<PAGE>
LOGO
FLAG INVESTORS
MANAGED MUNICIPAL FUND CLASS A SHARES
(A Class of Managed Municipal Fund, Inc.)
Managed Municipal Fund, Inc. (the "Fund") is designed to provide a high
level of total return with relative stability of principal and, secondarily,
high current income exempt from federal income tax through investment in a
portfolio consisting primarily of tax-free municipal obligations. To achieve
this objective, the Fund invests primarily in municipal obligations rated
within the three highest rating categories of Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group.
Flag Investors Class A Shares of the Fund ("Class A Shares") are available
through Alex. Brown & Sons Incorporated, the distributor of the Class A
Shares, as well as Participating Dealers and Shareholder Servicing Agents.
(See "How to Invest in the Fund.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated March 1, 1996 has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. It is available upon request and without
charge by calling the Fund at (800) 767-FLAG.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is March 1, 1996
<PAGE>
FLAG INVESTORS
MANAGED MUNICIPAL FUND CLASS A SHARES
(A Class of Managed Municipal Fund, Inc.)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
-----------------
Page
1. Fund Expenses .................................... 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 5
4. Investment Restrictions .......................... 11
5. How to Invest in the Fund ........................ 12
6. How to Redeem Shares ............................. 17
7. Telephone Transactions ........................... 18
8. Dividends and Taxes .............................. 19
9. Management of the Fund ........................... 22
10. Investment Advisor ............................... 22
11. Administrator .................................... 23
12. Distributor ...................................... 24
13. Custodian, Transfer Agent, Accounting Services ... 25
14. Performance Information .......................... 25
15. General Information .............................. 27
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No person has been authorized to give any information or to make
representations not contained in this Prospectus and, if given or made,
such information must not be relied upon as having been authorized by the
Fund or its distributor. This Prospectus does not constitute an offering by
the Fund or by its distributor in any jurisdiction in which such offering
may not lawfully be made. Shares may be offered only to residents of those
states in which such shares are eligible for purchase.
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1
<PAGE>
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1. Fund Expenses
..........................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases .............. 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None*
</TABLE>
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ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average daily net assets)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Management Fees (net of fee waivers) ............. .27%**
12b-1 Fees ....................................... .25%
Other Expenses (net of fee waivers) .............. .38%**
--------
Total Fund Operating Expenses (net of fee waivers) .90%**
</TABLE>
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* Purchases of $1 million or more are not subject to an initial sales
charge, however, a contingent deferred sales charge of .50% may be
imposed on such purchases. (See "How to Invest in the Fund -- Offering
Price.")
** The Fund's investment advisor and administrator intend, but are not
obligated, to waive their fees proportionately to the extent required so
that Total Fund Operating Expenses do not exceed .90% of the Fund's
average net assets. Absent fee waivers, Management Fees would be .40%,
Other Expenses (including administration fees) would be .45%, and Total
Fund Operating Expenses would be 1.10%, respectively, of the Fund's
average net assets.
Example:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period: 1 year 3 years 5 years 10 years
----------------------------------------- ---------- ----------- ----------- ------------
$54 $73 $94 $156
</TABLE>
* The example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Class A Shares through a financial institution may be
charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
Fund -- Offering Price", "Investment Advisor", "Administrator" and
"Distributor.") The Expenses and Example appearing in the table above are
based on the Fund's expenses for the fiscal year ended October 31, 1995
which, net of fee waivers, were .90% of its average net assets.
2
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The rules of the SEC require that the maximum sales charge (in the Class A
Shares' case, 4.50% of the offering price) be reflected in the above table.
However, certain investors may qualify for reduced sales charges (see "How to
Invest in the Fund -- Offering Price"). Due to the continuous nature of Rule
12b-1 fees, long-term shareholders of the Fund may pay more than the
equivalent of the maximum front-end sales charges permitted by the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
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2. Financial Highlights
The Fund was organized as a corporation under the laws of the State of
Maryland on January 5, 1990 and commenced operations on February 26, 1990.
The Fund commenced offering the Class A Shares on October 23, 1990. The Fund
has offered another class of shares (ISI Class Shares) since February 26,
1990. The financial highlights included in this table are a part of the
Fund's financial statements for the periods indicated and have been audited
by Coopers & Lybrand L.L.P., the Fund's independent accountants. The
financial statements and financial highlights for the fiscal year ended
October 31, 1995 and the report thereon of Coopers & Lybrand L.L.P. are
included in the Statement of Additional Information. Additional performance
information is contained in the Fund's Annual Report for the fiscal year
ended October 31, 1995, which can be obtained at no charge by calling the
Fund at (800) 767-FLAG.
3
<PAGE>
(For a Share outstanding throughout each period)
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<TABLE>
<CAPTION>
For the Period
February 26, 1990
Year Ended October 31, Through
1995 1994 1993 1992 1991 October 31, 1990
--------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $9.81 $11.10 $10.31 $10.36 $9.99 $10.00
Income from Investment
Operations:
Net investment income 0.48 0.46 0.50 0.50 0.57 0.38
Net realized and
unrealized gain/(loss)
on investments 0.98 (1.15) 0.94 0.22 0.49 (0.02)
Total from Investment
Operations 1.46 (0.69) 1.44 0.72 1.06 0.36
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investment income
and net realized
short-term gains (0.54) (0.56) (0.61) (0.65) (0.69) (0.37)
Distributions from net
realized long-term
gains (0.08) (0.04) (0.04) (0.12) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.62) (0.60) (0.65) (0.77) (0.69) (0.37)
------ ------ ------ ------ ------ ------
Net asset value at end
of period $10.65 $9.81 $11.10 $10.31 $10.36 $9.99
====== ====== ====== ====== ====== ======
Total Return:*
Flag Investors Class A
Shares 15.42% (6.49)% 14.36% 6.06% 10.85% 1.21%**
ISI Class Shares 15.42% (6.49)% 14.36% 6.06% 10.85% 3.78%
Ratios to Average Net
Assets:
Expenses(2) 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(1)
Net investment income(3) 4.72% 4.37% 4.38% 4.78% 5.57% 6.12%(1)
Supplemental Data:
Net assets at end of
period (000):
Flag Investors Class A
Shares $45,980 $49,903 $53,486 $45,536 $38,491 $5,698
ISI Class Shares $86,292 $83,607 $88,378 $51,420 $20,053 $17,290
Portfolio turnover rate 55% 37% 68% 95% 86% 99%
</TABLE>
- ----------------
* Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
** Flag Investors Class A Shares commenced operations on October 23, 1990.
(1) Annualized.
(2) Without the waiver of advisory and administration fees, the ratio of
expenses to average net assets would have been 1.10%, 1.11%, 1.14%,
1.27%, 1.47% and 1.92% for the periods ended October 31, 1995, 1994,
1993, 1992, 1991 and 1990, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average net assets would have been 4.52%, 4.16%,
4.14%, 4.41%, 4.99% and 5.11% for the periods ended October 31, 1995,
1994, 1993, 1992, 1991 and 1990, respectively.
4
<PAGE>
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3. Investment Program
...........................................................................
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The investment objective of the Fund is a high level of total return with
relative stability of principal, and secondarily, high current income exempt
from federal income tax through investment in a portfolio consisting
primarily of tax-free municipal obligations ("Municipal Obligations").
Municipal Obligations include securities of states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, the interest on which
is exempt from federal income tax in the opinion of bond counsel for the
issuer. Under normal market conditions, the Fund will invest at least 80% of
its net assets in Municipal Obligations. This policy is fundamental and may
be changed only by a majority vote of shareholders. The Fund does not
currently intend to acquire Municipal Obligations that are subject to
alternative minimum tax but may so invest up to 20% of its net assets. Any
capital gains from investments in Municipal Obligations will not be exempt
from federal income tax. (See "Dividends and Taxes -- Tax Treatment of
Dividends and Distributions.") There can be no assurance that the Fund will
achieve its investment objective.
The Fund will invest at least 75% of its portfolio of Municipal
Obligations in securities rated, on the date of investment, A1 or higher (in
the case of municipal bonds) and higher than MIG 3 (in the case of municipal
notes) by Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher
(in the case of municipal bonds) and higher than SP-2 (in the case of
municipal notes) by Standard & Poor's Ratings Group ("S&P") or, if unrated,
of comparable quality as determined by the Fund's investment advisor under
criteria approved by the Board of Directors. The Fund may invest up to 25% of
its portfolio of Municipal Obligations in securities rated A (in the case of
municipal bonds) or MIG 3 (in the case of municipal notes) by Moody's or
rated A (in the case of municipal bonds) or SP-2 (in the case of municipal
notes) by S&P or, if unrated, of comparable quality as determined by the
investment advisor under criteria approved by the Board of Directors.
Even under normal circumstances the Fund may invest to a limited extent in
taxable obligations depending on market conditions. These obligations may
include U.S. Government and agency, bank and corporate securities and
5
<PAGE>
repurchase agreements collateralized by such securities. For temporary
defensive purposes, the Fund may invest without limit in short-term
obligations of these types. The Fund may also invest in financial futures,
"when-issued" securities, standby commitments of brokers, dealers or banks and
variable and floating rate demand obligations. These investment practices,
which may involve certain special risks, are described below. The Fund's
investment objective may be changed only by the affirmative vote of a majority
of the outstanding shares of all classes of the Fund.
.............................................................................
SELECTION OF INVESTMENTS
The Fund's investment advisor is International Strategy and Investment
Inc. ("ISI" or the "Advisor" -- see "Investment Advisor"). ISI buys and sells
securities for the Fund's portfolio with a view toward, first, a high level
of total return with relative stability of principal and, second, high
current income that is federally tax exempt. Therefore, in addition to yield,
the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments.
While income distributions to shareholders will generally be tax exempt,
distributions of capital gains will be taxable. Accordingly, to the extent
the Fund achieves its investment objective, a larger portion of its
distribution will be taxable than would be the case if the Fund placed a
greater emphasis on earning tax exempt income. (See "Investment Program --
Taxable Investments" and "Dividends and Taxes -- Tax Treatment of Dividends
and Distributions.") ISI will be free to take full advantage of the entire
range of maturities offered by Municipal Obligations and may adjust the
average maturity of the Fund's portfolio from time to time, depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Thus, at
certain times the average maturity of the portfolio may be relatively short
(under five years, for example) and at other times may be relatively long (in
the 20-30 year range, for example). In determining which direction interest
rates are likely to move, the Advisor relies on the economic analysis made by
its chairman, Edward S. Hyman. There is no assurance that such economic
analysis will accurately predict interest rate trends or that the portfolio
strategies based on Mr. Hyman's economic analysis will be effective.
.............................................................................
SPECIAL RISK CONSIDERATIONS
As with other debt securities, the value of Municipal Obligations changes
as interest rates fluctuate. Changes in the value of portfolio securities
6
<PAGE>
will not affect interest income from those securities but will be reflected in
the Fund's net asset value. Thus, a decrease in interest rates will generally
result in an increase in the value of the Shares. Conversely, during periods
of rising interest rates, the value of the Shares will generally decline. The
magnitude of these fluctuations will generally be greater at times when the
average maturity of the Fund's portfolio securities is longer.
.............................................................................
PURCHASE OF WHEN-ISSUED SECURITIES
New issues of Municipal Obligations are usually offered on a when-issued
basis, which means that delivery and payment for such Municipal Obligations
normally take place within 45 days after the date of the commitment to
purchase. The payment obligation and the interest rate that will be received
on a when-issued security are fixed at the time the purchase commitment is
entered into, although no interest on such security accrues to the Fund prior
to payment and delivery. A segregated account of the Fund consisting of cash,
cash equivalents or U.S. Government securities or other high quality liquid
debt securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. Additional cash or liquid debt securities will be added to the
account when necessary. While the Fund will purchase securities on a
when-issued basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable to limit the effects of adverse market action. The securities so
purchased or sold are subject to market fluctuation so, at the time of
delivery of the securities, their value may be more or less than the purchase
or sale price. The Fund will ordinarily invest no more than 40% of its net
assets at any time in Municipal Obligations purchased on a when-issued basis.
............................................................................
STAND-BY COMMITMENTS
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase, at the Fund's option, specified
securities in the Fund's portfolio at a specified price. In this respect,
stand-by commitments are comparable to put options and thus the Fund's
ability to enforce such obligations is subject to the risk that the seller of
the commitment may default on its obligations. The Fund will acquire stand-by
commitments as a means of changing the average maturity of its portfolio in
response to expected changes in market interest rates.
7
<PAGE>
The Fund anticipates that stand-by commitments will generally be available
from brokers, dealers and banks without the payment of any direct or indirect
consideration, but the Fund may have to pay for stand-by commitments, thus
increasing the cost of acquiring and holding the underlying security and
similarly decreasing such security's yield. Gains realized in connection with
stand-by commitments will be taxable.
..............................................................................
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
The Fund may purchase floating and variable rate demand notes and bonds,
which are tax-exempt obligations normally having stated maturities in excess
of one year, but which permit the holder to demand payment of principal
either at any time or at specified intervals. The interest rates on these
obligations fluctuate from time to time in response to changes in the market
interest rates. Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. Where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem will be dependent on the ability of
the borrower to pay principal and interest on demand. Each demand note and
bond purchased by the Fund will meet the quality criteria established for the
purchase of other Municipal Obligations. The Advisor, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations in the Fund's portfolio.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments generally will be
traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. The Fund will not
invest more than 10% of its net assets in floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on less
than seven days' notice if there is no secondary market available for these
obligations.
.............................................................................
FUTURES CONTRACTS
The Fund may purchase and sell U.S. exchange traded futures contracts on
bond indices ("Futures Contracts"). At the same time a Futures Contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). The initial deposit varies but may be as low as
5% or less of the value of the contract. Daily thereafter, the Futures
Contract is valued and the payment of "variation margin" may be required, so
each day the Fund would provide or receive cash that reflects any decline
8
<PAGE>
or increase in the contract's value. A Futures Contract based on a municipal
bond index provides for a cash payment equal to the amount, if any, by which
the value of the index at maturity is above or below the value of the index at
the time the contract was entered into times a fixed index "multiplier." The
index underlying such a Futures Contract is generally a broad based index of
securities designed to reflect movements in the relevant market as a whole.
The index assigns weighted values to the securities included in the index, and
its composition is changed periodically.
These instruments will be used only to protect against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of the Futures Contract and may realize a loss on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions. Futures transactions involve other risks as well. For example, a
lack of correlation between the index and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses on the Futures Contract in excess of
any corresponding gain in the hedged portfolio positions. In addition, there
can be no assurance that a liquid secondary market will exist for any Futures
Contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions.
Regulations of the Commodity Futures Trading Commission (the "CFTC")
require that the Fund enter into transactions in Futures Contracts for
hedging purposes only, or that in the case of long positions in Futures
Contracts, an alternative test be satisfied, in order to assure that the Fund
will not be deemed to be a "commodity pool" as defined in CFTC regulations.
In addition, under CFTC rules the Fund may not purchase or sell such
instruments if, immediately thereafter, the sum of the amount of initial
margin deposits on existing Futures Contracts would exceed 5% of the Fund's
total assets. In addition, the Fund will not enter into Futures Contracts if
obligations under all Futures Contracts would amount to more than 30% of its
total assets.
Gains recognized from futures transactions engaged in by the Fund are
taxable income to shareholders. The Fund reserves the right to invest in
other types of financial futures without obtaining prior shareholder
approval.
9
<PAGE>
............................................................................
REPURCHASE AGREEMENTS
The Fund may agree to purchase U.S. Treasury Securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury Securities include Treasury bills, Treasury notes, Treasury bonds
and Separate Trading of Registered Interest and Principal of Securities
("STRIPS"), all of which are direct obligations of the U.S. Government and
are supported by the full faith and credit of the United States. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisor. Default by the
seller may, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, the Fund may be delayed or limited in
its ability to sell the collateral.
.............................................................................
TAXABLE INVESTMENTS
Although the Fund intends, to the extent feasible but subject to market
conditions, to invest up to 100% of its assets in tax exempt Municipal
Obligations, it may invest, from time to time, in securities, the interest on
which is subject to federal income tax. The Fund may make such investments
(a) pending investment of proceeds from sales of Fund shares or portfolio
securities in tax-exempt securities, (b) pending settlement of purchases of
portfolio securities, (c) to maintain liquidity for meeting anticipated
redemptions, or (d) when in the Advisor's opinion it is advisable because of
adverse conditions affecting the market for Municipal Obligations. The
taxable investments in which the Fund may invest consist of U.S. Treasury
Securities and repurchase agreements fully collateralized by U.S. Treasury
Securities (collectively, the "Taxable Investments"). The Fund may invest up
to 20% of its net assets in Taxable Investments. The Fund may earn taxable
income from other sources. Dividends paid by the Fund that are attributable
to interest earned from Taxable Investments and to taxable income from other
investments will be taxable to investors. (See "Dividends and Taxes -- Tax
Treatment of Dividends and Distributions.")
10
<PAGE>
.............................................................................
SIZE OF FUND
The Fund currently intends to limit the size of the Fund and to accept
share purchases only from existing shareholders at such time as the assets of
the Fund are in excess of $200 million but less than $250 million, and
thereafter not to accept any share purchases other than dividend
reinvestments.
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4. Investment Restrictions
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. Accordingly, the Fund will
not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for this purpose, the U.S. Government or any state or
local government or their agencies and instrumentalities are not
considered to be an industry);
2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for this purpose, the U.S.
