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EQUITY INCOME
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
BALANCED
Flag Investors Value Builder Fund
INCOME
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
TAX-FREE INCOME
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate
Tax-Free Income Fund
CURRENT INCOME
Flag Investors Cash Reserve Prime Shares
Flag
Investors
Intermediate-
P.O. Box 515 Term
Baltimore, Maryland 21203 Income
800-767-FLAG Fund
Distributed by:
Alex. Brown & Sons Annual Report
Incorporated December 31, 1995
<PAGE>
Flag Investors
Intermediate-term Income Fund
Dear Shareholders:
We are pleased to report on the Fund's progress for the six- and
twelve-month periods ended December 31, 1995.
1995 IN REVIEW
Against a background of slowing economic growth, benign inflationary
pressures and improving investor sentiment, interest rates continued their near
uninterrupted decline during the second half of the year (SEE CHARTS BELOW AND
TOP RIGHT). Providing much of the fuel that propelled common stocks to
unprecedented prices, the dramatic decline in rates enabled bond investors and
your Fund to more than recoup 1994's poor showing and to reap a year of
double-digit returns. Although bonds with longer maturities produced higher
returns, the Fund's intermediate-term structure allowed it to participate
substantially in the market's strong rally.
In this ideal market environment, the Fund recorded a total return of
5.7% for the last six months of the year and 15.4% for the entire year. A
substantial portion of the year's return came from net asset value (NAV)
appreciation (from $9.62 to $10.48), the balance from monthly dividends. From
its inception on May 13, 1991, the Fund has posted a cumulative total return of
41.1%, translating into an average annual total return of 7.7%.
HISTORICAL YIELD CURVES
[Graph here]
12/94 6/95 12/95
3 month 5.682 5.563 5.071
6 month 6.495 5.576 5.147
1 year 7.162 5.623 5.131
2 year 7.690 5.793 5.150
3 year 7.778 5.852 5.207
5 year 7.827 5.970 5.374
10 year 7.827 6.203 5.570
30 year 7.876 6.617 5.949
5-YEAR U.S. TREASURY YIELDS
(12/31/92 -- 12/31/95)
[Graph here]
12/92 5.992
3/93 5.330
6/93 5.111
9/93 4.764
12/93 5.208
3/94 6.114
6/94 6.832
9/94 7.280
12/94 7.827
3/95 7.071
6/95 5.966
9/95 6.015
12/95 5.381
Specific total return comparisons are listed below. These figures
assume the reinvestment of dividends and capital gains, but exclude the impact
of any sales charge.
PERFORMANCE COMPARISONS*
For the periods ended December 31, 1995
Average Six One
Maturity Months Year
Flag Investors Intermediate-Term
Income Fund 4.7 years 5.7% 15.4%
Lehman Brothers
Intermediate
Gov't./Corp. Bond Index 4.2 years 5.2% 15.3%
Lehman Brothers Gov't./
Corp. Bond Index 9.4 years 6.7% 19.2%
Lipper Short/Intermediate-Term
Bond Fund Peer Group Average 3-5 years 4.8% 12.4%
* The indices listed above are unmanaged and are widely recognized as indicators
of performance in their respective sectors. Past performance is not an
indicator of future results. Please review the Additional Performance
Information on page 4.
1
<PAGE>
Flag Investors
Intermediate-term Income Fund
OUTLOOK
Our outlook for interest rates in 1996 hinges on three interrelated
factors: 1) the growth rate of the economy; 2) the path of inflation; and 3) the
outcome of the Budget negotiations. In contrast to the past two years, we expect
economic growth to be sluggish for much of 1996 with no obvious source to
galvanize growth. Representing more than two-thirds of GDP, the consumer, now
heavily burdened by installment debt, is apt to be in a recovery mode for much
of the year. Despite lower mortgage rates, home sales have been sluggish and, as
a result, have not induced other related expenditures (furniture, appliances, et
al.). In response to these signs, business investment, which was a major source
of last year's strength for the economy, is expected to slow. With only minimal
pricing flexibility, coupled with weak final demand, corporate margin pressure
will become more obvious during the year and corporate profit growth will be
restrained.
