[FLAG INVESTORS LOGO]
FLAG INVESTORS
[PHOTOGRAPH APPEARS HERE]
FLAG
INVESTORS
TELEPHONE
INCOME
FUND
ANNUAL REPORT
DECEMBER 31, 1997
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REPORT HIGHLIGHTS
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o Excellent Long-Term Performance and Ranking
Your Fund's Class A Shares had an excellent year with a 37.4% total return.
We are proud the Fund has consistently ranked among the leaders of mutual
funds in the telecommunications sector. Our enthusiasm grows with the
industry, and we see bright futures in both traditional and emerging areas of
telecommunications.
o Proposed Name Change
Having managed the Fund since its inception, we have positioned the portfolio
as the industry has evolved, pursuing the best opportunities while remaining
sensitive to risks. At this time we believe it is in keeping with the
industry progression to rename the Fund the Flag Investors Communications
Fund to more appropriately capture the essence of these changes. To be
successful investors we must be flexible enough to recognize the potential of
companies outside the traditional industry segments. While the core of the
portfolio continues to reflect more traditional value and growth stock
characteristics, a percentage of the portfolio is dedicated to emerging
companies with great business models and dedicated management that are
creating strategic assets for the future.
o New Dividend Policy
As our results indicate, broadening our holdings to include many of the
faster growing sectors and companies has contributed greatly to the long-term
capital appreciation and total return of the Fund. It should also enhance the
stability of our returns relative to a pure telephone company orientation.
This broadening has, nevertheless, impacted the level of dividend income
generated in the portfolio. With these factors in mind, the Board of
Directors intends to adopt a quarterly dividend policy that will pay out only
the interest and dividends as earned without anticipating short-term gains.
Any extra income will be considered for distribution in the fourth quarter.
o Loyalty to Shareholders
We feel intensely loyal to our long-term shareholders. Thank you for your
continued support. Your portfolio managers are shareholders with you and our
focus is to continue earning excellent returns without taking undue risk.
These are vital issues. Please read the body of our letter for full details.
<PAGE>
FUND PERFORMANCE
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Average Annual Total Return*
Class A Class B Class D
For the periods ended 12/31/97 Shares Shares Shares**
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One Year 37.4% 36.4% 37.0%
................................................................................
Five Years 18.1% -- --
................................................................................
Ten Years 18.1% -- --
................................................................................
Since Inception 1/18/84 1/3/95 4/6/93
------- ------ ------
(Annualized) 17.9% 26.8% 16.3%
................................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the maximum 4.50%
sales charge were reflected, the quoted performance would be lower.
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 11.
**The Fund has not sold Class D Shares since November 18, 1994, but existing
shareholders may reinvest their dividends.
1
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LETTER TO SHAREHOLDERS
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Fellow Shareholders:
Fund Achieves Top Ranking
We are pleased to report the Flag Investors Telephone Income Fund had an
excellent year with a 37.4% total return for Class A Shares. Our results reflect
a strong return that exceeded the broader market indices, such as the Standard &
Poor's 500 Index (S&P). Our Regional Bell Operating Company (RBOC) holdings and
companies in the telecommunications service and equipment segments posted
superior results. Among the Specialty-Communications Fund sector, your Fund
earned Morningstar's category rating of 5 (highest rating) for the three years
ended December 31, 1997.*
Consistent Investment Approach in an Evolving Industry
We are proud the Fund has consistently ranked among the leaders of mutual
funds in the telecommunications sector. Our enthusiasm grows with the industry,
and we see bright futures in both traditional and emerging areas of
telecommunications. As quoted in our June 30, 1997 report by Louis V. Gerstner,
Jr. (IBM Chairman and CEO), "Information Technology is one of those technologies
that comes along every 100 years and totally transforms all of society... ."
Since its inception, your Fund has benefited from the opportunities created by
the industry's evolution and by combining our industry perspective with a
disciplined investment philosophy.
We remain concentrated in RBOCs, major independent telephone companies, and
established telecommunications product and service providers. However, to be
successful investors, we must be flexible enough to recognize the potential of
companies outside the traditional industry segments. We look for companies with
dedicated management that have great business models. America Online, WorldCom
and Qwest Communications are examples of companies that, we believe, will
increasingly benefit from focused business strategies. While the core of the
portfolio continues to reflect more traditional value and growth stock
characteristics, a percentage of the portfolio is allocated to these companies
that are creating strategic assets for the future.
Although the telecommunications industry capitalization exceeds $1 trillion
and is comprised of hundreds of companies, we believe it is critical to
investment success to remain focused on a select group of stocks with charac-
- -------
*Morningstar's category rating system of "1" (lowest) to "5" (highest) shows how
well a fund has balanced risk and return relative to other funds in its
investment category. It is calculated based on a fund's three-year total return
and excludes the effect of sales charge. A "5" rating indicates that a fund has
an above average return and low risk. The top 10% of funds in an investment
category receive a "5" rating. Past performance is not an indicator of future
results.