Government or its agencies and instrumentalities are not considered to be
an issuer and, in the case of Municipal Obligations, the public or private
entity ultimately responsible for payment of principal and interest on the
security is considered to be the issuer);
3) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equalling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase
securities; or
4) Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements with maturities of greater than seven days and
floating or variable rate demand obligations as to which the Fund cannot
exercise the demand feature on less than seven days' notice if there is no
secondary market available for these obligations.
11
<PAGE>
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
- -----------------------------------------------------------------------------
5. How to Invest in the Fund
Class A Shares may be purchased from Alex. Brown & Sons Incorporated
("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland 21202 or
through any securities dealer which has entered into a dealer agreement with
Alex. Brown ("Participating Dealers") or through any financial institution
which has entered into a shareholder servicing agreement with the Fund
("Shareholder Servicing Agents"). Class A Shares may also be purchased by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price (including any applicable
front-end sales charge), to the address shown on the Application Form.
The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases Through Automatic Investing Plan" below.) Orders
for purchases of Class A Shares are accepted on any day on which the New York
Stock Exchange is open for business ("Business Day").
The Fund reserves the right to suspend the sale of Class A Shares at any
time at the discretion of Alex. Brown. Purchase orders for Class A Shares
will be executed at a per share purchase price equal to the net asset value
next determined after receipt of the purchase order plus any applicable
front-end sales charge (the "Offering Price") on the date such net asset
value is determined (the "Purchase Date"). Purchases made by mail must be
accompanied by payment of the Offering Price. Purchases made through Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent must be in
accordance with such entity's payment procedures. Alex. Brown may, in its
sole discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
12
<PAGE>
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities are given their market value where feasible
based on quotations furnished by a pricing service approved by the Board of
Directors. Options and futures are valued at the settlement price, or if no
sales are reported, at the average of the last reported bid and asked prices.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established from time to time and monitored by the Fund's Board of
Directors. Debt obligations with maturities of 60 days or less are valued at
amortized cost which constitutes fair value as determined by the Fund's Board
of Directors.
.............................................................................
OFFERING PRICE
Class A Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and
decreases as the amount of purchase increases, as shown below:
<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------------ Retention
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
------------ ............ ------------ -------------- -------------------
<S> <C> <C> <C>
Less than $ 50,000 ... 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999 ... 3.50% 3.63% 3.00%
$ 100,000 - $249,999 ... 2.50% 2.56% 2.00%
$ 250,000 - $499,999 ... 2.00% 2.04% 1.50%
$ 500,000 - $999,999 ... 1.50% 1.52% 1.25%
$1,000,000 and over ..... None* None* None*
- ---------------------------------------------------------------------------------
</TABLE>
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In addition, an investor may obtain reduced sales charges as
set forth above through a right of accumulation of purchases of Class A
Shares and purchases of shares of other Flag Investors funds with the same
sales charge and purchases of shares of Flag Investors Intermediate-Term
Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. (the "Intermediate Funds"). The applicable sales charge will be
determined based on the total of (a) the shareholder's current purchase plus
13
<PAGE>
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of all Class A Shares and of all Flag Investors shares described above
and any Flag Investors Class D shares held by the shareholder. To obtain the
reduced sales charge through a right of accumulation, the shareholder must
provide Alex. Brown, either directly or through a Participating Dealer or
Shareholder Servicing Agent, as applicable, with sufficient information to
verify that the shareholder has such a right. The Fund may amend or terminate
this right of accumulation at any time as to subsequent purchases.
The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing Class A Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the
Offering Price applicable at the time of such purchase to the full amount
indicated on the Letter of Intent. A Letter of Intent is not a binding
obligation upon the investor to purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Class A Shares purchased with the first 5% of the full amount will be held in
escrow (while remaining registered in the name of the investor) to secure
payment of the higher sales charge applicable to the Class A Shares actually
purchased if the full amount indicated is not invested. Such escrowed shares
will be involuntarily redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
shares will be released. An investor who wishes to enter into a Letter of
Intent in conjunction with an investment in Class A Shares may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.
No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption
within 24 months following the purchase, at the rate of .50% on the lesser of
the value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
14
<PAGE>
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.
The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors may
be charged a fee if they effect transactions in Fund shares through a broker
or agent); (ii) participants in a Flag Investors fund payroll savings plan
program; (iii) investors who have redeemed Class A Shares, or shares of any
other mutual fund in the Flag Investors family of funds with the same sales
charges, or who have redeemed shares of the Intermediate Funds which they had
held for at least 24 months prior to redemption, in an amount that is not
more than the total redemption proceeds, provided that the purchase is within
90 days after the redemption; and (iv) current or retired Directors of the
Fund and directors and employees (and their immediate families) of ISI, Alex.
Brown, Participating Dealers and their respective affiliates.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
............................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their Class A
shares of those funds for an equal dollar amount of Class A Shares. Except as
provided below, Class A Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of Flag Investors Cash Reserve Prime Class A Shares may exchange
into Class A Shares upon payment of the difference in sales charges, as
applicable.
When a shareholder acquires Class A Shares through an exchange from
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the Class A Shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares. Shareholders of the Intermediate Funds may
15
<PAGE>
exchange into Class A Shares upon payment of the difference in sales charges,
as applicable, except that the exchange will be made at net asset value if the
shares of such funds have been held for more than 24 months.
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund who have paid
a sales charge may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to Alex. Brown or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the
payment of a sales charge and the source of such proceeds. Class A shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange. The Fund may
modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to the shareholder.
............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Class A Shares regularly by means of an
Automatic Investing Plan with a pre-authorized check drawn on their checking
accounts. Under this plan, the shareholder may elect to have a specified
amount invested monthly or quarterly in Class A Shares. The amount specified
will be withdrawn from the shareholder's checking account using the
pre-authorized check and will be invested in Class A Shares at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan may
do so by completing the appropriate section of the Application Form attached
to this Prospectus.
16
<PAGE>
.............................................................................
DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares. A
shareholder who wishes to enroll in the Dividend Reinvestment Plan should check
the appropriate box on the Application Form or call (800) 553-8080 for
additional information.
Alternately, shareholders may have their distributions invested in Class A
shares of other funds in the Flag Investors family of funds or in shares of the
Intermediate Funds. Shareholders who are interested in this option should call
(800) 553-8080 for additional information.
Reinvestments of distributions will be effected without a sales charge.
- -----------------------------------------------------------------------------
6. How to Redeem Shares
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Fund's transfer agent (the "Transfer Agent"). Shareholders may also redeem
Class A Shares by telephone (in amounts up to $50,000). (See "Telephone
Transactions" below.) A redemption order is effected at the net asset value
per share (reduced by any applicable contingent deferred sales charge) next
determined after receipt of the order (or, if stock certificates have been
issued for the Class A Shares to be redeemed, after the tender of the stock
certificates for redemption). Redemption orders received after 4:00 p.m.
(Eastern Time) will be effected at the net asset value next determined on the
following Business Day. Payment for redeemed Class A Shares will be made by
check and will be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer or Shareholder Servicing Agent, if applicable, and
the number of Class A Shares or dollar amount to be redeemed, signed by
all owners of the Class A Shares in the exact names in which their account
is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
17
<PAGE>
3) If Class A Shares are held in certificate form, stock certificates either
properly endorsed or accompanied by a duly executed stock power for Class
A Shares to be redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Class A Shares will be
paid on the next dividend payable date. If all of the Class A Shares in a
shareholder's account have been redeemed on a dividend payable date, the
dividend will be remitted by check to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares having a value of $10,000 or more may
arrange to have a portion of their Class A Shares redeemed monthly or
quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and, to the extent necessary, from share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of Class A Shares. A shareholder who wishes to enroll in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.
- ----------------------------------------------------------------------------
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Class A Shares in amounts up to $50,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business
Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular
or express mail at its address listed under "Custodian, Transfer Agent,
Accounting Services." Telephone transaction privileges are automatic.
Shareholders may specifically request that no telephone redemptions or
exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.
18
<PAGE>
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by regular or express
mail. Class A Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund -- Purchases by
Exchange" and "How to Redeem Shares.")
- -----------------------------------------------------------------------------
8. Dividends and Taxes
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of monthly dividends. The Fund may
distribute to shareholders any net capital gains (the excess of net long-term
capital gains over net short-term capital losses) on an annual basis or,
alternatively, may elect to retain such net capital gains and pay tax
thereon.
Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Class A Shares at net asset
value. Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent,
Accounting Services"), either directly or through their Participating Dealer
or Shareholder Servicing Agent, at least five days before the next date on
which dividends or distributions will be paid.
19
<PAGE>
.............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, it will be relieved of federal income tax on amounts distributed
to shareholders. The Fund also intends to make sufficient distributions prior
to the end of each calendar year to avoid liability for federal excise tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.
As long as this and certain other requirements are met, dividends derived
from the Fund's net tax-exempt interest income will be "exempt-interest
dividends" that are excluded from the gross income of the Fund's shareholders
for federal income tax purposes. Exempt-interest dividends may, however, have
collateral federal income tax consequences, including alternative minimum tax
consequences. Furthermore, the Fund may not be an appropriate investment for
persons who are "substantial users" of facilities financed with industrial
development bonds or private activity bonds (or related parties to
"substantial users"). (See the Statement of Additional Information.)
Current federal tax law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of exempt
interest dividends.
20
<PAGE>
Distributions to shareholders of net investment income of the Fund that is
not tax-exempt interest and of net short-term capital gains of the Fund will
be taxable to shareholders as ordinary income, whether such distributions are
received in cash or in additional Class A Shares.
Distributions to shareholders of net capital gains of the Fund are taxable
to shareholders as long-term capital gains, whether received in cash or
additional Class A Shares, and regardless of how long a shareholder has held
the shares. Shareholders will be advised annually as to the federal income
tax status of distributions made during the year.
Ordinarily, shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The sale, exchange or redemption of Class A Shares is a taxable event for
the shareholder.
Any gain or loss recognized on a sale, exchange or redemption of Class A
Shares by a shareholder who is not a dealer in securities will generally be
treated as a long-term capital gain or loss if the Class A Shares have been held
for more than twelve months and otherwise will be generally treated as a
short-term capital gain or loss. Any loss recognized by a shareholder upon the
sale or redemption of Class A Shares held for six months or less, however, will
be disallowed to the extent of any exempt-interest dividends received by the
shareholder with respect to such Shares. If Class A Shares on which a capital
gains distribution has been received are subsequently sold or redeemed and such
shares have been held for six months or less, any loss recognized will be
treated as a long term capital loss to the extent of the capital gains
distribution.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry Class A Shares will not be deductible for federal income tax
purposes.
The Fund may not be a suitable investment for tax-exempt shareholders and
plans, because such shareholders and plans would not gain any additional
benefit from the receipt of exempt-interest dividends.
Shareholders are encouraged to consult with their tax advisors concerning
the application of the rules set forth above to their particular
circumstances and the application of state and local taxes to an investment
in the Fund.
21
<PAGE>
- -----------------------------------------------------------------------------
9. Management of the Fund
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to
the Fund's officers, to Alex. Brown, as distributor of the Class A Shares, to
the Advisor and to the Fund's administrator. Four Directors and all of the
officers of the Fund are officers or employees of Alex. Brown, ISI or the
Fund's administrator. The other Directors of the Fund have no affiliation
with Alex. Brown, ISI or the Fund's administrator.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Edward S. Hyman Chairman Edward J. Veilleux Vice President
*W. James Price Vice Chairman Brian C. Nelson Vice President
*Richard T. Hale Vice Chairman and Secretary
*R. Alan Medaugh Director and President Nancy Lazar Vice President
James J. Cunnane Director Carrie L. Butler Vice President
John F. Kroeger Director Joseph A. Finelli Treasurer
Louis E. Levy Director Denice De Florio Assistant Vice
Eugene J. McDonald Director President
Harry Woolf Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Hyman, Price, Hale and Medaugh are "interested persons" of the Fund
within the meaning of Section 2(a)(19) under the Investment Company Act of
1940, as amended (the "Investment Company Act").
- ----------------------------------------------------------------------------
10. Investment Advisor
ISI, a registered investment advisor, serves as investment advisor to the
Fund pursuant to an investment advisory agreement dated as of April 1, 1991. ISI
employs Messrs. Edward S. Hyman and R. Alan Medaugh. Due to their stock
ownership, Messrs. Hyman and Medaugh may be deemed to be controlling persons of
ISI. As of December 31, 1995, the Advisor had approximately $1 billion under
management representing both tax-free and taxable accounts. The Advisor also
acts as investment advisor to Total Return U.S. Treasury Fund, Inc. and North
American Government Bond Fund, Inc., open-end investment companies with
approximately $438 million of aggregate net assets as of December 31, 1995.
For the fiscal year ended October 31, 1995, ISI received a fee (net of fee
waivers) equal to .27% of the Fund's average daily net assets. ISI and
22
<PAGE>
the Fund's administrator, have voluntarily agreed to reduce proportionately
their respective annual fees if necessary, so that the Fund's annual expenses
do not exceed .90% of its average daily net assets. (See "Fund Expenses.")
The address of the Advisor is 717 Fifth Avenue, New York, New York 10022.
..............................................................................
PORTFOLIO MANAGERS
Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh, President
of ISI and President and a Director of the Fund, have shared direct portfolio
management responsibility for the Fund since its inception. Mr. Hyman is
responsible for developing the economic analysis upon which the Fund's selection
of investments is based. (See "Investment Program.") Before joining ISI, Mr.
Hyman was a vice chairman and member of the Board of C.J. Lawrence Inc. and
prior thereto, an economic consultant at Data Resources. He writes a variety of
international and domestic economic research reports which follow trends that
may determine the direction of interest rates. These international and domestic
reports are sent to ISI's private institutional clients in the United States and
overseas. The periodical Institutional Investor, which rates analysts and
economists on an annual basis has rated Mr. Hyman as its "first team" economist,
which is its highest rating, in each of the last sixteen years.
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam
Management Company and Fidelity Management and Research.
- -----------------------------------------------------------------------------
11. Administrator
Investment Company Capital Corp. ("ICC"), 135 East Baltimore Street,
Baltimore, Maryland 21202, a wholly-owned subsidiary of Alex. Brown, provides
administration services to the Fund.
23
<PAGE>
ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
the shares are distributed and oversight of the relationship between the Fund
and its other service providers. For its services as administrator of the
Fund for the fiscal year ended October 31, 1995, ICC received a fee (net of
fee waivers) equal to .13% of the Fund's average daily net assets. ICC and
ISI have voluntarily agreed to reduce proportionately their respective annual
fees if necessary, so that the Fund's annual expenses do not exceed .90% of
its average daily net assets. (See "Fund Expenses.")
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
- -----------------------------------------------------------------------------
12. Distributor
Alex. Brown acts as distributor of the Class A Shares. Alex. Brown is an
investment banking firm which offers a broad range of investment services to
individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated which has engaged
directly and through subsidiaries and affiliates in the investment business
since 1800. Alex. Brown is a member of the New York Stock Exchange and other
leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.
The Fund has adopted a Distribution Plan for the Class A Shares pursuant
to Rule 12b-1 under the Investment Company Act (the "Plan"). As compensation
for its services for the fiscal year ended October 31, 1995, Alex. Brown
received a fee equal to .25% of the Class A Shares' average daily net assets.
Alex. Brown expects to allocate on a proportional basis most of its annual
fee to its investment representatives or up to all of its fee to selected
Participating Dealers as compensation for their ongoing shareholder services,
including processing redemption and sale requests and responding to
shareholder inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate on a
proportional basis up to all of its distribution fee as compensation for such
24
<PAGE>
financial institutions' ongoing shareholder services. Such financial
institutions may impose separate fees in connection with these services and
investors should review this Prospectus in conjunction with any such
institution's fee schedule. Amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
under the Plan.
Payments under the Plan are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares for
any period, the unexpended portion of the distribution fee may be retained by
Alex. Brown. Alex. Brown will from time to time and from its own resources
pay or allow additional discounts or promotional incentives in the form of
cash or other compensation (including merchandise or travel) to Participating
Dealers.
- -----------------------------------------------------------------------------
13. Custodian, Transfer Agent,
Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services for the fiscal year ended October 31, 1995, ICC
received from the Fund a fee equal to .05% of the Fund's average daily net
assets. (See the Statement of Additional Information.) ICC also serves as the
Fund's administrator.
- -----------------------------------------------------------------------------
14. Performance Information
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
relevant indices. All such advertisements will show the average annual total
return, net of the Fund's maximum sales charge, over one, five and ten year
periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding the average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value, net of the maximum sales charge and other fees,
25
<PAGE>
according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability in
investment company advertising and is not equivalent to a yield calculation.
The Fund may also advertise yield and tax-equivalent yield quotations. Any
yield quotation of the Fund is based on the annualized net investment income
per share of the Fund over a 30 day period. The yield for the Fund is
calculated by dividing the net investment income per share of the Fund earned
during the period by the maximum offering price per share of the Fund on the
last day of that period. The resulting figure is then annualized. The Fund's
yield calculations assume a maximum sales charge of 4.50% for the Class A
Shares. The Fund's taxable-equivalent yield is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment
to produce the after tax equivalent of the Fund's yield. In calculating
taxable-equivalent yield, the Fund assumes certain tax brackets for
shareholders.
If the Fund compares its performance to other funds or to relevant
indices, its performance will be stated in the same terms in which such
comparative data and indices are stated.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90 day U.S. Treasury
Bills, long-term U.S. Treasury bonds, bank certificates of deposit, the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal. For
these purposes, the performance of the Fund, as well as the performance of
such indices, may not reflect sales charges, the inclusion of which would
reduce performance results.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of investments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Class A Shares may be purchased, although not included
in calculations of performance, will reduce performance results.
