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FLAG INVESTORS
FLAG
INVESTORS
TELEPHONE
INCOME
FUND
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
(bullet) As we enter 1997, we see overlooked values in the local telephone
companies similar to those in the early 1980s when the Fund was
established. In addition, we are excited about opportunities in other
telecommunications areas.
(bullet) Your Fund has significantly outperformed the "original" AT&T--AT&T,
Regional Bell Operating Companies (RBOCs) and spin-offs--since
inception. In an evolving industry, our conservative yet flexible
investment approach has enabled us to generate these favorable,
comparable results.
(bullet) The Telecommunications Act of 1996 is just one example of an industry
event that has altered the course of telecommunications since the AT&T
breakup. Industry changes such as this legislation create investment
opportunity, and we are optimistic about the current potential.
(bullet) Telecommunications is both large and diverse, making your Fund a
"sector fund with a difference." We continue to see growth potential in
both traditional services, such as long distance and local telephone,
as well as in emerging segments of the industry.
"It's natural in every industry . . . when major changes take place . . .
there's a lag as old investment models get replaced by new frameworks for
growth. It's in these sort of gaps . . . between old perceptions and new
realities . . . that the best investment opportunities are seized. The most
fundamental investment fact for our industry today is that telecommunications
is entering an era of unprecedented growth."
--Edward E. Whitacre, Jr.
Board Chairman and CEO
of SBC Communications Inc.
<PAGE>
FUND PERFORMANCE
- -------------------------------------------------------------------------------
Growth of a $10,000 Investment in Class A Shares*
January 18, 1984-December 31, 1996
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 18,857 71,989
Total Value of Investment
(income + appreciation) $71,989
Value of Original Investment
and Income Distributions $18,857
Average Annual Total Return*
Class A Class B Class D
Periods ended 12/31/96 Shares Shares Shares
- -------------------------------------------------------------
One Year 13.5% 12.6% 13.0%
Five Years 13.5% -- --
Ten Years 14.5% -- --
Since Inception 1/18/84 1/3/95 4/6/93
------- ------ ------
(Annualized) 16.5% 22.2% 11.9%
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
were reflected, the quoted performance would be lower. Performance figures for
the classes differ because each class maintains a distinct expense structure.
For further details on 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 7.
1
<PAGE>
LETTER TO SHAREHOLDERS
- ------------------------------------------------------------------------------
Dear Shareholders:
Your Fund's Class A Shares had a total return for 1996 of 13.5%, a
respectable return, but lower than broader equity market indices. The
Telecommunications Act, passed in early 1996, outlined the plan for full
competition in the local telephone and long distance markets. Questions
regarding the plan's implementation and its effect on telephone companies
somewhat restrained telephone stock performance.
Opportunity in Unrecognized Value
As we enter 1997, we believe the Telecommunications Act will result in a
clearer view of fair competition and new growth opportunities for our key
telephone company holdings. Moreover, their stock prices are at very attractive
valuations. As investors who are attracted to the potential in undiscovered
values, we are excited by the current opportunity, which is reminiscent of the
uncertainties surrounding the telephone stocks in the early 1980s, when this
Fund was created. In addition, other investments in long distance, foreign
telecommunications, specialty services and telecommunications equipment are
well-positioned in this expanding global market.
Long-Term Performance
Since the 1984 breakup of AT&T (and the inception of the Fund), we have
seen steady but gradual change in the telecommunications industry. Given the
evolutionary nature of the industry, we have remained committed to a
conservative, yet flexible, investment approach that has enabled us to
significantly outperform the "original" AT&T (AT&T, RBOCs and spin-offs)2, as
shown in the following table and in the mountain chart on page 1. In addition,
your Fund's Class A Shares have had an annualized total return of 16.5% since
inception.
2
<PAGE>
- ------------------------------------------------------------------------------
Cumulative Total Return(1)
Flag Investors Telephone Income Fund vs. Original AT&T(2)
One Three Five Ten Since
Year Years Years Years Inception(3)
- ------------------------------------------------------------------------------
Flag Investors
Telephone Income Fund--Class A +13.5% +41.8% +88.4% +288.3% +619.9%
Original AT&T -6.6% +23.0% +67.4% +212.3% +555.0%
(1) These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales
charge were reflected, the quoted performance would be lower. Since
investment return and principal value will fluctuate, an investor's shares
may be worth more or less than their original cost when redeemed. Past
performance is not an indicator of future results. Please review the
Additional Performance Information on page 7.