2
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teristics we admire and know well. As of December 31, 1997, our top 10 holdings
total 50% of the portfolio, and we own only 33 telecommunications equities. We
believe good stock selection is the best way to add value, and we want to avoid
diluting the returns with excessive diversification.
Portfolio Development in 1997
The following table lists our top 10 contributors to net asset value in
fiscal 1997. Clearly telephone companies remain the cornerstones of the Fund,
and we expect them to play a major role in the Fund's future success. Data
communication, Internet provisioning, satellite services and competing local
telephone services are among the businesses represented by the companies listed
to the left that have significantly influenced the positive performance of the
Fund. We expect companies outside traditional local telephone service will
support the future growth of the Fund.
Top Telecommunications Equipment and Service Holdings'
Contribution to NAV
Ten Best Contributors Gain Per Fund Share
- -------------------------------------------------
SBC $1.16
.................................................
America Online 0.98
.................................................
Bell Atlantic Corp. 0.34
.................................................
Qwest Communications 0.30
.................................................
Lucent Technologies 0.28
.................................................
Telefonos de Mexico 0.23
.................................................
Orbital Sciences 0.20
.................................................
Ameritech Corp. 0.19
.................................................
US West 0.18
.................................................
Brooks Fiber Properties 0.17
.................................................
Missed Opportunity
In light of this year's strong performance, we also wanted to share with
you the missed opportunity from our sale of AT&T. Although AT&T has not been a
significant holding for some time, it is a company with a long and rich
tradition in telecommunications. Until 1997, the company had always been part of
the Fund and was one that we have traditionally bought and sold effectively. Our
reasons for selling the company this time included our lack of confidence in
company management, price competition in a major line of business and high
expense ratios. However, we underestimated the catalysts that would lead to the
eventual improvement in the performance of the stock. With the appointment of C.
Michael Armstrong as CEO, management moved swiftly to eliminate non-essential
businesses and articulate a long-term strategy. Ironically, potential
turnarounds such as this one are attractive to us, and we missed it this
3
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LETTER TO SHAREHOLDERS (CONTINUED)
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time. We still have concerns about certain areas of AT&T's business, but company
management is well aware of the issues and focused on the challenge.
We always stand ready to re-examine our opinion of companies and will not
let historic biases or pride cloud our investment decisions. We will continue to
follow AT&T with a new perspective. At an appropriate price, we would consider
AT&T as a potential future investment.
Dividend Policy Will Change
In order to maintain our existing levels of current income and remain
invested in the telecommunications industry, we would have to concentrate almost
entirely in local telephone companies practically to the exclusion of our
investments in other areas of telecommunications. As our results indicate,
broadening our holdings to include many of the faster growing sectors and
companies has contributed greatly to the long-term capital appreciation and
total return of the Fund (see chart below). It should also enhance the stability
of
Growth of a $10,000 Investment
January 18, 1984-December 31, 1997
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
Value of Original Investment + Income Distributions $19,615
Total Value of Investment (Income + Appreciation) $98,874
Income Appreciation
1/84 10,000 10,000
12/84 10,557 11,503
12/85 11,392 14,850
12/86 12,227 18,517
12/87 12,946 18,795
12/88 13,650 22,530
12/89 14,508 33,534
12/90 15,196 31,001
12/91 15,909 38,216
12/92 16,559 42,972
12/93 17,209 50,756
12/94 17,890 47,546
12/95 18,408 63,445
12/96 18,996 71,982
12/97 19,615 98,874
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the maximum 4.50%
sales charge were reflected, the quoted performance would be lower. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results. Please review the Additional Performance
Information on page 11.
4
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our returns relative to a pure telephone company orientation. This broadening
has, nevertheless, impacted the level of dividend income generated in the
portfolio. Attractive expansion opportunities at some of the higher dividend
paying companies have also prompted them to lower their payout ratios. Finally,
as stock prices have risen dramatically over the past decade the investment of
new cash flows in the Fund generates a lower yield to the overall Fund.
Our shareholders know we take a long-term approach and have experienced
relatively low portfolio turnover, preferring to be patient with our favorite
holdings. The moderate short-term gains that we have realized have been
regularly distributed as a part of our dividend to shareholders. While still
moderate in relation to the size of the Fund (approximately 1.0% of assets), the
short-term gains have become a much greater portion of the annual income
distribution as portfolio dividends have decreased for the reasons enumerated
above. We have generated short-term gains in nearly every year of the Fund's
existence, but they are not a predictable source of income. With these factors
in mind, the Board of Directors intends to adopt a quarterly dividend policy
that will pay out only the interest and dividends as earned without anticipating
short-term gains. Any extra income will be considered for distribution in the
fourth quarter. We anticipate this policy may reduce the quarterly distribution
to approximately $.035 per share, although the annual dividend, including any
year-end extra and excluding long-term capital gains, may approximate 50% to 75%
of the 1997 dividend if our history of realizing short-term gains continues.
