fund's investments in debt securities will change as
interest rates fluctuate. When interest rates decline, the values of such
securities generally can be expected to increase and when interest rates rise,
the values of such securities can generally be expected to decrease. The lower
rated and comparable unrated debt securities described above are subject to
greater risks of loss of income and principal than are higher rated fixed-income
securities. The market value of lower rated securities generally tends to
reflect the market's perception of the creditworthiness of the issuer and
short-term market developments to a greater extent than more highly rated
securities, which primarily reflect 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, 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.
Risks of Investments in Foreign Securities
Investing in securities issued by foreign corporations involves
considerations and possible risks not typically associated with investing in
securities issued by domestic corporations. The values of foreign investments
are affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are
incurred in connection with conversions between various currencies. In addition,
foreign brokerage commissions are generally higher than in the United States,
and foreign securities markets may be less liquid, more volatile and less
subject to governmental supervision than in the United States. Investments in
foreign countries could be affected by other factors not present in the United
States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards, potential difficulties in enforcing
contractual obligations and the possibility of extended settlement periods. For
additional risk disclosure see "Repurchase Agreements" and "When-Issued
Securities."
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Money Market Securities
From time to time the Fund may purchase high-quality short-term debt
securities, commonly known as money market securities. These securities include
direct obligations of the U.S. Government which consist of bills, notes and
bonds issued by the U.S. Treasury. Obligations issued by agencies of the U.S.
Government, while not direct obligations of the U.S. Government, are either
backed by the full faith and credit of the U.S. or are guaranteed by the U.S.
Treasury or supported by the issuing agencies' right to borrow from the U.S.
Treasury.
The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market, prior
to maturity. Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Time deposits earn a specified rate of
interest over a definite period of time; however time deposits cannot be traded
in the secondary market. Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods and furnish dollar
exchange. Maturities are generally six months or less.
The commercial paper that may be purchased includes variable amount
master demand notes, which may or may not be backed by bank letters of credit.
These notes permit the investment of 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 Advisors, be equivalent to the ratings
applicable to permitted investments for the Fund. The Advisors 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
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operator within the meaning and intent of the Commodity Exchange Act and the
regulations promulgated thereunder.
Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified debt
securities that initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. A purchase of an option involves payment of a premium for the option
without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions are (1) for bona
fide hedging purposes, or (2) for other purposes to the extent that the
aggregate initial margin deposits and premiums do not exceed 5% of the
liquidation value of the Fund's net assets (after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into).
Margins and premiums on bona fide hedging positions are excluded from this 5%
limit. The Advisor reserves the right to comply with such different standard as
may be established by CFTC rules and regulations with respect to the purchase or
sale of futures contracts or options thereon.
The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In addition, futures and futures option markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a 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 domestic banks or broker-dealers deemed to be creditworthy by the Fund's
Board of Directors under criteria established with the guidance of the Advisors.
A repurchase agreement is a short-term investment in which 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 Fund'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
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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. The Fund may purchase 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 Fund 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.
Temporary Investments. 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 Advisors 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. The Fund 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.
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. The vote of
a majority of the outstanding Shares of the Fund means the lesser of: (i) 67% or
more of the Shares present at a shareholder meeting at which the holders of more
than 50% of the Shares are present or represented or (ii) more than 50% of the
outstanding Shares of the Fund. 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
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3. Borrow money, except as a temporary measure to facilitate settlements
and for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at the
time of such borrowing, provided that, while borrowings by the Fund equaling 5%
or more of the Fund's total assets are outstanding, the Fund will not purchase
securities for investment.
4. 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.
5. Purchase or sell commodities or commodities contracts, provided that
the Fund may invest in financial futures and options on such futures.
6. 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.
7. Issue senior securities, provided that the Fund may invest in
financial futures and options on such futures.
8. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies.
9. Effect short sales of securities.
10. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions).
11. 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.
2. Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven days.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The Fund's net asset value per Share is determined daily as of the close
of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time)
each day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays (or the days on which they are observed): New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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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 net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties 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, as described in the Prospectuses. However, if the Board of
Directors determines that it would be in the best interests of the remaining
shareholders, the Fund will make payment of the redemption price in whole or in
part by a distribution of readily marketable securities from the portfolio of
the Fund in lieu of cash, in conformity with applicable rules of the SEC. If
Shares are redeemed in kind, the redeeming Shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares" and such valuation will be
made as of the same time the redemption price is determined. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectuses is not intended as a substitute
for careful tax planning. For example, under certain specified circumstances,
state income tax laws may exempt from taxation distributions of a regulated
investment company to the extent that such distributions are derived from
interest on federal obligations. Investors are urged to consult with their tax
advisor regarding whether such exemption is available.
