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Flag Investors
Mutual Funds
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate
Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ALEX. BROWN &SONS
INCORPORATED
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Flag
Investors
Telephone
Income
Fund
Semi-Annual Report
June 30, 1996
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[Flag Logo]
FLAG INVESTORS
TELEPHONE INCOME FUND
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Fund Performance
Average Annual Total Return*
Class A Class B Class D
Periods ended 6/30/96: Shares Shares Shares
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One Year 29.9% 28.8% 29.4%
Five Years 16.1% -- --
Ten Years 14.2% -- --
Since Inception: 1/18/84 1/3/95 4/6/93
(Annualized) 16.9% 28.4% 12.9%
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Investment Objective
A mutual fund designed to provide current income and long-term growth of capital
through a professionally managed portfolio of securities primarily invested in
companies in the telephone industry.
Growth of a $10,000 Investment
in Class A Shares*
(January 18, 1984 - June 30, 1996)
[Graph appears below]
Mountain #1 Mountain #2
----------- -----------
$10,000 $10,000
1984 $10,557 $11,503
1985 $11,392 $14,854
1986 $12,227 $18,539
1987 $12,946 $18,818
1988 $13,650 $22,563
1989 $14,508 $33,588
1990 $15,196 $31,053
1991 $15,909 $38,220
1992 $16,559 $42,976
1993 $17,209 $50,761
1994 $17,890 $47,551
1995 $18,408 $63,451
1996 $18,478 $69,800
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
was reflected, the quoted performance would be lower. Performance figures for
the classes differ because each class maintains a distinct expense structure and
each has a different inception date. For further details on the expense
structures, please refer to the Fund's prospectus. Since investment return and
principal value will fluctuate, an investor's shares may be worth more or less
than their original cost when redeemed. Past performance is not an indicator of
future results. Please review the Additional Performance Information on page 5.
1
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Dear Shareholders:
Performance Update
Your Fund reported a solid first-half total return of 10%. Strong
contributions from key holdings in long distance, overseas telecommunications,
major independent telephone and specialty equipment and service companies offset
recent weakness in the Regional Bell Operating Companies ("RBOCs"). Uncertainty
about the changing competitive environment created by telecommunications
legislation has resulted in year-to-date underperformance by our RBOC holdings.
Nevertheless, we remain extremely positive about the strengths of the local
telephone business and the future prospects of the telephone companies in the
new competitive environment.
A Sector Fund with a Difference
We feel that the Fund is a "sector fund with a difference." With unique
characteristics stimulating growth in new as well as basic services in both
domestic and international markets, the telecommunications industry may be less
likely to uniformly suffer from the cyclical downturns experienced by many
narrower sectors. Greater user recognition of the benefits derived from
telecommunications is a major driver of long-term growth. Wireless and data
services add value by connecting people and computers in new, more efficient
ways. These services improve both the quality of our lives and the way we do
business. Technological innovation provides users greater access to new
telecommunications services at steadily decreasing prices. In essence,
telecommunications is the catalyst for realizing the benefits of the information
age.
Focus on Good Business Rather
than Technology
With new product offerings being introduced to meet the needs of more
specialized market segments, investors are becoming increasingly aware of the
industry's impressive potential. From our perspective, we recognize the role new
technologies and services play in industry growth. However, we believe superior
technology plays primarily a supporting role in a company's long-term success.
Long-term positioning is often established by businesses through a combination
of successful traits, such as the ability to generate economies of scale through
efficient manufacturing while maintaining a strong brand identity. We try to
avoid companies that are too narrowly focused in terms of markets, products or
services and instead, concentrate on companies with strong competitive
advantages.
A good example is U.S. Robotics, a leading supplier of data communications
equipment to both business and consumer markets. In addition to their
proprietary modem architecture, the company maximizes the benefits of
well-established distribution channels and efficient manufacturing operations.