26
<PAGE>
- ----------------------------------------------------------------------------
15. General Information
............................................................................
CAPITAL SHARES
The Fund is a Maryland corporation, authorized to issue forty million
shares of capital stock, with a par value of $.001 per share. Shares of the
Fund have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding shares of
capital stock voting together for election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share is entitled to its portion of the Fund's
assets after all debts and expenses have been paid. The fiscal year end of
the Fund is October 31.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The shares offered by this Prospectus have been designated "Flag
Investors Managed Municipal Fund Class A Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have another class of shares in addition to the shares offered hereby, "ISI
Managed Municipal Fund Shares." Shares of that class are sold through
broker-dealers and have similar 12b-1 fees and front-end sales charges as the
Class A Shares. Different classes of the Fund may be offered to certain
investors and holders of such shares may be entitled to certain exchange
privileges not offered to Class A Shares. All classes of the Fund share a
common investment objective, portfolio and advisory fee, but the classes may
have different distribution expenses and sales charges and, accordingly,
performance may differ.
............................................................................
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders but
special meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.
27
<PAGE>
.............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual and annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
.............................................................................
SHAREHOLDERS INQUIRIES
Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
28
<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND CLASS A SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Managed Municipal
Fund Class A Shares" and mail with this application to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
Attn: Flag Investors Managed Municipal Fund Class A Shares
For assistance in completing this application please call:
1-800-553-8080 8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
To open an IRA account, call 1-800-767-3524 to request an IRA
application.
I enclose a check for $_______ payable to "Flag Investors Managed
Municipal Fund Class A Shares" for the purchase of Flag Investors
Managed Municipal Fund Class A Shares. The minimum initial purchase is
$2,000, except that the minimum initial purchase for shareholders of
any other Flag Investors Fund or class is $500 and the minimum initial
purchase for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent purchase requires a $100 minimum, except that
the minimum subsequent purchase under the Fund's Automatic Investing
Plan is $250 for quarterly purchases and $100 for monthly purchases.
The Fund reserves the right not to accept checks for more than $50,000
that are not certified or bank checks.
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any:_______________________
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- -----------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- --------------------------------- --------------------------------------
Tax ID Number Date of Trust
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- -----------------------------------------------------------------------------
For the Benefit of
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the _______________________Uniform Gifts to Minors Act
State of Residence
MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
<PAGE>
LETTER OF INTENT (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Flag Investors Managed Municipal Fund Class
A Shares, as shown below, in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
- -----------------------------------------------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B Shares)
set forth below to be applied for a reduced sales charge. List the Account
numbers of other Flag Investors Funds that you or your immediate family (spouse
and children under 21) already own that qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Class A Shares of the Fund at
no sales charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
- -----------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $_____ for me, on a monthly or quarterly basis, on or
about the 20th of each month or if quarterly, the 20th of January, April,
July and October, and to draw a bank draft in payment of the investment
against my checking account. (Bank drafts may be drawn on commercial banks
only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- -----------------------------------------------------------------------------
Bank Name
- -----------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
- -----------------------------------------------------------------------------
Depositor's Signature Date
- -----------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
<PAGE>
- -----------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of _____________ , 19__ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $______,
from Class A Shares that I own, payable to the account registration address
as shown above. (Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
- -----------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/we do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
- -----------------------------------------------------------------------------
Bank:
- -----------------------------------------------------------------------------
Address:
- -----------------------------------------------------------------------------
Account No:
- -----------------------------------------------------------------------------
Bank Account Name:
- -----------------------------------------------------------------------------
<PAGE>
SIGNATURE AND TAXPAYER
CERTIFICATION
I have received a copy of the Fund's prospectus dated March 1, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:
- -----------------------------------------------------------------------------
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- -----------------------------------------------------------------------------
Signature Date
- -----------------------------------------------------------------------------
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name:____________________________________________ Dealer Code:________
Dealer's Address:_________________________________________ Branch Code:________
Representative:___________________________________________ Rep. No.: __________
<PAGE>
ISI MANAGED MUNICIPAL FUND SHARES
(A Class of Managed Municipal Fund, Inc.)
717 Fifth Avenue
New York, NY 10022
For information call (800) 955-7175
The investment objective of this mutual fund (the "Fund") is a high level
of total return with relative stability of principal and, secondarily, high
current income through investment in a portfolio consisting primarily of
municipal obligations the interest on which is exempt from federal income
tax. To achieve this objective, the Fund invests primarily in municipal
obligations rated within the three highest rating categories of Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
Shares of the ISI class of the Fund ("Shares") are available through
Armata Financial Corp., the distributor of the Shares, as well as
Participating Dealers and Shareholder Servicing Agents. (See "How to Invest
in the Fund.") This Prospectus sets forth basic information that investors
should know about the Fund prior to investing and should be retained for
future reference. A Statement of Additional Information dated March 1, 1996,
has been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by contacting the Fund at the above address or telephone number.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES
INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is March 1, 1996
<PAGE>
1. FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
<S> <C>
Maximum Sales Charge Imposed on Purchases .............. 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None
Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average net assets)
Management Fees (net of fee waivers) ................... .27%*
12b-1 Fees ............................................. .25%
Other Expenses (net of fee waivers) .................... .38%*
---------
Total Fund Operating Expenses (net of fee waivers) ..... .90%*
</TABLE>
- ------
*The Fund's investment advisor and administrator intend, but are not
obligated, to waive their fees proportionately to the extent required so
that Total Fund Operating Expenses do not exceed .90% of the Fund's average
net assets. Absent fee waivers, Management Fees would be .40%. Other
Expenses (including administration fees) would be .45% and Total Fund
Operating Expenses would be 1.10%, respectively, of the Fund's average net
assets.
EXAMPLE:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:* $53 $72 $93 $155
- ------
*The example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and expenses
that an investor in the Fund will bear directly and indirectly. A person who
purchases Shares through a financial institution may be charged separate fees by
the financial institution. (For more complete descriptions of the various costs
and expenses, see "How to Invest in the Fund -- Offering Price", "Investment
Advisor", "Administrator" and "Distributor.") The Expenses and Example appearing
in the table above are based on the Fund's expenses for the fiscal year ended
October 31, 1995 which, net of fee waivers, were .90% of its average net assets.
The rules of the SEC require that the maximum sales charge (in the Shares' case,
4.45% of the offering price) be reflected in the above table. However, certain
investors may qualify for reduced sales charges (see "How to Invest in the Fund
- -- Offering Price"). Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
2
<PAGE>
2. FINANCIAL HIGHLIGHTS
The Fund was organized as a corporation under the laws of the State of
Maryland on January 5, 1990 and commenced operations on February 26, 1990.
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., the Fund's independent accountants. The financial
statements and financial highlights for the fiscal year ended October 31,
1995 and the report thereon of Coopers & Lybrand L.L.P. are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended October 31,
1995, which is available at no cost by calling the Fund at (800) 955-7175.
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
February 26, 1990
Year Ended October 31, (commencement of
---------------------------------------------------------- operations) through
1995 1994 1993 1992 1991 October 31, 1990
--------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99 $ 10.00
------- ------- ------- ------- ------- --------
Income from Investment Operations:
Net investment income .................. 0.48 0.46 0.50 0.50 0.57 0.38
Net realized and unrealized gain/(loss)
on investments ..................... 0.98 (1.15) 0.94 0.22 0.49 (0.02)
------- ------- ------- ------- ------- --------
Total from Investment Operations ...... 1.46 (0.69) 1.44 0.72 1.06 0.36
------- ------- ------- ------- ------- --------
Less Distributions:
Dividends from net investment income
and net realized short-term gains .. (0.54) (0.56) (0.61) (0.65) (0.69) (0.37)
Distributions from net realized
long-term gains .................... (0.08) (0.04) (0.04) (0.12) -- --
------- ------- ------- ------- ------- --------
Total distributions ................... (0.62) (0.60) (0.65) (0.77) (0.69) (0.37)
------- ------- ------- ------- ------- --------
Net asset value at end of period ...... $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99
======= ======= ======= ======= ======= ========
Total Return:*
ISI Class Shares ...................... 15.42% (6.49)% 14.36% 6.06% 10.85% 3.78%
Flag Investors Class A Shares ......... 15.42% (6.49)% 14.36% 6.06% 10.85% 1.21%**
Ratios to Average Net Assets:
Expenses(2) ........................... 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(1)
Net investment income(3) .............. 4.72% 4.37% 4.38% 4.78% 5.57% 6.12%(1)
Supplemental Data:
Net assets at end of period (000):
ISI Class Shares ................... $86,292 $83,607 $88,378 $51,420 $20,053 $17,290
Flag Investors Class A Shares ...... $45,980 $49,903 $53,486 $45,536 $38,491 $5,698
Portfolio turnover rate ............... 55% 37% 68% 95% 86% 99%
</TABLE>
- ------
* Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
** Flag Investors Class A Shares commenced operations on October 23, 1990.
(1) Annualized.
(2) Without the waiver of advisory and administration fees, the ratio of
expenses to average net assets would have been 1.10%, 1.11%, 1.14%,
1.27%, 1.47% and 1.92% for the periods ended October 31, 1995, 1994,
1993, 1992, 1991 and 1990, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average net assets would have been 4.52%, 4.16%, 4.14%,
4.41%, 4.99% and 5.11% for the periods ended October 31, 1995, 1994, 1993,
1992, 1991 and 1990, respectively.
3
<PAGE>
3. INVESTMENT PROGRAM
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The investment objective of the Fund is a high level of total return, with
relative stability of principal, and secondarily, high current income,
through an investment in a portfolio consisting primarily of municipal
obligations the interest on which is exempt from federal income tax
("Municipal Obligations"). Municipal Obligations include securities of
states, territories and possessions of the United States and the District of
Columbia, and their political subdivisions, agencies and instrumentalities,
the interest on which is exempt from federal income tax in the opinion of
bond counsel for the issuer. Under normal market conditions, the Fund will
invest at least 80% of its net assets in Municipal Obligations. This policy
is fundamental and may be changed only by a majority vote of shareholders.
The Fund does not currently intend to acquire Municipal Obligations that are
subject to alternative minimum tax but may so invest up to 20% of its net
assets. Any capital gains from investments in Municipal Obligations will not
be exempt from federal income tax. (See "Dividends and Taxes--Tax Treatment
of Dividends and Distributions.") There can be no assurance that the Fund
will achieve its investment objective.
The Fund will invest at least 75% of its portfolio of Municipal Obligations
in securities rated, on the date of investment, A1 or higher (in the case of
municipal bonds) and higher than MIG 3 (in the case of municipal notes) by
Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher (in the
case of municipal bonds) and higher than SP-2 (in the case of municipal
notes) by Standard & Poor's Ratings Group ("S&P") or, if unrated, of
comparable quality as determined by the Fund's investment advisor under
criteria approved by the Board of Directors. The Fund may invest up to 25% of
its portfolio of Municipal Obligations in securities rated A (in the case of
municipal bonds) or MIG 3 (in the case of municipal notes) by Moody's or
rated A (in the case of municipal bonds) or SP-2 (in the case of municipal
notes) by S&P or, if unrated, of comparable quality as determined by the
investment advisor under criteria approved by the Board of Directors.
Even under normal circumstances the Fund may invest to a limited extent in
taxable obligations depending on market conditions. These obligations may
include U.S. Government and agency, bank and corporate securities and
<PAGE>
repurchase agreements collateralized by such securities. For temporary
defensive purposes, the Fund may invest without limit in short-term
obligations of these types. The Fund may also invest in financial futures,
"when-issued" securities, standby commitments of brokers, dealers or banks
and variable and floating rate demand obligations. These investment
practices, which may involve certain special risks, are described below. The
Fund's investment objective may be changed only by the affirmative vote of a
majority of the outstanding shares of all classes of the Fund.
SELECTION OF INVESTMENTS
The Fund's investment advisor is International Strategy and Investment Inc.
("ISI" or the "Advisor"--see "Investment Advisor"). ISI buys and sells
securities for the Fund's portfolio with a view toward, first, a high level
of total return with relative stability of principal and, second, high
current income that is federally tax exempt. Therefore, in addition to yield,
the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments.
While income distributions to shareholders will generally be tax exempt,
distributions of capital gains will be taxable. Accordingly, to the extent
the Fund achieves its investment objective, a larger portion of its
distributions will be taxable than would be the case if the Fund placed a
greater emphasis on earning tax exempt income. (See "Investment
Program--Taxable Investments" and "Dividends and Taxes--Tax Treatment of
Dividends and Distributions.")
ISI will be free to take full advantage of the entire range of maturities
offered by Municipal Obligations and may adjust the average maturity of the
Fund's portfolio from time to time, depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. Thus, at certain times the
average maturity of the portfolio may be relatively short (under five years,
for example) and at other times may be relatively long (in the 20-30 year
range, for example). In determining which direction interest rates are likely
to move, the Advisor relies on the economic analysis made by its chairman,
Edward S. Hyman. There is no assurance that such economic analysis will
accurately predict interest rate trends or that the portfolio strategies
based on Mr. Hyman's economic analysis will be effective.
4
<PAGE>
SPECIAL RISK CONSIDERATIONS
As with other debt securities, the value of Municipal Obligations changes as
interest rates fluctuate. Changes in the value of portfolio securities will
not affect interest income from those securities but will be reflected in the
Fund's net asset value. Thus, a decrease in interest rates will generally
result in an increase in the value of the Shares. Conversely, during periods
of rising interest rates, the value of the Shares will generally decline. The
magnitude of these fluctuations will generally be greater at times when the
average maturity of the Fund's portfolio securities is longer.
PURCHASE OF WHEN-ISSUED SECURITIES
New issues of Municipal Obligations are usually offered on a when-issued
basis, which means that delivery and payment for such Municipal Obligations
normally take place within 45 days after the date of the commitment to
purchase. The payment obligation and the interest rate that will be received
on a when-issued security are fixed at the time the purchase commitment is
entered into, although no interest on such security accrues to the Fund prior
to payment and delivery. A segregated account of the Fund consisting of cash,
cash equivalents or U.S. Government securities or other high quality liquid
debt securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. Additional cash or liquid debt securities will be added to the
account when necessary. While the Fund will purchase securities on a
when-issued basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable to limit the effects of adverse market action. The securities so
purchased or sold are subject to market fluctuation so, at the time of
delivery of the securities, their value may be more or less than the purchase
or sale price. The Fund will ordinarily invest no more than 40% of its net
assets at any time in Municipal Obligations purchased on a when-issued
basis.
STAND-BY COMMITMENTS
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase, at the Fund's option, specified
securities in the Fund's portfolio at a specified price. In this respect,
stand-by commitments are comparable to put options and thus the Fund's
<PAGE>
ability to enforce such obligations is subject to the risk that the seller of
the commitment may default on its obligations. The Fund will acquire stand-by
commitments as a means of changing the average maturity of its portfolio in
response to expected changes in market interest rates.
The Fund anticipates that stand-by commitments will generally be available
from brokers, dealers and banks without the payment of any direct or indirect
consideration, but the Fund may have to pay for stand-by commitments, thus
increasing the cost of acquiring and holding the underlying security and
similarly decreasing such security's yield. Gains realized in connection with
stand-by commitments will be taxable.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
The Fund may purchase floating and variable rate demand notes and bonds,
which are tax-exempt obligations normally having stated maturities in excess
of one year, but which permit the holder to demand payment of principal
either at any time or at specified intervals. The interest rates on these
obligations fluctuate from time to time in response to changes in the market
interest rates. Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. Where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem will be dependent on the ability of
the borrower to pay principal and interest on demand. Each demand note and
bond purchased by the Fund will meet the quality criteria established for the
purchase of other Municipal Obligations. The Advisor, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations in the Fund's portfolio.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments generally will be
traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. The Fund will not
invest more than 10% of its net assets in floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on less
than seven days' notice if there is no secondary market available for these
obligations.
FUTURES CONTRACTS
The Fund may purchase and sell U.S. exchange traded futures contracts on bond
indices ("Futures Contracts"). At the same time a Futures Contract is purchased
5
<PAGE>
or sold, the Fund must allocate cash or securities as a deposit payment
("initial deposit"). The initial deposit varies but may be as low as 5% or less
of the value of the contract. Daily thereafter, the Futures Contract is valued
and the payment of "variation margin" may be required, so each day the Fund
would provide or receive cash that reflects any decline or increase in the
contract's value. A Futures Contract based on a municipal bond index provides
for a cash payment equal to the amount, if any, by which the value of the index
at maturity is above or below the value of the index at the time the contract
was entered into times a fixed index "multiplier." The index underlying such a
Futures Contract is generally a broad based index of securities designed to
reflect movements in the relevant market as a whole. The index assigns weighted
values to the securities included in the index, and its composition is changed
periodically.
These instruments will be used only to protect against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of the Futures Contract and may realize a loss on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions. Futures transactions involve other risks as well. For example, a
lack of correlation between the index and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses on the Futures Contract in excess of
any corresponding gain in the hedged portfolio positions. In addition, there
can be no assurance that a liquid secondary market will exist for any Futures
Contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions.
Regulations of the Commodity Futures Trading Commission (the "CFTC") require
that the Fund enter into transactions in Futures Contracts for hedging
purposes only, or that in the case of long positions in Futures Contracts, an
alternative test be satisfied, in order to assure that the Fund will not be
deemed to be a "commodity pool" as defined in CFTC regulations. In addition,
<PAGE>
under CFTC rules the Fund may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial margin deposits on
existing Futures Contracts would exceed 5% of the Fund's total assets. In
addition, the Fund will not enter into Futures Contracts if obligations under
all Futures Contracts would amount to more than 30% of its total assets.
