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FLAG INVESTORS
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FLAG
INVESTORS
SHORT-
INTERMEDIATE
INCOME
FUND
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
REPORT HIGHLIGHTS
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o With a weighted average maturity structure that ranged between three and
four years, your Fund's Class A Shares delivered total returns of 4.4% and
7.1% for the six- and 12-month periods ended December 31, 1997,
respectively.
o The recent Asian financial crisis prompted a "flight to quality" and gave
bonds a boost as investors sought the stability of U.S. fixed-income
securities.
o Currently, our domestic economy is on sound footing, and we expect economic
growth to contract and inflation to remain low, if not move lower.
Near-term, we are optimistic about the course of interest rates and expect
many of the factors that helped the bond market in 1997 to persist.
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to report on the Fund's progress for the six- and 12-month
periods ended December 31, 1997.
1997 In Review
The anomalous combination of benign inflationary pressures and strong
economic growth was a boon to both stocks and bonds during 1997. Although
equities garnered more investor attention for much of the year, bonds gained
considerable respect in the wake of the expanding Asian financial crisis.
Concerned that fallout from Asia would sharply curb domestic growth and push the
rate of inflation even lower, investors sought the stability and safe haven of
U.S. dollar-dominated fixed-income securities. A neutral monetary policy,
improving budgetary/fiscal strength, and declining net U.S. Treasury borrowings
contributed meaningfully to the general decline in rates, the flattening of the
yield curve, and the ensuing strong bond market returns.
HISTORICAL YIELD CURVE
(12/96-12/97)
[GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]
12/31/96 12/31/97
3 month 5.186% 5.342%
6 month 5.297 5.435
1 year 5.488 5.476
2 year 5.868 5.642
3 year 6.01 5.669
5 year 6.206 5.705
10 year 6.418 5.741
30 year 6.641 5.924
In this benign inflationary environment, intermediate-term rates traded in
a fairly narrow range of 6.00% to 6.85% during the first half of the year and
drifted lower to 5.60% at year-end. With a constant duration of three years,
your Fund's Class A Shares captured the lion's share of market returns and
posted total returns of 4.4% and 7.1% for the six- and 12-month periods ended
December 31, 1997, respectively. Most of this year's performance came from the
Fund's monthly dividend, with a smaller portion from net asset value (NAV)
appreciation as rates declined. From its inception on May 13, 1991, the Fund's
1
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
- --------------------------------------------------------------------------------
Class A Shares have posted a cumulative total return of 57.4%, translating into
an average annual return of 7.1%. The Fund's short-intermediate-term maturity
structure continues to capture a great percentage of available market yield with
a small fraction of its systematic risk.
U.S. TREASURY YIELDS
(12/31/96--12/31/97)
[GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]
5-Year 10-Year
12/96 6.26% 6.5 %
6.38 6.61
6.31 6.54
6.39 6.62
6.25 6.49
6.15 6.4
6.06 6.26
6.16 6.37
6.39 6.55
6.37 6.54
6.51 6.69
6.62 6.75
3/97 6.78 6.91
6.76 6.91
6.84 6.97
6.71 6.82
6.84 6.94
6.51 6.64
6.52 6.67
6.55 6.72
6.58 6.74
6.5 6.66
6.37 6.49
6.29 6.43
6.27 6.37
6/97 6.33 6.45
6.194 6.307
6.116 6.22
6.143 6.242
6.075 6.179
6.071 6.18
6.216 6.366
6.064 6.235
6.194 6.358
6.222 6.339
6.229 6.35
6.166 6.282
6.01 6.092
9/97 5.987 6.081
5.865 5.988
6.024 6.143
6.076 6.158
5.898 5.981
5.708 5.831
5.81 5.902
5.802 5.879
5.754 5.811
5.839 5.874
5.88 5.914
5.685 5.728
5.707 5.736
12/97 5.707 5.738
Specific total return comparisons are listed below.
Performance Comparisons*
For Periods Ending Dec. 31, 1997 Six Months One Year Avg. Duration
- --------------------------------------------------------------------------------
Flag Investors Short-Intermediate
Income Fund - Class A Shares 4.4% 7.1% 3.0 yrs.