Given a slow domestic economy and mediocre growth abroad, the outlook
for inflation is benign and likely to remain so for an extended period of time,
especially after the Labor Department recalibrates its method of computing CPI
statistics. We expect these adjustments, widely thought to have overstated the
inflation rates by a meaningful margin, should lower the future reported rate,
leaving further room for lower rates.
Congress and the Administration are not too far apart on the goal of,
and the methodology for, deficit reduction. We expect some resolution on the
Budget to be grudgingly reached sometime during the first quarter, and that the
eventual components of these resolutions will prove constructive, but will
ultimately shave up to 1% off the GDP over the next few years. As monetary
policy historically operates with a long lag, fiscal policy, which has reflected
a neutral-to-restrictive bias for most of the 1990s, is likely to remain so for
the balance of the decade. This policy does not preclude further reductions in
short-term rates during the year as the Fed strives to keep the REALFed Funds
rate at 2%.
In summary, we anticipate a slow economy with low inflation and a
gradual decline in short-to- intermediate rates.
PORTFOLIO CONSIDERATIONS
Although we are confident that the overall downward trend in rates
remains intactNalbeit at a considerably slower pace than in 1995Nwe question
what the bond market can do for an encore. Moreover, given the mechanics of
fixed-income total return calculations, last year's extraordinary results and
the prevailing sense of optimism regarding Fed policy, we have shifted the
Fund's assets to a mildly defensive stance. Recognizing that the appreciation of
deep discount bonds had provided a substantial portion of last year's gains, we
have moved a portion of the Fund's assets into fuller coupon, premium issues to
insulate the NAV from principal erosion should rates begin to rise. Concerned
also that the prevailing low level of rates will foster a surge in corporate
bond underwritings and a widening in spreads, we have reduced the Fund's
exposure in certain corporate bonds in favor of Treasury, A gency and selected
mortgage-backed issues (SEE CHART, PG. 3).
2
<PAGE>
Flag Investors
Intermediate-term Income Fund
PORTFOLIO COMPOSITION
December 31, 1994
[Pie Chart]
Agency and Mortgage-Backed 23%
Corporate 37%
Treasury 18%
Cash 9%
Asset-Backed 11%
Foreign Government 2%
December 31, 1995
[Pie Chart]
Agency & Mortgage-Backed 43%
Treasury 17%
Cash 3%
Asset-Backed 11%
Corporate 26%
DIVIDEND POLICY
The Fund continues to distribute $0.05 per share monthly. This
distribution represents a current yield commensurate with yields available in
the higher quality intermediate-term sector of the bond market.
We appreciate your continued support.
Sincerely,
/s/ M. Elliott Randolph, Jr. /s/ Paul D. Corbin
M. Elliott Randolph, Jr. Paul D. Corbin
President Executive Vice President
January 22, 1996
DIVIDENDS FOR CALENDAR 1995
Total dividends declared for calendar 1995 are as follows:
Income...........$0.60
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 ass et value, please contact your
investment representative or the Fund at 1-800-553-8080.
3
<PAGE>
Flag Investors
Intermediate-term 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 hypo-
AVERAGE ANNUAL TOTAL RETURN*
% Return With
Periods ended 12/31/95: Sales Charge**
One Year 13.77%
Since Inception (5/13/91) 7.38%
CHANGE IN VALUE OF A $10,000 INVESTMENT
(May 13, 1991 -- December 31, 1995)
[Graph here]
Flag Investors Intermediate- Lehman Brothers Intermediate
Term Income Fund Gov't/Corp. Bond Index
5/91 $ 9,850 5/91 $10,000
12/91 10,815 12/91 10,993
6/92 11,040 6/92 11,324
12/92 11,429 12/92 11,781
6/93 12,150 6/93 12,513
12/93 12,455 12/93 12,817
6/94 12,042 6/94 12,481
12/94 12,042 12/94 12,569
6/95 13,156 6/95 13,776
12/95 13,900 12/95 14,498
* These figures assume the reinvestment of all dividends and capital gains
distributions. The Lehman Brothers Intermediate Government/ Corporate Bond
Index is an unmanaged index that is widely recognized as a general measure of
the performance in the intermediate-term government and corporate bond
sector. Past performance is not an indicator of future results.