We believe this policy is more reflective of the trends within the
industry, and we want to emphasize that the current income reduction has been
offset dramatically through greater capital appreciation than would have been
the case with a higher income orientation. This does not indicate in any way a
less conservative approach to investing. In fact, we believe your assets can be
more effectively invested with the added flexibility to pursue the best values
in the industry.
For Investors Requiring Greater Cash Flow
We feel intensely loyal to our long-term shareholders, many of whom
originally purchased the Fund before we had established a strong performance
record because they were attracted to the high yield. For the valid reasons
stated above, the yield has declined and our new dividend policy
5
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LETTER TO SHAREHOLDERS (CONTINUED)
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will reduce at least the quarterly payment further. Nevertheless, we would urge
those shareholders who require a higher cash flow to consider adopting a
Systematic Withdrawal Program through which they can tailor a quarterly or
monthly payment composed of income and moderate share redemptions to meet their
needs. Although share redemptions may be subject to capital gains, with the
significant reduction in capital gains tax rates, this would also be a more
tax-efficient way to achieve a cash flow from the Fund. Fund administrators
stand ready to assist you and answer any further questions in this regard. (Call
1-800-553-8080.)
Proposed Investment Objective and Fund Name Change: Flag
Investors Communications Fund
As long-term shareholders of the Fund are aware, the process of broadening
the telecommunications subsectors represented in the portfolio has been under
way since the creation of the Fund to manage change emanating from the break-up
of the old AT&T in 1984. Having managed the Fund since its inception, we have
positioned the portfolio as the industry has evolved, pursuing the best
opportunities while remaining sensitive to risks. Throughout this period we have
also consistently retained our investment discipline of focusing on a limited
number of holdings. We believe our disciplined management throughout this period
of evolution in the communications industry accounts for our consistently high
category ranking.
Consistent with these trends, the Board has determined that it is no longer
practical for the Fund to continue to seek current income as a significant part
of its stated investment objective or to concentrate its investments in the more
narrowly described telephone industry. Consequently, shareholders are being
asked under separate Proxy materials to approve a change in the investment
objective from "current income and long-term growth of capital without undue
risk" to "to maximize total return," as well as to replace the Fund's
fundamental investment policy on industry concentration from the "telephone"
industry to "the communications field." Following such shareholder approval, the
Board intends to change the Fund's name to the "Flag Investors Communications
Fund." You should be assured that this does not represent a change from the
steady progression of the Fund management over the past 14 years. We urge you to
read the Proxy materials for a more thorough discussion of these issues.
6
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A benefit of flexibility is our ability to gain access to additional growth
segments of the industry. For example, two of the largest contributors to net
asset value, SBC and America Online, are very different companies but major
participants in telecommunications. SBC's core business is traditional local
telephone service. It is a well-managed company with a high dividend yield and a
low relative price-to-earnings ratio. America Online is a young rapidly growing
company, by contrast, with the Internet as a primary focus. A company with an
experienced, focused management team, it pays no dividend.
Limiting our scope to mainly dividend equities could have eliminated
America Online from our list of potential investment opportunities. As explained
above under the Dividend Policy section, seeking maximum current income has
become less important than assuring maximum total return (principal appreciation
plus current income). Moreover, the added diversity this flexibility engenders
has become important to minimizing investment risk, as well as to maximizing
returns.
Future Opportunity
Lucent Technologies is a company focused on the communications systems
and technology marketplace. We have, in a sense, a tremendous worldwide boom
in this area. People working at home, people who are demanding more
communications in their everyday life, and enterprises that are globalizing,
as well as service providers ... telephone companies and Internet service
providers ... all demanding more communications technology.
Richard A. McGinn
President and Chief Executive Officer
Lucent Technologies, Inc.
We sought Mr. McGinn's industry perspective because of the prominent role
of his company in both the past and future of telecommunications. Under the AT&T
umbrella, it introduced virtually all of the technology that set the standards
for modern networks. Today, as a separate business, Lucent continues to thrive
by leveraging its technological strength to compete in an open international
marketplace. We share Mr. McGinn's view and enthusiasm for the future and
believe that the industry is still in the early stages of development.
7
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LETTER TO SHAREHOLDERS (CONCLUDED)
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We are confident in the ability of all of the Fund's companies to execute
in this dynamic environment.
Thank you for your continued support. Your portfolio managers are
shareholders with you and our focus is to continue earning excellent returns
without taking undue risk.
