Flag Investors
Family of 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
Flag
Investors
Telephone
Income
Fund
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
Alex. Brown & Sons
Incorporated
Annual Report
December 31, 1995
Flag Investors
TELEPHONE INCOME FUND
Dear Shareholders:
FUND RANKED #1 AMONG EQUITY INCOME FUNDS
For the year ended December 31, 1995, your Fund's total return was
33.4%. Adding to strong returns in prior years, the Fund's ten-year total return
as of year-end achieved the #1 ranking among 22 funds in the Equity Income Funds
category from Lipper Analytical Services* (SEE AVERAGE ANNUAL TOTAL RETURN, P
2.). We are delighted with this recognition and remain focused on achieving
above average long-term rewards without taking undue risk.
THE YEAR IN REVIEW
As demand for both new and traditional telecommunications services
continued to increase throughout the year, 1995 proved to be very exciting for
industry participants. Early in the year, we measurably increased the Fund's
investment in the local telephone companies (Baby Bells and independents)
believing that their earnings growth was improving and that their stocks were
undervalued. This proved to be correct, and the stocks appreciated strongly in
the second half as other investors recognized the improving fundamentals. We
also increased the Fund's long distance holdings, and they contributed nicely to
the results. The performance of these two sectors was further enhanced by a
significant decline in long-term interest rates. The telecommunications
equipment and specialty service providers contributed modestly to the annual
return as declines in the fourth quarter reduced some of the earlier gains.
Finally, our reduction in selected foreign telephone company holdings proved
beneficial.
We have carefully evaluated the events and trends of 1995 and believe
the Fund is well-positioned as we enter 1996. Although several regulatory and
competitive issues remain unresolved, we continue to see opportunities in the
telecommunications sector while emphasizing our conservative investment
approach.
DECADE OF STEADY CHANGE
We have often discussed the 1984 breakup of AT&T and the lasting
influence this decision has had on all industry participants. Despite the
long-term effects of the divestiture, change within the industry occurred
gradually. The evolutionary nature of telecommunications in the years following
the AT&T breakup allowed us to make informed decisions. This past year, we saw
the most significant industry developments since 1984. We believe these
developments will result in major changes in telecommunications beginning as
early as 1996, and although we expect changes to occur faster than the original
AT&T divestiture, they will be measured in years not months.
YEAR OF ACCELERATING CHANGE
In 1995, competition overtook regulation as the driving force behind
the business decisions of major telecommunications companies. Congress, with
sweeping legislation, recently rewrote the competitive rules for long distance
carriers, local telephone companies and cable operators. AT&T announced a
restructuring designed to improve future positioning in all of its markets. The
discovery of the Internet by both businesses and consumers has created a new,
specialized group of Internet service providers, as well as a demand for
traditional telecommunications equipment and services like modems and local
telephone lines. The Federal Communications Commission (FCC) auctioned off
Personal Communications Service (PCS) licenses, potentially increasing the
number of competitive providers in cellular markets. Over the following pages,
we have highlighted what we view as the major industry events and trends of 1995
(SEE PAGES 3-5).
*Funds are grouped according to investment objective and are ranked by total
return performance relative to other funds in their respective categories. As of
December 31, 1995, Flag Investors Telephone Income Fund's 1-year performance
ranked #43 out of 130 equity income funds and its 5-year
performance ranked #26 out of 56 equity income funds.
INDUSTRY REQUIRES ADAPTATION
The dynamic nature of the industry requires both companies and
investors to adjust to a new environment. Large telephone companies are making
the transition from regulated utilities offering commodity services to
facilitators of new communications applications. While we believe the telephone
companies have great advantages as incumbent providers, they must operate more
efficiently and introduce services that meet their customers'
1
<PAGE>
changing needs in order to remain competitive. Although efficiency and
innovation improve the telephone companies' long-term positioning, these
programs require a high level of capital investment. As a consequence, telephone
companies will continue to pay shareholders a healthy dividend, but a larger
percentage of their strong cash flows will be reinvested in new and existing
telecommunications businesses.
SHAREHOLDERS' DIVIDENDS ADJUSTED IN MID-1995
As investors, we support the change of emphasis, but recognize that
future dividend increases will trail the rate of earnings growth. In response to
the changes in telephone company dividend payouts, we adjusted our dividend
policy in mid-1995. These adjustments include a quarterly, rather than a monthly
dividend at a slightly lower payout level. Understanding our shareholders'
desire for income, we have established a policy that we believe can be
maintained for the foreseeable future.