Another Fund holding, General Instrument, has solid growth prospects despite
recent disappointments. Although transition to next generation product lines
adversely affected short-term profitability, General Instrument has the
potential to leverage its leading market position as an end-to-end supplier to
cable networks, and create new growth opportunities in international cable TV as
well as telephone company markets.
Strong Prospects for Local Telephone
Companies
As investors in the telecommunications industry, we are very positive about
the long-term prospects
2
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FLAG INVESTORS
TELEPHONE INCOME FUND
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for local telephone companies. We don't ignore the realities of the evolving
telephone industry.
As we have discussed in previous letters, new competitive rules do not
create immediate winners and losers. As new niche service providers continue to
enter the local telephone market, the winners will be the businesses that
demonstrate, in a new market climate, the ability to acquire new customers as
well as retain existing ones. Telephone companies maintain significant
competitive advantages such as economies of scale, high market recognition and
efficient, low-cost networks. With fair regulatory rulings, telephone companies
will be able to respond to competition by offering new services and entering new
markets. We see daily examples that "the network" will remain at the heart of
telecommunications. As a result, the telephone companies remain at the core of
the Fund.
Investment Philosophy
With the number of potential opportunities available to telecommunications
industry investors, it is important to adhere to an investment discipline. Like
the diversified Flag Investors Value Builder and Flag Investors Equity Partners
Funds, we use a "flexible value" approach to invest in our sector. We look for
value in attractive businesses with steady, predictable cash flows that sell at
reasonable prices.
Capable, shareholder-oriented management is very important to us.
Challenges created by competition, regulation or technology can adversely affect
shareholder value. With the opportunities available to industry participants, we
expect management to capitalize on their competitive advantage, earn high rates
of return on invested capital, and make adjustments to improve upon inadequate
returns. With shareholder-oriented management, SBC Communications (formerly
Southwestern Bell), our largest holding, operates a telecommunications company
with strong cash flow. Management's ability to make good business decisions has
yielded impressive returns from their local telephone, cellular and
international operations.
Portfolio Developments
Without exhaustive detail, we would like to shed some light on recent
portfolio developments. Although it was a difficult first half of the year for
RBOCs, four of our five RBOC holdings outperformed the RBOCs that are not owned
by the Fund. Unfortunately, SBC Communications posted the largest first-half
decline among RBOCs. Short-term uncertainties surrounding the pending merger
with Pacific Telesis have had an adverse effect on SBC's stock price. However,
we remain very confident in SBC's management and are enthusiastic about the
long-term prospects for the combined SBC/Pacific Telesis enterprise.
Highlighted in the chart on page 4 are the major contributors to, as well
as detractors from, the Fund's performance in the first six months of the year.
They are shown by their impact on the change in the Fund's Net Asset Value
(NAV), a calculation that gains significance through a combination of the size
of the holding as well as its percentage price change. While this is useful to
understanding recent developments, one should not lose sight of the more
important impact on long-term results, which is demonstrated for these holdings
by the gain on investment of each as a percentage of their average cost in the
portfolio.
We hope these long-term statistics will help illustrate our commitment to
building long-term value for the portfolio.
3
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Contributors to Net Asset Value Performance
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Six-Month Long-Term
Perspective Perspective
Contribution to NAV Gain on
(12/31/95-6/30/96) Investment*
Five Best Contributors
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Cincinnati Bell $0.31 180%
LCIInternational $0.17 182%
BroadBand Technologies $0.14 6%
QUALCOMM $0.13 79%
MFSCommunications $0.11 190%
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Five Worst Contributors
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SBCCommunications $(0.20) 115%
CellStar Corp. $(0.06) (24)%
AT&T $(0.05) 68%
DSCCommunications $(0.04) 19%
Bell Atlantic $(0.02) 102%
*Percentage of average cost.