- --------------------------------------------------------------------------------
Lehman Brothers Intermediate Gov't./
Corp. Bond Index 4.9% 7.9% 3.3 yrs.
- --------------------------------------------------------------------------------
Lipper Short/Intermediate Investment
Grade Debt Funds Average 4.3% 6.6% n/a
- --------------------------------------------------------------------------------
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of the Fund's 1.50% maximum sales charge.
If the sales charge were reflected, the quoted performance would be lower. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. The Lehman
Brothers Intermediate Government/Corporate Bond Index is an unmanaged index that
is widely recognized as an indicator of performance in the intermediate-term
government and corporate bond sector. The Lipper Short-Intermediate Investment
Grade Debt Funds Average is an index of approximately 85 managed funds that have
at least 65% of their assets in investment grade debt securities that are rated
in the top four grades and have dollar-weighted average maturities of one to
five years. Individuals cannot invest directly in any index. Past performance is
not an indicator of future results. Please review the Additional Performance
Information on page 6.
2
<PAGE>
- --------------------------------------------------------------------------------
Outlook
Our outlook for interest rates for 1998 hinges on several interrelated
factors, foremost of which are the pace of economic growth and consumption in
the wake of Asia's unfolding financial turmoil, its influence on inflation and
the Fed's policy response to these developments. Our economy is not immune from
the tumult in the Asian economies, but neither is it likely to succumb to these
developments. While our domestic economy is on sound footing, we expect economic
growth to contract and inflation to remain low, if not move lower. Near-term, we
are optimistic about the course of interest rates and expect many of the factors
that helped the bond market in 1997 to persist. We cite the following positive
observations: the U.S. dollar remains strong; monetary policy is on hold due to
high real rates; improving federal budgetary posture has reduced the
government's dependency on bond issuance; and the growing demand for bonds is
likely to persist, given the ongoing flight to quality in the international
arena and the rebalancing of asset allocations away from more volatile stocks.
With its defensive maturity bias, this is an ideal market environment for your
Fund.
Portfolio Considerations
Unable to discern any intersector spread changes, we kept the Fund's
overall asset allocation evenly balanced during the first half of the year among
the bond market's major sectors: Treasuries, agencies, mortgages, corporates and
asset-backed issues (see pie chart on page 4). Confident that the run up in
rates during the early part of the second quarter was more cyclical than secular
and likely to be short lived, we extended the Fund's duration to 3.1 years,
close to its prescribed maximum, and increased its corporate bond allocation
during the second half of the year. As the decline in rates gathered momentum
during the year, we began to trim back on the Fund's mortgage securities because
of concerns that another wave of refinancing would put that sector under
enormous performance pressure. These "fine tuning" measures worked well as each
of the Fund's different sectors contributed proportionally to the year's
results.
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
Portfolio Composition
June 30, 1997 December 31, 1997
[PIE CHART APPEARS HERE] [PIE CHART APPEARS HERE]
[SEE PERCENTAGES BELOW] [SEE PERCENTAGES BELOW]
Agency & Mortgage-Backed...46% Agency & Mortgaged-Backed...29%
Treasury...................23% Corporate...................28%
Asset-Backed...............15% Asset-Backed................18%
Corporate..................11% Treasury....................17%
Cash....................... 5% Cash........................ 8%
Dividend Policy
The Fund has continued to distribute $0.05 per share monthly. Recognizing
the importance of improving shareholder wealth, we continue to emphasize
strategies that maximize total return (current income plus NAV appreciation).
We appreciate your continued support.
Sincerely,
/s/ M. Elliott Randolph, Jr. /s/ Paul D. Corbin
- ---------------------------- ----------------------------
M. Elliott Randolph, Jr. Paul D. Corbin
Co-Portfolio Manager Co-Portfolio Manager
January 16, 1998
4
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Portfolio Statistics (As of December 31, 1997)
Average Maturity 4.2 years
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Average Duration 3.0 years
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Average Quality AA1
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Maturity Breakdown:
- --------------------------------------------------------------------------------
0-1 year 20%
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1-3 years 34%
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3-5 years 38%
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5-10 years 8%
- --------------------------------------------------------------------------------
Dividends for Calendar 1997
Total dividends declared for calendar 1997 are as follows:
Class A Institutional
Shares Shares
------ ------
Income............................. $0.60 $0.62
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.