Sincerely,
/s/ Bruce E. Behrens /s/ Liam D. Burke
- -------------------- -----------------
Bruce E. Behrens Liam D. Burke
Co-Portfolio Manager Co-Portfolio Manager
January 16, 1998
8
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FLAG INVESTORS TELEPHONE INCOME FUND
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Telecommunications Holdings Percent of Net Assets
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I. Regional Bell Operating Companies
(RBOCs):
Ameritech Corporation 3.7%
Bell Atlantic Corporation 5.5
SBC Communications Inc. 16.5
U.S. West Communications Group 3.8
----
29.5
II. Independent Local Exchange Carriers:
Cincinnati Bell Inc. 5.1
GTE Corporation 5.3
----
10.4
III. Long Distance Telephone Companies:
Frontier Corporation 3.5
General Communications, Inc. 0.5
MCI Communications Corporation 1.2
Pacific Gateway Exchange, Inc. 1.6
Sprint Corporation 2.1
WorldCom, Inc. 4.5
----
13.4
IV. Foreign Telephone Companies:
Clearnet Communications Inc. 0.8
Telefonica de Espana SAADR 1.7
Telefonos de Mexico SA ADR 2.3
Teleglobe Inc. 0.8
Vimpel-Communications SP ADR 0.8
----
6.4
V. Telecommunication Equipment Providers:
BlackBox Corporation 1.9
CellStar Corporation 0.5
DSC Communications Corporation 0.7
Lucent Technologies Inc. 3.7
Motorola Inc. 2.2
3Com Corporation 1.3
----
10.3
VI. Specialty Telecommunication Services:
AirTouch Communications Inc. 1.9
America Online, Inc. 7.8
Brooks Fiber Properties, Inc. 1.6
First Data Corporation 2.0
Mobile Telecommunication Technologies Corporation 1.3
NEXTEL Communications Inc. 0.8
Novell Inc. 1.6
Orbital Sciences Corporation 2.3
Qwest Communications International Inc. 2.7
TCACable TV, Inc. 0.4
----
22.4
Total Telecommunications Industry 92.4%
====
9
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FLAG INVESTORS TELEPHONE INCOME FUND
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Dividend Declaration
1997 Year-End Dividend
The Board of Directors has declared a year-end per share distribution
payable on December 19, 1997 to shareholders of record on December 12, 1997.
Class A Class B Class D
Shares Shares Shares
------- ------- -------
Long-term capital gains $1.10 $1.10 $1.10
Income 0.13 0.13 0.13
----- ----- -----
Total distributions $1.23 $1.23 $1.23
Dividends for Calendar 1997
Total dividends declared for calendar 1997 are as follows:
Class A Class B Class D
Shares Shares Shares
------- ------- -------
Long-term capital gains $1.50 $1.50 $1.50
Income 0.40 0.31 0.36
----- ----- -----
Total distributions $1.90 $1.81 $1.86
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.
10
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FLAG INVESTORS TELEPHONE INCOME FUND
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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 reflects the impact of the
Fund's total expenses and the currently effective 4.50% maximum initial sales
charge for the Fund's Class A Shares. The graph reflects a 3.00% contingent
deferred sales charge for the Fund's Class B Shares, which is the applicable
sales charge for the represented time period, and a 1.50% maximum initial sales
charge for the Fund's Class DShares. The Class DShares' 1.00% maximum contingent
deferred sales charge is not reflected in the graph since it is not applicable
to shares held for more than four years, which is the represented time period.
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 SECtotal return figures differ from those we
reported because the time periods may be different and because the
SECcalculation includes the impact of the currently effective applicable
maximum sales charge. The Class A Shares' total returns reflect the 4.50%
maximum initial sales charge. The Class B Shares' one-year total return
reflects the applicable 4.00% contingent deferred sales charge, while the total
return since inception reflects the applicable 3.00% contingent deferred sales
charge. The Class D Shares' one-year total return reflects the 1.50% initial
sales charge and the applicable 1.00% contingent deferred sales charge, while
the total return since inception reflects only the applicable 1.50% maximum
sales charge. These total returns correspond to those experienced by
individual shareholders only if their shares were purchased on the first day
of each time period and the maximum sales charge was paid. Any performance
figures shown are for the full period indicated. Since investment return and
principal value will fluctuate, an investor's shares may be worth more or less
than their original cost when redeemed. Past performance is not an indicator of
future results.
11
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FLAG INVESTORS TELEPHONE INCOME FUND
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Additional Performance Information (continued)
Change in Value of a $10,000 Investment in Class A Shares*
January 18, 1984-December 31, 1997
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
Flag Investors S&P 500
Telephone Income Composite
Fund $94,425 $92,343
1984 10,687 10,985
1985 14,081 14,182
1986 16,714 17,684
1987 17,587 17,949
1988 20,501 21,516
1989 26,920 32,025
1990 26,085 29,606
1991 34,109 36,496
1992 36,715 41,038
1993 40,405 48,472
1994 40,918 45,406
1995 56,275 60,590
1996 69,212 68,743
1997 92,343 94,425
Average Annual Total Return*
<TABLE>
<S><C>
Periods Ended 12/31/97 1 Year 5 Years 10 Years Since Inception**
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Class A Shares 31.18% 17.05% 17.52% 17.46%
.....................................................................................
</TABLE>
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% maximum sales charge. Past
performance is not an indicator of future results. The S&P 500 Composite is an
unmanaged index that is a widely recognized indicator of general market
performance.