EXPANDED INVESTMENT OPPORTUNITIES
The universe of telecommunications equities that meet our conservative
investment criteria has increased dramatically over the last ten years. Although
we concentrate the Fund's $530 million of investments among 25 to 30 telephone
and telecommunications companies, we now follow over 100 potential investments
in order to take advantage of the expanding, global nature of the industry. As
conservative investors with strict criteria, we believe there is substantial
opportunity to earn very attractive returns over the next decade without undue
risk. We will continue to concentrate on well-managed companies that pursue
focused business strategies and place a priority on shareholder interests. In
closing, we would like to express our appreciation to our loyal shareholders for
their continued support.
Sincerely,
/s/ Bruce E. Behrens /s/ J. Dorsey Brown, III
Bruce E. Behrens J. Dorsey Brown, III
PRESIDENT EXECUTIVE VICE PRESIDENT
February 5, 1996
Growth of a $10,000 Investment in Class A Shares
Income vs. Appreciation
(January 18, 1984-December 31, 1995)
[graph here]
Income Appreciation
1/84 $10,000 $10,000
12/84 $10,557 $11,503
12/85 $11,392 $14,854
12/86 $12,227 $18,539
12/87 $12,946 $18,818
12/88 $13,650 $22,563
12/89 $14,508 $33,588
12/90 $15,196 $31,053
12/91 $15,909 $38,220
12/92 $16,559 $42,976
12/93 $17,209 $50,761
12/94 $17,890 $47,512
12/95 $18,408 $63,399
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
CLASS A CLASS B CLASS D
PERIODS ENDED 12/31/95: SHARES SHARES SHARES
<S> <C> <C> <C>
One Year 33.4% -- 32.9%
Five Years 15.3% -- --
Ten Years 15.6% -- --
Since Inception: 1/18/84 1/3/95 4/6/93
(Annualized) 16.7% 32.4%** 11.5%
</TABLE>
*These figures assume the reinvestment of dividends and capital gains
distributions but exclude the impact of any sales charge.
The performance of 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.
Past performance is not an indicator of future results. Please review the
Additional Performance Information on page 6.
**Aggregate Total Return.
2
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Major Events and Trends in the Telecommunications Industry
TELECOMMUNICATIONS LEGISLATION
Congress recently passed a telecommunications reform bill that will
affect regulations surrounding the sale and provisioning of basic services like
cable, long distance and local telephone. Local telephone operating companies
will no longer be guaranteed a local telephone service monopoly. The elimination
of the local telephone company's exclusive right to offer this service will
enable alternative local telephone providers such as long distance and cable
companies to enter this market. In return for opening up their monopoly markets,
Regional Bell Operating Companies (RBOCs) will have easier access to long
distance, cable and information service markets.
Even after its passage, debate within the industry continues about
which industry segments will benefit from this legislation. Our sense from the
beginning of this process was that it would be unlikely that any final bill
would heavily favor any particular group, and the bill passed by Congress seems
to bear this out. Rather than predicting which industry segments will benefit,
we will concentrate on specific company issues. The telecommunications market is
divided among many users with varying levels of sophistication and service
requirements. Although legislation will change the competitive landscape, the
failure or success of an individual company will not be determined by Congress.
The ability to understand customer needs and the delivery of products and
services to meet those needs will differentiate the winners from the losers.
AT&T RESTRUCTURING
In order to become more competitive in a rapidly changing marketplace,
AT&T, the Fund's second largest holding, is restructuring its operations into
three distinct businesses. The businesses include Communications Services (the
"new" AT&T), Communications Products (Lucent Technologies) and Global
Information Services (NCR).
COMMUNICATIONS SERVICES (THE "NEW" AT&T)
Retaining the AT&T "brand," this group will operate the traditional
long distance business, wireless services and Universal Card Services. In
addition, a new division specializing in telecommunications consulting will also
be included in the operation. The "new" AT&T will emphasize delivering
integrated telecommunications service-based solutions to customers. These
services will include wireless, long distance and, eventually, local telephone
service. AT&T's plan to offer local telephone service will result in direct
competition with its best network switching equipment customers--the local
telephone companies. By divesting the network switching business, AT&T will
successfully eliminate a future client conflict.
COMMUNICATIONS PRODUCTS
(LUCENT TECHNOLOGIES)
As a stand alone business, Lucent Technologies includes AT&T Network
Systems Group, which provides communications switching systems to long distance,
local telephone and cellular network service companies. Other businesses include
voice and data communications equipment, communications microprocessors and Bell
Laboratories. A key to potential future growth of this company is strong
3
<PAGE>
AT&T (CONTINUED)
demand from network service clients such as long distance and cellular
companies. As a separate entity from the AT&T communications services business,
Lucent Technologies will be able to freely market to existing AT&T long distance
competitors like MCI and Sprint, as well as competing wireless carriers. Former
AT&T competitors will be able to evaluate Lucent Technologies' offerings, and
this will provide a new potential revenue source.