5
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on May 13,
1991 through the most recent fiscal year-end and must reflect the impact of the
Fund's total expenses and the currently effective 1.50% maximum sales charge for
the Fund's Class A Shares.
In addition to the Lehman Brothers Intermediate Government/Corporate Bond
Index, we will also begin comparing the Fund's performance to the Merrill Lynch
1-3 Year Treasury Index because we believe its shorter average maturity also
makes it an appropriate benchmark for the Fund.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the indices shown are 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 these indices
would have had to own the securities that they represent. Acquiring these
securities would require a considerable amount of money and would incur expenses
that are not reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate, an
investor's shares may be worth more or less than their original cost when
redeemed. Past performance is not an indicator of future results.
6
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class A Shares*
May 13, 1991-December 31, 1997
[GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]
Flag Lehman
Investors Brothers Merrill
Short- Intermediate Lynch
Intermediate Gov't./ 1-3 Year
Income Corp. Bond Treasury
Fund Index Index
5/91 $ 9,850 $10,000 $10,000
12/91 10,815 10,993 10,759
12/92 11,429 11,780 11,436
12/93 12,455 12,815 12,057
12/94 12,042 12,569 12,125
12/95 13,909 14,497 13,458
12/96 14,471 15,084 14,129
12/97 15,503 16,271 15,070
Average Annual Total Return*
Periods Ended 12/31/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares 5.52% 5.97% 6.83%
- --------------------------------------------------------------------------------
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results. 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.
The Merrill Lynch 1-3 Year Treasury Index is an unmanaged index that is
widely recognized as a general measure of the performance in the short-term
Treasury sector.
** May 13, 1991.
7
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE INFORMATION (CONCLUDED)
Change in Value of a $10,000 Investment in Institutional Shares*
November 2, 1995-December 31, 1997
[GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]
Flag Lehman
Investors Brothers Merrill
Short- Intermediate Lynch
Intermediate Gov't./ 1-3 Year
Income Corp. Bond Treasury
Fund Index Index
11/95 $10,000 $10,000 $10,000
12/95 10,202 10,105 10,077
3/96 10,118 10,021 10,110
6/96 10,174 10,083 10,212
9/96 10,360 10,262 10,381
12/96 10,630 10,514 10,578
3/97 10,623 10,502 10,648
6/97 10,922 10,812 10,883
9/97 11,193 11,104 11,096
12/97 11,417 11,342 11,282
Average Annual Total Return*
Periods Ended 12/31/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Institutional Shares 7.40% -- 6.32%
- --------------------------------------------------------------------------------
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** 11/2/95.
8
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1997
<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS--27.8%
Banc One Columbus
7.375%, 12/1/02 AA- $1,000 $ 1,043,750
Bear Stearns Company Incorporated
6.50%, 8/1/02 A 2,000 2,015,000
Block Financial Corporation
6.75%, 11/1/04 A 2,000 2,032,500
Countrywide Home Loan
7.26%, 5/10/04 A 2,000 2,092,500
First Maryland Bancorp
7.20%, 7/1/07 A- 2,000 2,090,000
Ford Motor Credit
6.05%, 3/31/98 A+ 2,000 2,000,300
General Motors Acceptance Corporation
5.625%, 2/15/01 A- 1,000 987,500
International Lease Finance
6.43%, 9/15/00 A+ 2,000 2,015,000
Norwest Corporation
7.68%, 5/10/02 AA- 1,048 1,054,550
Pacific Gas & Electric
6.25%, 3/1/04 AA- 2,000 2,010,000
Philip Morris Cos., Inc.