**January 18, 1984.
12
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FLAG INVESTORS TELEPHONE INCOME FUND
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Change in Value of a $10,000 Investment in Class B Shares*
January 3, 1995-December 31, 1997
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
S&P 500 Flag Investors
Composite Telephone Income
$21,984 Fund $20,032
1/95 10,000 10,000
3/95 10,692 10,446
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 14,510
9/96 15,205 13,953
12/96 16,477 14,910
3/97 16,917 14,487
6/97 19,854 17,287
9/97 21,365 19,005
12/97 21,984 20,032
Average Annual Total Return*
Periods Ended 12/31/97 1 Year 5 Years Since Inception**
- ---------------------------------------------------------------------
Class B Shares 32.36% -- 25.93%
.....................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's applicable sales charge. Past performance
is not an indicator of future results.
**January 3, 1995.
13
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FLAG INVESTORS TELEPHONE INCOME FUND
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Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Class D Shares*
April 6, 1993-December 31, 1997
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
S&P 500 Flag Investors
Composite Telephone Income
$24,684 Fund $20,123
4/93 10,000 9,850
6/93 10,278 10,165
12/93 10,799 10,423
6/94 10,422 9,734
12/94 10,937 9,784
6/95 13,134 11,032
12/95 15,043 13,004
6/96 16,553 14,275
12/96 18,501 14,694
6/97 22,292 17,069
12/97 24,684 20,123
Average Annual Total Return*
Periods Ended 12/31/97 1 Year 5 Years Since Inception**
- ---------------------------------------------------------------------------
Class D Shares 33.90% -- 15.91%
...........................................................................
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's applicable sales charge. Past performance
is not an indicator of future results.
**April 6, 1993.
14
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FLAG INVESTORS TELEPHONE INCOME FUND
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Statement of Net Assets December 31, 1997
<TABLE>
<CAPTION>
Market Value
Shares Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
TELECOMMUNICATIONS INDUSTRY -- 92.4%
Common Stock -- 92.4%
320,408 AirTouch Communications Inc.* $ 13,316,957
600,000 America Online, Inc.* 53,512,500
320,000 Ameritech Corporation 25,760,000
416,608 Bell Atlantic Corporation 37,911,328
366,428 BlackBox Corporation* 12,962,390
200,000 Brooks Fiber Properties, Inc.* 11,000,000
172,500 CellStar Corporation* 3,428,437
1,130,100 Cincinnati Bell Inc. 35,033,100
469,700 Clearnet Communications Inc.-- Class A* 5,342,838
200,000 DSC Communications Corporation* 4,800,000
470,300 First Data Corporation 13,756,275
993,400 Frontier Corporation 23,903,687
500,000 General Communications, Inc.* 3,312,500
693,820 GTE Corporation 36,252,095
315,235 Lucent Technologies Inc. 25,179,396
200,000 MCI Communications Corporation 8,562,500
405,000 Mobile Telecommunication Technologies
Corporation* 8,910,000
265,000 Motorola Inc. 15,121,563
200,000 NEXTEL Communications Inc.-- Class A* 5,200,000
1,495,000 Novell Inc.* 11,212,500
520,347 Orbital Sciences Corporation* 15,480,323
200,000 Pacific Gateway Exchange, Inc.* 10,762,500
312,200 Qwest Communications International Inc.* 18,575,900
1,544,760 SBC Communications Inc. 113,153,670
250,000 Sprint Corporation 14,656,250
53,400 TCA Cable TV, Inc. 2,456,400
128,000 Telefonica de Espana SA ADR 11,656,000
285,000 Telefonos de Mexico SA ADR-- Series L 15,977,813
184,100 Teleglobe Inc. 5,592,038
573,000 U.S. West Communications Group 25,856,625
150,000 Vimpel-Communications-- SP ADR* 5,343,750
1,031,300 WorldCom, Inc.* 31,196,825
259,000 3Com Corporation* 9,048,813
------------
Total Common Stock of Telecommunications Industry
(Cost $336,509,211) 634,234,973
------------
</TABLE>
15
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FLAG INVESTORS TELEPHONE INCOME FUND
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Statement of Net Assets (concluded) December 31, 1997
<TABLE>
<CAPTION>
Shares/ Market Value
Par (000) Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
NON-TELECOMMUNICATIONS INDUSTRY - 6.5%
Common Stock -- 5.7%
626,900 Alexander Haagen Properties, Inc. $ 10,931,569
620,548 Conseco Inc. 28,196,149
------------
Total Common Stock of Non-Telecommunications
Industry (Cost $10,960,927) 39,127,718
------------
Corporate Bond -- 0.8%
$5,000 HMH Properties, 9.5%, 5/15/05
(Cost $4,917,676) 5,325,000
------------
Total Non-Telecommunications Industry
(Cost $15,878,603) 44,452,718
------------
REPURCHASE AGREEMENT -- 1.1%
7,848 Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased at $7,850,725
on 1/2/98, collateralized by U.S. Treasury Notes
with a market value of $8,005,743.