Gains recognized from futures transactions engaged in by the Fund are taxable
income to shareholders. The Fund reserves the right to invest in other types
of financial futures without obtaining prior shareholder approval.
REPURCHASE AGREEMENTS
The Fund may agree to purchase U.S. Treasury Securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury Securities include Treasury bills, Treasury notes, Treasury bonds
and Separate Trading of Registered Interest and Principal of Securities
("STRIPS"), all of which are direct obligations of the U.S. Government and
are supported by the full faith and credit of the United States. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisor. Default by the
seller may, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, the Fund may be delayed or limited in
its ability to sell the collateral.
TAXABLE INVESTMENTS
Although the Fund intends, to the extent feasible but subject to market
conditions, to invest up to 100% of its assets in tax exempt Municipal
Obligations, it may invest, from time to time, in securities, the interest on
which is subject to federal income tax. The Fund may make such investments (a)
pending investment of proceeds from sales of Shares or portfolio securities in
tax-exempt securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for meeting anticipated redemptions, or
(d) when in the Advisor's opinion it is advisable because of adverse conditions
affecting the market for Municipal Obligations. The taxable investments in which
the Fund may invest consist of U.S. Treasury Securities and repurchase
6
<PAGE>
agreements fully collateralized by U.S. Treasury Securities (collectively, the
"Taxable Investments"). The Fund may invest up to 20% of its net assets in
Taxable Investments. The Fund may earn taxable income from other sources.
Dividends paid by the Fund that are attributable to interest earned from Taxable
Investments and to taxable income from other investments will be taxable to
investors. (See "Dividends and Taxes -- Tax Treatment of Dividends and
Distributions.")
SIZE OF FUND
The Fund currently intends to limit the size of the Fund and to accept share
purchases only from existing shareholders at such time as the assets of the
Fund are in excess of $200 million but less than $250 million, and thereafter
not to accept any share purchases other than dividend reinvestments.
4. INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. Accordingly, the Fund will
not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for this purpose the U.S. Government or any state or
local government or their agencies and instrumentalities are not
considered to be an industry);
2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for this purpose, the U.S.
Government or its agencies and instrumentalities are not considered to be
an issuer and, in the case of Municipal Obligations, the public or private
entity ultimately responsible for payment of principal and interest on the
security is considered to be the issuer);
3) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equalling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase
securities; or
<PAGE>
4) Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements with maturities of greater than seven days and
floating or variable rate demand obligations as to which the Fund cannot
exercise the demand feature on less than seven days' notice if there is no
secondary market available for these obligations.
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
5. HOW TO INVEST IN THE FUND
Shares may be purchased from Armata Financial Corp. ("Armata"), P.O. Box 515,
Baltimore, Maryland 21203, or through any securities dealer which has entered
into a dealer agreement with Armata ("Participating Dealers") or through any
financial institution which has entered into a shareholder servicing
agreement with the Fund ("Shareholder Servicing Agents"). Shares may also be
purchased by completing the Application Form attached to this Prospectus and
returning it, together with payment of the purchase price (including any
applicable front-end sales charge), to the address shown on the Application
Form. As used herein, the "Fund" refers to Managed Municipal Fund, Inc.,
whereas references to the "Shares" shall mean ISI Managed Municipal Fund
Shares which is a class of shares of the Fund.
The minimum initial investment is $5,000, except that the minimum initial
investment for participants in the Fund's Automatic Investing Plan is $250. Each
subsequent investment must be at least $250, except that the minimum subsequent
investment for participants in the Fund's Automatic Investing Plan is $100 for
monthly investments and $250 for quarterly investments. (See "Purchases through
Automatic Investing Plan" below.) Orders for purchases of Shares are accepted on
any day on which the New York Stock Exchange is open for business ("Business
Day"). The Fund reserves the right to suspend the sale of Shares at any time at
the discretion of Armata. Purchase orders for Shares will be executed at a per
Share purchase price equal to the net asset value next determined after receipt
of the purchase order plus any applicable front-end sales charge (the "Offering
Price") on the date such net asset value is determined (the "Purchase Date").
Purchases made by mail must be accompanied by payment of the Offering Price.
Purchases made through Armata or a Participating Dealer or Shareholder Servicing
7
<PAGE>
Agent must be in accordance with such entity's payment procedures. Armata may,
in its sole discretion, refuse to accept any purchase order.
The net asset value per Share is determined once daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities will be given their market value where feasible
based on quotations furnished by a pricing service approved by the Board of
Directors. Options and futures are valued at the settlement price, or if no
sales are reported, at the average of the last reported bid and asked prices.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established from time to time and monitored by the Fund's Board of
Directors. Debt obligations with maturities of 60 days or less are valued at
amortized cost which constitutes fair value as determined by the Fund's Board
of Directors.
OFFERING PRICE
Shares may be purchased from Armata, Participating Dealers or Shareholder
Servicing Agents at the Offering Price which includes a sales charge which is
calculated as a percentage of the Offering Price and decreases as the amount
of purchase increases as shown below:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as Percentage of Dealer Retention
Percentage of Net Amount as Percentage of
Amount of Purchase Offering Price Invested Offering Price*
----------------------- --------------- -------------- ----------------
<S> <C> <C> <C>
Less than $ 50,000 ..... 4.45% 4.66% 4.00%
$50,000 - $ 99,999 ..... 3.50% 3.63% 3.00%
$100,000 - $ 249,999 ..... 2.50% 2.56% 2.00%
$250,000 - $ 499,999 ..... 2.00% 2.04% 1.50%
$500,000 - $ 999,999 ..... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999 ... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 ... 0.50% 0.50% 0.50%
$3,000,000 and over ....... None None None
</TABLE>
- ------
* Armata may from time to time reallow to Participating Dealers up to 100% of
the sales charge included in the Offering Price of Shares. Dealers that
receive a reallowance of 100% of the sales charge may be considered
underwriters for purposes of the federal securities laws.
<PAGE>
A shareholder who purchases additional Shares may obtain reduced sales
charges as set forth in the table above through a right of accumulation. In
addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Shares and purchases of
shares of other mutual funds in the ISI family of funds. The applicable sales
charge will be determined based on the total of (a) the investor's current
purchase plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of all Shares and of all shares of such other
mutual funds in the ISI family of funds held by the shareholder. To obtain
the reduced sales charge through a right of accumulation, the shareholder
must provide Armata, either directly or through a Participating Dealer or
Shareholder Servicing Agent, as applicable, with sufficient information to
verify that the shareholder has such a right. The Fund may amend or terminate
this right of accumulation at any time as to subsequent purchases. The term
"purchase" refers to an individual purchase by a single purchaser, or to
concurrent purchases, which will be aggregated, by a purchaser, the
purchaser's spouse and their children under the age of 21 years purchasing
Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Shares. Each purchase of
Shares under a Letter of Intent will be made at the Offering Price applicable
at the time of such purchase to the full amount indicated on the Letter of
Intent. A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of the full amount. Shares purchased with the first 5%
of the full amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales charge applicable
to the Shares actually purchased if the full amount indicated is not
invested. Such escrowed Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has
been purchased, the escrowed Shares will be released. An investor who wishes
to enter into a Letter of Intent in conjunction with an investment in Shares
may do so by completing the appropriate section of the Application Form
attached to this Prospectus.
The Fund may sell Shares at net asset value (without sales charge) to the
following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Shares on behalf of
their fiduciary and advisory clients, provided such clients have paid an account
8
<PAGE>
management fee for these services; (ii) investors who have redeemed Shares, or
shares of any other mutual fund in the ISI family of funds that have similar
sales charges, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within six months after the redemption and the
amount of the purchase is at least $5,000; and (iii) current or retired
Directors of the Fund, directors and employees (and their immediate families) of
ISI, the Fund's administrator, and their respective affiliates, and employees of
Participating Dealers. In addition, investors who have redeemed shares of funds
in the ISI family of funds that have lower sales charges may purchase Shares at
net asset value in an amount that is not more than the total redemption
proceeds, provided that they held the shares of such funds for more than 24
months prior to the redemption, the purchase is within six months after the
redemption and the amount of the purchase is at least $5,000.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other mutual funds in the ISI family of funds that have
similar sales charges may exchange their shares of those funds for an equal
dollar amount of Shares. Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge. In
addition, shareholders of funds in the ISI family of funds that have lower
sales charges may exchange into other funds in the family upon payment of the
difference in sales charges, except that the exchange will be made at net
asset value if the shares have been held for at least 24 months. The net
asset value of shares purchased and redeemed in an exchange request received
on a Business Day will be determined on the same day, provided that the
exchange request is received prior to 4:00 p.m. (Eastern Time). Exchange
requests received after 4:00 p.m. (Eastern Time) will be effected on the next
Business Day.
The exchange privilege may be exercised only in those states where the class
of shares of such other funds may legally be sold. Investors should receive
and read the applicable prospectus prior to tendering shares for exchange.
Until February 28, 1997, shareholders of any other mutual fund who have paid
a sales charge on their shares of such fund, and shareholders of any
closed-end fund, may exchange shares of such funds for an equal dollar amount
<PAGE>
of Shares by submitting to Armata or a Participating Dealer, the proceeds of
the redemption or sale of shares of such funds, together with evidence of the
payment of a sales charge (for mutual funds only) and the source of such
proceeds. Shares issued pursuant to this offer will not be subject to the
sales charges described above or any other charge.
The Fund may modify or terminate these offers of exchange at any time and
will provide shareholders with 60 days' written notice prior to any such
modification or termination. The exchange privilege with respect to other ISI
funds may also be exercised by telephone. (See "Telephone Transactions"
below.)
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Shares regularly by means of an Automatic Investing
Plan with a pre-authorized check drawn on their checking accounts. Under this
plan, the shareholder may elect to have a specified amount invested monthly
or quarterly in Shares. The minimum initial investment is $250. Each
subsequent investment must be at least $100 for monthly investments and $250
for quarterly investments. The amount specified will be withdrawn from the
shareholder's checking account using the pre-authorized check and will be
invested in Shares at the applicable Offering Price determined on the date
the amount is available for investment. Participation in the Automatic
Investing Plan may be discontinued either by the Fund or the shareholder upon
30 days' prior written notice to the other party. A shareholder who wishes to
enroll in the Automatic Investing Plan may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Shares. A shareholder
who wishes to enroll in the Dividend Reinvestment Plan should check the
appropriate box on the Application Form or call (800) 882-8585 for additional
information.
Alternately, shareholders may have their distributions invested in shares of
other funds in the ISI family of funds. Shareholders who are interested in this
option should call (800) 882-8585 for additional information.
Reinvestments of distributions will be effected without a sales charge.
9
<PAGE>
6. HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investment on any Business Day
by transmitting a redemption order through Armata, a Participating Dealer, a
Shareholder Servicing Agent or by regular or express mail to the Fund's
transfer agent (the "Transfer Agent"). Shareholders may also redeem Shares by
telephone (in amounts up to $50,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per Share next determined
after receipt of the order (or, if stock certificates have been issued for
the Shares to be redeemed, after the tender of the stock certificates for
redemption). Redemption orders received after 4:00 p.m. (Eastern Time) will
be effected at the net asset value next determined on the following Business
Day. Payment for redeemed Shares will be made by check and will be mailed
within seven days after receipt of a duly authorized telephone redemption
request or of a redemption order fully completed and, as applicable,
accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer or Shareholder Servicing Agent, if applicable, and
the number of Shares or dollar amount to be redeemed, signed by all owners
of the Shares in the exact names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
3) If Shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for Shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Shares will be paid on the
next dividend payable date. If all of the Shares in a shareholder's account
have been redeemed on a dividend payable date, the dividend will be remitted
by check to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
<PAGE>
7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other ISI
funds, or redeem Shares in amounts up to $50,000, by notifying the Transfer
Agent by telephone at (800) 882-8585 on any Business Day between the hours of
8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its
address listed under "Custodian, Transfer Agent, Accounting Services."
Telephone transaction privileges are automatic. Shareholders may specifically
request that no telephone redemptions or exchanges be accepted for their
accounts. This election may be made on the Application Form or at any time
thereafter by completing and returning appropriate documentation supplied by
the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected
at the net asset value as determined on the next Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied written instructions of such transaction requests. The Fund or the
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
telephone instructions if either of them does not employ these procedures. If
these procedures are employed, neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
During periods of extreme economic or market changes, shareholders may
experience difficulty in effecting telephone transactions. In such event,
requests should be made by regular or express mail. Shares held in certificate
form may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")
8. DIVIDENDS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its net
investment income in the form of monthly dividends. The Fund may distribute to
10
<PAGE>
shareholders any net capital gains (the excess of net long-term capital gains
over net short-term capital losses) on an annual basis or, alternatively, may
elect to retain such net capital gains and pay tax thereon.
Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Shares at net asset value.
Shareholders may elect to terminate automatic reinvestment by giving written
notice to the Transfer Agent (see "Custodian, Transfer Agent, Accounting
Services"), either directly or through their Participating Dealer or
Shareholder Servicing Agent, at least five days before the next date on which
dividends or distributions will be paid.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial, or administrative action. The Statement
of Additional Information sets forth further information concerning taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, it will be relieved of federal income tax on amounts distributed
to shareholders. The Fund also intends to make sufficient distributions prior
to the end of each calendar year to avoid liability for federal excise tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders, by satisfying the Code's requirements that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.
As long as this and certain other requirements are met, dividends derived
from the Fund's net tax-exempt interest income will be "exempt-interest
dividends" that are excluded from the gross income of the Fund's shareholders
for federal income tax purposes. Exempt interest dividends may, however, have
<PAGE>
collateral federal income tax consequences, including alternative minimum tax
consequences. Furthermore, the Fund may not be an appropriate investment for
persons who are "substantial users" of facilities financed with industrial
development bonds or private activity bonds (or related parties to
"substantial users"). (See the Statement of Additional Information.)
Current federal tax law limits the types and volumes of bonds qualifying for
the federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of exempt interest
dividends.
Distributions to shareholders of net investment income of the Fund that is
not tax-exempt interest and of net short-term capital gains of the Fund will
be taxable to shareholders as ordinary income, whether such distributions are
received in cash or in additional Shares.
Distributions to shareholders of net capital gains of the Fund are taxable to
shareholders as long-term capital gains, whether received in cash or
additional Shares, and regardless of how long a shareholder has held the
Shares. Shareholders will be advised annually as to the federal income tax
status of distributions made during the year.
Ordinarily, shareholders will include all dividends declared by the Fund as
income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The sale, exchange or redemption of Shares is a taxable event for the
shareholder.
Any gain or loss recognized on a sale, exchange or redemption of Shares of the
Fund by a shareholder who is not a dealer in securities will generally be
treated as a long-term capital gain or loss if the Shares have been held for
more than twelve months and otherwise will be treated as a short-term capital
gain or loss. Any loss recognized by a shareholder upon the sale of Shares of
the Fund held six months or less, however, will be disallowed to the extent of
any exempt-interest dividends received by the shareholder with respect to such
Shares. If Shares on which a capital gains distribution has been received are
11
<PAGE>
subsequently sold or redeemed and such Shares have been held for six months or
less, any loss recognized will be treated as long-term capital loss to the
extent of the capital gains distribution.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry Shares will not be deductible for federal income tax purposes.
The Fund may not be a suitable investment for tax-exempt shareholders and
plans, because such shareholders and plans would not gain any additional
benefit from the receipt of exempt-interest dividends.
Shareholders are encouraged to consult with their tax advisors concerning the
application of the rules set forth above to their particular circumstances
and the application of state and local taxes to an investment in the Fund.
9. MANAGEMENT OF THE FUND
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to
the Fund's officers, to Armata, as distributor of the Shares, to the Advisor
and to the Fund's administrator. Four Directors and all of the officers of
the Fund are officers or employees of Armata, ISI or the Fund's
administrator. The other Directors of the Fund have no affiliation with
Armata, ISI or the Fund's administrator.
The Fund's Directors and officers are as follows:
*Edward S. Hyman Chairman
*W. James Price Vice Chairman
*Richard T. Hale Vice Chairman
*R. Alan Medaugh Director and President
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Harry Woolf Director
Edward J. Veilleux Vice President
Brian C. Nelson Vice President and Secretary
Nancy Lazar Vice President
Carrie L. Butler Vice President
Joseph A. Finelli Treasurer
Denice De Florio Assistant Vice President
Laurie D. DePrine Assistant Secretary
- ------
* Messrs. Hyman, Price, Hale and Medaugh are "interested persons" of the Fund
within the meaning of Section 2(a)(19) under the Investment Company Act of
1940, as amended (the "Investment Company Act").
<PAGE>
10. INVESTMENT ADVISOR
ISI, a registered investment advisor, serves as investment advisor to the Fund
pursuant to an investment advisory agreement dated as of April 1, 1991. ISI
employs Messrs. Edward S. Hyman and R. Alan Medaugh. Due to their stock
ownership, Messrs. Hyman and Medaugh may be deemed to be controlling persons of
ISI. As of December 31, 1995, the Advisor had approximately $1 billion under
management representing both tax-free and taxable accounts. The Advisor also
acts as investment advisor to Total Return U.S. Treasury Fund, Inc. and North
American Government Bond Fund, Inc., open-end investment companies with
approximately $438 million of net assets as of December 31, 1995.