GLOBAL INFORMATION SERVICES (NCR)
NCR provides data processing systems to the financial, retail and
communications industries. The inability to include data processing in the AT&T
product line and NCR's disappointing performance as an independent entity
resulted in significant earnings dilution. As a repositioned business with a
less ambitious strategy, NCR has the potential to succeed as a niche competitor
offering specialized computer platforms to financial, retail and communications
clients.
AT&T's markets are becoming increasingly complex and this
reorganization will improve the company's competitive positioning. As three
separate entities, each business will operate smaller, more efficient
organizations with lower cost structures and will be better able to serve their
respective markets by avoiding potential customer conflicts. The final breakup
of AT&T will not occur until the end of 1996, and certain aspects of the
proposed divestiture have yet to be announced. We support AT&T's decision but
will continue to evaluate the restructuring as additional information becomes
available.
THE INTERNET
Historically the realm of technology-oriented users, the Internet is
rapidly becoming a common tool for accessing information and communicating among
groups with common interests. Approximately 33% of households in the United
States have a personal computer (PC). Although about two-thirds of these PCs are
equipped with communications-enabling modems, it is estimated that only 6%
actually access the Internet. With relatively easy and inexpensive access to the
Internet available, we see renewed demand for local telecommunications services,
including additional telephone access lines as well as digital services that
offer faster information transmission speeds.
In today's data communications market, the local telephone company is
positioned to benefit from increasing demand for the Internet and on-line
services. However, with changing regulation and available technology, there
exists the possibility of new providers offering services that compete with the
local telephone network. We will continue to review the competitive strengths
and weaknesses of all communications providers in anticipation of possible
shifts in future trends in the telecommunications industry.
(CONTINUED)
4
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
PERSONAL COMMUNICATIONS SERVICE (PCS)
Cellular service is a significant revenue and earnings contributor for
many major telecommunications service providers. Each city, or market, was
limited to two carriers that owned exclusive licenses to provide cellular
service. During 1995, the FCC revised this format by auctioning PCS licenses to
create additional competition for cellular network operators. Despite the
potential of PCS as an alternative to cellular service, new market participants
will need to overcome several competitive disadvantages. Efficient distribution
channels need to be created to compete with those already established by the
current cellular carriers. Wireless customers are demanding communications
availability in increasingly larger areas. In order to approximate the coverage
of existing providers, there will be constant pressure on PCS carriers to invest
in network expansion. In the United Kingdom, results from the entry of PCS
providers into established cellular markets reveal not only a greater awareness
of the new entrants' services but renewed demand for existing cellular service.
With low penetration rates in certain market segments, there will be
market opportunities for new wireless entrants. In addition, PCS service will
result in downward pressure on cellular pricing; however, new market entrants
will not completely disrupt the existing cellular operations. Businesses and
consumers are requiring communications service providers to combine wireless
with long distance and local telephone and offer an integrated service package
designed to meet specific user needs. The trend does not favor one
communications medium but leans toward service offerings suited to the needs of
the user.
<TABLE>
<CAPTION>
Telecommunications Holdings
Percent of
Net Assets
<S> <C> <C>
I. Regional Bell Operating Companies:
(RBOCs)
Ameritech Corp. 4.4%
Bell Atlantic Corp. 3.3
BellSouth Corp. 2.7
Pacific Telesis Group 5.7
SBC Communications Inc. 9.3
25.4
II. Independent Local Exchange Carriers:
Cincinnati Bell Inc. 4.1
GTE Corp. 7.3
Southern New England
Telecommunications Corp. 5.2
16.6
III. Long Distance Telephone Companies:
AT&T Corp. 8.0
Frontier Corp. 6.3
LCI International Inc. 2.1
16.4
IV. Foreign Telephone Companies:
BCE Inc. 2.6
Compania Telefonica National de Espana 1.2
Telefonos de Mexico SA 3.0
Vodafone Group PLC 0.8
7.6
V. Telecommunication Equipment Providers:
BlackBox Corp. 1.1
BroadBand Technologies 1.0
Cellstar Corp. 0.6
DSC Communications Corp. 1.4
General Instrument Corp. 1.0
Motorola Inc. 4.5
Octel Communications Corp. 0.9
QUALCOMM Inc. 2.6
13.1
VI. Specialty Telecommunication Services:
AirTouch Communications Inc. 1.2
MFS Communications 2.1
Orbital Sciences Corp. 0.4
3.7
VII. Telecommunication Bonds:
Orbital Sciences Corp. 0.2
Total Telephone Industry 83.0%
</TABLE>
5
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Additional Performance Information
The shareholder letter included in this report contains statistics
designed to help you evaluate the performance of your Fund's management. To
further assist in this evaluation, the Securities andExchange Commission
(SEC)requires that we include, on an annual basis, a line graph comparing the
Fund's performance to that of an appropriate market index. This graph must
measure the growth of a $10,000 hypothetical investment from the Fund's initial
public offering through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its 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.