The following general discussion of certain 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.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends,
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interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, and certain other
related income, including, generally, certain gains from options, futures and
forward contracts; and (b) diversify its holdings so that, at the end of each
fiscal quarter of the Fund's taxable year, (i) at least 50% of the market value
of the Fund's total assets is represented by cash and cash items, United States
Government securities, securities of other RICs, and other securities, with such
other securities limited, in respect to any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
that the Fund controls and which are engaged in the same, similar, or related
trades or business. For purposes of the 90% gross income requirement described
above, investments in REITs are stock or securities.
In addition to the requirements described above, in order to qualify as
a RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net short-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
If the Fund fails to qualify for any taxable year as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax rates without any deduction for distributions to
shareholders, and such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In this event, such distributions generally will be
eligible for the dividends-received deduction for corporate shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares. The Fund anticipates that
it will distribute substantially all of its investment company taxable income
for each taxable year.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to
-9-
<PAGE>
certain limitations, a dividend will be treated as a qualifying dividend if it
has been received from a domestic corporation. Because REIT distributions do not
qualify for the dividends-received deduction, it is not expected that the Fund
distributions will qualify for the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the year
of payment. However, 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 received by the shareholder and paid by the Fund
in the year in which the dividends were declared.
Investors should consider the tax implications of purchasing Shares just
prior to the ex-dividend date of any ordinary income dividend or capital gains
distribution. Those investors will be taxable on the entire amount of the
dividend or distribution received, even though some or all of it may have been
realized by the Fund prior to the investor's purchase.
The Fund will provide an annual statement to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
Sale or Exchange of Fund Shares
The sale or exchange of a share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution with respect to
the Share (or any undistributed net capital gains of the Fund with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
In certain cases, the Fund will be required to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who (1)
has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending on October 31 of that year (and any retained
amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. The Fund
intends to make
-10-
<PAGE>
sufficient distributions to avoid imposition of this tax, or to retain, at most,
its net capital gains and pay tax thereon.
The Fund's investments in partnership units of master limited
partnerships, which are taxable as partnerships, will generally not produce
income of a type required for qualification as a regulated investment company as
discussed above. Holders of partnership units of such master limited
partnerships are required to take into account their allocable share of each
item of the partnership's income and loss in computing their individual tax
liabilities. Further, each such item of income generally retains the same tax
attributes in the hands of the 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 regulated investment companies. As a result, the
Fund intends to limit its investments in partnership units of master limited
partnerships.
State and Local Tax Considerations
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
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 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)
Vice Chairman, Brown Investment Advisory & Trust Company (formerly,
Alex. Brown Capital Advisory & Trust Company); Director, Investment
Company Capital Corp. (registered investment advisor) and Virginia Hot
Springs, Inc. (property management); Formerly, Vice Chairman and
Managing Director, Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated).
JAMES J. CUNNANE, Director (3/11/38)
60 Seagate Drive, Unit P106, Naples, Florida 34103. Managing Director,
CBC Capital (merchant banking), 1993-Present and Director, Net.World
(telecommunications), 1998-present; Formerly, Senior Vice President and
Chief Financial Officer, General Dynamics Corporation (defense)(1989-
1993) and Director, The Arch Fund (registered investment company).
-11-
<PAGE>
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, The Nevis Fund (registered
investment company) and Circon Corp. (medical instruments). Formerly,
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now BT Alex.
Brown Incorporated) 1985-1987; General Partner, Alex. Brown & Sons
Incorporated (now BT Alex. Brown Incorporated) 1976-1985.
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); Executive Vice Chairman and Director, Central
Carolina Bank & Trust (banking) and Director, Victory Funds (registered
investment companies); Formerly, Director, AMBAC Treasurers Trust
(registered investment company) and D.P. Mann Holdings (insurance).
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 and Chief Executive Officer, LaSalle Investment
Management, L.P. (formerly, ABKB/LaSalle Securities Limited
Partnership), 100 East Pratt Street, Baltimore, Maryland 21202.
Portfolio Manager with LaSalle or its predecessors since 1985.
KEITH R. PAULEY, Executive Vice President (9/27/61)
Managing Director, LaSalle Investment Management, LP. (formerly,
ABKB/LaSalle Securities Limited Partnership), 100 East Pratt Street,
Baltimore, Maryland 21202. Portfolio Manager with LaSalle or its
predecessors since 1986.