6.95%, 6/1/06 A 2,000 2,050,000
Sears Roebuck Acceptance Corporation
6.34%, 9/19/00 A- 2,190 2,203,687
-----------
Total Corporate Bonds
(Cost $21,390,553) 21,594,787
-----------
U.S. GOVERNMENT AGENCY SECURITIES--25.5%
Federal Home Loan Banks Board - 7.7%
Debentures
7.151%, 9/13/05 (Callable 3/13/98) AAA 3,000 2,999,880
6.900%, 4/28/00 (Callable 4/28/98) AAA 3,000 3,011,550
Federal National Mortgage Assoc. - 7.1%
Debentures
6.250%, Due 8/12/03 AAA 3,500 3,494,785
7.120%, Due 4/19/02 AAA 2,000 2,023,820
Mortgage-Backed Securities - 9.4%
Federal Home Loan Mortgage Corp.
Pool #G10049, 8.00%, 10/1/07 AAA 844 871,922
</TABLE>
9
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1997
<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- --------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AGENCY SECURITIES (concluded)
Mortgage-Backed Securities (concluded)
Federal Home Loan Mortgage Corp.
Pool #G10543, 6.00%, 6/1/11 AAA $2,649 $ 2,607,868
Pool #M19094, 7.00%, 2/1/98 AAA 792 803,591
Federal National Mortgage Assoc.
Pass-through
Pool #326570, 7.00%, Due 2/1/08 AAA 2,980 3,025,905
Guaranteed Export Trust - 1.3%
8.187%, 12/15/04 AAA 913 971,339
-----------
Total U.S. Government Agency Securities
(Cost $19,492,391) 19,810,660
-----------
U.S. TREASURY SECURITIES--16.9%
U.S. Treasury Notes
5.875%, 2/15/00 AAA 1,000 1,004,150
6.250%, 2/15/03 AAA 5,000 5,115,700
5.750%, 8/15/03 AAA 2,000 2,001,720
5.750%, 10/31/03 AAA 5,000 5,005,800
-----------
Total U.S. Treasury Securities
(Cost $12,751,849) 13,127,370
-----------
ASSET-BACKED SECURITIES--17.9%
Aesop Funding II Limited Liability Company
6.22%, 10/20/01 AAA 2,500 2,514,500
California Infrastructure Pacific Gas &
Electric, 97-1-A4
6.16%, 6/25/03 AAA 2,000 2,002,109
FHLMC Structured Pass-through, Series T-9
6.43%, 2/25/13 AAA 1,500 1,469,590
Green Tree Financial Corporation
8.25%, 1/15/20 NR** 3,000 3,190,980
Metris Master Trust
6.87%, 10/20/05 AAA 3,000 3,084,492
Premier Auto Trust, 94-1-A3
4.75%, 2/2/00 AAA 54 53,813
Premier Auto Trust, 96-3-A4
6.75%, 11/6/00 AAA 1,500 1,529,130
-----------
Total Asset-Backed Securities
(Cost $13,697,185) 13,844,614
-----------
</TABLE>
10
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- ------------------------------------------------------------------------------------
<S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--3.2%
Federal Home Loan Mortgage Corp. - 2.1%
Multi-Class Mortgage Certificates
Series 106-F, 8.50%, 12/15/20 AAA $1,615 $ 1,647,006
Federal National Mortgage Assoc. - 1.1%
Multi-Class Mortgage Certificates
Series 88-18-B, 9.40%, 7/25/03 AAA 125 131,027
Series 91-11-G, 7.00%, 11/25/19 AAA 705 703,859
-----------
Total Collateralized Mortgage Obligations
(Cost $2,468,052) 2,481,892
-----------
REPURCHASE AGREEMENT--8.5%
Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased on
1/2/98, collateralized by U.S. Treasury
Bonds with a market value of $6,716,883.