(Cost $7,848,000) 7,848,000
------------
Total Investments in Securities -- 100.0%
(Cost $360,235,814)** 686,535,691
Liabilities in Excess of Other Assets, Net-- (0.0)% (265,252)
------------
Net Assets-- 100.0% $686,270,439
============
</TABLE>
16
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
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Net Asset Value Per:
Class A Share
($622,865,153 / 32,149,145 shares outstanding) $19.37(1)
======
Class B Share
($32,474,116 / 1,689,565 shares outstanding) $19.22(2)
======
Class D Share
($30,931,170 / 1,597,845 shares outstanding) $19.36(3)
======
Maximum Offering Price Per:
Class A Share
($19.37 / 0.955) $20.28
======
Class B Share $19.22
======
Class D Share
($19.36 / 0.985) $19.65
======
- ------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $358,380,658.
(1) Redemption value is $19.37.
(2) Redemption value is $18.45 following a 4.00% maximum contingent deferred
sales charge.
(3) Redemption value is $19.17 following a 1.00% maximum contingent deferred
sales charge.
See Notes to Financial Statements.
17
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------------
1997
<S><C>
Investment Income (Note 1):
Dividends $ 12,090,126
Interest 1,073,514
Less: Foreign taxes withheld (119,424)
------------
Total income 13,044,216
------------
Expenses:
Investment advisory fee (Note 2) 4,172,769
Distribution fee (Note 2) 1,775,102
Transfer agent fee (Note 2) 501,719
Accounting fee (Note 2) 119,938
Custodian fee (Note 2) 65,443
Directors' pension 62,142
Printing and postage 61,407
Registration fees 34,821
Legal 32,727
Audit 29,988
Directors' fees 28,152
Miscellaneous 9,962
------------
Total expenses 6,894,170
------------
Net investment income 6,150,046
------------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 53,763,750
Change in unrealized appreciation or depreciation of investments 132,712,907
------------
Net gain on investments 186,476,657
------------
Net increase in net assets resulting from operations $192,626,703
============
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------------
1997 1996
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 6,150,046 $ 9,222,665
Net realized gain from security
transactions 53,763,750 44,618,521
Change in unrealized appreciation or
depreciation of investments 132,712,907 13,950,633
------------ ------------
Net increase in net assets resulting
from operations 192,626,703 67,791,819
------------ ------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares (12,292,592) (8,654,688)
Class B Shares (438,661) (157,647)
Class D Shares (560,042) (410,330)
Net realized mid-term and long-term gains:
Class A Shares (45,697,778) (29,498,290)
Class B Shares (2,233,281) (1,015,396)
Class D Shares (2,314,208) (1,607,601)
------------ ------------
Total distributions (63,536,562) (41,343,952)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 32,057,019 36,388,229
Value of shares issued in reinvestment
of dividends 52,863,614 33,751,356
Cost of shares repurchased (78,344,677) (77,258,035)
------------ ------------
Increase/(decrease) in net assets derived from
capital share transactions 6,575,956 (7,118,450)
------------ ------------
Total increase in net assets 135,666,097 19,329,417
Net Assets:
Beginning of year 550,604,342 531,274,925
------------ ------------
End of year $686,270,439 $550,604,342
============ ============
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the
Year Ended
December 31,
- -------------------------------------------------------------------------------
1997
[S] [C]
Per Share Operating Performance:
Net asset value at beginning of year $ 15.59
--------
Income from Investment Operations:
Net investment income 0.27
Net realized and unrealized gain/(loss) on investments 5.41
--------
Total from Investment Operations 5.68
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.40)
Distributions from net realized mid-term and long-term gains (1.50)
--------
Total distributions (1.90)
--------
Net asset value at end of year $ 19.37
========
Total Return(1) 37.36%
Ratios to Average Daily Net Assets:
Expenses 1.11%
Net investment income 1.07%
Supplemental Data:
Net assets at end of year (000) $622,865
Portfolio turnover rate 26%
Average commissions per share(4) $ 0.0598
- -------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99% and 0.98% for the
years ended December 31, 1995, 1994 and 1993, respectively.
(3) 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% and 3.06%
for the years ended December 31, 1995, 1994 and 1993, respectively.
(4) 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.
20
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 14.87 $ 12.30 $ 13.70 $ 12.20
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.27 0.40 0.41 0.42
Net realized and unrealized gain/(loss) on investments 1.67 3.58 (1.27) 1.78
------- ------- ------- -------
Total from Investment Operations 1.94 3.98 (0.86) 2.20
------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.41) (0.44) (0.42)
Distributions from net realized mid-term and long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- ------- -------
Total distributions (1.22) (1.41) (0.54) (0.70)
------- ------- ------- -------
Net asset value at end of year $ 15.59 $ 14.87 $ 12.30 $ 13.70
======= ======= ======= =======
Total Return(1) 13.46% 33.44% (6.32)% 18.12%
Ratios to Average Daily Net Assets:
Expenses 1.14% 0.93%(2) 0.92%(2) 0.92%(2)
Net investment income 1.74% 2.85%(3) 3.14%(3) 3.12%(3)
Supplemental Data:
Net assets at end of year (000) $505,371 $492,454 $435,805 $469,163
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share(4) $ 0.0696 -- -- --
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 15.51
-------
Income from Investment Operations:
Net investment income 0.18
Net realized and unrealized gain on investments 5.34
-------
Total from Investment Operations 5.52
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.31)
Distributions from net realized mid-term and long-term gains (1.50)
-------
Total distributions (1.81)
-------
Net asset value at end of period $ 19.22
=======
Total Return(2) 36.36%
Ratios to Average Daily Net Assets:
Expenses 1.86%
Net investment income 0.29%
Supplemental Data:
Net assets at end of period (000) $32,474
Portfolio turnover rate 26%
Average commissions per share(6) $0.0598
- ---------
(1) Commencement of operations.