JAMES A. ULMER III, Executive Vice President (8/30/39)
Principal, LaSalle Investment Management, L.P. (formerly, ABKB/LaSalle
Securities Limited Partnership), 100 East Pratt Street, Baltimore,
Maryland 21202, 1997-Present; Member, National Association of Real
Estate Investment Trusts and past Chair of the Real Estate Analysts
Group of the New York Society of Securities Analysts. Formerly,
Portfolio analyst and strategist, AIRES Real Estate Services, 1993-1997.
-12-
<PAGE>
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
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, 1997-Present. Formerly,
Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers
LLP), 1988 -1997.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown Incorporated, 1996-Present;
Formerly, Manager and Foreign Markets Specialist, Putnam Investments
Inc. (registered investment companies), 1994- 1996; Supervisor, Brown
Brothers Harriman & Co. (domestic and global custody), 1991-1994.
- --------------
* 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 12 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 three funds and as a Director of seven funds in the Fund Complex.
Mr. Semans serves as Chairman of five funds and as a Director of five funds in
the Fund Complex. Messrs. Cunnane, Hardiman, Levy, McDonald and Vogt serve as
Directors of each fund in the Fund Complex. Ms. Rimel serves as Director 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 Chairmen
of the Fund Complex's Audit Committee and Executive Committee receive 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, 1998, Independent
Directors' fees attributable to the assets of the Fund totaled approximately
$2,230.
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, 1998.
-13-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Total Compensation From the
From the Fund Payable to Pension or Fund and Fund Complex
Directors for the Retirement Benefits Payable to Directors for the
Name of Person, Fiscal Year Ended Accrued as Part Fiscal Year Ended
Position December 31, 1998 of Fund Expenses December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard T. Hale, Chairman(1) $0 $0 $0
Truman T. Semans, Director(1) $0 $0 $0
James J. Cunnane, Director $240(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex
Joseph R. Hardiman, Director(5) $113(2) (3) $19,500 for service on 11(6)
Boards in the Fund Complex
John F. Kroeger, Director(7) $302 (3) $49,000 for service on 13(4)
Boards in the Fund Complex
Louis E. Levy, Director $268(2) (3) $44,000 for service on 13(4)
Boards in the Fund Complex
Eugene J. McDonald, Director $240(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex
Rebecca W. Rimel, Director $244(2) (3) $39,000 for service on 12(4,6)
Boards in the Fund Complex
Carl W. Vogt, Esq., Director $246(2) (3) $39,000 for service on 13(4,6)
Boards in the Fund Complex
</TABLE>
- ----------------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) None of the amounts payable to Messrs. Cunnane, Levy, McDonald, Vogt, and
to Ms. Rimel was deferred pursuant to the deferred compensation plan.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1998 was approximately $407.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to the Fund's board on September 27, 1998.
(6) Mr. Hardiman and Ms. Rimel receive and Mr. Vogt received proportionately
higher compensation from each fund for which they serve as a director.
(7) Retired effective September 27, 1998.
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. The Fund has one Participant, a Director who retired on
December 31, 1996 who qualified for the Retirement Plan by serving fourteen
years as a Director in the Fund Complex and who will be paid a quarterly fee of
$4,875 by the Fund Complex for the rest of his life. 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, 1998 are as follows: for Mr. Cunnane, 4 years; for Mr. Levy, 4
years; for Mr. McDonald, 6 years; for Ms. Rimel, 3 years; for Mr. Vogt, 3 years;
and for Mr. Hardiman, 0 years.
-14-
<PAGE>
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairmen of Audit and Other Participants
--------------------- ------------------
Executive Committees
--------------------
<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 50%
to 100% 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 Funds, BT Alex. Brown Cash Reserve Fund, Inc.
and BT International Equity Fund 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 Advisors' 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 any 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 within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity 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.
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 LaSalle Investment)
Management, L.P. (formerly, ABKB/LaSalle Securities Limited Partnership
("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. LaSalle, a
Maryland limited partnership, is a registered investment advisor that is
indirectly controlled by Jones Lang LaSalle Incorporated, an international real
estate investment management company, that was formed on November 1, 1994 to
acquire the real estate securities investment advisory
-15-
<PAGE>
business of Alex. Brown Kleinwort Benson Realty Advisors Corporation. [ (See
Investment Advisor and Sub-Advisor in the Prospectus).]