(Cost $6,585,000) NR 6,585 6,585,000
----------
Total Investment in Securities--99.8%
(Cost $76,385,030)*** 77,444,323
Other Assets in Excess of Liabilities, Net--0.2% 181,175
-----------
Net Assets--100.0% $77,625,498
===========
Net Asset Value and Redemption Price Per:
Class A Share
($45,569,338 / 4,386,630 shares outstanding) $10.39
======
Institutional Share
($32,056,160 / 3,052,560 shares outstanding) $10.50
======
MAXIMUM OFFERING PRICE PER:
Class A Share ($10.39 / 0.985) $10.55
======
Institutional Share $10.50
======
</TABLE>
- ----------
* The Standard & Poor's rating indicated is believed to be the most recent
rating available as of December 31, 1997. The U.S. Government Agency
Securities and U.S. Treasury Securities are assumed to have AAA ratings
because they are backed by the full faith and credit of the U.S.
government. These ratings have not been audited by Deloitte & Touche LLP.
** Although this holding is not rated by S&P, it is rated Aaa by Moody's and
AAA by Fitch.
*** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
December 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $5,072,268
----------
Expenses:
Investment advisory fee (Notes 2 and 7) 268,092
Distribution fee (Note 2) 136,962
Legal 76,448
Accounting fee (Note 2) 59,200
Transfer agent fee (Note 2) 31,985
Registration fees 31,620
Printing and postage 26,951
Audit 25,025
Custodian fee (Note 2) 16,089
Directors' fees 4,976
Pricing fee 4,820
Miscellaneous 2,309
Insurance 745
----------
Total expenses 685,222
Less: Fees waived (Note 2) (203,590)
----------
Net expenses 481,632
----------
Net investment income 4,590,636
----------
Realized and unrealized gain/(loss) on investments (Note 1):
Net realized gain from security transactions 95,306
Change in unrealized appreciation
or depreciation of investments 680,823
----------
Net gain on investments 776,129
----------
Net increase in net assets resulting from operations $5,366,765
==========
See Notes to Financial Statements.
12
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 4,590,636 $ 4,307,970
Net gain/(loss) from security transactions 95,306 (141,613)
Change in unrealized appreciation or
depreciation of investments 680,823 (1,267,527)
------------ ------------
Net increase in net assets resulting
from operations 5,366,765 2,898,830
------------ ------------
Dividends to Shareholders From:
Net investment income:
Class A Shares (3,165,854) (3,528,967)
Institutional Shares (1,359,289) (602,635)
------------ ------------
Total distributions (4,525,143) (4,131,602)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 23,594,729 24,144,316
Value of shares issued in reinvestment of
dividends 2,514,042 2,641,312
Cost of shares repurchased (25,416,223) (18,763,222)
------------ ------------
Increase in net assets derived from
capital share transactions 692,548 8,022,406
------------ ------------
Total increase in net assets 1,534,170 6,789,634
Net Assets:
Beginning of year 76,091,328 69,301,694
------------ ------------
End of year $ 77,625,498 $ 76,091,328
============ ============
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 10.28
-------
Income from Investment Operations:
Net investment income 0.61
Net realized and unrealized gain/(loss) on investments 0.10
-------
Total from Investment Operations 0.71
Less Distributions:
Distributions from net investment income
and short-term gains (0.60)
Return of capital --
Distributions from net realized long-term gains --
-------
Total distributions (0.60)
-------
Net asset value at end of year $ 10.39
=======
Total Return(1) 7.13%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70%
Net investment income(3) 5.92%
Supplemental Data:
Net assets at end of year (000) $45,569
Portfolio turnover rate 65%
- ----------
(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 0.96%, 0.99%, 0.93%, 0.84% and
0.85% for the years ended December 31, 1997, 1996, 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 5.66%, 5.83%, 5.77%,
5.43% and 5.28% for the years ended December 31, 1997, 1996, 1995, 1994 and
1993, respectively.