** Assumes maximum sales charge of 1.50%.
thetical investment from the Fund's inception through the most recent fiscal
year-end and must reflect the impact of the Fund's total expenses and its
currently effective 1.50% maximum sales charge.
While this table is 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 Fund's total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than the original
investment when redeemed.
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.
4
<PAGE>
Flag Investors
Intermediate-term Income Fund
Statement of Net Assets December 31, 1995
S&P PAR VALUE
SECURITY RATING(1) (000) (NOTE A)
CORPORATE BONDS - 26.1%
BANC ONE COLUMBUS
7.375%, 12/1/02 AA- $1,000 $ 1,092,500
BANC ONE CREDIT CARD MASTER TRUST
6.30%, 10/15/02 AAA 3,000 3,067,500
BEAR STEARNS CO.
6.625%, 1/15/04 A 3,000 3,041,250
COUNTRYWIDE FUNDING
8.25%, 7/15/02 A- 3,250 3,599,375
FUND AMERICA ENTERPRISE
7.75%, 2/1/03 BBB+ 3,000 3,142,500
PACIFIC GAS & ELECTRIC
6.25%, 3/1/04 A 2,000 2,002,500
SOCIeTe NATIONALE ELF AQUITAINE
7.75%, 5/1/99 AA- 2,000 2,125,000
TOTAL CORPORATE BONDS (Cost $17,483,844) 18,070,625
U.S. GOVERNMENT AGENCY SECURITIES - 20.1%
FEDERAL HOME LOAN BANKS BOARD - 4.4%
7.151%, 9/13/05 (callable 9/13/97) AAA 3,000 3,086,310
FEDERAL HOME LOAN MORTGAGE CORP. - 2.1%
Pool #G10049, 8.00%, 10/1/07 AAA 1,393 1,444,393
FEDERAL NATIONAL MORTGAGE ASSOC. - 5.9%
MULTI-CLASS MORTGAGE CERTIFICATES
Pool #326570, 7.00%, 2/1/08 AAA 3,997 4,074,315
GOVERNMENT NATIONAL MORTGAGE ASSOC. - 6.0%
MULTI-CLASS MORTGAGE CERTIFICATES
Pool #194615, 8.00%, Due 3/15/17 AAA 166 172,545
Pool #204405, 8.00%, Due 4/15/17 AAA 184 191,503
Pool #371200, 8.00%, Due 12/15/23 AAA 1,618 1,687,303
Pool #371206, 8.00%, Due 12/15/23 AAA 2,019 2,105,216
GUARANTEED EXPORT TRUST - 1.7%
8.187%, 12/15/04 AAA 1,060 1,148,055
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $13,700,276) 13,909,640
U.S. TREASURY SECURITIES - 16.6%
U.S. TREASURY NOTES
4.75%, 9/30/98 AAA 4,000 3,952,120
5.50%, 4/15/00 AAA 2,500 2,521,550
5.75%, 8/15/03 AAA 5,000 5,067,200
TOTAL U.S. TREASURY SECURITIES
(Cost $11,205,039) 11,540,870
5
<PAGE>
Flag Investors
Intermediate-term Income Fund
Statement of Net Assets (CONCLUDED) December 31, 1995
S&P PAR VALUE
SECURITY RATING(1) (000) (NOTE A)
ASSET-BACKED SECURITIES - 11.3%
PREMIER AUTO TRUST, 94-1-A3,
4.75%, 2/2/00 AAA $ 944 $ 937,160
DISCOVER CREDIT CARD, 93-A-A,
6.25%, 8/16/00 AAA 3,000 3,052,620
SEARS CREDIT ACCOUNT MASTER TRUST,
II95-2-A, 8.10%, 6/15/04 AAA 3,500 3,808,770
TOTAL ASSET-BACKED SECURITIES
(Cost $7,481,229) 7,798,550