(2) AT&T and seven RBOCs and related spin-offs--AirTouch, Lucent and U.S. West
Media Group.
(3) 1/18/84.
Portfolio Flexibility
Industry changes, such as those being created by the recent
Telecommunications Act, often provide significant long-term investment
opportunity. We have successfully managed the Fund through several such periods
in the past, and flexibility is important. Although the RBOCs and major
independent telephone companies have made up the core of the Fund's assets, the
Fund was never intended to be a proxy for a telephone company index.
We have often discussed the telephone companies' financial strengths and
the advantages of an efficiently operated telephone network. However, we have
also paid close attention to telephone companies' valuations relative to the
Standard & Poor's 500 Index and have always been selective about the individual
companies that we believe provide the greatest potential for long-term growth.
The chart on page 4 highlights our telephone sector weightings during key
periods of the Fund's history.
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- -------------------------------------------------------------------------------
Sector Weightings as a Percentage of Fund's Net Assets
12/31/84 12/31/89 12/31/93 12/31/96
- -------------------------------------------------------------------------------
Local Telephone
RBOCs 55.7% 47.3% 20.9% 30.1%
Independent Telephone Cos. 6.5% 13.8% 7.9% 18.3%
---- ---- ---- ----
Total Local Telephone 62.2% 61.1% 28.8% 48.4%
Long Distance 9.1% 9.5% 13.0% 8.0%
Foreign Telecommunications 0.0% 3.7% 15.1% 7.8%
Specialty Service & Equipment 0.0% 0.0% 7.0% 26.1%
Total Telecommunications 71.3% 74.3% 63.9% 90.3%
==== ==== ==== ====
Our heavy telephone company weightings during the Fund's earlier years
reflected a telephone group that was valued at a discount to the S&P 500 and
generated higher relative earnings growth. During the 1990 to 1993 time frame,
as telephone stock valuations approached or exceeded the S&P 500 and their
earnings prospects lagged the ensuing earnings growth of the broader market, we
reduced our position. Subsequently, as the earnings potential of the local
exchange companies has improved again and valuations now understate their
potential, we have increased our telephone company weightings. Importantly,
forecasts of the S&P 500 earnings for 1997 and beyond reflect more normal
increases of perhaps 6% to 8%, while we expect many of the telephone companies
to have earnings that are significantly better in the 9% to 11% range.
A Sector Fund with a Difference
Investing in such a large, diverse industry with strong growth prospects
makes your Fund a "sector fund with a difference." Telecommunications affords us
the flexibility, as shown in the above chart, to take advantage of opportunities
in both traditional local telephone and long distance services as well as in
emerging areas of telecommunications. Even the more mature segments demonstrate
greater growth than the overall economy. Early estimates indicate that in 1996,
the Gross Domestic Product grew at a 3% rate compared to an increase in local
telephone access lines of nearly 4% and long distance volume of 8%. Solid
industry fundamentals reflect a stable pricing environment and widespread
acceptance of new applications that create higher usage of both wireline and
wireless services. In addition to traditional local telephone and long distance
service (worldwide revenues of $300 billion), there are new niche
4
<PAGE>
services and equipment businesses that are contributing to significant
market expansion. In a global market that is increasingly dependent on both
voice and data communications, it is apparent that telecommunications should
continue to outpace GDP growth worldwide.
Telephone Companies Increasing Future Investments
One of the great strengths of telephone companies has long been their ample
cash flows. In order to improve their chances of success in this dynamic
industry, the telephone companies have increased investments to generate new
revenue and reduce costs. As many of these investments promise very high rates
of return, we are supportive of those managements who have demonstrated the
ability to allocate these resources wisely. SBC Communications (formerly
Southwestern Bell) is a prime example through their early acquisition of
cellular properties and foreign investments at very favorable prices. They have
also shown good caution in their expenditures on less-proven technologies before
adequate markets develop. We expect SBC to add further value through their
pending merger with Pacific Telesis.
If greater regulatory clarity emerges over the next year, as we expect it
will, there may be an acceleration of opportunities for the telephone companies
to invest in new facilities and related businesses. One aspect of an increased
investment emphasis is that dividend growth may be further restrained and could
affect the current dividend level of the Fund. Nevertheless, assuming our
favored managements spend their cash flow wisely, we would expect the net result
of their decisions to enhance the overall investment result for our
shareholders.