Enthusiastic Investors
We would like to express our appreciation for the continued support of our
loyal shareholders. Hopefully, we have conveyed our enthusiasm for this
attractive investment sector. Telecommunications should experience many years of
above-average growth with numerous opportunities for well-managed companies and
their investors to earn good returns. We believe conservative investors can
obtain the wealth-building benefit of concentrating on an attractive "sector
with a difference" without taking undue risk.
Sincerely,
/s/ Bruce E. Behrens /s/ J. Dorsey Brown, III
Bruce E. Behrens J. Dorsey Brown, III
President Executive Vice President
July 19, 1996
Telecommunications Holdings
Percent of
Net Assets
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I. Regional Bell Operating Companies:
(RBOCs)
Ameritech Corp. 4.1%
Bell Atlantic Corp. 2.8
BellSouth Corp. 2.5
Pacific Telesis Group 7.2
SBC Communications Inc. 7.5
24.1
II. Independent Local Exchange Carriers:
Cincinnati Bell Inc. 5.7
GTE Corp. 4.6
Southern New England
Telecommunications Corp. 5.1
15.4
III. Long Distance Telephone Companies:
AT&T Corp. 7.2
Excel Communications Inc. 0.1
Frontier Corp. 5.5
LCIInternational Inc. 2.7
15.5
IV. Foreign Telephone Companies:
BCEInc. 2.8
Compania Telefonica National de Espana 1.5
Telefonos de Mexico SA 3.0
Vodafone Group PLC 0.8
8.1
V. Telecommunication Equipment Providers:
BlackBox Corp. 1.5
BroadBand Technologies 1.8
CellStar Corp. 0.2
DSC Communications Corp. 1.1
General Instrument Corp. 1.1
Lucent Technologies Inc. 0.8
Motorola Inc. 4.7
Octel Communications Corp. 1.0
QUALCOMM Inc. 4.2
U.S. Robotics Corp. 1.0
17.4
VI. Specialty Telecommunication Services:
AirTouch Communications Inc. 1.1
MFS Communications Co. Inc. 2.3
NEXTEL Communications Inc. 0.7
Orbital Sciences Corp. 0.9
Preferred Networks Inc. 0.2
5.2
VII. Telecommunication Bonds:
Orbital Sciences Corp. 0.3
Total Telephone Industry 86.0%
4
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Additional Performance Information
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The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
andExchange Commission (SEC)requires that when we report such figures, we also
include the Fund's total return, according to a standardized formula, for
various time periods through the end of the most recent calendar quarter. The
SEC total return figures differ from those we reported because the time periods
may be different and because the SEC calculation includes the impact of the
currently effective 4.50% maximum sales charge for the Fund's Class A Shares,
4.00% maximum contingent deferred sales charge for the Fund's Class B Shares and
1.50% maximum sales charge for the Fund's Class D Shares. In addition, the SEC
calculation for the Class D Shares reflects the impact of a 1.00% maximum
contingent deferred sales charge since the represented time period is less than
four years.
AVERAGE ANNUAL TOTAL RETURN
Class A Class B Class D
Periods ended 6/30/96: Shares Shares Shares
- --------------------------------------------------------------------------------
One Year 27.92% 24.84% 26.47%
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Five Years 15.72% -- --
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Ten Years 14.04% -- --
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Since Inception* 16.74% 25.99% 12.11%
*Inception dates: Class A Shares: 1/18/84; Class B Shares: 1/3/95; Class D
Shares: 4/6/93.
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results.