For the fiscal year ended October 31, 1995, the Advisor received a fee (net
of fee waivers) equal to .27% of the Fund's average daily net assets. ISI and
the Fund's administrator have voluntarily agreed to reduce their respective
annual fees proportionately, if necessary, so that the Fund's annual expenses
do not exceed .90% of it's average daily net assets. (See "Fund Expenses.")
The address of the Advisor is 717 Fifth Avenue, New York, New York 10022
(telephone: (800) 955-7175).
PORTFOLIO MANAGERS
Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh, President
of ISI and President and a Director of the Fund, have shared direct portfolio
management responsibility for the Fund since its inception. Mr. Hyman is
responsible for developing the economic analysis upon which the Fund's
selection of investments is based. (See "Investment Program.") Before joining
ISI, Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence
Inc. and prior thereto, an economic consultant at Data Resources. He writes
a variety of international and domestic economic research reports which follow
trends that may determine the direction of interest rates.
12
<PAGE>
These international and domestic reports are sent to ISI's private institutional
clients in the United States and overseas. The periodical Institutional
Investor, which rates analysts and economists on an annual basis, has rated Mr.
Hyman as its "first team" economist, which is its highest rating, in each of the
last sixteen years.
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam
Management Company and Fidelity Management and Research.
11. ADMINISTRATOR
Investment Company Capital Corp. ("ICC"), 135 East Baltimore Street,
Baltimore, Maryland 21202 provides administration services to the Fund. ICC
is a wholly-owned subsidiary of Alex. Brown and an affiliate of Armata.
ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
the Shares are distributed and oversight of the relationship between the Fund
and its other service providers. For its services as administrator of the
Fund for the fiscal year ended October 31, 1995, ICC received a fee (net of
fee waivers) equal to .13% of the Fund's average daily assets. ICC and ISI
have voluntarily agreed to reduce their respective annual fees
proportionately, if necessary, so that the Fund's annual expenses do not
exceed .90% of it's average daily net assets. (See "Fund Expenses.")
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
12. DISTRIBUTOR
Armata acts as distributor of the Shares pursuant to a Distribution Agreement
and related Plan of Distribution (the "Plan") adopted pursuant to Rule 12b-1
<PAGE>
under the Investment Company Act. Armata is a broker-dealer that was formed
in 1983 and is an affiliate of the Administrator. As compensation for its
services for the fiscal year ended October 31, 1995, Armata received a fee
equal to .25% of the Shares' average daily net assets. Armata expects to
allocate on a proportional basis up to all of its fee to selected
Participating Dealers as compensation for their ongoing shareholder services,
including processing redemption and sale requests and responding to
shareholder inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Armata will allocate on a proportional
basis up to all of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
impose separate fees in connection with these services and investors should
review this Prospectus in conjunction with any such institution's fee
schedule. Amounts allocated to Participating Dealers and Shareholder Servicing
Agents may not exceed amounts payable to Armata under the Plan.
Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay
Armata's overhead expenses. If the cost of providing distribution services to
the Fund in connection with the sale of the Shares is less than .25% of the
average daily net assets invested in Shares for any period, the unexpended
portion of the distribution fee may be retained by Armata. Armata or its
associated persons will from time to time and from its own resources pay or
allow additional discounts or promotional incentives in the form of cash or
other compensation (including merchandise or travel) to Participating
Dealers.
13. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking association
with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 882-8585), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services for the fiscal year ended October 31, 1995, ICC
received from the Fund a fee equal to .05% of the Fund's average daily net
assets. (See the Statement of Additional Information.) ICC also serves as the
Fund's administrator.
13
<PAGE>
14. PERFORMANCE INFORMATION
From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
relevant indices. All such advertisements will show the average annual total
return, net of the Fund's maximum sales charge, over one, five and ten year
periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding the average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value, net of the maximum sales charge and other fees,
according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability
in investment company advertising and is not equivalent to a yield
calculation.
The Fund may also advertise yield and tax-equivalent yield quotations. Any
yield quotation of the Fund is based on the annualized net investment income
per share of the Fund over a 30 day period. The yield for the Fund is
calculated by dividing the net investment income per share of the Fund earned
during the period by the maximum offering price per share of the Fund on the
last day of that period. The resulting figure is then annualized. The Fund's
yield calculations assume a maximum sales charge of 4.45% for the Shares. The
Fund's taxable-equivalent yield is calculated by determining the rate of
return that would have to be achieved on a fully taxable investment to
produce the after tax equivalent of the Fund's yield. In calculating
taxable-equivalent yield, the Fund assumes certain tax brackets for
shareholders.
If the Fund compares its performance to other funds or to relevant indices,
its performance will be stated in the same terms in which such comparative
data and indices are stated.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90 day U.S. Treasury
Bills, long-term U.S. Treasury bonds, bank certificates of deposit, the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
<PAGE>
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal. For
these purposes, the performance of the Fund, as well as the performance of
such indices, may not reflect sales charges, the inclusion of which would
reduce performance results.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of investments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Shares may be purchased, although not included in
calculations of performance, will reduce performance results.
15. GENERAL INFORMATION
CAPITAL SHARES
The Fund is a Maryland corporation, authorized to issue forty million shares
of capital stock, with a par value of $.001 per share. Shares have equal
rights with respect to voting. Voting rights are not cumulative, so the
holders of more than 50% of the outstanding Shares voting together for
election of Directors may elect all the members of the Board of Directors of
the Fund. In the event of liquidation or dissolution of the Fund, each Share
is entitled to its portion of the Fund's assets after all debts and expenses
have been paid. The fiscal year end of the Fund is October 31.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in a
separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "ISI Managed
Municipal Fund Shares." The Board has no present intention of establishing any
additional series of the Fund but does have another class of shares in addition
to the Shares offered hereby, "Flag Investors Managed Municipal Fund Class A
Shares." Shares of that class are sold through broker-dealers and have similar
12b-1 fees and front-end sales charges as the Shares. Different classes of the
Fund may be offered to certain investors and holders of such shares may be
entitled to certain exchange privileges not offered to Shares. All classes of
14
<PAGE>
the Fund share a common investment objective, portfolio and advisory fee, but
the classes may have different distribution expenses and sales charges and,
accordingly, performance may differ.
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders but special
meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.
REPORTS
The Fund furnishes shareholders with semi-annual and annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Shares should contact the
Transfer Agent at (800) 882-8585, Armata, ISI, a Participating Dealer or
Shareholder Servicing Agent, as appropriate.
15
<PAGE>
ISI MANAGED MUNICIPAL FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "ISI Managed Municipal Fund Shares" and mail with this
application to:
Armata Financial Corp./ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
The minimum initial purchase is $5,000, except that the minimum initial
purchase for participants in the Fund's Automatic Investing Plan is $250.
Each subsequent purchase requires a $250 minimum, except that the minimum
subsequent purchase under the Fund's Automatic Investing Plan is $100 for
monthly purchases and $250 for quarterly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.
- --------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
INDIVIDUAL OR JOINT TENANT
- --------------------------------------------------------
First Name Initial Last Name
- --------------------------------------------------------
Social Security Number
- --------------------------------------------------------
Joint Tenant Initial Last Name
- --------------------------------------------------------
Social Security Number
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- --------------------------------------------------------
Name of Corporation, Trust or Partnership
- --------------------------------------------------------
Tax ID Number
- --------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- --------------------------------------------------------
Existing Account No., if any
GIFTS TO MINORS
- --------------------------------------------------------
Custodian's Name (only one allowed by law)
- --------------------------------------------------------
Minor's Name (only one)
- --------------------------------------------------------
Social Security Number of Minor
under the __________________Uniform Gifts to Minors Act
State of Residence
MAILING ADDRESS
- --------------------------------------------------------
Street
- --------------------------------------------------------
City State Zip
( )
- --------------------------------------------------------
Daytime Phone
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF INTENTION (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares
of ISI Managed Municipal Fund Shares in an aggregate amount at least equal
to:
_$50,000 __$100,000 __$250,000 __$500,000 __$1,000,000 __$2,000,000 __$3,000,000
- --------------------------------------------------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the ISI Fund(s) set forth below to be applied for
a reduced sales charge. List the Account numbers of other ISI Funds that you
or your immediate family (spouse and children under 21) already own that
qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
<PAGE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options is selected, all distributions will be
reinvested.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ for me, on a monthly or quarterly basis, on or
about the 20th of each month or if quarterly, the 20th of January, April,
July and October, and to draw a bank draft in payment of the investment
against my checking account. (Bank drafts may be drawn on commercial banks
only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- -----------------------------------------------------------------------------
Bank Name
- -----------------------------------------------------------------------------
Existing ISI Managed Municipal Fund Account No., if any
Please attach a voided check.
- -----------------------------------------------------------------------------
Depositor's Signature Date
- -----------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
- -----------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other ISI Funds) unless I mark one or both of the boxes below.
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: __________ Bank Account No: __________
Address: __________ Bank Account Name: __________
__________
- --------------------------------------------------------------------------------
<PAGE>
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated March 1, 1996. Under
penalties of perjury, I certify (1) that the number shown on this form is my
correct taxpayer identification number and (2) that I am not subject to
backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified me that I am no
longer subject to backup withholding. (Strike out the language in (2) if it
is not correct.)
If a non-resident alien, please indicate country of residence: _______________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature (if a joint acct., both must sign) Date
- --------------------------------------------------------------------------------
FOR DEALER USE ONLY
Dealer's Name: ___________________________ Dealer Code: __________________
Dealer's Address: ___________________________ Branch Code: __________________
___________________________
Representative: ___________________________ Rep. No. __________________
<PAGE>
ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)
No person has been authorized to give any information or to make representations
not contained in this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or its distributor.
This Prospectus does not constitute an offering by the Fund or by its
distributor in any jurisdiction in which such offering may not lawfully be made.
Shares may be offered only to residents of those states in which such shares are
eligible for purchase.
TABLE OF CONTENTS
PAGE
----
1. Fund Expenses .................................................... 2
2. Financial Highlights ............................................. 3
3. Investment Program ............................................... 4
4. Investment Restrictions .......................................... 7
5. How to Invest in the Fund ........................................ 7
6. How to Redeem Shares ............................................. 10
7. Telephone Transactions ........................................... 10
8. Dividends and Taxes .............................................. 10
9. Management of the Fund ........................................... 12
10. Investment Advisor ............................................... 12
11. Administrator .................................................... 13
12. Distributor ...................................................... 13
13. Custodian, Transfer Agent,
Accounting Services ............................................... 13
14. Performance Information .......................................... 14
15. General Information .............................................. 14
LOGO
ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)
A mutual fund with the investment objective of a high level of total
return with relative stability of principal and secondarily, high current
income through investment in a portfolio consisting primarily of municipal
obligations the interest on which is exempt from federal income tax.
MARCH 1, 1996
PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------
MANAGED MUNICIPAL FUND, INC.
135 East Baltimore Street
Baltimore, Maryland 21202
----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM YOUR PARTICIPATING
DEALER OR SHAREHOLDER SERVICING AGENT OR BY WRITING OR
CALLING ALEX. BROWN & SONS INCORPORATED, 135 EAST BALTIMORE
ST., BALTIMORE, MARYLAND 21202, (800) 767-FLAG (FOR THE FLAG
INVESTORS SHARES CLASS) OR BY WRITING OR CALLING ARMATA
FINANCIAL CORP., P.O. BOX 515, MARYLAND 21203, (410)
727-1700 (FOR THE ISI SHARES CLASS).
Statement of Additional Information Dated: March 1, 1996
Relating to Prospectuses Dated: March 1, 1996
of
Flag Investors Managed Municipal Fund Class A Shares
and
ISI Managed Municipal Fund Shares
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
1. General Information and History .............................................................1
2. Investment Objective and Policies ...........................................................1
3. Valuation of Shares and Redemption...........................................................7
4. Federal Tax Treatment of Dividends
and Distributions............................................................................7
5. Management of the Fund......................................................................11
6. Investment Advisory and Other Services......................................................15
7. Administration..............................................................................16
8. Distribution of Fund Shares ................................................................17
9. Portfolio Transactions......................................................................20
10. Capital Stock ..............................................................................21
11. Reports.....................................................................................22
12. Custodian, Transfer Agent and Accounting Services ..........................................22
13. Independent Accountants ....................................................................23
14. Performance Information ....................................................................23
15. Control Persons and Principal Holders of
Securities ................................................................................25
16. Financial Statements ....................................................................25
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Managed Municipal Fund, Inc. (the "Fund") is an open-end
management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required
to furnish prospective investors with certain information concerning the
activities of the company being considered for investment. The Fund currently
offers two classes of shares: Flag Investors Managed Municipal Fund Class A
Shares, (the "Flag Investors Shares Class") and ISI Managed Municipal Fund
Shares (the "ISI Shares Class"). There are two separate prospectuses for the
Fund's shares: one for the Flag Investors Shares Class and one for the ISI
Shares Class. Each prospectus contains important information concerning the
classes of shares offered thereby and the Fund, and may be obtained without
charge from Alex. Brown & Sons Incorporated ("Alex. Brown"), 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 767-FLAG), or
Armata Financial Corp. ("Armata"), P.O. Box 515, Baltimore, Maryland 21203
(telephone: (410) 727-1700) or from Participating Dealers which offer shares
of the respective classes of the Fund ("Shares") to prospective investors. As
used herein the term "Prospectus" describes information common to the
prospectuses of the two classes of the Fund's shares. Otherwise the term
"Prospectus" will be modified by the appropriate class designation. As used
herein, the "Fund" refers to Managed Municipal Fund, Inc. and specific
references to any class of the Fund's shares will be made by using the name of
such class. Prospectuses may also be obtained from Shareholder Servicing
Agents. Some of the information required to be in this Statement of Additional
Information is also included in the Fund's current Prospectuses. To avoid
unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement respecting the Fund and its Shares
filed with the SEC. Copies of the Registration Statement as filed, including
such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of
Maryland on January 5, 1990. The Fund filed a registration statement with the
SEC registering itself as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act") and its Shares under the Securities Act of 1933, and commenced
operations on February 26, 1990. The Fund has offered the Flag Investors
Managed Municipal Fund Class A Shares since October 23, 1990.
For the period from November 9, 1992 through February 27,
1994, the Fund offered another class of shares: Flag Investors Managed
Municipal Fund Class B Shares. Shares of that class were renamed the Flag
Investors Managed Municipal Fund Class D Shares and are no longer being
offered.
Under a License Agreement dated October 23, 1990, between
the Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to
the Fund the "Flag Investors" name and logo, but retains rights to that name
and logo, including the right to permit other investment companies to use
them.
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is a high level of total
return with relative stability of principal, and secondarily, a high level of
current income exempt from federal income tax through investing in a portfolio
consisting primarily of municipal obligations ("Municipal Obligations"). There
can be no assurance that the Fund will achieve its investment objective.
-1-
<PAGE>
Municipal Obligations include debt securities issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax.
For a discussion of quality, maturity and other criteria the Fund applies in
investing in Municipal Obligations, see "Investment Objective and Policies" in
the Prospectus.
Municipal Obligations can be classified into three principal
categories: "general obligation bonds", "revenue bonds" and "notes". General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power of the issuer.
Revenue bonds include, in most cases, "tax exempt industrial development
bonds", i.e., bonds issued by or on behalf of public authorities to obtain
funds for privately-operated facilities. Tax-exempt industrial development
bonds do not generally carry the pledge of the credit of the issuing
municipality, but are generally guaranteed by the corporate entity on whose
behalf they are issued. Notes are short-term instruments used to provide for
short-term capital needs. They are obligations of the issuing municipalities
or agencies and are sold in anticipation of a bond sale, collection of taxes
or receipt of other revenues.
At least 75% of the Fund's portfolio of Municipal
Obligations will be invested in securities rated, at the time of purchase,
higher than A by Moody's or S&P or municipal notes rated at the time of
purchase, MIG-1 or MIG-2 by Moody's or SP-1 by S&P. The ratings of Moody's for
tax-exempt bonds in which the Fund may invest are Aaa, Aa1, Aa, and A1. Bonds
rated Aaa are judged by Moody's to be of the "best quality". The rating of Aa
is assigned by Moody's to bonds which are of "high quality by all standards"
but as to which margins of protection or other elements make long-term risks
appear somewhat larger than Aaa rated bonds. The Aaa and Aa rated bonds
comprise what are generally known as "high grade bonds". Bonds rated A by
Moody's possess many favorable investment attributes and are considered as
upper-medium-grade obligations. The numerical modifier 1, in the generic
rating classifications of A and Aa indicates that the obligation ranks in the
higher end of its generic rating category. The ratings of S&P for tax-exempt
bonds in which the Fund may invest are AAA, AA+, AA, AA-, and A+. Bonds rated
AAA bear the highest rating assigned by S&P to a debt obligation. Such rating
is intended to indicate an extremely strong capacity to repay principal and
pay interest. Bonds rated AA by S&P are also intended to qualify as
high-quality debt obligations. Such rating is intended to indicate a very
strong capacity to repay principal and pay interest, and in the majority of
instances bonds with such rating differ from AAA issues to a small degree.
Bonds rated A by S&P have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in the higher
rated categories. The addition of a plus or minus sign to the A or AA
categories shows relative standing within these rating categories. The two
highest rating categories by Moody's for tax-exempt notes are MIG 1 and MIG 2.