We are grateful for the continued support of our loyal shareholders. We
remain most enthusiastic about the future of the industry and the investment
opportunity for growth and income without taking undue risk.
Sincerely,
/s/ Bruce E. Behrens /s/ Liam D. Burke /s/ J. Dorsey Brown III
- --------------------- ------------------------ -----------------------
Bruce E. Behrens Liam D. Burke J. Dorsey Brown, III
President Executive Vice President Executive Vice President
January 20, 1997
5
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Telecommunications Holdings Percent of Net Assets
I. Regional Bell Operating Companies:
(RBOCs)
Ameritech Corporation 4.3%
Bell Atlantic Corporation 5.8
BellSouth Corporation 1.7
Pacific Telesis Group 9.2
SBC Communications Inc. 9.1
----
30.1
II. Independent Local Exchange Carriers:
Cincinnati Bell Inc. 6.7
GTE Corporation 6.8
Southern New England Telecommunications Corporation 4.8
----
18.3
III. Long Distance Telephone Companies:
AT&T Corporation 1.8
Excel Communications Inc. 0.1
Frontier Corporation 4.2
LCI International Inc. 1.9
----
8.0
IV. Foreign Telephone Companies:
BCE Inc. 3.2
Telefonica de Espana SAADR 1.6
Telefonos de Mexico SA ADR 3.0
----
7.8
V. Telecommunication Equipment Providers:
BlackBox Corporation 2.8
BroadBand Technologies Inc. 0.8
CellStar Corporation 0.4
DSC Communications Corporation 0.7
General Instrument Corporation 0.8
Lucent Technologies Inc. 1.5
Motorola Inc. 3.8
Octel Communications Corporation 0.8
QUALCOMM Inc. 1.0
U.S. Robotics Corporation 1.9
----
14.5
VI. Specialty Telecommunication Services:
AirTouch Communications Inc. 1.0
America Online, Inc. 3.6
MFS Communications Co. Inc. 4.3
Mobile Telecommunication 0.6
NEXTEL Communications Inc. 0.5
Orbital Sciences Corporation 1.4
Preferred Networks Inc. 0.2
----
11.6
Total Telephone Industry 90.3%
=====
6
<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 and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on January
18, 1984 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses and 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 SECcalculation for the Class D Shares reflects
the impact of a 1.00% maximum contingent deferred sales charge when the
represented time period is less than four years.
While the following charts are required by SEC rules, 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 SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the
SEC calculation includes the impact of the currently effective maximum sales
charge. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed. Past performance is not an indicator of future results.
7
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Class A Shares*
January 18, 1984-December 31, 1996
S&P Flag
Investors
1/84 $10,687 $ 9,550
12/84 10,687 10,986
12/85 14,081 14,186
12/86 16,714 17,705
12/87 17,587 17,971
12/88 20,501 21,548
12/89 26,920 32,076
12/90 27,754 29,655
12/91 36,292 36,500
12/92 39,064 41,042
12/93 42,990 48,477
12/94 43,536 45,411
12/95 59,875 60,596
12/96 73,640 68,750
Flag Investors Telephone Income Fund $68,750
S&P 500 Composite $73,640
Average Annual Total Return*
Periods Ended 12/31/96 1 Year 5 Years 10 Years Since Inception**
- --------------------------------------------------------------------------
Class A Shares 8.35% 12.46% 14.00% 16.04%
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results. The
S&P 500 Composite is an unmanaged index that is a widely recognized indicator
of general market performance.
** January 18, 1984.
8
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class B Shares*
January 3, 1995-December 31, 1996
S&P Flag
Investors
1/95 $10,000 $10,000
3/95 10,692 10,447
6/95 11,697 11,263
9/95 12,640 12,787
12/95 13,397 13,242
3/96 14,119 13,474
6/96 14,743 14,511
9/96 15,205 13,953
12/96 16,478 14,510
Flag Investors Telephone Income Fund $14,510
S&P 500 Composite $16,478
Average Annual Total Return*
Periods Ended 12/31/96 1 Year 5 Years Since Inception**
- ------------------------------------------------------------------------
Class B Shares 9.57% -- 20.52%
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** January 3, 1995.