While the following tables are required by SECrules, such comparisons
are of limited utility since the index shown is not adjusted for sales charges
and ongoing management, distribution and operating expenses applicable to the
Fund. An investor who wished to replicate the total return of this index would
have had to own the securities that it represents. Acquiring these securities
would require a considerable amount of money and would incur expenses that are
not reflected in the index results.
The Fund's 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 the original
investment when redeemed.
AVERAGE ANNUAL TOTAL RETURN--CLASS A*
% Return With
Periods ended 12/31/95: Sales Charge/1
One Year 27.43%
Five Years 14.29%
Ten Years 15.09%
Since Inception (1/18/84) 16.26%
Change in Value of a $10,000 Investment
Class A Shares
(January 18, 1984-December 31, 1995)
[graph here]
Flag
Investors
Telephone S&P 500
Income Fund Composite
1/84 $ 9,550 $10,000
1984 $10,986 $10,676
1985 $14,186 $14,062
1986 $17,705 $16,679
1987 $17,971 $17,550
1988 $21,548 $20,441
1989 $32,076 $26,899
1990 $29,655 $26,056
1991 $36,500 $33,982
1992 $41,042 $36,564
1993 $48,477 $40,244
1994 $45,374 $40,767
1995 $60,546 $56,087
1 Assumes maximum sales charge of 4.50%.
* These figures assume the reinvestment of all dividends and capital gains
distributions. The S&P 500 Composite is an unmanaged index that is widely
recognized as an indicator of general market performance. Past performance
is not an indicator of future results.
6
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Additional Performance Information (CONTINUED)
AGGREGATE TOTAL RETURN--CLASS B*
% Return With
Period ended 12/31/95: CDSC1
Since Inception (1/3/95) 28.42%
Change in Value of a $10,000 Investment*
Class B Shares
(January 3, 1995-December 31, 1995)
[graph here]
Flag
Investors
Telephone S&P 500
Income Fund Composite
1/95 $10,000 $10,000
3/95 $10,447 $10,692
6/95 $11,263 $11,707
9/95 $12,787 $12,630
12/95 $12,842 $13,389
1Assumes maximum contingent deferred sales charge of 4.00%.
AVERAGE ANNUAL TOTAL RETURN--CLASS D*
% Return With
Periods ended 12/31/95: Sales Charge and CDSC2
One Year 29.91%
Since Inception (4/6/93) 10.57%
Change in Value of a $10,000 Investment*
Class D Shares
(April 6, 1993-December 31, 1995)
[graph here]
Flag
Investors
Telephone S&P 500
Income Fund Composite
4/93 $ 9,850 $10,000
6/93 $10,165 $10,283
12/93 $10,639 $10,793
6/94 $ 9,934 $10,424
12/94 $ 9,987 $10,928
6/95 $11,261 $13,134
12/95 $13,173 $15,021
2Assumes maximum sales charge of 1.50% and maximum contingent deferred sales
charge of 1.00%.
*These figures assume the reinvestment of all dividends and capital gains
distributions. The S&P 500 Composite is an unmanaged index that is widely
recognized as an indicator of general market performance. Past performance is
not an indicator of future results.
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.