Notes bearing the designation MIG 1 are judged by Moody's to be of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancings. Notes bearing the designation MIG 2 are judged by Moody's to be
of high quality, with margins of protection ample although not so large as in
the preceding group. The highest S&P rating for municipal notes issued on or
after July 29, 1984 is "SP-1". Prior to July 29, 1984, municipal notes carried
the same symbols as municipal bonds. The designation "SP-1" is intended to
indicate a very strong capacity to pay principal and interest. A "+" is added
for those issues determined by S&P to possess very strong characteristics.
Only municipal note issues with a rating by S&P of SP-1 or higher will qualify
for the 75% requirement.
- 2 -
<PAGE>
The Fund may invest up to 25% of its portfolio of Municipal
Obligations in municipal bonds rated A by Moody's or S&P or in municipal notes
bearing the designation MIG 3 by Moody's or SP-2 by S&P. Notes bearing the MIG
3 are judged by Moody's to be of favorable quality, with all security elements
accounted for but lacking the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established. S&P grants a rating of SP-2
to a note when it believes the issuer has a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
The ratings of Moody's and S&P represent each service's
opinion as to the quality of the municipal bonds or notes rated. It should be
emphasized that ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer. Subsequent to its
purchase by the Fund, an issue of municipal bonds or notes may cease to be
rated, or its ratings may be reduced. Neither event requires the elimination
of that obligation from the Fund's portfolio, but will be a factor in
determining whether the Fund should continue to hold that issue in its
portfolio.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. See "Federal Tax Treatment of
Dividends and Distributions" for the effect of current federal tax law on this
exemption.
"When-Issued" Securities: The Fund may purchase securities
on a "when-issued" basis. When the Fund commits to purchase a security on a
"when-issued" basis, it will set up procedures consistent with the General
Statement of Policy of the SEC concerning such purchases. Since that policy
currently recommends that an amount of the Fund's assets equal to the amount
of the purchase be held aside or segregated to be used to pay for the
commitment, the Fund will always have cash, cash equivalents or U.S.
Government securities or other high quality debt securities sufficient to
cover any commitments or to limit any potential risk. However, although the
Fund does not intend to make such purchases for speculative purposes and
intends to adhere to the provisions of the SEC policy, purchases of securities
on such basis may involve more risks than other types of purchases. For
example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it is necessary to sell the
"when-issued" securities before delivery, the Fund may incur a loss because of
market fluctuations since the time the commitment to purchase such securities
was made and any gain would not be tax-exempt. At the time the Fund makes the
commitment to purchase or sell securities on a "when-issued" basis, it will
record the transaction and thereafter reflect the value of such security
purchased in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
Futures Contracts: The Fund may enter into futures contracts based on
municipal bond indices ("Futures Contracts"). A Futures Contract based on a
municipal bond index provides for a cash payment, equal to the amount, if any,
by which the value of the index at maturity is above or below the value of the
index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a
broad based index of securities designed to reflect movements in the relevant
market as a whole. The index assigns weighted values to the securities
included in the index, and its composition is changed periodically. Futures
Contracts have been designed by exchanges which have been designated as
"contract markets" by the Commodity Futures Trading Commission (the "CFTC"),
and must be executed through a futures commission merchant, or brokerage firm,
- 3 -
<PAGE>
which is a member of the relevant contract market. The exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment ("initial
deposit"). The initial deposit varies but may be as low as 5% or less of the
value of the contract. Daily thereafter, the Futures Contract is valued and
the payment of "variation margin" may be required since each day the Fund
would provide or receive cash that reflect any decline or increase in the
contract's value.
Although Futures Contracts call for the making or acceptance
of a cash settlement at a specified future time, the contractual obligation is
usually fulfilled before such date by buying or selling, as the case may be,
on a commodities exchange, an identical Futures Contract calling for
settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts. The purpose of the acquisition or sale of a Futures
Contract, in the case of a portfolio such as that of the Fund which holds or
intends to acquire long-term fixed income securities, is to attempt to protect
the Fund from fluctuations in interest rates without actually buying or
selling long-term fixed income securities. For example, if the Fund owns
long-term bonds and interest rates were expected to increase, the Fund might
sell index Futures Contracts. Such a sale would have much the same effect as
selling an equivalent value of the long-term bonds owned by the Fund. If
interest rates did increase, the value of the debt securities in the portfolio
would decline but the value of the Futures Contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. The Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
the use of Futures Contracts as an investment technique allows the Fund to
maintain a hedging position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, Futures Contracts may be purchased to attempt to hedge against
anticipated purchases of long-term bonds at higher prices. Since the
fluctuations in the value of Futures Contracts should be similar to that of
long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the Futures Contracts could be liquidated and the
Fund could then buy long-term bonds on the cash market. To the extent the Fund
enters into Futures Contracts for this purpose, the assets in the segregated
asset account maintained to cover the Fund's obligations with respect to such
Futures Contracts will consist of cash, cash equivalents or liquid securities
from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to
such Futures Contracts.
Although the Fund will invest in Futures Contracts for
hedging purposes, Futures Contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment judgment
of the Fund's investment advisor, International Strategy and Investment Inc.
("ISI" or the "Advisor") about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of bonds held in its portfolio and interest rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of its
bonds which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices
- 4 -
<PAGE>
which reflect the rising market. The Fund may have to sell securities at a
time when it may be disadvantageous to do so.
Various additional risks exist with respect to the trading
of futures. For example, the Fund's ability effectively to hedge all or a
portion of its portfolio through transactions in such instruments will depend
on the degree to which price movements in the underlying index correlate with
price movements in the relevant portion of the Fund's portfolio. The trading
of futures entails the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index. The
Fund's ability to engage in futures strategies will also depend on the
availability of liquid markets in such instruments. Transactions in these
instruments are also subject to the risk of brokerage firm or clearing house
insolvencies. The liquidity of a secondary market in a Futures Contract may be
adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In
addition, the exchanges on which futures are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single
investor, whether acting alone or in concert with others (regardless of
whether such contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers). In addition,
the ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out Futures Contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the Advisor may still not result in a
successful transaction.
Repurchase Agreements: The Fund may agree to purchase
securities issued by the United States Treasury ("U.S. Treasury Securities")
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Such repurchase agreements will be fully collateralized and the Fund
will enter into such agreements only with banks and broker-dealers which are
judged creditworthy by the Fund's Board of Directors. The Fund's procedures
regarding repurchase agreements are discussed in greater detail in the Fund's
Prospectus. The collateral for these repurchase agreements will be held by the
Fund's custodian or by a duly appointed sub-custodian. The Fund will enter
into repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. The list of approved banks and
broker-dealers will be monitored regularly by the Advisor and reviewed at
least quarterly by the Fund's Board of Directors. The seller under a
repurchase agreement may be required to maintain the value of the securities
subject to the repurchase agreement at not less than the repurchase price.
Default by the seller would, however, expose the Fund to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or limited
in its ability to sell the collateral.
- 5 -
<PAGE>
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as
federal and state regulatory limitations. The investment restrictions recited
below are in addition to those described in the Fund's Prospectus, and are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the outstanding Shares. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate,
provided that the Fund may purchase securities secured or otherwise supported
by interests in real estate;
2. Purchase or sell commodities or commodities contracts,
provided that for purposes of this restriction financial futures contracts are
not considered commodities or commodities contracts.
3. Act as an underwriter of securities within the meaning
of the U.S. federal securities laws except insofar as it might be deemed to be
an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities;
4. Issue senior securities, provided that investments in
financial futures contracts and when-issued securities shall not be deemed to
involve issuance of a senior security;
5. Make loans, except that the Fund may purchase or hold
debt instruments in accordance with its investment objectives and policies;
6. Effect short sales of securities;
7. Purchase securities on margin except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
transactions;
8. Purchase participations or other direct interests in
oil, gas or other mineral exploration or development programs or leases; or
9. Invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days.
The following are investment restrictions that may be
changed by a vote of a majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have
been in operation directly or through predecessors for less than three years;
2. Invest in shares of any other investment company
registered under the Investment Company Act, other than in connection with a
merger, consolidation, reorganization or acquisition of assets;
3. Purchase or retain the securities of any issuer if to
the knowledge of the Fund any officer or Director of the Fund or its
investment advisor owns beneficially more than .5% of the outstanding
securities of such issuer and together they own beneficially more than 5% of
the securities of such issuer;
4. Invest in companies for the purpose of exercising
management or control;
- 6 -
<PAGE>
5. Invest in puts or calls or any combination thereof,
provided that the Fund may acquire "stand-by commitments" with respect to
Municipal Obligations held in its portfolio; or
6. Purchase warrants.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined once daily as of
4:00 p.m. (Eastern Time) each day on which the New York Stock Exchange is open
for business (a "Business Day"). The New York Stock Exchange is open for
business on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting liabilities attributable to all
shares and any liabilities attributable to the specific class, and dividing
the resulting amount by the number of then outstanding shares of the class.
For this purpose, portfolio securities will be given their market value where
feasible. Debt securities (other than short-term obligations), including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices,
because such valuations are believed to reflect more accurately the fair value
of such securities. Use of the pricing service has been approved by the Board
of Directors. Short-term obligations (i.e., those with maturities of 60 days
of less) are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Futures Contracts will normally be
valued at the settlement price on the exchange on which they are primarily
traded. Portfolio securities for which there are no such valuations are valued
at fair value as determined in good faith by or at the direction of the Board
of Directors.
Redemption
Under normal circumstances, the Fund will redeem Shares by
check as described in the Prospectus. However, if the Board of Directors
determines that it would be in the best interests of the remaining
shareholders to make payment of the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming
shareholder will incur brokerage costs in later converting the assets into
cash. The method of valuing portfolio securities is described under "Valuation
of Shares" and such valuation will be made as of the same time the redemption
price is determined. The Fund has elected to be governed by Rule 18f-1 under
the Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder.
The Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
- 7 -
<PAGE>
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional
federal tax considerations generally affecting the Fund and its shareholders
that are not described in the Fund's Prospectus. No attempt is made to present
a detailed explanation of the tax treatment of the Fund or its shareholders,
and the discussion here and in the Fund's Prospectus is not intended as a
substitute for careful tax planning.
The following discussion of federal income tax consequences
is based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein,
and may have a retroactive effect with respect to the transactions
contemplated herein.
Qualification as a Regulated Investment Company
The Fund intends to be taxed as a regulated investment
company (a "RIC") under Subchapter M of the Code. In order to qualify as a RIC
for any taxable year, the Fund must (1) derive at least 90% of its gross
income from dividends, interest, gains from the sale or other disposition of
stocks or securities, and other income (including but not limited to gains
from options, futures, or forward contracts) derived with respect to its
business in investing in such stocks or securities (the "Income Requirement"),
and (2) derive less than 30% of its gross income from gains on the sale or
other disposition of stocks or securities held for less than three months
("Short-Short Gain Test").
In addition, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its assets must consist of cash and
cash items, U.S. government securities, securities of other RICs, and
securities of other issuers (as to which the Fund has not invested more than
5% of the value of its total assets in securities of any one issuer and as to
which the Fund does not hold more than 10% of the outstanding voting
securities of any one issuer). In addition, at the close of each quarter of
the Fund's taxable year, no more than 25% of the value of its total assets may
be invested in the securities (other than U.S. government securities and
securities of other RICs), of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses (the "Asset Diversification Test").
The Fund will not lose its status as a RIC if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of portfolio
assets not attributable to a purchase.
Under Subchapter M, the Fund is exempt from federal income
tax on its net investment income and net capital gains (the excess of net
long-term capital gains over net short-term capital losses) which it
distributes to shareholders, provided that it distributes each year at least
90% of its investment company taxable income (net investment income and the
excess of net short-term capital gains over net long-term capital losses) and
90% of its net tax-exempt interest income (the "Distribution Requirement"),
and complies with certain other requirements of the Code. The Distribution
Requirement for any year may be waived if the Fund establishes to the
satisfaction of the Internal Revenue Service that it is unable to satisfy the
Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax (discussed below).
Although the Fund intends to distribute substantially all of
its net investment income and capital gains for any taxable (i.e. fiscal)
year, the Fund will be subject to federal income taxation to the extent any
such income or gains are not distributed.
- 8 -
<PAGE>
Fund Distributions
Distributions of investment company taxable income will
generally be taxable to shareholders as ordinary income, regardless of whether
such distributions are paid in cash or are reinvested in Shares.
As noted in the Prospectus, exempt-interest dividends are
excludable from a shareholder's gross income for regular federal income tax
purposes. Exempt-interest dividends may nevertheless be subject to the
alternative minimum tax imposed by Section 55 of the Code (the "Alternative
Minimum Tax") or the environmental tax imposed by Section 59A of the Code (the
"Environmental Tax"). The Alternative Minimum Tax is imposed at a rate of up
to 28% in the case of non-corporate taxpayers and at the rate of 20% in the
case of corporate taxpayers, to the extent it exceeds the taxpayer's regular
tax liability. The Environmental Tax is imposed at the rate of 0.12% and
applies only to corporate taxpayers. The Alternative Minimum Tax and the
Environmental Tax may be affected by the receipt of exempt-interest dividends
in two circumstances. First, exempt-interest dividends derived from certain
"private activity bonds" issued after August 7, 1986, will generally be an
item of tax preference and therefore potentially subject to the Alternative
Minimum Tax and the Environmental Tax. The Fund intends, when possible, to
avoid investing in private activity bonds. Second, in the case of
exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined
in Section 56(g) of the Code, in calculating the corporation's alternative
minimum taxable income for purposes of determining the Alternative Minimum Tax
and the Environmental Tax.
The percentage of income that constitutes "exempt-interest
dividends" will be determined for each year for the Fund and will be applied
uniformly to all dividends declared with respect to the Fund during that year.
This percentage may differ from the actual percentage for any particular day.
The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gains"). If such gains are distributed as a capital gains
distribution, they are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has held Fund Shares.
Conversely, if the Fund elects to retain its net capital gains, it will be
taxed thereon at the applicable corporate tax rate. In this event, it is
expected that the Fund also will elect to have shareholders treated as having
received a distribution of such gains, with the result that they will be
required to report such gains on their returns as long-term capital gains,
will receive a refundable tax credit for their allocable share of federal
income tax paid by the Fund on the gains, and will increase the tax basis for
their Shares by an amount equal to 65% of the deemed distribution.
Generally, gain or loss on the sale, exchange or redemption
of a Share will be capital gain or loss which will be long-term if the Share
has been held for more than one year and otherwise will be short-term.
However, if a shareholder recognizes a loss on the sale, exchange or
redemption of a Share held for six months or less, such loss will be treated
as a long-term capital loss to the extent that any capital gains distributions
have been paid with respect to such Share (or any undistributed net capital
gains of the Fund with respect to such Share is included in determining the
shareholder's long-term capital gains). Similarly, any loss recognized by a
shareholder with respect to Shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder with respect to such Shares. In addition, any loss recognized on a
sale or other disposition of Shares will be disallowed to the extent an
investor repurchases (or enters into a contract or option to repurchase)
Shares within a period of 61 days (beginning 30 days before and ending 30 days
- 9 -
<PAGE>
after the disposition of the Shares). Investors should particularly note that
this loss disallowance rule will apply to Shares received through the
reinvestment of dividends during the 61-day period.
Investors should be careful to consider the tax implications
of purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend or distribution received, even though the net
asset value per Share on the date of such purchase may have reflected the
amount of such forthcoming dividend or distribution.
If for any taxable year the Fund does not qualify as a RIC,
all of its taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to shareholders, and such
distributions will be taxable to shareholders as ordinary dividends to the
extent of the Fund's current and accumulated earnings and profits. Such
distributions will generally be eligible for the 70% dividends received
deduction in the case of corporate shareholders.
The Fund will be required in certain cases to withhold and
remit to the United States Treasury 31% of distributions payable to any
shareholder who (1) has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the Internal
Revenue Service for failure to properly report payments of interest or
dividends, or (3) who has failed to certify to the Fund that such shareholder
is not subject to backup withholding.
The Fund will provide a statement annually to shareholders
as to the federal tax status of distributions paid (or deemed to be paid) by
the Fund during the year.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% federal excise tax on
RICs that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the calendar year plus 98% of their capital gains
net income for the one-year period ending on October 31 of such calendar year.
The excise tax is imposed on the undistributed part of this required
distribution. In addition, the balance of such income must be distributed
during the next calendar year to avoid liability for the excise tax in that
year. For the foregoing purposes, a company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year. For this purpose, in determining its capital gain net
income for the one-year period ending on October 31 of such calendar year, the
Fund must reduce its capital gain net income by the amount of any net ordinary
loss for the calendar year (but not below the net capital gains for the
one-year period ending on October 31). Because the Fund intends to distribute
all of its income currently (or to retain at most its "net capital gains" and
pay tax thereon), the Fund does not anticipate incurring any liability for
this excise tax. However, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments in order to make
sufficient distributions to avoid excise tax liability and, in addition, that
the liquidation of such investments in such circumstances may affect the
ability of the Fund to satisfy the Short-Short Gain Test.
Interest on indebtedness incurred or continued by
shareholders to purchase or carry Shares of the Fund will not be deductible
for federal income tax purposes. The deduction otherwise allowable to property
and casualty insurance companies for "losses incurred" will be reduced by an
amount equal to a portion of exempt-interest dividends received or accrued
during any taxable year. Foreign corporations engaged in a trade or business
in the United States will be subject to a "branch profits tax" on their
- 10 -
<PAGE>
"dividend equivalent amount" for the taxable year, which will include
exempt-interest dividends. Certain Subchapter S corporations may also be
subject to taxes on their "passive investment income," which could include
exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends)
plus one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by industrial
development bonds or private activity bonds should consult their tax advisors
before purchasing Shares. "Substantial user" is defined generally as including
a "non-exempt person" who regularly uses in trade or business a part of such a
facility.