9
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Class D Shares*
April 6, 1993-December 31, 1996
S&P Flag
Investors
4/93 $10,000 $ 9,850
6/93 10,278 10,165
12/93 10,798 10,639
6/94 10,421 9,934
12/94 10,935 9,987
6/95 13,133 11,261
12/95 15,041 13,273
6/96 16,551 14,571
12/96 18,499 14,899
Flag Investors Telephone Income Fund $14,899
S&P 500 Composite $18,499
Average Annual Total Return*
Periods Ended 12/31/96 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------
Class D Shares 10.57% -- 11.26%
....................................................................
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** April 6, 1993.
10
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1996
Market Value
Shares Security (Note 1)
- ------------------------------------------------------------------------------
TELEPHONE INDUSTRY--90.3%
Common Stock--90.3%
220,408 AirTouch Communications Inc.* $ 5,565,302
600,000 America Online, Inc. 19,950,000
394,000 Ameritech Corporation 23,886,250
224,224 AT&T Corporation 9,753,744
370,000 BCE Inc. 17,667,500
497,608 Bell Atlantic Corporation 32,220,118
223,464 BellSouth Corporation 9,022,359
366,428 BlackBox Corporation* 15,115,155
290,000 BroadBand Technologies Inc.* 4,277,500
115,000 CellStar Corporation* 2,070,000
595,800 Cincinnati Bell Inc. 36,716,175
200,000 DSC Communications Corporation* 3,575,000
25,000 Excel Communications Inc.* 525,000
1,022,400 Frontier Corporation 23,131,800
214,700 General Instrument Corporation* 4,642,888
823,320 GTE Corporation 37,461,060
496,841 LCI International Inc. 10,682,081
181,235 Lucent Technologies Inc. 8,382,119
440,000 MFS Communications Co. Inc.* 23,980,000
405,000 Mobile Telecommunication 3,442,500
340,000 Motorola Inc. 20,867,500
200,000 NEXTEL Communications Inc.--Class A* 2,612,500
250,000 Octel Communications Corporation* 4,375,000
435,347 Orbital Sciences Corporation* 7,509,736
1,373,808 Pacific Telesis Group 50,487,444
130,000 Preferred Networks Inc.* 845,000
140,000 QUALCOMM Inc.* 5,582,500
969,106 SBC Communications Inc. 50,151,235
690,000 Southern New England
Telecommunications Corporation 26,823,750
128,000 Telefonica de Espana SA ADR 8,864,000
500,000 Telefonos de Mexico SA ADR--Series L 16,500,000
148,000 U.S. Robotics Corporation* 10,656,000
------------
Total Common Stock
(Cost $327,639,322) 497,341,216
------------
11
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- ------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1996
Shares/ Market Value
Par (000) Security (Note 1)
- ------------------------------------------------------------------------------
NON-TELEPHONE INDUSTRY--8.5%
Common Stock--7.6%
626,900 Alexander Haagen Properties, Inc. $ 9,246,775
367,774 Conseco Inc. 23,445,593
67,700 Meditrust Corporation 2,708,000
100,000 Nationwide Health Properties, Inc. 2,425,000
122,128 Simon DeBartolo Group, Inc. 3,785,968
------------
Total Common Stock
(Cost $18,040,909) 41,611,336
------------
Corporate Bond--0.9%
$ 5,000 HMH Properties, 9.5%, 5/15/05
(Cost $4,910,351) 5,225,000
------------
Total Non-Telephone Industry
(Cost $22,951,260) 46,836,336
------------
REPURCHASE AGREEMENT--1.0%
5,410 Goldman Sachs & Co., 6.00%
Dated 12/31/96, to be repurchased on
1/2/97, collateralized by U.S. Treasury
Notes with a market value of $5,518,672.
(Cost $5,410,000) 5,410,000
------------
Total Investments in Securities--99.8%
(Cost $356,000,582)** 549,587,552
------------
Other Assets in Excess of Liabilities, Net--0.2% 1,016,790
------------
Net Assets--100.0% $550,604,342
============
12
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Net Asset Value Per:
Class A Share
($505,371,023 / 32,421,696 shares outstanding) $15.59(dagger)
=======
Class B Share
($17,660,516 / 1,138,610 shares outstanding) $15.51(double daggers)
=======
Class D Share
($27,572,803 / 1,768,618 shares outstanding) $15.59(triple daggers)
=======
Maximum Offering Price Per:
Class A Share
($15.59 / .955) $16.32
=======
Class B Share $15.51
=======
Class D Share
($15.59 / .985) $15.83
=======
- ---------------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $352,513,493.
(dagger) Redemption value is $15.59.