Under the Investment Advisory Agreement, ICC has agreed to obtain and
evaluate economic, statistical and financial information and to formulate and
implement investment policies for the Fund. ICC has delegated this latter
responsibility to LaSalle. Any investment program undertaken by ICC or
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 LaSalle
shall be liable to the Fund or its shareholders for any act or omission by ICC
or 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 LaSalle to the Fund are not exclusive and ICC
and 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. ICC has contractually agreed to reduce its
annual fee, if necessary, or to make payments to the Fund to the extent so that
the Fund's annual expenses 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. This agreement will
continue until at least April 30, 2000 and may be extended. As compensation for
its services, 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 29, 1998. 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 for the last three fiscal years
were as follows:
- --------------------------------------------------------------------------------
Advisory Fees For the Fiscal Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Contractual Fee $315,817 $255,425 $167,868
- --------------------------------------------------------------------------------
Less amount waived ($144,382) ($128,442) ($167,868)
- --------------------------------------------------------------------------------
Fee after waivers $171,435* $126,983* $0*
- --------------------------------------------------------------------------------
- ---------------
* Absent fee waivers for the fiscal years ended December 31, 1998,
December 31, 1997 and December 31, 1996, the Fund's Total Operating
Expenses would have been 1.55%, 1.58% and 2.28%, respectively, of
the Flag Investors Class A Shares' average daily net assets, 2.30%,
2.33% and 3.03%, respectively, of the Flag Investors Class B Shares'
average daily net assets, and 1.28% and 1.39%, respectively, of the
Institutional Shares' average daily net assets.
-16-
<PAGE>
Sub-Advisory fees paid by ICC to ABKB/LaSalle for the last three fiscal
years were as follows:
Fiscal Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
ABKB/LaSalle $105,311(1) $80,292(1) $3,163(1)
- --------------------------------------------------------------------------------
- ----------------
(1) Net of fee waivers.
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.
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 September 29, 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
-17-
<PAGE>
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 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:
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31,
- --------------------------------------------------------------------------------
Fee 1998 1997 1996
- --------------------------------------------------------------------------------
12b-1 Fee $166,311(1) $134,163(2) $59,251(3,4)
- --------------------------------------------------------------------------------
Class B Shareholder Servicing Fee $23,251(1) $ 17,894(3) $ 9,232(4,5)
- --------------------------------------------------------------------------------
- -------------
(1) Fees received by ICC Distributors, the Fund's distributor.
(2) 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.
(3) 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.
(4) Fees received by Alex. Brown, the Fund's distributor.
(5) 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.
-18-
<PAGE>
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 materially increase the fee to be paid pursuant to
the related Distribution Agreement without the approval of the shareholders of
the class. The Plans may be terminated at any time 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 1998 1997 1996
-----------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A $147,191(1) $ 0 $264,345(2) $124,308(4) $224,818(6) $152,214(6)
Commissions
- ---------------------------------------------------------------------------------------------------------------------
Class B $ 38,866(1) $ 0 $168,550(3) $ 61,341(5) $137,648(6,7) $124,915(6,7)
Contingent
Deferred
Sales Charge
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) By ICC Distributors, the Fund's distributor.
(2) 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.
(3) 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.
(4) By Alex. Brown.
(5) By Alex. Brown.
(6) By Alex. Brown, the Fund's distributor.
(7) 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 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
-19-
<PAGE>
portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing of certificates representing Shares; all costs and
expenses in connection with the registration and maintenance of registration of
the Fund and its Shares with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs and
expenses of printing, including typesetting and distributing prospectuses and
statements of additional information of the Fund and supplements thereto to the
Fund's shareholders; all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory board
or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the 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.
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 the Advisors 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 the Advisors through
placement of portfolio transactions of other clients may be of value to them in
fulfilling their obligations to the Fund. No specific value can be determined
for research and statistical services furnished without cost to the Advisors 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 the Advisors' 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
-20-
<PAGE>
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 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 the
Advisors to furnish reports and to maintain records in connection with such
reviews.
The Advisors directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
----------------------------------------
Fiscal Year Ended December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
Transactions Directed $21,012,909 $41,151,108 $16,906,535
- ---------------------------------------------------------------------
Commissions Paid $ 40,363 $73,026 $34,640
- ---------------------------------------------------------------------
For the fiscal year ended December 31, 1998 the Fund paid $290,267 in
brokerage commissions to BT Alex. Brown and its affiliates. 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, 1998, the Fund held a 4.50% repurchase agreement issued
by Goldman Sachs & Co. valued at $972,509. Goldman Sachs & Co. is a "regular
broker or dealer" of the Fund.
ICC and 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 the Advisors. The Advisors
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.