COLLATERALIZED MORTGAGE OBLIGATIONS - 22.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 11.9%
MULTI-CLASS MORTGAGE CERTIFICATES
Series 21-H, 5.85%, 1/25/19 AAA 4,000 3,941,361
Series 1163-I, 6.95%, 12/15/20 AAA 600 610,782
Series 106-F, 8.50%, 12/15/20 AAA 3,562 3,670,704
FEDERAL NATIONAL MORTGAGE ASSOC. -- 10.8%
MULTI-CLASS MORTGAGE CERTIFICATES
Series 1988-18-B, 9.40%, 7/25/03 AAA 237 248,636
Series 1992-149-D, 12.00%, 4/25/19 AAA 2,068 2,139,593
Series 1991-11-G, 7.00%, 11/25/19 AAA 3,052 3,069,546
Series 1995-W-1-A2, 8.20%, 4/25/25 AAA 2,000 2,058,200
GOLDMAN SACHS TRUST SERIES 3 -- 0.1%
Remic, Series 3 E-4, 8.00%, 5/27/15 AAA 66 67,321
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $15,609,443) 15,806,143
REPURCHASE AGREEMENT - 2.6%
GOLDMAN SACHS & CO., 5.70%
Dated 12/29/95, to be repurchased
on 1/2/96, collateralized by
U.S. Treasury Bonds with a market
value of $1,834,529. (Cost $1,806,000) NR* 1,806 1,806,000
TOTAL INVESTMENT IN SECURITIES - 99.5%
(Cost $67,285,831)** 68,931,828
OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 0.5% 369,866
NET ASSETS - 100.0% $69,301,694
NET ASSET VALUE PER:
CLASS A SHARE ($67,115,974 / 6,406,450 shares outstanding) $10.48
INSTITUTIONAL SHARE ($2,185,720 / 206,585 shares outstanding) $10.58
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE ($10.48 / .985) $10.64
INSTITUTIONAL SHARE $10.58
(1) The Standard & Poor's rating indicated is believed to be the most recent
rating available as of December 31, 1995.
* Not rated.
** Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
6
<PAGE>
Flag Investors
Intermediate-term Income Fund
Statement of Operations For the Year Ended December 31, 1995
INVESTMENT INCOME (NOTE A):
Interest $ 4,829,563
EXPENSES:
Investment advisory fee (Note B) 252,372
Distribution fee (Note B) 179,666
Accounting fee (Note B) 57,172
Printing and postage 32,168
Custodian fees 25,999
Transfer agent fees (Note B) 24,999
Legal 24,999
Audit 23,999
Registration fees 19,998
Organizational expense (Note A) 9,092
Miscellaneous 8,500
Directors' fees 5,000
Insurance 3,680
Total expenses 667,644
Less: Fees waived (Note B) (162,943)
Net expenses 504,701
Net investment income 4,324,862
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTEA):
Net realized loss from securities transactions (1,018,416)
Change in unrealized appreciation of investments 7,179,328
Change in unrealized appreciation of assets and
liabilities denominated in foreign currency 1,216
Net gain on investments 6,162,128
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,486,990
See accompanying Notes to Financial Statements.