Directors and Officers
W. James Price Bruce E. Behrens
Chairman President
Charles W. Cole, Jr. J. Dorsey Brown, III
Director Executive Vice President
James J. Cunnane Hobart C. Buppert, II
Director Vice President
Richard T. Hale Liam D. Burke
Director Vice President
John F. Kroeger Gary V. Fearnow
Director Vice President
Louis E. Levy Lee S. Owen
Director Vice President
Eugene J. McDonald Edward J. Veilleux
Director Vice President
Rebecca W. Rimel Brian C. Nelson
Director Vice President
Truman T. Semans Joseph A. Finelli
Director Treasurer
Carl W. Vogt, Esq. Edward J. Stoken
Director Secretary
Harry Woolf Laurie D. DePrine
Director Assistant Secretary
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
5
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Statement of Net Assets June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Shares/
Par Market Value
(000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
TELEPHONE INDUSTRY: 86.0%
Common Stock: 85.7%
220,408 AirTouch Communications Inc.* $ 6,226,526
659,224 AT&T Corp. 40,871,888
394,000 Ameritech Corp. 23,393,750
400,000 BCE Inc. 15,800,000
247,008 Bell Atlantic Corp. 15,746,760
330,964 BellSouth Corp. 14,024,600
366,428 BlackBox Corp.* 8,702,665
315,000 BroadBand Technologies* 10,158,750
115,000 CellStar Corp.* 1,006,250
625,800 Cincinnati Bell Inc. 32,619,825
150,000 Compania Telefonica National de Espana SA ADR 8,268,750
200,000 DSC Communications Corp.* 6,025,000
25,000 Excel Communications Inc.* 675,000
1,022,400 Frontier Corp. 31,311,000
214,700 General Instrument Corp.* 6,199,463
587,320 GTE Corp. 26,282,570
496,841 LCI International Inc. 15,588,386
125,000 Lucent Technologies Inc. 4,734,375
340,000 MFS Communications Co. Inc.* 12,792,500
420,000 Motorola Inc. 26,407,500
200,000 NEXTEL Communications Inc.--Class A* 3,812,500
300,000 Octel Communications Corp.* 5,925,000
331,000 Orbital Sciences Corp.* 5,378,750
1,213,808 Pacific Telesis Group 40,966,020
130,000 Preferred Networks Inc.* 1,121,250
450,000 QUALCOMM Inc.* 23,906,250
859,106 SBC Communications Inc. 42,310,970
690,000 Southern New England Telecommunications Corp. 28,980,000
500,000 Telefonos de Mexico--L SA ADR 16,750,000
68,000 U.S. Robotics Corp.* 5,814,000
124,000 Vodafone Group PLC ADR 4,572,500
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Total Common Stock (Cost $303,315,426) 486,372,798
Corporate Bonds: 0.3%
$1,500 Orbital Sciences Corp., Cvt., 6.75%, 3/1/03 1,788,750
- ---------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $1,893,840) 1,788,750
Total Telephone Industry (Cost $305,209,266) 488,161,548
NON-TELEPHONE INDUSTRY: 12.5%
Common Stock: 7.7%
626,900 Alexander Haagen Properties, Inc. 7,992,975
285,912 Conseco Inc. 11,436,480
</TABLE>
6
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Statement of Net Assets (concluded) June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Shares/
Par Market Value
(000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
NON-TELEPHONE INDUSTRY (continued)
Common Stock (continued)
179,600 DeBartolo Realty Corp. $ 2,896,050
109,000 General Growth Properties 2,629,625
145,000 Meditrust Corp. 4,839,375
400,000 Nationwide Health Properties, Inc. 8,450,000
50,000 Philip Morris Cos., Inc. 5,200,000
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Total Common Stock (Cost $26,963,496) 43,444,505
Convertible Preferred Stock: 4.0%
246,000 American Express, 6.25% Cvt Pfd 16,143,750
100,000 Conseco Inc., 6.5% Series D Cvt Pfd 6,287,500
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Total Convertible Preferred Stock (Cost $14,295,500) 22,431,250
Corporate Bonds: 0.8%
$5,000 HMH Properties, 9.50%, 5/15/05 4,787,500
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Total Corporate Bonds (Cost $4,906,930) 4,787,500
Total Non-Telephone Industry (Cost $46,165,926) 70,663,255
REPURCHASE AGREEMENT: 1.1%
6,144 Goldman Sachs & Co., 5.25%
Dated 6/28/96, to be repurchased on 7/1/96, collateralized
by U.S. Treasury Notes with a market value of $6,267,758.