7
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Statement of Net Assets December 31, 1995
SHARES/
PAR MARKET VALUE
(000) (NOTE A)
TELEPHONE INDUSTRY: 83.0%
COMMON STOCK: 80.7%
220,408 AirTouch Communications Inc.* $ 6,226,526
659,224 AT&T Corp.* 42,684,754
394,000 Ameritech Corp. 23,246,000
400,000 BCE Inc. 13,800,000
262,008 Bell Atlantic Corp. 17,521,785
330,964 BellSouth Corp. 14,396,934
366,428 BlackBox Corp.* 6,000,259
320,500 BroadBand Technologies* 5,208,125
115,000 Cellstar Corp.* 2,990,000
625,800 Cincinnati Bell Inc. 21,746,550
150,000 Compania Telefonica National de Espana ADS 6,281,250
200,000 DSC Communications Corp.* 7,375,000
1,122,400 Frontier Corp. 33,672,000
214,700 General Instrument Corp. 5,018,612
887,320 GTE Corp. 39,042,080
210,000 MFS Communications* 11,182,500
420,000 Motorola Inc. 23,940,000
150,000 Octel Communications Corp.* 4,837,500
156,000 Orbital Sciences Corp.* 1,989,000
900,408 Pacific Telesis Group 30,276,219
325,000 QUALCOMM Inc.* 13,975,000
859,106 SBC Communications Inc. 49,398,595
690,000 Southern New England Telecommunications Corp. 27,427,500
500,000 Telefonos de Mexico SA ADS 15,937,500
124,000 Vodafone Group PLC ADR 4,371,000
TOTAL COMMON STOCK (Cost $282,175,040) 428,544,689
CONVERTIBLE PREFERRED STOCK: 2.1%
207,800 LCI International Inc., 5% Cvt Pfd 11,117,300
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $6,138,548) 11,117,300
CORPORATE BONDS: 0.2%
$1,000 Orbital Sciences Corp., 6.75%, 3/1/03 1,065,000
TOTAL CORPORATE BONDS (Cost $1,259,443) 1,065,000
TOTAL TELEPHONE INDUSTRY (Cost $289,573,031) 440,726,989
8
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Statement of Net Assets (CONTINUED) December 31, 1995
SHARES/
PAR MARKET VALUE
(000) (NOTE A)
NON-TELEPHONE INDUSTRY: 16.0%
COMMON STOCK: 11.1%
626,900 Alexander Haagen Properties $ 7,679,525
242,956 Conseco Inc. 15,215,119
179,600 DeBartolo Realty Corporation 2,334,800
109,000 General Growth Properties 2,261,750
145,000 Meditrust SBI 5,056,875
200,000 Nationwide Health Properties Inc. 8,400,000
200,000 Philip Morris Cos., Inc. 18,100,000
TOTAL COMMON STOCK (Cost $35,502,588) 59,048,069
CONVERTIBLE PREFERRED STOCK: 3.6%
246,000 American Express, 6.25% Cvt Pfd 13,653,000
100,000 Conseco Inc., 6.5% Series D Cvt Pfd 5,300,000
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $14,295,500) 18,953,000
CORPORATE BONDS: 1.3%
$5,000 HMH Properties, 9.50%, 5/15/05 5,125,000
2,000 Philip Morris Cos., Inc., Deb., 8.75%, 12/1/96 2,057,500
TOTAL CORPORATE BONDS (Cost $6,903,103) 7,182,500
TOTAL NON-TELEPHONE INDUSTRY (Cost $56,701,191) 85,183,569
REPURCHASE AGREEMENT: 0.5%
$2,493 GOLDMAN SACHS & CO., 5.70%
Dated 12/29/95, to be repurchased on 1/2/96,
collateralized by U.S. Treasury Notes with a market
value of $2,543,435.
(Cost $2,493,000) 2,493,000
9
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Statement of Net Assets (CONCLUDED) December 31, 1995
MARKET VALUE
(NOTE A)
TOTAL INVESTMENTS IN SECURITIES: 99.5%
(Cost $348,767,222)** $528,403,558
OTHER ASSETS IN EXCESS OF LIABILITIES, NET: 0.5% 2,871,367
NET ASSETS: 100.0% $531,274,925
NET ASSET VALUE PER:
CLASS A SHARE
($492,453,558 / 33,120,036 shares outstanding) $14.87/1
CLASS B SHARE
($7,504,388 / 505,908 shares outstanding) $14.83/2
CLASS D SHARE
($31,316,979 / 2,105,445 shares outstanding) $14.87/3
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($14.87 / .955) $15.57
CLASS B SHARE $14.83
*Non-income producing security.
**Aggregate cost for federal tax purposes was $345,969,173.
1Redemption value is $14.87.
2Redemption value is $14.24 following 4.00% maximum contingent deferred sales
charge.
3Redemption value is $14.72 following 1.00% maximum contingent
deferred sales charge.
See accompanying Notes to Financial Statements.
10
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Statement of Operations For the Year Ended December 31, 1995
INVESTMENT INCOME (NOTE A):
Dividends $ 16,903,886
Interest 2,093,131
Other income 19,502
Less:Foreign taxes withheld (242,692)
Total income 18,773,827
EXPENSES:
Investment advisory fee (Note B) 2,584,817
Distribution fees (Note B) 1,378,330
Transfer agent fees (Note B) 550,000
Printing and postage 144,435
Accounting fee (Note B) 113,878
Legal 59,397
Custodian fee 56,745
Registration fees 51,428
Directors' fees 26,712
Audit 25,999
Miscellaneous 24,527
Insurance 18,230
Total expenses 5,034,498
Less:Fees waived (Note B) (287,343)
Net expenses 4,747,155
Net investment income 14,026,672
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 35,372,071*
Change in unrealized appreciation of investments 93,655,306
Net gain on investments 129,027,377
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $143,054,049
*Net realized gain for federal tax purposes was $36,106,029.