Issuers of bonds purchased by the Fund (or the beneficiary
of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such
bonds may become subject to federal income taxation retroactively to the date
thereof if such representations are determined to have been inaccurate or if
the issuer of such bonds (or the beneficiary of such bonds) fails to comply
with such covenants.
Rules of state and local taxation of distributions from
regulated investment companies often differ from the rules for federal income
taxation described above. Shareholders of the Fund should consult with their
tax advisors regarding the application of the rules set forth above to their
particular circumstances and also regarding the application of state and local
tax laws to an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 717 Fifth Avenue, New York, New York 10022.
*EDWARD S. HYMAN, Chairman and Director (4/8/45)
Chairman, International Strategy and Investment Inc.,
1991-Present; Formerly, Vice Chairman and Member of the
Board of Directors, C.J. Lawrence Inc. (money manager),
1972-1991.
*R. ALAN MEDAUGH, Director and President (8/20/43)
President, International Strategy and Investment Inc.;
Formerly, Managing Director, C.J. Lawrence Fixed Income
Management (money manager).
*W. JAMES PRICE, Vice Chairman and Director (10/6/24)
6885 North Ocean Boulevard, Apartment 306, Ocean Ridge,
Florida 33435-3342. Director, Boca Research, Inc. (computer
peripherals). Managing Director Emeritus, Alex. Brown &
- 11 -
<PAGE>
Sons Incorporated; Formerly, Director, CSX Corporation
(transportation) and PHH Corporation (business services).
*RICHARD T. HALE, Vice Chairman and Director (7/17/45)
Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, MD 21202. Managing Director, Alex. Brown & Sons
Incorporated; Chartered Financial Analyst.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri
63141. Managing Director, CBC Capital (merchant banking),
1993-Present; Formerly, Senior Vice President and Chief
Financial Officer, General Dynamics Corporation (defense),
1989-1993 and Director, The Arch Fund (registered investment
company).
JOHN F. KROEGER, Director (8/11/24)
P.O. Box 464, 24875 Swan Road-Martingham, St. Michaels,
Maryland 21663. Director/Trustee, AIM Funds (registered
investment companies); Formerly, Consultant, Wendell &
Stockel Associates, Inc. (consulting firm); General
Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (finance and banking); Chairman of
the Quality Control Inquiry Committee, American Institute
of Certified Public Accountants; Formerly, Trustee, Merrill
Lynch Funds for Institutions, 1991-1993; Adjunct Professor,
Columbia University-Graduate School of Business, 1991-1992;
Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200
West Main Street, Durham, North Carolina 27705. President,
Duke Management Company (investments); Executive Vice
President, Duke University (education, research and
healthcare).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton,
New Jersey 08540. Professor-at-Large Emeritus, Institute
for Advanced Study; Director, ATL and Spacelabs Medical
Corp. (medical equipment) and Family Health International
(non-profit research and education); Trustee, Reed College
(education); Director, Research America (non-profit medical
research); Formerly, Trustee, Rockefeller Foundation; and
Director, Merrill Lynch Cluster C Funds (registered
investment companies).
EDWARD J. VEILLEUX, Vice President (8/26/43)
Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, MD 21202. Principal, Alex. Brown & Sons
Incorporated; President, Investment Company Capital Corp.
(registered investment advisor); Vice President, Armata
Financial Corp. (registered broker-dealer).
- 12 -
<PAGE>
NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International
Strategy and Investment Inc., 1991-Present; Formerly, Vice
President, C.J. Lawrence Inc. (money manager), 1981-1991.
BRIAN C. NELSON, Vice President and Secretary (7/31/59)
Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, MD 21202. Vice President, Alex. Brown & Sons
Incorporated, Investment Company Capital Corp. (registered
investment advisor) and Armata Financial Corp. (registered
broker-dealer); Assistant Secretary, The Glenmede Fund,
Inc. and The Glenmede Portfolios (registered investment
companies).
CARRIE L. BUTLER, Vice President (5/1/67)
Vice President, International Strategy and Investment Inc.;
Formerly, Mutual Fund Sales Assistant, C.J. Lawrence Fixed
Income Management (money manager), 1989-1991.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, MD 21202. Vice President, Alex. Brown & Sons
Incorporated, September 1995-Present; Treasurer, The
Glenmede Fund, Inc. and The Glenmede Portfolios (registered
investment companies), December 1995-Present; Formerly,
Vice President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President,
Delaware Management Company Inc., 1980-August 1995.
DENICE DE FLORIO, Assistant Vice President (4/23/69)
Assistant Vice President, International Strategy and
Investment Inc., March 1995-Present; Formerly, Assistant
Portfolio Manager, Smith Barney's Municipal Money Market
Funds and Taxable Money Market Funds, February
1993-February 1995 and Portfolio Administrator, Offitbank,
September 1991-February 1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, MD 21202. Asset Management Department, Alex.
Brown & Sons Incorporated, 1991 to Present; Formerly,
Student, 1989-1991.
- --------
* A Director who is an "interested person" as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors or
officers of some or all of the other investment companies advised,
distributed, administered or managed by Alex. Brown, Armata Financial Corp.,
or by any of their respective affiliates. There are currently 12 funds in the
Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund complex
(the "Fund Complex"). Mr. Hyman serves as a Director of three funds in the
Fund Complex. Mr. Medaugh serves as Director and President of one fund and as
President of two other funds in the Fund Complex. Mr. Hale serves as President
and Director of one fund, Vice President of one fund and as a Director of 10
other funds in the Fund Complex. Mr. Price serves as a Director of seven funds
in the Fund Complex. Messrs. Cunnane, Kroeger, Levy, McDonald and Woolf serve
as Directors of each fund in the Fund Complex. Ms. Lazar and Ms. Butler serve
as Vice Presidents and Ms. De Florio serves as an Assistant Vice President of
three funds in the Fund Complex. Mr. Veilleux serves as Executive Vice
President of one fund and as Vice President of each of the other funds in the
Fund Complex. Mr. Nelson serves as Vice President and Secretary, Mr. Finelli
- 13 -
<PAGE>
serves as Treasurer and Ms. DePrine serve as Assistant Secretary,
respectively, of each of the funds in the Fund Complex.
Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown, Armata Financial Corp., ISI or the Fund's
administrator may be considered to have received remuneration indirectly. As
compensation from the Fund, each Director who is not an "interested person" of
the Fund (as defined in the Investment Company Act) (a "Non-Interested
Director") receives an aggregate annual fee (plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with his attendance at Board and
committee meetings) from all Flag Investors/ISI Funds and Alex. Brown Cash
Reserve Fund, Inc. for which he serves. In addition, the Chairman of the Fund
Complex's Audit Committee receives an aggregate annual fee from the Fund
Complex. Payment of such fees and expenses is allocated among all such funds
described above in direct proportion to their relative net assets. For the
fiscal year ended October 31, 1995, Non-Interested Directors' fees
attributable to the assets of the Fund totalled $7,501. The following table
shows aggregate compensation paid to each of the Fund's Directors by the Fund
and the Fund Complex, respectively, in the fiscal year ended October 31, 1995.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Total Compensation From the
Position the Fund for the Fiscal Year Fund and Fund Complex Paid
Ended October 31, 1995 to Directors for the Fiscal Year
Ended October 31, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Edward S. Hyman $0 $0
Chairman
*R. Alan Medaugh $0 $0
Director & President
*Richard T. Hale $0 $0
Vice Chairman
*W. James Price $0 $0
Vice Chairman
James J. Cunnane $932(1) $29,250 for service on
Director 13 Boards in Fund Complex(2)
N. Bruce Hannay** $1,260(1) $39,000 for service on
Director 13 Boards in Fund Complex(2)
John F. Kroeger $1,386(1) $42,900 for service on
Director 13 Boards in Fund Complex(2)
Louis E. Levy $1,260(1) $39,000 for service on
Director 13 Boards in Fund Complex(2)
Eugene J. McDonald $1,260(1) $39,000 for service on
Director 13 Boards in Fund Complex(2)
Harry Woolf $1,260(1) $39,000 for service on
Director 13 Boards in Fund Complex(2)
</TABLE>
- ------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired, effective January 31, 1996.
- 14 -
<PAGE>
(1) Of the amounts paid to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $932, $919, $0, $0, $1,260 and $1,260, respectively, was
deferred pursuant to a deferred compensation plan.
(2) One of these funds ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion
of five years of service, each Participant will be entitled to receive an
annual retirement benefit equal to a percentage of the fee earned by him in
his last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by
him in his last year of service. The fee will be paid quarterly, for life, by
each Fund for which he serves. The Retirement Plan is unfunded and unvested.
Messrs. Kroeger and Woolf have qualified but have not yet received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994 and a Director who retired effective January 31, 1996, each of whom has
qualified for the Retirement Plan and will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each
fund in the Fund Complex based upon the relative net assets of such fund to
the Fund Complex.
Beginning in December, 1994, any Director who receives fees
from the Fund is permitted to defer a minimum of 50%, or up to all, of his
annual compensation pursuant to a Deferred Compensation Plan.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act (the "Code of
Ethics"). The Code of Ethics significantly restricts the personal investing
activities of all employees of the Advisor and the directors and officers of
the Fund's distributors. As described below, the Code of Ethics imposes
additional, more onerous, restrictions on the Fund's investment personnel,
including the portfolio managers and employees who execute or help execute a
portfolio manager's decisions or who obtain contemporaneous information
regarding the purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of the Advisor, any
director or officer of the Fund's distributors, and all Non-Interested
Directors, preclear any personal securities investments (with limited
exceptions, such as non-volitional purchases or purchases which are part of an
automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities
in an initial public offering, a prohibition from profiting on short-term
trading in securities and preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
ISI serves as the Fund's investment advisor pursuant to an
investment advisory agreement dated as of April 1, 1991 (the "Investment
Advisory Agreement"). ISI is a registered investment advisor that was formed
in January, 1991. ISI employs Messrs. Edward S. Hyman, the Fund's Chairman and
R. Alan Medaugh, the Fund's President. ISI is also the investment advisor to
Total Return U.S. Treasury Fund, Inc. and North American Government Bond Fund,
Inc.
- 15 -
<PAGE>
Under the Investment Advisory Agreement, the Advisor
obtains and evaluates economic, statistical and financial information to
formulate and implement investment policies for the Fund. Any investment
program undertaken by the Advisor will at all times be subject to policies and
control of the Fund's Board of Directors. The Advisor will provide the Fund
with office space for managing its affairs, with the services of required
executive personnel and with certain clerical and bookkeeping services and
facilities. These services are provided by the Advisor without reimbursement
by the Fund for any costs. The Advisor shall not be liable to the Fund or its
shareholders for any act or omission by the Advisor or any losses sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty. As compensation for
its services, the Advisor is entitled to receive an annual fee from the Fund,
payable monthly, at the annual rate of .40% of the Fund's average daily net
assets. The Advisor and the Administrator have voluntarily agreed to reduce
proportionately their respective annual fees, if necessary, so that the Fund's
annual expenses do not exceed .90% of the respective average net assets of the
Flag Investors Shares and the ISI Shares Classes. The services of the Advisor
to the Fund are not exclusive and the Advisor is free to render similar
services to others.
In addition, the Advisor has agreed to reduce its aggregate
fees on a monthly basis for any fiscal year to the extent required so that the
amount of the ordinary expenses of the Fund (excluding brokerage commissions,
interest, taxes and extraordinary expenses such as legal claims, liabilities,
litigation costs and indemnification related thereto) paid or incurred by the
Fund for such fiscal year does not exceed the expense limitations applicable
to the Fund imposed by the securities laws or regulations of the states in
which the Shares are registered or qualified for sale, as such limitations may
be raised or lowered from time to time. Currently, the most restrictive of
such expense limitations requires the Advisor to reduce its fees to the extent
required so that ordinary expenses of the Fund (excluding brokerage
commissions, interest, taxes and extraordinary expenses such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not
exceed 2.5% of the first $30 million of the Fund's average daily net assets,
2.0% of the next $70 million of the Fund's average daily net assets and 1.5%
of the Fund's average daily net assets in excess of $100 million. In addition,
if required to do so by any applicable state securities laws or regulations,
the Advisor will reimburse the Fund to the extent required to prevent the
expense limitations of any state law or regulation from being exceeded.
The Advisor is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. Because purchases and sales of securities by the Fund will
usually be principal transactions, the Fund will incur little, if any,
brokerage commission expense. The Advisor's primary consideration in effecting
securities transactions will be to obtain best price and execution. To the
extent that the execution and prices of more than one dealer are comparable,
the Advisor may, in its discretion, effect transactions with dealers that
furnish statistical research or other information or services that may benefit
the Fund's investment program.
The Investment Advisory Agreement will continue in effect
from year to year after its initial two year term if such continuance is
specifically approved at least annually by the Fund's Board of Directors,
including a majority of the Non-Interested Directors who have no direct or
indirect financial interest in such agreements, by votes cast in person at a
meeting called for such purpose, and by a vote of a majority of the
outstanding Shares (as defined under "Capital Stock"). The Investment Advisory
Agreement was most recently approved by the Board of Directors in the
foregoing manner on September 25, 1995. The Fund or the Advisor may terminate
the Investment Advisory Agreement on 60 days' written notice without penalty.
- 16 -
<PAGE>
The Investment Advisory Agreement will terminate automatically in the event of
assignment (as defined in the Investment Company Act). For the fiscal years
ended October 31, 1995, October 31, 1994 and October 31, 1993, ISI received
fees from the Fund of $531,628, $563,840 and $485,646, respectively and from
such amounts waived fees of $177,885, $191,665 and $192,586, respectively.
7. ADMINISTRATION
Investment Company Capital Corp. ("ICC" or the
"Administrator"), 135 East Baltimore Street, Baltimore, Maryland 21202
provides administration services to the Fund including: monitoring the Fund's
regulatory compliance, supervising all aspects of the Fund's service
providers, arranging, but not paying for, the printing and mailing of
prospectuses, proxy materials and shareholder reports, preparing and filing
all documents required by the securities laws of any state in which the Shares
are sold, establishing the Fund's budgets, monitoring the Fund's distribution
plan, preparing the Fund's financial information and shareholder reports,
calculating dividend and distribution payments and arranging for the
preparation of state and federal tax returns.
As compensation for providing administration services to the
Fund, the Administrator is entitled to receive an annual fee, calculated daily
and paid monthly, at the annual rate of .20% of the Fund's average daily net
assets. The Administrator and the Advisor have voluntarily agreed to reduce
proportionately their respective fees, if necessary, so that the annual
expenses for the Flag Investors Shares and the ISI Shares Classes do not
exceed .90% of such classes' respective average daily net assets. For the
fiscal year ended October 31, 1995 and for the period from January 1, 1994
through October 31, 1994, ICC received fees of $265,814 and $234,666,
respectively, and from such amounts waived fees of $88,942 and $80,446,
respectively. Prior to January 1, 1994, Alex. Brown provided administration
services to the Fund. For the period from November 1, 1993 through December
31, 1993 and for the fiscal year ended October 31, 1993, Alex. Brown received
fees (net of fee waivers) of $31,868 and $150,530, respectively.
ICC also serves as the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. (See
"Custodian, Transfer Agent and Accounting Services.") ICC is a wholly-owned
subsidiary of Alex. Brown and an affiliate of Armata.
8. DISTRIBUTION OF FUND SHARES
The Flag Investors Managed Municipal Fund Class A Shares
Distribution Agreement provides that Alex. Brown has the exclusive right to
distribute the Flag Investors Managed Municipal Fund Class A Shares either
directly or through other broker-dealers. The ISI Managed Municipal Fund
Shares Distribution Agreement provides that Armata has the exclusive right to
distribute ISI Managed Municipal Fund Shares, either directly or through other
broker-dealers. Armata is a broker-dealer that was formed in 1983 and is an
affiliate of Alex. Brown and ICC. (The ISI Managed Municipal Fund Shares
Distribution Agreement and the Flag Investors Managed Municipal Fund Class A
Shares Distribution Agreement are herein collectively referred to as the
"Distribution Agreements"). The Distribution Agreements further provide that
the distributors on behalf of the relevant class, will: solicit and receive
orders for the purchase of Shares; accept or reject such orders on behalf of
the Fund in accordance with the Fund's currently effective Prospectus and
transmit such orders as are accepted to the Fund's transfer agent as promptly
as possible; receive requests for redemptions and transmit such redemption
requests to the Fund's transfer agent as promptly as possible; and respond to
inquiries from shareholders concerning the status of their accounts and the
- 17 -
<PAGE>
operations of the Fund. Neither Alex. Brown nor Armata have undertaken to sell
any specific number of Shares. The Distribution Agreements further provide
that, in connection with the distribution of Shares, Alex. Brown and Armata
will be responsible for all of their respective promotional expenses. The
services provided by Alex. Brown and Armata to the Fund are not exclusive, and
they are free to provide similar services to others. Alex. Brown and Armata
shall not be liable to the Fund or its shareholders for any act or omission by
them or any losses sustained by the Fund or its shareholders except in the
case of willful misfeasance, bad faith, gross negligence or reckless disregard
of duty.
Alex. Brown and Armata have entered into Sub-Distribution
Agreements with certain broker-dealers ("Participating Dealers") under which
the Participating Dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from shareholders concerning the
status of their accounts and the operations of the Fund.