(Cost $6,144,000) 6,144,000
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Total Investments in Securities: 99.6%
(Cost $357,519,192)** 564,968,803
Other Assets in Excess of Liabilities, Net: 0.4% 2,480,346
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Net Assets: 100.0% $567,449,149
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Net Asset Value Per:
Class A Share
($523,175,829 / 32,184,917 shares outstanding) $16.26(1)
Class B Share
($13,711,980 / 847,456 shares outstanding) $16.18(2)
Class D Share
($30,561,340 / 1,881,155 shares outstanding) $16.25(3)
Maximum Offering Price Per:
Class A Share
($16.26 / .955) $17.03
Class B Share $16.18
</TABLE>
* Non-income producing security.
** Aggregate cost for federal tax purposes was $354,721,143.
(1) Redemption value is $16.26.
(2) Redemption value is $15.53 following 4.00% maximum contingent deferred
sales charge.
(3) Redemption value is $16.09 following 1.00% maximum contingent deferred
sales charge.
See accompanying Notes to Financial Statements.
7
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Statement of Operations For the Six Months Ended June 30, 1996
(Unaudited)
INVESTMENT INCOME (NOTE A):
Dividends $ 7,763,731
Interest 616,904
Less: Foreign taxes withheld (118,501)
Total income 8,262,134
EXPENSES:
Investment advisory fee (Note B) 1,631,391
Distribution fee (Note B) 771,050
Transfer agent fee (Note B) 274,247
Accounting fee (Note B) 58,301
Printing and postage 54,412
Custodian fee 42,384
Legal 26,268
Miscellaneous 14,878
Directors' fees 14,072
Audit 12,964
Insurance 8,650
Registration fees 8,190
Total expenses 2,916,807
Net investment income 5,345,327
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 18,895,487
Change in unrealized appreciation of investments 27,813,274
Net gain on investments 46,708,761
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $52,054,088
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See accompanying Notes to Financial Statements.
8
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TELEPHONE INCOME FUND
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Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
June 30, 1996 Ended
(Unaudited) December 31, 1995
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<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 5,345,327 $ 14,026,672
Net realized gain from security transactions 18,895,487 35,372,071
Change in unrealized appreciation of investments 27,813,274 93,655,306
Net increase in net assets resulting from operations 52,054,088 143,054,049
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares (2,936,585) (13,188,618)
Class B Shares (46,972) (71,352)
Class D Shares (156,707) (766,702)
Net realized short-term gains:
Class A Shares -- (594,281)
Class B Shares -- (6,947)
Class D Shares -- (39,689)
Net realized long-term gains:
Class A Shares -- (31,183,490)
Class B Shares -- (411,017)
Class D Shares -- (2,033,414)
Total distributions (3,140,264) (48,295,510)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 21,254,374 35,420,420
Value of shares issued in reinvestment of dividends 2,270,221 40,313,196
Cost of shares repurchased (36,264,195) (106,718,217)
Decrease in net assets derived from
capital share transactions (12,739,600) (30,984,601)
Total increase in net assets 36,174,224 63,773,938
NET ASSETS:
Beginning of period 531,274,925 467,500,987
End of period $567,449,149 $ 531,274,925
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</TABLE>
See accompanying Notes to Financial Statements.