14
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE 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 $ 10.48 $ 9.62 $ 10.57 $ 10.37
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.63 0.62 0.57 0.57
Net realized and unrealized gain/(loss) on investments (0.23) 0.84 (0.92) 0.34
------- ------- ------- -------
Total from Investment Operations 0.40 1.46 (0.35) 0.91
Less Distributions:
Distributions from net investment income
and short-term gains (0.60) (0.60) (0.57) (0.69)
Return of capital -- -- (0.03) --
Distributions from net realized long-term gains -- -- -- (0.02)
------- -------- ------- -------
Total distributions (0.60) (0.60) (0.60) (0.71)
------- -------- ------- -------
Net asset value at end of year $ 10.28 $ 10.48 $ 9.62 $ 10.57
======= ======== ======= =======
Total Return(1) 4.04% 15.43% (3.32)% 8.98%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70% 0.70% 0.70% 0.70%
Net investment income(3) 6.11% 6.00% 5.57% 5.43%
Supplemental Data:
Net assets at end of year (000) $58,584 $67,116 $78,789 $112,520
Portfolio turnover rate 42% 46% 50% 86%
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
November 2,
For the Year Ended 1995(1) through
December 31, December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995
<S> <C>
Per Share Operating Performance:
Net asset value at
beginning of period $ 10.38 $ 10.58 $10.42
------- ------- ------
Income from Investment Operations:
Net investment income 0.61 0.59 0.09
Net realized and unrealized
gain/(loss) on investments 0.13 (0.17) 0.12
------- ------- ------
Total from Investment Operations 0.74 0.42 0.21
Less Distributions:
Distributions from net investment
income and short-term gains (0.62) (0.62) (0.05)
------- ------- ------
Net asset value at end of period $ 10.50 $ 10.38 $10.58
======= ======= ======
Total Return 7.40% 4.20% 12.47%(2)
Ratios to Average Daily Net Assets:
Expenses(3) 0.45% 0.45% 0.45%(2)
Net investment income(4) 6.17% 6.35% 6.52%(2)
Supplemental Data:
Net assets at end of period (000) $32,056 $17,507 $2,186
Portfolio turnover rate 65% 42% 46%
- ----------
(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.72%, 0.76% and 0.72%
(annualized) for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.90%, 6.04% and 6.27%
(annualized) for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.
See Notes to Financial Statements.
16
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FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
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Notes to Financial Statements
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund"), formerly
Flag Investors Intermediate-Term Income Fund, Inc., was organized as a Maryland
Corporation on April 16, 1990 and commenced operations May 13, 1991. The Fund is
registered under the Investment Company Act of 1940 as a diversified, open-end
investment management company. It is designed to provide a high level of current
income consistent with preservation of principal within an intermediate-term
maturity structure.
The Fund consists of two share classes: Class A Shares, which commenced May
13, 1991, and Institutional Shares, which commenced November 2, 1995.
The Class A Shares have a 1.50% maximum front-end sales charge and a 0.25%
distribution fee. The Institutional Shares have neither a front-end sales charge
nor a 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 debt security based on
quotations provided by a pricing service, which uses transactions on
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities to determine
value. The Fund values a portfolio security that is primarily traded
on a national exchange by using the last sale price reported for the
day. When a market quotation is unavailable, the Investment Advisor
determines a fair value using procedures that the Board of Directors
establishes and monitors. 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
17
<PAGE>
FLAG INVESTORS SHORT-INTERMDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
NOTE 1--concluded
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 TAXES--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. SECURITY 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.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for 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. Dividends from
net investment income are declared and paid monthly. Distributions of
capital gains are recorded on the ex-dividend dates. Distributions in
excess of net investment income are due to different tax treatments of
dividends declared.
18
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fee, 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. As compensation for its
advisory services, the Fund pays ICC an annual fee. This fee is based on the
Fund's average daily net assets and is calculated daily and paid monthly at the
following annual rates: 0.35% of the first $1 billion, 0.30% of the next $500
million and 0.25% of the amount over $1.5 billion.
ICC has agreed to reduce its aggregate fees so that ordinary Fund expenses
for any fiscal year do not exceed 0.70% of the Class A Shares' average daily net
assets and 0.45% of the Institutional Shares' average daily net assets. For the
year ended December 31, 1997, ICC waived fees of $203,590.
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 $59,200 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 $31,985 for
transfer agent services for the year ended December 31, 1997.