(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 1.74% (annualized) for the period
ended December 31, 1995.
(4) 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.
(5) Annualized.
(6) 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.
22
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.83 $12.28
Income from Investment Operations: ------- ------
Net investment income 0.19 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 mid-term and 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(2) 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses 1.92% 1.70%(3,5)
Net investment income 0.95% 2.13%(4,5)
Supplemental Data:
Net assets at end of period (000) $17,661 $7,504
Portfolio turnover rate 20% 24%
Average commissions per share(6) $0.0696 --
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 15.59
-------
Income from Investment Operations:
Net investment income 0.23
Net realized and unrealized gain/(loss) on investments 5.40
-------
Total from Investment Operations 5.63
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.36)
Distributions in excess of net investment income --
Distributions from net realized long-term gains (1.50)
-------
Total distributions (1.86)
-------
Net asset value at end of period $ 19.36
=======
Total Return(2) 36.94%
Ratios to Average Daily Net Assets:
Expenses 1.46%
Net investment income 0.73%
Supplemental Data:
Net assets at end of period (000) $30,931
Portfolio turnover rate 26%
Average commissions per share(6) $ 0.0598
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(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 1.34%, 1.34% and 1.31% for the
years ended December 31, 1995, 1994 and the period ended December 31, 1993,
respectively.
(4) Without the waiver of advisory fees (Note 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.
(5) Annualized.
(6) 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.
24
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
April 6, 1993(1)
through
For the Year Ended December 31, December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.87 $ 12.30 $ 13.67 $ 13.21
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.22 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(2) 13.00% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses 1.49% 1.28%(3) 1.27%(3) 1.27%(3,5)
Net investment income 1.40% 2.50%(4) 2.81%(4) 2.73%(4,5)
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(6) $0.0696 -- -- --
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Telephone Income Fund, Inc. (the "Fund"), which is organized
as a Maryland Corporation and commenced operations January 18, 1984, is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end investment management company. On January 18, 1984 (the exchange date),
investors received five Fund shares for each American Telephone & Telegraph
Company (AT&T) share, with rights to the divested Bell regional operating
companies attached, in a tax-free exchange. The Fund's objective is to provide
current income and long-term growth of capital without undue risk primarily by
investing in common stock, securities convertible thereto and debt obligations
of companies in the telephone industry and in income-producing securities
(including debt obligations) of issuers in the telephone or other industries.
The Fund consists of three share classes: Class A Shares, which commenced
January 18, 1984; Class D Shares, which commenced April 6, 1993; and Class B
Shares, which commenced January 3, 1995. The Fund has not sold Class D Shares
since November 18, 1994, but existing shareholders may reinvest their dividends.
The Class A, Class B and Class D Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge, the Class B Shares
have a contingent deferred sales charge and the Class D Shares have both a
front-end sales charge and a contingent deferred sales charge. In addition, each
class has a different distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.
26
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 1--continued
As of December 31, 1997, there were no Board valued securities. The Fund
values short-term obligations with maturities of 60 days or less at
amortized cost.
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement matures.
The agreement ensures that the collateral's market value, including any
accrued interest, is sufficient if the broker defaults. The Fund's
access to the collateral may be delayed or limited if the broker
defaults and the value of the collateral declines or if the broker
enters into an insolvency proceeding.
C. FEDERAL INCOME TAX--The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains,
it will be exempt from most, if not all, federal income and excise
taxes. As a result, the Fund has made no provisions for federal income
taxes.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. For
financial reporting purposes, the cost includes the value of the
securities received in the exchange. For income tax purposes, the tax
cost is based on the AT&T shares in the hands of the exchanging AT&T
shareholders on the exchange date. Interest income is recorded on an
accrual basis and includes the pro rata amortization of premiums and
accretion of discounts when appropriate. Income and common expenses are
allocated to each class based on its respective average net assets.
Class specific expenses are charged directly to each class. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
27
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust New
York Corporation, is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee based on the Fund's average daily net
assets. This fee is calculated daily and paid monthly at the following annual
rates: 0.85% 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 the amount over $1.5
billion.
As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 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 the amount over $1.5 billion.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $119,938 for accounting services for the year ended
December 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $501,719 for
transfer agent services for the year ended December 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNCBank served as the Fund's custodian.
From September 22, 1997 to December 31, 1997, the Fund accrued $18,189 in
custody expenses.