9
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TELEPHONE INCOME FUND
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Financial Highlights--Class A Shares
(For a share outstanding throughout each period)*
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1996 For the Year Ended December 31,
(Unaudited) 1995 1994 1993 1992 1991
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 14.87 $ 12.30 $ 13.70 $ 12.20 $ 11.28 $ 9.57
Income from Investment Operations:
Net investment income 0.15 0.40 0.41 0.42 0.42 0.45
Net realized and unrealized gain/(loss)
on investments 1.33 3.58 (1.27) 1.78 0.93 1.74
Total from Investment Operations 1.48 3.98 (0.86) 2.20 1.35 2.19
Less Distributions:
Dividends from net investment income
and short-term gains (0.09) (0.41) (0.44) (0.42) (0.42) (0.46)
Distributions from net realized
long-term gains -- (1.00) (0.10) (0.28) (0.01) (0.02)
Total distributions (0.09) (1.41) (0.54) (0.70) (0.43) (0.48)
Net asset value at end of period $ 16.26 $ 14.87 $ 12.30 $ 13.70 $ 12.20 $ 11.28
Total Return(1) 10.01% 33.44% (6.32)% 18.12% 12.35% 23.08%
Ratios to Average Daily Net Assets:
Expenses(3) 1.09%(2) 0.93% 0.92% 0.92% 0.92% 0.92%
Net investment income(4) 2.01%(2) 2.85% 3.14% 3.12% 3.81% 4.38%
Supplemental Data:
Net assets at end of period (000) $523,176 $492,454 $435,805 $469,163 $307,641 $238,571
Portfolio turnover rate 14% 24% 23% 14% 6% 7%
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</TABLE>
* Computed based upon average shares outstanding.
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99%, 0.98%,1.07% and
1.17% for the years ended December 31, 1995,1994,1993,1992 and 1991,
respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 2.79%,
3.07%, 3.06%, 3.66% and 4.13% for the years ended December 31, 1995, 1994,
1993, 1992 and 1991, respectively.
See accompanying Notes to Financial Statements.
10
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FLAG INVESTORS
TELEPHONE INCOME FUND
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Financial Highlights--Class B Shares
(For a share outstanding throughout each period)*
<TABLE>
<CAPTION>
For the Six For the Period
Months Ended January 3, 1995**
June 30, 1996 through
(Unaudited) December 31, 1995
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.83 $12.28
Income from Investment Operations:
Net investment income 0.09 0.30
Net realized and unrealized gain on investments 1.32 3.56
Total from Investment Operations 1.42 3.86
Less Distributions:
Dividends from net investment income and short-term gains (0.07) (0.31)
Distributions from net realized long-term gains -- (1.00)
Total distributions (0.07) (1.31)
Net asset value at end of period $ 16.18 $14.83
Total Return(1) 9.58% 32.42%
Ratios to Average Daily Net Assets:
Expenses(3) 1.85%(2) 1.70%(2)
Net investment income(4) 1.32%(2) 2.13%(2)
Supplemental Data:
Net assets at end of period (000) $13,712 $7,504
Portfolio turnover rate 14% 24%
</TABLE>
* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses
to average daily net assets would have been 1.74% (annualized) for the
period ended December 31, 1995.
(4) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 2.09%
(annualized) for the period ended December 31, 1995.
See accompanying Notes to Financial Statements.
11
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TELEPHONE INCOME FUND
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Financial Highlights--Class D Shares
(For a share outstanding throughout each period)*
<TABLE>
<CAPTION> For the
For the Six Year Ended For the Period
Months Ended December 31, April 6, 1993**
June 30, 1996 ---------------- through
(Unaudited) 1995 1994 December 31, 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.87 $ 12.30 $ 13.67 $ 13.21
Income from Investment Operations:
Net investment income 0.13 0.34 0.37 0.25
Net realized and unrealized gain/(loss)
on investments 1.33 3.58 (1.20) 0.80
Total from Investment Operations 1.46 3.92 (0.83) 1.05
Less Distributions:
Dividends from net investment income
and short-term gains (0.08) (0.35) (0.42) (0.31)
Distribution in excess of net investment income -- -- (0.02) --
Distributions from net realized
long-term gains -- (1.00) (0.10) (0.28)
Total distributions (0.08) (1.35) (0.54) (0.59)
Net asset value at end of period $ 16.25 $ 14.87 $ 12.30 $ 13.67
Total Return(1) 9.78% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses(3) 1.43%(2) 1.28% 1.27% 1.27%(2)
Net investment income(4) 1.65%(2) 2.50% 2.81% 2.73%(2)
Supplemental Data:
Net assets at end of period (000) $30,561 $31,317 $31,696 $23,481
Portfolio turnover rate 14% 24% 23% 14%
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</TABLE>
* Computed based upon average shares outstanding.