(double daggers) Redemption value is $14.89 following 4.00% maximum contingent
deferred sales charge.
(triple daggers) Redemption value is $15.43 following 1.00% maximum contingent
deferred sales charge.
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
Dec. 31,
- ------------------------------------------------------------------------------
1996
Investment Income (Note 1):
Dividends $14,802,988
Interest 971,287
Less: Foreign taxes withheld (148,592)
-----------
Total income 15,625,683
-----------
Expenses:
Investment advisory fee (Note 2) 3,562,609
Distribution fee (Note 2) 1,559,921
Transfer agent fee (Note 2) 623,604
Printing and postage 191,642
Accounting fee (Note 2) 117,160
Legal 105,286
Custodian fees 67,181
Miscellaneous 55,576
Audit 49,511
Director's fees 36,330
Insurance 17,258
Registration fees 16,940
-----------
Total expenses 6,403,018
-----------
Net investment income 9,222,665
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 44,618,521
Change in unrealized appreciation or
depreciation of investments 13,950,633
-----------
Net gain on investments 58,569,154
-----------
Net increase in net assets resulting from operations $67,791,819
===========
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Increase in Net Assets:
Operations:
Net investment income $ 9,222,665 $ 14,026,672
Net realized gain from security transactions 44,618,521 35,372,071
Change in unrealized appreciation or
depreciation of investments 13,950,633 93,655,306
------------ ------------
Net increase in net assets resulting
from operations 67,791,819 143,054,049
------------ ------------
Distributions to Shareholders from:
Net investment income:
Class A Shares (8,654,688) (13,188,618)
Class B Shares (157,647) (71,352)
Class D Shares (410,330) (766,702)
Net realized short-term gains:
Class A Shares (3,437,642) (594,281)
Class B Shares (118,740) (6,947)
Class D Shares (187,069) (39,689)
Net realized long-term gains:
Class A Shares (26,060,648) (31,183,490)
Class B Shares (896,656) (411,017)
Class D Shares (1,420,532) (2,033,414)
------------ ------------
Total distributions (41,343,952) (48,295,510)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 36,388,229 35,420,420
Value of shares issued in reinvestment
of dividends 33,751,356 40,313,196
Cost of shares repurchased (77,258,035) (106,718,217)
------------ ------------
Decrease in net assets derived from
capital share transactions (7,118,450) (30,984,601)
------------ ------------
Total increase in net assets 19,329,417 63,773,938
Net Assets:
Beginning of year 531,274,925 467,500,987
------------ ------------
End of year $550,604,342 $ 531,274,925
------------ ------------
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)(1)
For the Year Ended
Dec. 31, For the Year Ended Dec. 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 14.87 $ 12.30 $ 13.70 $ 12.20 $ 11.28
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.27 0.40 0.41 0.42 0.42
Net realized and unrealized gain/(loss)
on investments 1.67 3.58 (1.27) 1.78 0.93
------- ------- ------- ------- -------
Total from Investment Operations 1.94 3.98 (0.86) 2.20 1.35
------- ------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.41) (0.44) (0.42) (0.42)
Distributions from net realized
long-term gains (0.84) (1.00) (0.10) (0.28) (0.01)
------- ------- ------- ------- -------
Total distributions (1.22) (1.41) (0.54) (0.70) (0.43)
------- ------- ------- ------- -------
Net asset value at end of year $ 15.59 $ 14.87 $ 12.30 $ 13.70 $ 12.20
======= ======= ======= ======= =======
Total Return(2) 13.46% 33.44% (6.32)% 18.12% 12.35%
Ratios to Average Daily Net Assets:
Expenses(3) 1.14% 0.93% 0.92% 0.92% 0.92%
Net investment income(4) 1.74% 2.85% 3.14% 3.12% 3.81%
Supplemental Data:
Net assets at end of year (000) $505,371 $492,454 $435,805 $469,163 $307,641
Portfolio turnover rate 20% 24% 23% 14% 6%
Average commissions per share $ 0.07(5) -- -- -- --
</TABLE>
- -----------------
(1) Computed based upon average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99%, 0.98% and 1.07% for
the years ended December 31, 1995, 1994, 1993 and 1992, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.79%, 3.07%, 3.06% and
3.66% for the years ended December 31, 1995, 1994, 1993 and 1992,
respectively.