7
<PAGE>
Flag Investors
Intermediate-term Income Fund
Statement of Changes in Net Assets
FOR THE YEAR ENDED DECEMBER 31,
1995 1994
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 4,324,862 $ 5,692,067
Net loss from security transactions (1,018,416) (2,533,036)
Change in unrealized appreciation/
(depreciation) of investments 7,179,328 (6,950,668)
Change in unrealized appreciation/
(depreciation) of assets and
liabilities denominated in
foreign currency 1,216 --
Net increase/(decrease) in net
assets resulting from operations 10,486,990 (3,791,637)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares (4,208,250) (5,690,349)
Flag Investors Institutional
Shares (7,962) --
Return of capital:
Flag Investors Class A Shares -- (324,493)
Flag Investors Institutional Shares -- --
Total distributions (4,216,212) (6,014,842)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 4,986,795 18,470,875
Value of shares issued in
reinvestment of dividends 2,635,861 4,067,306
Cost of shares repurchased (23,380,739) (46,462,862)
Decrease in net assets derived from
capital share transactions (15,758,083) (23,924,681)
Total decrease in net assets (9,487,305) (33,731,160)
NET ASSETS:
Beginning of year 78,788,999 112,520,159
End of year $69,301,694 $ 78,788,999
See accompanying Notes to Financial Statements.
8
<PAGE>
Flag Investors
Intermediate-term Income Fund
Financial Highlights -- Flag Investors Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 13, 1991*
FOR THE YEAR ENDED DECEMBER 31, THROUGH
1995 1994 1993 1992 DEC. 31, 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.62 0.57 0.57 0.63 0.32
Net realized and unrealized gain/(loss)
on investments 0.84 (0.92) 0.34 (0.05) 0.64
Total from Investment Operations 1.46 (0.35) 0.91 0.58 0.96
LESS DISTRIBUTIONS:
Dividends from net investment
income and short-term gains (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital -- (0.03) -- -- --
Distributions from net realized
long-term gains -- -- (0.02) -- --
Total distributions (0.60) (0.60) (0.71) (0.75) (0.42)
Net asset value at end of period $ 10.48 $ 9.62 $10.57 $10.37 $10.54
TOTAL RETURN(1) 15.43% (3.32)% 8.98% 5.68% 9.79%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.70% 0.70% 0.70% 0.70% 0.70%**
Net investment income(3) 6.00% 5.57% 5.43% 6.01% 5.97%**
SUPPLEMENTAL DATA:
Net assets at end of period (000) $67,116 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate 46% 50% 86% 107% 46%
</TABLE>
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales loads.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 0.93%, 0.84%, 0.85%, 0.87% and 1.73%
(annualized) for the years ended December 31, 1995, 1994, 1993, 1992, and
for the period ended December 31, 1991, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 5.77%, 5.43%, 5.28%, 5.83%
and 4.94% (annualized) for the years ended December 31, 1995, 1994,
1993, 1992, and for the period ended December 31, 1991,
respectively. See accompanying Notes to Financial Statements.
9
<PAGE>
Flag Investors
Intermediate-term Income Fund
Financial Highlights -- Institutional Shares
(FOR A SHARE OUTSTANDING DURING THE PERIOD)
FOR THE PERIOD
NOVEMBER 2, 1995*
THROUGH
DECEMBER 31, 1995
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 10.42
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.09
Net realized and unrealized gain on investments 0.12
Total from Investment Operations 0.21
LESS DISTRIBUTIONS:
Dividends from net investment income and
short-term capital gains (0.05)
Net asset value at end of period $ 10.58
TOTAL RETURN 12.47%**
RATIOS TO AVERAGE NET ASSETS:
Expenses(1) 0.47%**
Net investment income(2) 6.52%**
SUPPLEMENTAL DATA:
Net assets at end of period (000) $ 2,186
Portfolio turnover rate 46%
* Commencement of operations.
** Annualized.
(1) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 0.72% (annualized) for the period
ending December 31, 1995.
(2) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 6.27% (annualized) for the
period ending December 31, 1995.
See accompanying Notes to Financial Statements.