** Commencement of operations.
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses
to average daily net assets would have been 1.34%, 1.34% and 1.31% for
the years ended December 31, 1995, 1994 and the period ended
December 31, 1993, respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily net assets would have been 2.44%, 2.74% and 1.98%
for the years ended December 31, 1995, 1994 and the period ended December
31, 1993, respectively.
See accompanying Notes to Financial Statements.
12
<PAGE>
[Flag Logo]
FLAG INVESTORS
TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
A. Significant Accounting Policies - Flag Investors Telephone Income Fund,
Inc. ("the Fund") is organized as a Maryland corporation and commenced
operations on January 18, 1984 (the exchange date) when investors received
five shares of the Fund in a tax-free exchange for each share of American
Telephone & Telegraph Company (AT&T), with rights to the divested Bell
regional operating companies attached. The Fund is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. On April 6, 1993, the Fund began offering Class D Shares
(formerly Class B Shares). The Class A and Class D Shares each have
different sales charges and distribution fees. As of November 18, 1994,
Class D Shares are no longer available for sale; however, existing
shareholders may reinvest their dividends. On January 3, 1995, the Fund
began offering Class B Shares. Class B Shares have no initial sales charge
but are subject to a contingent deferred sales charge on certain shares
redeemed within six years of purchase.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Security Valuation - Portfolio securities that are listed on a National
Securities Exchange are valued on the basis of their last price or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices. Unlisted securities held by the Fund are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost.
Repurchase Agreements - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an
agreed upon date and price. The seller, under a repurchase agreement, will
be required on a daily basis to maintain the value of the securities subject
to the agreement at not less than the repurchase price. The agreement is
conditioned upon the collateral being deposited under the Federal Reserve
book-entry system.
Federal Income Taxes - No provision is made for federal income taxes as it
is the Fund's intention to continue to qualify as a regulated investment
company and to continue to make requisite distributions to the shareholders
that will be sufficient to relieve it from all or substantially all federal
income and excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles. Accordingly,
periodic reclassifications are made within the Fund's capital accounts to
reflect income and capital gains available for distribution under income tax
regulations.
Other - Security transactions are accounted for on the trade date, and the
cost of investments sold is determined by use of the specific identification
method for both financial reporting and income tax purposes. Cost for
financial reporting purposes includes the value of the securities received
in the exchange. For income tax purposes, the tax cost is the basis of the
AT&T shares in the hands of the exchanging AT&T shareholders at the date of
exchange. Interest income is recorded on an accrual basis; dividend income
is recorded on the ex-dividend date.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., is the Fund's investment advisor and Alex. Brown
Investment Management ("ABIM") is the Fund's sub-advisor. As compensa-
13
<PAGE>
[Flag Logo]
FLAG INVESTORS
TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
tion for its advisory services, ICC receives from the Fund an annual fee,
calculated daily and paid monthly, at the following annual rates based upon
the Fund's average daily net assets: 0.85% of the first $100 million, 0.75%
of the next $100 million, 0.70% of the next $100 million, 0.65% of the
next $200 million, 0.58% of the next $500 million, 0.53% of the next $500
million and 0.50% of that portion in excess of $1.5 billion.