(5) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
16 & 17
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)(1)
For the Period
For the Year Jan. 3, 1995(2)
Ended through
Dec. 31, Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 14.83 $12.28
------- ------
Income from Investment Operations:
Net investment income 0.19 0.30
Net realized and unrealized gain
on investments 1.63 3.56
------- ------
Total from Investment Operations 1.82 3.86
------- ------
Less Distributions:
Distributions from net investment
income and net realized
short-term gains (0.30) (0.31)
Distributions from net realized
long-term gains (0.84) (1.00)
------- ------
Total distributions (1.14) (1.31)
------- ------
Net asset value at end of period $ 15.51 $14.83
======= ======
Total Return(3) 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses(4) 1.92% 1.70%(6)
Net investment income(5) 0.95% 2.13%(6)
Supplemental Data:
Net assets at end of period (000) $17,661 $7,504
Portfolio turnover rate 20% 24%
Average commissions per share $ 0.07(7) --
- -----------------
(1) Computed based upon average shares outstanding.
(2) Commencement of operations.
(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 1.74% (annualized) for the period
ended December 31, 1995.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.09% (annualized) for
the period ended December 31, 1995.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
18
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)(1)
For the Period
Apr. 6, 1993(2)
through
For the Year Ended Dec. 31, Dec. 31,
- --------------------------------------------------------------------------------------
<S> <C>
1996 1995 1994 1993
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 0.22 0.34 0.37 0.25
Net realized and unrealized gain/(loss)
on investments 1.67 3.58 (1.20) 0.80
------- ------- ------- -------
Total from Investment Operations 1.89 3.92 (0.83) 1.05
------- ------- ------- -------
Less Distributions:
Distributions from net investment
income and net realized
short-term gains (0.33) (0.35) (0.42) (0.31)
Distributions in excess of net
investment income -- -- (0.02) --
Distributions from net realized
long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- ------- -------
Total distributions (1.17) (1.35) (0.54) (0.59)
------- ------- ------- -------
Net asset value at end of period $ 15.59 $ 14.87 $ 12.30 $ 13.67
======= ======= ======= =======
Total Return(3) 13.00% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses(4) 1.49% 1.28% 1.27% 1.27%(6)
Net investment income(5) 1.40% 2.50% 2.81% 2.73%(6)
Supplemental Data:
Net assets at end of period (000) $27,573 $31,317 $31,696 $23,481
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share $ 0.07(7) -- -- --
</TABLE>
- ----------------
(1) Computed based upon average shares outstanding.
(2) Commencement of operations.
(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 1.34%, 1.34% and 1.31% for the
years ended December 31, 1995, 1994 and the period ended December 31, 1993,
respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.44%, 2.74% and 1.98%
for the years ended December 31, 1995, 1994 and the period ended December
31, 1993, respectively.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
19
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--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.
The Class A and Class D Shares each have different sales charges and
distribution fees. As of 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, which 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:
A. Security Valuation--Portfolio securities that are primarily traded on a
recognized U.S. securities exchange are valued on the basis of their
last sale price. In the event that there are no sales or the security is
not listed, it is valued at the average between the last reported bid
and asked prices or at the fair value as determined by the Investment
Advisor under procedures established and monitored by the Board of
Directors. Short-term obligations with maturities of 60 days or less are
valued at amortized cost.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The
agreement ensures that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default. If the
counterparty defaults and the value of the collateral declines or if the
20
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
NOTE 1--concluded
counterparty enters into an insolvency proceeding, realization of the
collateral by the Fund may be delayed or limited.
C. Federal Income Tax -- 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 make requisite distributions to 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, if any.
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 gains available for distribution
under income tax regulations.
D. 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.
NOTE 2--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 compensation 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. Prior to April 11, 1996, the annual rates based upon the Fund's
average daily net assets were: 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 in
excess of $300 million.
21
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
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 $117,160 for accounting services for the year
ended December 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $623,604 for
transfer agent services for the year ended December 31, 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 year ended December 31, 1996,
distribution fees aggregated $1,559,921 of which $1,251,568, $131,771 and
$176,582 were attributable to Class A Shares, Class B Shares and Class D Shares,
respectively. Alex. Brown received $7,000 of commissions on security
transactions from the Fund for the year ended December 31, 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 period January 1, 1996 through December 31, 1996 was
approximately $19,997, and the accrued liability was approximately $68,940.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 70 million shares of $.001 par value
capital stock (60 million Class A Shares, 5 million Class B Shares, 3 million
Class D Shares and 2 million undesignated). Transactions in shares of the Fund
are listed on the following pages.