As compensation for providing distribution services, the Fund pays
ICCDistributors ("ICCDistributors"), which is not related to ICC, an annual fee
that is calculated daily and paid monthly. This fee is paid at an annual rate
equal to 0.25% of the Class A Shares' average daily net assets, 1.00% (including
a
28
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 2--concluded
0.25% shareholder servicing fee) of the Class B Shares' average daily net assets
and 0.60% of the Class D Shares' average daily net assets. For the year ended
December 31, 1997, distribution fees aggregated $1,775,102, of which $1,366,303
was attributable to the Class A Shares, $238,514 was attributable to the Class B
Shares and $170,285 was attributable to the Class D Shares. Prior to September
1, 1997, Alex. Brown & Sons Incorporated served as the Fund's distributor for
the same compensation and on substantially the same terms as ICC Distributors
and earned $497, 863 for Class A Shares, $96,600 for Class B Shares and $60,149
for Class D Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1997 was $62,142, and the accrued liability was $78,065.
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, 5 million Class B, 3 million Class D and 2
million undesignated). Transactions in shares of the Fund were as follows:
Class A Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 1,332,424 1,730,953
Shares issued to shareholders on
reinvestment of dividends 2,595,376 2,022,300
Shares redeemed (4,200,351) (4,451,593)
------------ ------------
Net decrease in shares outstanding (272,551) (698,340)
============ ============
Proceeds from sale of shares $ 23,153,177 $ 26,738,906
Value of reinvested dividends 47,729,473 30,812,547
Cost of shares redeemed (71,340,867) (69,090,064)
------------ ------------
Net decrease from capital share transactions $ (458,217) $(11,538,611)
============ ============
29
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--concluded
Class B Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 506,254 628,129
Shares issued to shareholders on
reinvestment of dividends 138,015 73,229
Shares redeemed (93,315) (68,656)
----------- -----------
Net increase in shares outstanding 550,955 632,702
=========== ===========
Proceeds from sale of shares $ 8,903,842 $ 9,649,323
Value of reinvested dividends 2,533,345 1,109,830
Cost of shares redeemed (1,625,592) (1,071,919)
----------- -----------
Net increase from capital share transactions $ 9,811,595 $ 9,687,234
=========== ===========
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 141,577 120,074
Shares redeemed (312,350) (456,901)
----------- -----------
Net decrease in shares outstanding (170,773) (336,827)
=========== ===========
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 2,600,796 1,828,979
Cost of shares redeemed (5,378,218) (7,096,052)
----------- -----------
Net decrease from capital share transactions $(2,777,422) $(5,267,073)
=========== ===========
30
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $151,901,940 and sales of investment securities
aggregated $203,875,781 for the year ended December 31, 1997.
On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $328,155,033
of which $331,656,230 related to appreciated securities and $3,501,197 related
to depreciated securities.
NOTE 5--Net Assets
On December 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $302,344,862
Class B Shares 26,428,649
Class D Shares 20,882,375
Accumulated net realized gain from security transactions 10,314,676
Unrealized appreciation of investments 326,299,877
------------
$686,270,439
============
NOTE 6--Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Telephone Income Fund held a special meeting
for its shareholders on August 14, 1997. During the meeting, shareholders
approved a new Investment Advisory Agreement between the Fund and ICC and a new
Sub-Advisory Agreement among the Fund, ICC and ABIM. The new agreements are
substantially the same as the former agreements.
31
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Board of Directors of
Flag Investors Telephone Income Fund, Inc.
We have audited the accompanying statement of net assets of Flag Investors
Telephone Income Fund, Inc., ("the Fund"), as of December 31, 1997 and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. 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, 1997 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, 1997, the results of
its operations for the year then ended, the changes in its net assets and its
financial highlights for each of the five years in the period then ended in
conformity with generally accepted accounting principles.
COOPERS &LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 29, 1998
32
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Tax Information (Unaudited)
For the Year Ended December 31, 1997
The amount of long-term capital gain paid for the fiscal year ended
December 31, 1997 was $50,245,268.
Of the ordinary distributions made during the fiscal year ended December
31, 1997, 76.78% qualify for the dividends received deduction available to
corporate shareholders.
33
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Directors and Officers
TRUMAN T. SEMANS
Chairman
JAMES J. CUNNANE CARL W. VOGT, ESQ.
Director Director
RICHARD T. HALE HARRY WOOLF
Director President
JOHN F. KROEGER AMY M. OLMERT
Director Secretary
LOUIS E. LEVY JOSEPH A. FINELLI
Director Treasurer
EUGENE J. MCDONALD SCOTT J. LIOTTA
Director Assistant Secretary
REBECCA W. RIMEL
Director
Investment Objective
A mutual fund designed to provide current income and long-term growth of capital
without undue risk primarily by investing in common stock, securities
convertible thereto and debt obligations of companies in the telephone industry
and in income-producing securities (including debt obligations) of issuers in
the telephone or other industries.
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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.
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[FLAG INVESTORS 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:
ICC DISTRIBUTORS, INC.