As compensation for its sub-advisory services, ABIM receives 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: 0.60%
of the first $100 million, 0.55% of the next $100 million, 0.50% of the next
$100 million, 0.45% of the next $200 million, 0.40% of the next $500
million, 0.37% of the next $500 million and 0.35% of that portion in excess
of $1.5 billion.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based upon the Fund's average
daily net assets. ICC received $58,301 for accounting services for the six
months ended June 30, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $274,247 for
transfer agent services for the six months ended June 30, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated ("Alex. Brown") receives from the Fund an annual fee,
calculated daily and paid monthly, at an annual rate equal to 0.25% of the
Fund's average daily net assets of Class A Shares, 1.00% (includes 0.25%
shareholder servicing fee) of the average daily net assets of Class B Shares
and 0.60% of the average daily net assets of Class D Shares. For the six
months ended June 30, 1996, distribution fees aggregated $771,050 of which
$625,649, $53,289 and $92,112 were attributable to Class A Shares, Class B
Shares and Class D Shares, respectively. Alex. Brown received no commissions
on security transactions from the Fund for the six months ended June 30,
1996.
The Fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the six months ended June 30, 1996 was approximately $7,429.
C. Capital Share Transactions - The Fund is authorized to issue up to 70
million shares of capital stock (60 million Class A Shares, 5 million Class
B Shares, 3 million Class D Shares and 2 million undesignated), par value
$.001 per share, all of which are designated as common stock. Transactions
in shares of the Fund were as follows:
Class A Shares
For the Six
Months Ended For the
June 30, 1996 Year Ended
(Unaudited) Dec. 31, 1995
Shares sold 1,028,391 2,145,785
Shares issued to share-
holders on reinvest-
ment of dividends 139,203 2,674,624
Shares redeemed (2,102,713) (7,132,553)
Net decrease in shares
outstanding (935,119) (2,312,144)
Proceeds from sale
of shares $ 15,784,177 $ 28,720,184
Value of reinvested
dividends 2,082,418 37,305,866
Cost of shares redeemed (32,316,204) (97,427,131)
Net decrease from
capital share
transactions $(14,449,609) $(31,401,081)
14
<PAGE>
[Flag Logo]
FLAG INVESTORS
TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
Class B Shares
For the
Six Months For the Period
Ended Jan. 3, 1995*
June 30, 1996 through
(Unaudited) Dec. 31, 1995
Shares sold 359,790 489,011
Shares issued to
shareholders on
reinvestment of
dividends 2,772 32,826
Shares redeemed (21,014) (15,929)
Net increase in shares
outstanding 341,548 505,908
Proceeds from sale
of shares $5,470,120 $6,700,236
Value of reinvested
dividends 41,336 458,760
Cost of shares redeemed (325,912) (229,177)
Net increase from
capital share
transactions $5,185,544 $6,929,819
- --------------------------------------------------------------------------------
*Commencement of operations.
Class D Shares
For the Six
Months Ended For the Year
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
Shares sold -- --
Shares issued to share-
holders on reinvest-
ment of dividends 9,779 183,832
Shares redeemed (234,069) (655,092)
Net decrease in shares
outstanding (224,290) (471,260)
Proceeds from sale
of shares $ -- $ --
Value of reinvested
dividends 146,544 2,548,570
Cost of shares redeemed (3,622,079) (9,061,909)
Net decrease from
capital share
transactions $(3,475,535) $(6,513,339)
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term and U.S. government obligations, aggregated
$38,046,052 and $51,826,632, respectively, for the six months ended June 30,
1996. There were no purchases or sales of U.S. Government obligations for
the period.
At June 30, 1996, net unrealized appreciation for all securities in which
there is an excess of value over tax cost was $210,247,660, of
which $215,241,620 related to appreciated securities and $4,993,960
related to depreciated securities.
E. Net Assets - At June 30, 1996, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $299,892,081
Flag Investors Class B Shares 12,115,364
Flag Investors Class D Shares 25,451,335
Undistributed net
investment income 2,205,063
Accumulated net realized gain
from securities transactions 20,335,695
Unrealized appreciation of
investments 207,449,611
$567,449,149
15