See accompanying Notes to Financial Statements.
11
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
<S> <C> <C>
Net investment income $ 14,026,672 $ 15,367,428
Net gain from security transactions 35,372,071 4,980,639
Change in unrealized appreciation/(depreciation)
of investments 93,655,306 (52,606,757)
Net increase/(decrease) in net assets resulting
from operations 143,054,049 (32,258,690)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares (13,188,618) (14,498,099)
Class B shares (71,352) --
Class D shares (766,702) (869,329)
Net realized short-term gains:
Class A shares (594,281) (1,380,369)
Class B shares (6,947) --
Class D shares (39,689) (207,441)
Net realized long-term gains:
Class A shares (31,183,490) (3,302,412)
Class B shares (411,017) --
Class D shares (2,033,414) (243,429)
Total distributions (48,295,510) (20,501,079)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 35,420,420 74,463,764
Value of shares issued in reinvestment of dividends 40,313,196 14,926,479
Cost of shares repurchased (106,718,217) (61,773,728)
Increase/(decrease) in net assets derived from
capital share transactions (30,984,601) 27,616,515
Total increase/(decrease) in net assets 63,773,938 (25,143,254)
NET ASSETS:
Beginning of year 467,500,987 492,644,241
End of year $ 531,274,925 $467,500,987
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Financial Highlights -- Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)*
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $12.30 $13.70 $12.20 $11.28 $9.57
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.40 0.41 0.42 0.42 0.45
Net realized and unrealized gain/(loss)
on investments 3.58 (1.27) 1.78 0.93 1.74
Total from Investment Operations 3.98 (0.86) 2.20 1.35 2.19
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains (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 (1.41) (0.54) (0.70) (0.43) (0.48)
Net asset value at end of year $14.87 $12.30 $13.70 $12.20 $ 11.28
TOTAL RETURN 33.44% (6.32)% 18.12% 12.35% 23.08%
RATIOS TO AVERAGE NET ASSETS:
Expenses/1 0.93% 0.92% 0.92% 0.92% 0.92%
Net investment income/2 2.85% 3.14% 3.12% 3.81% 4.38%
SUPPLEMENTAL DATA:
Net assets at end of year (000) $492,454 $435,805 $469,163 $307,641 $238,571
Portfolio turnover rate 24% 23% 14% 6% 7%
</TABLE>
* Computed based upon average shares outstanding.
1 Without the waiver of advisory fees (Note B), the ratio of expenses to
average 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.
2 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average 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.
13
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Financial Highlights -- Class B Shares
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)*
FOR THE PERIOD
JANUARY 31, 1995**
THROUGH
DECEMBER 31, 1995
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $12.28
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.30
Net realized and unrealized gain/(loss) on investments 3.56
Total from Investment Operations 3.86
LESS DISTRIBUTIONS:
Dividends from net investment income and short-term gains (0.31)
Distribution from net realized long-term gains (1.00)
Total distributions (1.31)
Net asset value at end of period $14.83
TOTAL RETURN 32.42%
RATIOS TO AVERAGE NET ASSETS:
Expenses/2 1.70%/1
Net investment income/3 2.13%/1
SUPPLEMENTAL DATA:
Net assets at end of period (000) $7,504
Portfolio turnover rate 24%
* Computed based upon average shares outstanding.
** Commencement of operations.
1 Annualized.
2 Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.74% (annualized) for the period ended
December 31, 1995.
3 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 2.09% (annualized) for the
period ended December 31, 1995.
See accompanying Notes to Financial Statements.