Effective September 22, 1997, Bankers Trust Company, a subsidiary of
Bankers Trust New York Corporation, became the Fund's custodian. Prior to
September 22, 1997, PNC Bank served as the Fund's custodian. From September 22,
1997 to December 31, 1997, the Fund accrued $4,671 in custody expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), 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. 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. For the year ended December 31, 1997, distribution fees aggregated
$136,962.
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 $4,620, and the accrued liability was $5,029.
19
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 60 million shares of $.001 par value
capital stock (45 million Class A, 2 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory & Trust and 3 million undesignated).
Transactions in shares of the Fund are listed below.
Class A Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 643,871 824,212
Shares issued to shareholders on
reinvestment of dividends 188,623 223,342
Shares redeemed (2,147,036) (1,752,832)
------------ ------------
Net decrease in shares outstanding (1,314,542) (705,278)
============ ============
Proceeds from sale of shares $ 6,656,537 $ 8,509,093
Value of reinvested dividends 1,939,315 2,288,737
Cost of shares redeemed (22,186,651) (18,054,319)
------------ ------------
Net decrease from capital share transactions $(13,590,799) $ (7,256,489)
============ ============
Institutional Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 1,621,803 1,513,443
Shares issued to shareholders on
reinvestment of dividends 55,315 34,119
Shares redeemed (310,716) (67,989)
----------- -----------
Net increase in shares outstanding 1,366,402 1,479,573
=========== ===========
Proceeds from sale of shares $16,938,192 $15,635,223
Value of reinvested dividends 574,727 352,575
Cost of shares redeemed (3,229,572) (708,903)
----------- -----------
Net increase from capital share transactions $14,283,347 $15,278,895
=========== ===========
20
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
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NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $47,383,704 and sales of investment securities aggregated $46,467,965
for the year ended December 31, 1997.
On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,116,074 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $56,781.
NOTE 5--Net Assets
On December 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares.......................................... $48,313,133
Institutional Shares.................................... 31,719,118
Accumulated net realized loss from security transactions..... (3,409,521)
Unrealized appreciation of investments....................... 1,059,293
Distributions in excess of net investment income............. (56,525)
-----------
$77,625,498
===========
NOTE 6--Federal Income Tax Information
Generally accepted accounting principles require that we reclassify certain
components of net assets to reflect permanent differences between financial
reporting and tax purposes. We have reclassified permanent book/tax differences
of $69,801 to undistributed net investment income from accumulated net realized
loss from security transactions. This reclassification has no effect on net
assets or net asset values per share.
On December 31, 1997, there was a tax capital loss carryforward of
$3,406,552 of which $260,038 expires in 2002, $3,111,390 expires in 2003 and
$35,124 expires in 2004. This carryforward will be used to offset any future net
capital gains.
NOTE 7--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 Short-Intermediate 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. The new agreement is substantially the same as the former agreement.
21
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Flag Investors Short-Intermediate Income Fund, Inc.:
We have audited the accompanying statement of net assets of the Flag
Investors Short-Intermediate Income Fund, Inc. as of December 31, 1997, and 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 five-year 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 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, 1997 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
Short-Intermediate Income Fund, Inc. as of December 31, 1997, 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 29, 1998
22
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Tax Information (Unaudited)
For the Year Ended December 31, 1997
Of the ordinary distributions made during the fiscal year ended December
31, 1997, 19.30% have been derived from investments in U.S. Government and
Agency Obligations. All or a portion of the distributions from this income may
be exempt from taxation at the state level. Consult your tax advisor for state
specific information.
23
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Directors and Officers
RICHARD T. HALE
Chairman
JAMES J. CUNNANE CARL W. VOGT, ESQ.
Director Director
JOHN F. KROEGER HARRY WOOLF
Director President
LOUIS E. LEVY JOSEPH A. FINELLI
Director Treasurer
EUGENE J. MCDONALD AMY M. OLMERT
Director Secretary
REBECCA W. RIMEL SCOTT J. LIOTTA
Director Assistant Secretary
TRUMAN T. SEMANS
Director
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.
24
<PAGE>
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
- --------------------------------------------------------------------------------
<PAGE>
[FLAG INVESTORS LOGO]
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.
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