10
<PAGE>
Flag Investors
Intermediate-term Income Fund
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Intermediate-Term Income
Fund, Inc. (the "Fund") is registered under the Investment Company Act of
1940 as an open-end, diversified management investment company designed to
provide a high level of current income consistent with preservation of
capital within an intermediate-term maturity structure. The Fund commenced
operations on May 13, 1991, consisting of Class A Shares, which are
subject to a maximum front-end sales charge of 1.50% and a 0.25%
distribution fee. On November 2, 1995, the Fund began offering
Institutional Shares, which are not subject to a front-end sales charge or a
distribution fee. 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. The following is a summary of significant accounting
policies followed by the Fund.
SECURITY VALUATION - Debt securities are valued on the basis of
quotations provided by a pricing service, which uses information with
respect to transactions on bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Portfolio securities that are listed on a
national securities exchange are valued on the basis of their last sale
price or, in the absence of recorded sales, at the average of readily
available closing bid and asked prices. Securities or other assets for
which market quotations are not readily available are valued at their fair
value so determined in good faith 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
which approximates market.
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
under Subchapter M of the Internal Revenue Code and to make requisite
distributions to the shareholders that will be sufficie nt 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 on a monthly basis and net realized long-term capital
gains annually, if any.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the
specific identification method for both financial reporting and income tax
purposes. Interest income is recorded on an accrual basis and includes
amortization of premiums and accretion of discounts.
Costs incurred by the Fund in connection with its organization,
registration and the initial public offering of shares have been deferred
and are being amortized on the straight-line method over a five-year period
beginning on the date on which the Fund commenced its investment
activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown &
Sons Incorporated ("Alex. Brown"), serves as the Fund's investment
advisor. As compensation for its advisory services, ICC receives from the
Fund an annual fee, calculated daily and paid monthly, at an annual rate of
0.35% of the first $1 billion of the Fund's average daily net assets; 0.30%
of the Fund's average daily net assets in excess of $1 billion but not
exceeding $1.5 bil-
11
<PAGE>
Flag Investors
Intermediate-term Income Fund
Notes to Financial Statements (CONTINUED)
lion; and 0.25% of the Fund's average daily net assets in excess of $1.5
billion.
ICC has agreed to reduce its aggregate fees so that ordinary expenses of the
Fund for any fiscal year do not exceed 0.70% of the Fund's average daily
net assets. For the year ended December 31, 1995, ICCwaived fees of
$162,943.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $24,999 for
transfer agent services for the year ended December 31, 1995.
As compensation for its accounting services, ICC receives from the Fund
an annual fee, calculated daily and paid monthly, from the Fund's
average daily net assets. ICC received $57,172 for accounting services for
the year ended December 31, 1995.
As compensation for providing distribution services, ICC 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.
For the year ended December 31, 1995, distribution fees aggregated $179,666.
Flag Investors/ISI Fund complex has adopted a retirement plan for eligible
Directors. The pension expense as of year ended December 31, 1995 was not
material.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 55 million
shares of capital stock (45 million Class A, 5 million Institutional, 2
million Class B and 3 million undesignated), par value $.001 per share, all
of which are designated as common stock. Transa ctions in shares of the Fund
were as follows:
FLAG INVESTORS CLASS A SHARES
FOR THE YEAR ENDED DECEMBER 31,
1995 1994
Shares sold 267,783 1,793,782
Shares issued to
shareholders on
reinvestment of
dividends 261,580 404,005
Shares redeemed (2,317,104) (4,649,437)
Net decrease in shares
outstanding (1,787,741) (2,451,650)
Proceeds from sale
of shares $ 2,690,780 $18,470,875
Value of reinvested
dividends 2,635,861 4,067,306
Cost of shares
redeemed (23,241,599) (46,462,862)
Net decrease from
capital share
transactions $(17,914,958) $(23,924,681)
INSTITUTIONAL SHARES
FOR THE PERIOD NOVEMBER 2, 1995*
THROUGH DECEMBER 31, 1995
Shares sold 219,797
Shares issued to
shareholders on
reinvestment of
dividends --
Shares redeemed (13,212)
Net increase in shares
outstanding 206,585
Proceeds from sale
of shares $2,296,015
Value of reinvested
dividends --
Cost of shares
redeemed (139,140)
Net increase from
capital share
transactions $2,156,875
*Commencement of operations.