14
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Financial Highlights -- Class D Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)*
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED APRIL 6, 1993
DECEMBER 31, THROUGH
1995 1994 DECEMBER 31, 1993
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 12.30 $ 13.67 $ 13.21
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.34 0.37 0.25
Net realized and unrealized gain/(loss) on investments 3.58 (1.20) 0.80
Total from Investment Operations 3.92 (0.83) 1.05
LESS DISTRIBUTIONS:
Dividends from net investment income and short-term gains (0.35) (0.42) (0.31)
Distribution in excess of net investment income -- (0.02) --
Distribution from net realized long-term gains (1.00) (0.10) (0.28)
Total distributions (1.35) (0.54) (0.59)
Net asset value at end of period $ 14.87 $ 12.30 $ 13.67
TOTAL RETURN 32.91% (6.13)% 8.01%
RATIOS TO AVERAGE NET ASSETS:
Expenses/2 1.28% 1.27% 1.27%/1
Net investment income/3 2.50% 2.81% 2.73%/1
SUPPLEMENTAL DATA:
Net assets at end of period (000) $31,317 $31,696 $23,481
Portfolio turnover rate 24% 23% 14%
</TABLE>
* Computed based upon average shares outstanding.
** Commencement of operations.
1 Annualized.
2 Without the waiver of advisory fees (Note B), the ratio of expenses to
average 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.
3 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average 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.
See accompanying Notes to Financial Statements.
15
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Notes to Financial Statements
Dear Shareholders:
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 Regional Bell 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 loads and distribution fees. Beginning
November 18, 1994, Class D Shares were 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 tri-party 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 - Inv
estment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown &Sons
Incorporated ("Alex. Brown"), is the Fund's investment advisor and Alex. Brown
Investment Management ("ABIM") is the Fund's sub-advisor. As compensation for
its advisory services, ICC receives from the Fund an annual fee, calculated
daily and paid monthly, at the annual rate of 0.65% of the first $100 million of
the Fund's average daily net assets; 0.55% of the Fund's average daily net
assets in excess of $100 million but not exceeding $200 million; 0.50% of the
Fund's average daily net assets in excess of $200 million but not exceeding $300
million; and 0.45% of the Fund's average daily net assets in excess of $300
million.
As compensation for its sub-advisory services, ABIMreceives a fee from
ICC, payable from its advisory fee, calculated daily and paid monthly, at
an annual rate of 0.40% of the first $100 million of the Fund's average
daily net assets; 0.35% of the Fund's average daily net
16
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Notes to Financial Statements (CONTINUED)
assets in excess of $100 million but not exceeding $200 million; 0.30%
of the Fund's average daily net assets in excess of $200 million but not
exceeding $300 million; and 0.25% of the Fund's average daily net assets
over $300 million.
Through October 6, 1995, ICC had agreed to reduce its aggregate fees
so that ordinary expenses of the Fund for any fiscal year did not exceed
0.92% of average daily net assets of Class A Shares, 1.67% of Class B
Shares and 1.27% of Class D Shares.For the period January 1, 1995 through
October 6, 1995, ICC voluntarily waived $287,343 in fees. Effective October
7, 1995, ICC is no longer waiving fees.
As compensation for its transfer agent services, ICCreceives from the
Fund a per account fee, calculated and paid monthly. ICC received $550,000
for transfer agent services for the year ended December 31, 1995.
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 $113,878 for accounting
services for the year ended December 31, 1995.
As compensation for providing distribution services, 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 year ended December 31, 1995,
distribution fees aggregated $1,378,330 of which $1,153,794, $35,130 and
$189,406 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 year ended December 31, 1995.
Flag Investors/ISI Fund complex has adopted a retirement plan for
eligible Directors. The actuarially computed pension expense for the year
ended December 31, 1995 was approximately $15,000.
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 YEAR ENDED
DECEMBER 31,
1995 1994
Shares sold 2,145,785 4,615,066
Shares issued to share-
holders on reinvest-
ment of dividends 2,674,624 1,088,372
Shares redeemed (7,132,553) (4,517,710)
Net increase/(decrease)
in shares
outstanding (2,312,144) 1,185,728
Proceeds from sale
of shares $ 28,720,184 $ 60,821,115
Value of reinvested
dividends 37,305,866 13,849,565
Cost of shares
redeemed . (97,427,131) (58,534,367)
Net increase/(decrease)
from capital share
transactions $(31,401,081) $ 16,136,313
CLASS B SHARES
FOR THE
PERIOD
JANUARY 3, 1995*
THROUGH
DECEMBER 31, 1995
Shares sold . . . . . . . . . 489,011
Shares issued to shareholders
on reinvestment
of dividends . . . . . . 32,826
Shares redeemed . . . . . (15,929)
Net increase in shares
outstanding . . . . . . . 505,908
Proceeds from sale
of shares . . . . . . . . . $6,700,236
Value of reinvested
dividends . . . . . . . . . 458,760
Cost of shares redeemed (229,177)
Net increase from
capital share
transactions . . . . . . $6,929,819
*Commencement of operations.