22
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 3--continued
Class A Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold 1,730,953 2,145,785
Shares issued to shareholders on
reinvestment of dividends 2,022,300 2,674,624
Shares redeemed (4,451,593) (7,132,553)
-------------- --------------
Net decrease in shares outstanding (698,340) (2,312,144)
============== ==============
Proceeds from sale of shares $ 26,738,906 $ 28,720,184
Value of reinvested dividends 30,812,547 37,305,866
Cost of shares redeemed (69,090,064) (97,427,131)
-------------- --------------
Net decrease from capital share transactions $(11,538,611) $(31,401,081)
============== ==============
Class B Shares
-------------------------------
For the Period
For the Jan. 3, 1995*
Year Ended through
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold 628,129 489,011
Shares issued to shareholders on
reinvestment of dividends 73,229 32,826
Shares redeemed (68,656) (15,929)
-------------- --------------
Net increase in shares outstanding 632,702 505,908
============== ==============
Proceeds from sale of shares $ 9,649,323 $6,700,236
Value of reinvested dividends 1,109,830 458,760
Cost of shares redeemed (1,071,919) (229,177)
-------------- --------------
Net increase from capital share transactions $ 9,687,234 $6,929,819
============== ==============
- --------------
*Commencement of operations.
23
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--concluded
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 120,074 183,832
Shares redeemed (456,901) (655,092)
-------------- --------------
Net decrease in shares outstanding (336,827) (471,260)
============== ==============
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 1,828,979 2,548,570
Cost of shares redeemed (7,096,052) (9,061,909)
-------------- --------------
Net decrease from capital share transactions $(5,267,073) $(6,513,339)
============== ==============
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term and
U.S. government obligations, aggregated $105,864,301 and $146,174,704,
respectively, for the year ended December 31, 1996. There were no purchases or
sales of U.S. government obligations for the period.
On December 31, 1996, net unrealized appreciation for all securities in
which there was an excess of value over tax cost was $197,074,059, of which
$210,460,413 related to appreciated securities and $13,386,354 related to
depreciated securities.
NOTE 5--Net Assets
On December 31, 1996, net assets consisted of:
Paid-in capital:
Class A Shares $302,803,079
Class B Shares 16,617,054
Class D Shares 23,659,797
Accumulated net realized gain from securities transactions 13,937,442
Unrealized appreciation of investments 193,586,970
------------
$550,604,342
============
24
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
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, 1996 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, 1996 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, 1996, 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
February 4, 1997
25
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Dividend Declaration
1996 Year-End Dividend
For calendar 1996, the Board of Directors has declared the following per
share distribution payable on December 30, 1996 to shareholders of record on
December 20, 1996.
Class A Class B Class D
Shares Shares Shares
------- ------- -------
Income $.110 $.110 $.110
Long-term
capital gains .780 .780 .780
----- ----- -----
Total distributions $.890 $.890 $.890
Dividends for Calendar 1996
Total dividends declared for calendar 1996 are as follows:
Class A Class B Class D
Shares Shares Shares
------- ------- -------
Income $ .380 $ .295 $ .328
Long-term
capital gains .840 .840 .840
------ ------ ------
Total distributions $1.220 $1.135 $1.168
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.
26
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Directors and Officers
TRUMAN T. SEMANS
Chairman
JAMES J. CUNNANE LIAM D. BURKE
Director Executive Vice President
CHARLES W. COLE, JR. HOBART C. BUPPERT, II
Director Vice President
RICHARD T. HALE LEE S. OWEN
Director Vice President
JOHN F. KROEGER GARY V. FEARNOW
Director Vice President
LOUIS E. LEVY EDWARD J. VEILLEUX
Director Vice President
EUGENE J. MCDONALD SCOTT J. LIOTTA
Director Vice President
REBECCA W. RIMEL JOSEPH A. FINELLI
Director Treasurer
CARL W. VOGT, ESQ. EDWARD J. STOKEN
Director Secretary
BRUCE E. BEHRENS LAURIE D. COLLIDGE
President Assistant Secretary
J. DORSEY BROWN, III
Executive Vice President
Investment Objective
A mutual fund designed to provide current income and long-term growth of capital
through a professionally managed portfolio of securities primarily engaged in
the telephone industry.
27
<PAGE>
This page intentionally left blank.
<PAGE>
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
<PAGE>
[LOGO]
FLAG INVESTORS
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 Short-Intermediate 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