12
<PAGE>
Flag Investors
Intermediate-term Income Fund
Notes to Financial Statements (CONCLUDED)
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment securities, other
than short-term obligations, aggregated $31,389,840 and
$42,317,826, respectively, for the year ended December 31, 1995.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was
$1,747,187, and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $101,190.
E. CAPITAL LOSS CARRYFORWARD - At December 31, 1995, there was a tax capital
loss carryforward of $3,494,748, of which $383,359 expires in 2002
and $3,111,389 expires in 2003. This carryforward will be used to offset
future net capital gains, if any.
F. NET ASSETS - At December 31, 1995, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $69,160,420
Flag Investors Institutional
Shares 2,156,875
Accumulated net realized loss from
security transactions (3,514,478)
Unrealized appreciation of
investments 1,645,997
Overdistribution of net investment
income (147,120)
$69,301,694
13
<PAGE>
Flag Investors
Intermediate-term Income Fund
Independent Auditors' Report
The Board of Directors and Shareholders, Flag Investors Intermediate-Term
Income Fund, Inc.:
We have audited the accompanying statement of net assets of Flag
Investors Intermediate-Term Income Fund, Inc. as of December 31, 1995, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the four-year period then ended
and the period May 13, 1991 (commencement of operations) to December 31, 1991.
These financial statements and financial highlights are the responsibili ty 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 the 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 securities owned at December
31, 1995 by correspondence with the custodian. 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, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Flag
Investors Intermediate-Term Income Fund, Inc. as of December 31, 1995, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE &TOUCHE LLP
Princeton, New Jersey
January 26, 1996
14
<PAGE>
Flag Investors
Intermediate-term Income Fund
Directors and Officers
Richard T. Hale M. Elliott Randolph, Jr.
CHAIRMAN PRESIDENT
James J. Cunnane Paul D. Corbin
DIRECTOR EXECUTIVE VICE PRESIDENT
N. Bruce Hannay Gary V. Fearnow
DIRECTOR VICE PRESIDENT
John F. Kroeger Edward J. Veilleux
DIRECTOR VICE PRESIDENT
Louis E. Levy Brian C. Nelson
DIRECTOR VICE PRESIDENT AND SECRETARY
Eugene J. McDonald Monica M. Hausner
DIRECTOR VICE PRESIDENT
W. James Price Joseph A. Finelli
DIRECTOR TREASURER
Harry Woolf Laurie D. DePrine
DIRECTOR ASSISTANT SECRETARY
Investment Objective
An open-end mutual fund designed to provide a high level of current income
consistent with preservation of principal within an intermediate-term maturity
structure.
Chairman's Letter
The year 1995 saw the retirement of two of our longtime Directors. We would
like to thank them for their valuable and tireless service over the years.
Alonzo G. Decker, former Chairman and CEO of Black & Decker, was one of our
original Directors, joining the Board in 1981. He served with distinction, and
his wise counsel will be much missed; but we know he will enjoy having more time
to spend on his farm on the Eastern Shore of Maryland.
Bruce Hannay, former Vice President for Patents and Research at Bell Labs,
joined our Board at the time we formed Flag Investors Telephone Income Fund. His
knowledge of the telecommunications industry was of great assistance to us. His
willingness to cross the country four times each year to attend our Board
meetings tells us a great deal about his energy and loyalty. We wish him well in
his retirement in the beautiful State of Washington.
Al and Bruce, we thank you and will miss you.
Sincerely,
/s/ Richard T. Hale
Richard T. Hale
15