17
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Notes to Financial Statements
CLASS D SHARES
FOR THE YEAR ENDED
DECEMBER 31,
1995 1994
Shares sold -- 1,028,832
Shares issued to share-
holders on reinvest-
ment of dividends 183,832 84,910
Shares redeemed (655,092) (254,327)
Net increase/(decrease)
in shares
outstanding (471,260) 859,415
Proceeds from sale
of shares $ -- $13,642,649
Value of reinvested
dividends 2,548,570 1,076,914
Cost of shares
redeemed (9,061,909) (3,239,361)
Net increase/(decrease)
from capital share
transactions $(6,513,339) $11,480,202
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment securities, other
than short-term obligations and U.S. government securities, aggregated
$114,577,349 and $176,205,901, respectively, for the year ended December 31,
1995. There were no purchases or sales of U.S. Government obligations.
At December 31, 1995, net unrealized appreciation for all securities in
which there is an excess of value over tax cost was $182,434,385, of which
$194,645,463 related to appreciated securities and $12,211,078 related to
depreciated securities.
E. NET ASSETS - At December 31, 1995, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $314,341,690
Flag Investors Class B Shares 6,929,820
Flag Investors Class D Shares 28,926,870
Undistributed net realized gain
from security transactions 1,440,208
Unrealized appreciation of
investments 179,636,337
$531,274,925
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Flag Investors Telephone Income Fund, Inc.
We have audited the accompanying statement of net assets of Flag Investors
Telephone Income Fund, Inc. as of December 31, 1995 and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Flag
Investors Telephone Income Fund, Inc. as of December 31, 1995, the results of
its operations for the year then ended, the changes in its net assets and its
financial highlights for each of the respective periods in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 26, 1996
18
<PAGE>
Flag Investors
TELEPHONE INCOME FUND
Chairman's Letter
The year 1995 saw the retirement of two of our longtime Directors. We would
like to thank them for their valuable and tireless service over the years.
Alonzo G. Decker, former Chairman and CEO of Black &Decker, was one of our
original Directors, joining the Board in 1981. He served with distinction, and
his wise counsel will be much missed; but we know he will enjoy having more time
to spend on his farm on the Eastern Shore of Maryland.
Bruce Hannay, former Vice President for Patents and Research at Bell Labs,
joined our Board at the time we formed Flag Investors Telephone Income Fund. His
knowledge of the telecommunications industry was of great assistance to us. His
willingness to cross the country four times each year to attend our Board
meetings tells us a great deal about his energy and loyalty. We wish him well in
his retirement in the beautiful State of Washingt on.
Al and Bruce, we thank you and will miss you.
Sincerely,
/s/ W. James Price
W. James Price
DIVIDEND DECLARATION
1995 YEAR-END DIVIDEND
For calendar 1995, the Board of Directors has declared the
following per share distribution payable on December 28, 1995 to shareholders
of record on December 21, 1995.
Class A Class B Class D
Shares Shares Shares
Income $.101 $.034 $.055
Short-term
Capital Gains .010 .010 .010
Total distribution $.111 $.044 $.065
DIVIDENDS FOR CALENDAR 1995
Total dividends declared for calendar 1995 are as follows:
Class A Class B Class D
Shares Shares Shares
Income $ .401 $ .303 $ .3412
Short-term
Capital Gains .010 .010 .0100
Long-term
Capital Gains 1.000 1.000 1.0000
Total distribution $1.411 $1.313 $1.3512
Shareholders who have elected to participate in the Fund's dividend
reinvestment plan have received their distribution in additional shares of the
Fund. If you are not currently a plan participant but would like to have your
dividends reinvested at net asset value, please contact your investment
representative or the Fund at 1-800-553-8080.
Directors and Officers
W. James Price
CHAIRMAN
James J. Cunnane
DIRECTOR
N. Bruce Hannay
DIRECTOR
Robert S. Killebrew
DIRECTOR
John F. Kroeger
DIRECTOR
Louis E. Levy
DIRECTOR
Eugene J. McDonald
DIRECTOR
Truman T. Semans
DIRECTOR
Harry Woolf
DIRECTOR
Bruce E. Behrens
PRESIDENT
J. Dorsey Brown, III
EXECUTIVE VICE PRESIDENT
Hobart C. Buppert
VICE PRESIDENT
Liam D. Burke
VICE PRESIDENT
Gary V. Fearnow
VICE PRESIDENT
Richard T. Hale
VICE PRESIDENT
Lee S. Owen
VICE PRESIDENT
Edward J. Veilleux
VICE PRESIDENT
Brian C. Nelson
VICE PRESIDENT AND SECRETARY
Joseph A. Finelli
TREASURER
Laurie D. DePrine
ASSISTANT SECRETARY