-21-
<PAGE>
9. CAPITAL STOCK
The Fund is authorized to issue 30 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 four classes of
Shares: "Flag Investors Real Estate Securities Fund Class A Shares," "Flag
Investors Real Estate Securities Fund Class B Shares", "Flag Investors Real
Estate Securities Fund Class C Shares" and "Flag Investors Real Estate
Securities Fund Institutional Shares." The Flag Investors Real Estate Securities
Fund Class C Shares have not been offered prior to the date of this Statement of
Additional Information. 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. 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 fiscal year ended December 31, 1998, Bankers Trust was
paid $15,719 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, 1998,
ICC received transfer agency fees of $49,118.
As compensation for providing accounting services, ICC receives an
annual fee, calculated daily and paid monthly as shown below.
-22-
<PAGE>
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%
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, 1998, ICC received fees of $41,142.
12. INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
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:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-,
5-, or 10-year periods (or fractional portion
thereof) of a hypothetical $1,000 payment made at
the beginning of the 1-, 5- or 10-year periods.
-23-
<PAGE>
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 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, 1998 were as follows:
One-Year Period Ended Inception Through
December 31, 1998 December 31, 1998
- --------------------------------------------------------------------------------
Ending Total Return Ending Average
Class Redeemable Redeemable Annual Total
Value Value Return
- --------------------------------------------------------------------------------
Class A $753 -24.7% $1,441 9.59%
January 3, 1995 +
- --------------------------------------------------------------------------------
Class B $743 -25.7% $1,436 9.49%
January 3, 1995 +
- --------------------------------------------------------------------------------
Institutional $790 -20.98% $939 -3.52%
March 31, 1997
- --------------------------------------------------------------------------------
+ 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.
-24-
<PAGE>
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, 1998 was 3.54% for the Class A Shares, 2.97%
for the Class B Shares, and 3.96% for the Institutional Shares.
Except as noted below, for the purpose of determining net investment
income earned during the period, interest earned on debt obligations held by the
Fund is calculated by computing the yield to maturity of each obligation based
on the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, based on the purchase price (plus actual
accrued interest), dividing the result by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued interest) in order
to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset value
per share. Undeclared earned income is net investment income that, at the end of
the base period, has not been declared as a dividend, but is reasonably expected
to be and is declared as a dividend shortly thereafter.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund's portfolio
turnover rate was 24% for the fiscal year ended December 31, 1998 and 35% for
the fiscal year ended December 31, 1997.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following shareholders owned of record or beneficially 5% or more
of the outstanding shares of a class of the Fund, as of February 1, 1999:
-25-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Bankers Trust Corp & Affil 401K Savings X 12.89% of Class A Shares
Plan
The Partnershare Plan of Bankers Trust
NY Corp & Affil
100 Plaza One
Jersey City, NJ 07311-3999
- ---------------------------------------------------------------------------------------------------------------------
BT Alex. Brown Incorporated X 12.94% of Institutional Shares
FBO 250-10788-16
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------------------
BT Alex. Brown Incorporated X 87.03% of Institutional Shares
FBO 259-88338-18
P.O. Box 1346
Baltimore, MD 21203-1346
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* 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 February 1, 1999.
16. FINANCIAL STATEMENTS
See next page.
-26-
<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)
-27-
<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)
-28-
<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.
-29-
<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.
-30-
<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.
-31-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
For the Period
January 3, 1995(1)
For the Years through
Ended December 31, 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 Return(3) ......................................... (20.82)% 22.01% 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses(4) .......................................... 1.25% 1.25% 1.25% 1.25%(6,7)
Net investment income(5) ............................. 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.
-32- & -33-
<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 Years January 3, 1995(1)
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 ............... $ 15.71 $ 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 Return(3) ......................................... (21.39)% 21.11% 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses(4) .......................................... 2.00% 2.00% 2.00% 2.00%(6,7)
Net investment income(5) ............................. 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.
-34- & -35-
<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, 1997(1)
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:
Expenses(2) ..................... 1.00% 1.00%(4)
Net investment income(3) ........ 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.
-36-
<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
-37-
<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.
-38-
<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
ABKB/LaSalle 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.
-39-
<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
============ ============
-40-
<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
========= =========
-41-
<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
============
-42-
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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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 include 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
<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 a "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.
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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 - 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 - 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 - 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 - Judged to be of the best quality. Carry the smallest degree of
investment risk and are generally referred to as "gilt-edged." Interest payments
are protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. 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 - Possess many favorable investment attributes and 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.
A-1
<PAGE>
Baa - Considered as medium-grade obligations i.e., 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