As compensation for providing distribution services as
described above, Alex. Brown and Armata each receive an annual fee, paid
monthly, equal to .25% of the average daily net assets of the Flag Investors
Shares and the ISI Class Shares, respectively. Alex. Brown and Armata expect
to allocate most of their annual fees to investment representatives and up to
all of their fees to Participating Dealers who enter into Sub-Distribution
Agreements with Alex. Brown or Armata, respectively.
Pursuant to Rule 12b-1 under the Investment Company Act,
which provides that investment companies may pay distribution expenses,
directly or indirectly, only pursuant to a plan adopted by the investment
company's board of directors and approved by its shareholders, the Fund has
adopted a Plan of Distribution for each of its classes of shares (the
"Plans"). Under the Plans, the Fund pays a fee to Alex. Brown and Armata for
distribution and other shareholder servicing assistance as set forth in the
Distribution Agreements, and Alex. Brown and Armata are authorized to make
payments out of the fee to their investment representatives and to
Participating Dealers. The Distribution Agreements, including the Distribution
Plans and forms of Sub-Distribution Agreement, were most recently approved by
the Fund's Board of Directors, including a majority of the Non-Interested
Directors on September 25, 1995. The Distribution Agreements and the Plans
encompassed therein will remain in effect from year to year as specifically
approved at least annually by the Fund's Board of Directors and by the
affirmative vote of a majority of the Non-Interested Directors by votes cast
in person at a meeting called for such purpose.
In approving the Plans, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable
likelihood that the Plans would benefit the Fund and its shareholders. The
Plans will be renewed only if the Directors make a similar determination in
each subsequent year. The Plans may not be amended to increase materially the
fee to be paid pursuant to the Distribution Agreement without the approval of
the shareholders of the Fund. The Plans may be terminated at any time and the
Distribution Agreements may be terminated at any time upon 60 days' notice, in
either case without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the outstanding Shares
(as defined under "Capital Stock"). Any Sub-Distribution Agreement may be
terminated in the same manner at any time. The Distribution Agreements and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plans to Alex. Brown and Armata
pursuant to the Distribution Agreements and to broker-dealers pursuant to
- 18 -
<PAGE>
Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors
shall be committed to the discretion of the Non-Interested Directors then in
office.
In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which Alex. Brown and Armata will
allocate a portion of their respective distribution fees as compensation for
such financial institutions' ongoing shareholder services. Although banking
laws and regulations prohibit banks from distributing shares of open-end
investment companies such as the Fund, according to interpretations from
various bank regulatory authorities, financial institutions are not prohibited
from acting in other capacities for investment companies, such as the
Shareholder Servicing capacities described above. Should future legislative,
judicial or administrative action prohibit or restrict the activities of the
Shareholder Servicing Agents in connection with the Shareholder Servicing
Agreements, the Fund may be required to alter materially or discontinue its
arrangements with the Shareholder Servicing Agents. Such financial
institutions may impose separate fees in connection with these services and
investors should review this Prospectus in conjunction with any such
institution's fee schedule. In addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein, and banks
and financial institutions may be required to register as dealers pursuant to
state law.
Under the Plans, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
and Armata under the Plans. Payments under the Plans are made as described
above regardless of Alex. Brown's or Armata's actual cost of providing
distribution services and may be used to pay Alex. Brown's and Armata's
overhead expenses. If the cost of providing distribution services to the Fund
in connection with the sale of the Flag Investors Shares or the ISI Shares is
less than .25% of the respective classes' average daily net assets for any
period, the unexpended portion of the distribution fee may be retained by
Alex. Brown and Armata, as appropriate. The Plans do not provide for any
charges to the Fund for excess amounts expended by Alex. Brown and Armata and,
if the Plans are terminated in accordance with their terms, the obligation of
the Fund to make payments to Alex. Brown and Armata pursuant to the Plans will
cease and the Fund will not be required to make any payments past the date the
related Distribution Agreement terminates.
For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, Armata received 12b-1 fees from the Fund of
$212,053, $217,473 and $173,304, respectively, for distribution of the ISI
Class Shares. During the same periods, Armata paid $202,553, $205,956 and
$167,726, respectively, to Participating Dealers and financial institutions.
Armata received no brokerage commissions from the Fund during these periods.
In addition, for the fiscal year ended October 31, 1995, Armata incurred
expenses of $6,792 for advertising and $5,811 for printing and mailing
prospectuses to prospective investors. For the fiscal years ended October 31,
1995, October 31, 1994 and October 31, 1993, Alex. Brown received 12b-1 fees
of $120,214, $130,687 and $125,492, respectively from the Fund for
distribution of the Flag Investors Class A Shares. During the same periods
Alex. Brown paid $110,093, $119,258 and $71,559, respectively, to its
investment representatives and paid $9,238, $5,277 and $4,099, respectively,
to Participating Dealers and financial institutions. Alex. Brown received no
brokerage commissions from the Fund during these periods. In addition, for the
fiscal year ended October 31, 1995, Alex. Brown incurred expenses of $0 for
advertising and $11,365 for printing and mailing prospectuses to prospective
investors. For the period from November 9, 1992 through February 28, 1994,
Alex. Brown was also distributor for the Flag Investors Class D Shares (known
at such time as the Flag Investors Class B Shares) pursuant to a Plan of
- 19 -
<PAGE>
Distribution in effect for such class. For distribution services for such
shares for the period from November 1, 1993 through October 19, 1994 and for
the period from November 9, 1992 through October 31, 1993, Alex. Brown
received from the Fund 12b-1 fees of $10,173 and $11,359, respectively, and
paid $0 to its investment representatives and $0 to Participating Dealers.
For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, Alex. Brown received sales commissions on the Flag
Investors Class A Shares of $63,394, $128,141 and $220,671, and from such
amounts retained $62,002, $125,181 and $217,701 in each such year,
respectively. For the fiscal years ended October 31, 1995, October 31, 1994
and October 31, 1993, Armata received sales commissions on the ISI Class
Shares of $353,850, $184,450 and $862,747 and from such amounts retained
$18,641, $28,864 and $122,125 in each such year, respectively.
The Fund has paid all costs associated with its organization
and registration under the Securities Act of 1933 and the Investment Company
Act. Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depository appointed by the Fund for the safekeeping of cash,
portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and
transfer taxes, and fees payable by the Fund to federal, state or other
governmental agencies; the costs and expenses of engraving or printing of
certificates representing Shares; all costs and expenses in connection with
the registration and maintenance of registration of the Fund and its Shares
with the SEC and various states and other jurisdictions (including filing
fees, legal fees and disbursements of counsel); the costs and expenses of
printing, including typesetting and distributing prospectuses and statements
of additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Directors' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory
board or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Non-Interested Directors,
and of independent public accountants, in connection with any matter relating
to the Fund; a portion of membership dues of industry associations; interest
payable on Fund borrowings; postage; insurance premiums on property or
personnel (including officers and Directors) of the Fund which inure to its
benefit; extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification related thereto);
and all other charges and costs of the Fund's operation unless otherwise
explicitly assumed by Alex. Brown, ICC or Armata. Absent fee waivers for the
fiscal year ended October 31, 1995, the Fund's Total Operating Expenses were
1.10% of its average net assets.
9. PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection and for negotiation of
commission rates. The Advisor may direct purchase and sale orders to any
broker-dealer.
Municipal obligations and other debt securities are traded
principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. The cost of securities
purchased from underwriters includes an underwriter's commission or
- 20 -
<PAGE>
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Advisor attempts to
negotiate with underwriters to decrease the commission or concession for the
benefit of the Fund. The Advisor normally seeks to deal directly with the
primary market makers unless, in its opinion, better prices are available
elsewhere. Securities firms or futures commission merchants may receive
brokerage commissions on transactions involving Futures Contracts. On
occasion, certain money market instruments may be purchased directly from an
issuer without payment of a commission or concession.
The Advisor's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, the Advisor may, in its discretion, effect
transactions with broker-dealers that furnish statistical, research or other
information or services which are deemed by the Advisor to be beneficial to
the Fund's investment program. Certain research services furnished by
broker-dealers may be useful to the Advisor with clients other than the Fund.
Similarly, any research services received by the Advisor
through placement of portfolio transactions of other clients may be of value
to the Advisor in fulfilling its obligations to the Fund. No specific value
can be determined for research and statistical services furnished without cost
to the Advisor by a broker-dealer. The Advisor is of the opinion that because
the material must be analyzed and reviewed by its staff, its receipt does not
tend to reduce expenses, but may be beneficial in supplementing the Advisor's
research and analysis. Therefore, it may tend to benefit the Fund by improving
the Advisor's investment advice. The Advisor's policy is to pay a
broker-dealer higher commissions for particular brokerage transactions, if
any, than might be charged if a different broker-dealer had been chosen when,
in the Advisor's opinion, this policy furthers the overall objective of
obtaining best price and execution. Subject to periodic review by the Fund's
Board of Directors, the Advisor is also authorized to pay broker-dealers
higher commissions on brokerage transactions for the Fund in order to secure
research and investment services described above. The allocation of orders
among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board. During the fiscal years ended October 31,
1995, October 31, 1994 and October 31, 1993 no brokerage commissions were paid
by the Fund for research services.
The Fund is required to identify any securities of its
"regular brokers or dealers" (as such term is defined in the Investment
Company Act) which the Fund has acquired during its most recent fiscal year.
As of October 31, 1995, the Fund held a 5.75% repurchase agreement issued by
Goldman Sachs & Co. valued at $12,982,000. Goldman Sachs & Co. is a "regular
broker or dealer" of the Fund.
The Advisor manages other investment accounts. It is
possible that, at times, identical securities will be acceptable for the Fund
and one or more of such other accounts; however, the position of each account
in the securities of the same issuer may vary and the length of time that each
account may choose to hold its investment in such securities may likewise
vary. The timing and amount of purchase by each account will also be
determined by its cash position. If the purchase or sale of securities
consistent with the investment policies of the Fund or one or more of these
accounts is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable
by the Advisor. The Advisor may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and
most favorable execution. Such simultaneous transactions, however, could
adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security which it seeks to purchase or sell.
- 21 -
<PAGE>
10. CAPITAL STOCK
The Fund is authorized to issue forty million Shares of
common stock, par value $.001 per Share. The Board of Directors may increase
or decrease the number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of shares by the
Directors at any time without shareholder approval. The Fund has created four
classes of Shares: ISI Managed Municipal Fund Shares, Flag Investors Managed
Municipal Fund Class A Shares (formerly known as Flag Investors Managed
Municipal Fund Shares), Flag Investors Managed Municipal Fund Class B Shares
and Flag Investors Managed Municipal Fund Class D Shares. The Flag Investors
Managed Municipal Fund Class B Shares and the Flag Investors Managed Municipal
Fund Class D Shares are not currently being offered. All Shares of the Fund
regardless of class would have equal rights with respect to voting, except
that with respect to any matter affecting the rights of the holders of a
particular series or class, the holders of each series would vote separately.
Any such series would be a separately managed portfolio and shareholders of
each series would have an undivided interest in the net assets of that series.
For tax purposes, the series would be treated as separate entities. Generally,
each class of shares issued by a particular series will be identical to every
other class and expenses of the Fund (other than 12b-1 fees) are prorated
among all classes of a series based upon the relative net assets of each
class. Any matters affecting any class exclusively would be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting
rights, and therefore the holders of more than 50% of the outstanding Shares
voting together for election of Directors may elect all the members of the
Board of Directors of the Fund. In such event, the remaining holders cannot
elect any members of the Board of Directors of the Fund. There are no
preemptive, conversion or exchange rights applicable to any of the Shares. The
issued and outstanding Shares are fully paid and non-assessable. In the event
of liquidation or dissolution of the Fund, each Share is entitled to its
portion of the Fund's assets (or the assets allocated to a separate series of
shares if there is more than one series) after all debts and expenses have
been paid.
As used in this Statement of Additional Information, the
term "majority of the outstanding Shares" means the vote of the lesser of (i)
67% or more of the Shares present at a meeting, if the holders of more than
50% of the outstanding Shares are present or represented by proxy, or (ii)
more than 50% of the outstanding Shares.
11. REPORTS
The Fund furnishes shareholders with semi-annual and annual
reports containing information about the Fund and its operations, including a
list of investments held in the Fund's portfolio and financial statements. The
annual financial statements are audited by the Fund's independent accountants.
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of
PNC Bank Corp. has been retained to act as custodian of the Fund's
investments. PNC Bank receives such compensation from the Fund for its
services as custodian as may be agreed to from time to time by PNC Bank and
the Fund. Investment Company Capital Corp., 135 East Baltimore Street,
Baltimore, Maryland 21202 (telephone: (800) 553-8080 for the Flag Investors
- 22 -
<PAGE>
Shares Class and (800) 882-8585 for the ISI Shares Class) has been retained to
act as the Fund's transfer and dividend disbursing agent. As compensation for
these services, ICC receives up to $10.62 per account per year plus
reimbursement for out-of-pocket expenses incurred in connection therewith. For
the fiscal year ended October 31, 1995, such fees totalled $81,033.
ICC also provides accounting services to the Fund. As
compensation for providing accounting services, ICC is entitled to receive an
annual fee, calculated daily and paid monthly as shown below.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000 (fixed fee)
$ 10,000,001 - $ 20,000,000 .100%
$ 20,000,001 - $ 30,000,000 .080%
$ 30,000,001 - $ 40,000,000 .060%
$ 40,000,001 - $ 50,000,000 .050%
$ 50,000,001 - $ 60,000,000 .040%
$ 60,000,001 - $ 70,000,000 .030%
$ 70,000,001 - $ 99,999,999 .020%
$100,000,001 - $ 500,000,000 .015%
$500,000,001 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of
accounting services: express delivery service, independent pricing and
storage. As compensation for providing accounting services for the fiscal year
ended October 31, 1995, ICC received fees of $59,938.
ICC also serves as the Fund's administrator.
13. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by
Coopers & Lybrand L.L.P. whose report thereon appears elsewhere herein, and
has been included herein in reliance upon the report of such firm of
accountants given on their authority as experts in accounting and auditing.
Coopers & Lybrand L.L.P. has offices at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103.
14. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the
Fund to that of other open-end diversified management investment companies and
to stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than
in terms of yield. The total return quotations, under the rules of the SEC,
must be calculated according to the following formula:
n
P(1 + T) = ERV
- 23 -
<PAGE>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of
the 1, 5, or 10 year periods (or
fractional portion thereof) of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertising for
publication, and will cover one, five, and ten year periods or a shorter
period dating from the effectiveness of the Fund's registration statement or
the date the Fund (or a series) commenced operations (provided such date is
subsequent to the date the registration statement became effective). During
its first year of operation the Fund may, in lieu of annualizing its total
return, use an aggregate total return calculated in the same manner. In
calculating the ending redeemable value, the maximum sales load is deducted
from the initial $1,000 payment and all dividends and distributions by the
Fund are assumed to have been reinvested at net asset value as described in
the prospectus on the reinvestment dates during the period. "T" in the formula
above is calculated by finding the average annual compounded rate of return
over the period that would equate an assumed initial payment of $1,000 to the
ending redeemable value. Any sales loads that might in the future be made
applicable at the time to reinvestments would be included as would any
recurring account charges that might be imposed by the Fund.
The Fund may also from time to time include in such
advertising total return figures that are not calculated according to the
formula set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in
comparing the Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Morningstar, Inc., with
the performance of the Lehman Brothers Municipal Bond Index, the Consumer
Price Index, the return on 90 day U.S. Treasury bills, the Standard and Poor's
500 Stock Index or the Dow Jones Industrial Average, the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment
date. For the purpose of other comparisons, the Fund performs a second
alternative computation for its aggregate and average annual total return by
assuming the investment of $10,000 in Shares and assuming no reinvestment of
dividends or other distributions.
For these alternative computations, the Fund assumes that
the $10,000 invested in Shares is net of all sales charges (as distinguished
from the computation required by the SEC where the $1,000 payment is reduced
by sales charges before being invested in Shares). The Fund will, however,
disclose the maximum sales charges and will also disclose that the performance
data do not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted. Such alternative total return information will
be given no greater prominence in such advertising than the information
prescribed under SEC rules, and all advertisements containing performance data
will include a legend disclosing that such performance data represent past
performance and that the investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
- 24 -
<PAGE>
Calculated according to SEC rules, for the one year period
ended September 30, 1995, the ending redeemable value of a hypothetical $1,000
payment for ISI Managed Municipal Fund Shares was $1,060, resulting in a total
return for such Shares equal to 5.95%. For the five year period ended
September 30, 1995, the ending redeemable value of a hypothetical $1,000
payment for ISI Managed Municipal Fund Shares was $1,468, resulting in an
average annual total return for such Shares equal to 7.97%. For the period from
February 26, 1990 (effectiveness of the Fund's registration statement) through
the end of the Fund's most recent calendar quarter on September 30, 1995, the
ending redeemable value of a hypothetical $1,000 payment for ISI Managed
Municipal Fund Shares was $1,481, resulting in an average annual total return
for such Shares equal to 7.27%.
Calculated according to SEC rules for the one year period
ended September 30, 1995, the ending redeemable value of a hypothetical $1,000
payment for Flag Investors Managed Municipal Fund Class A Shares was $1,059,
resulting in an annual return for such Shares equal to 5.90%. For the period
from October 23, 1990 (initial public offering of the Flag Investors Managed
Municipal Fund Class A Shares) through the end of the Fund's most recent
calendar quarter on September 30, 1995, the ending redeemable value of a
hypothetical $1,000 payment for Flag Investors Managed Municipal Fund Class A
Shares was $1,376, resulting in an average annual total return for such Shares
equal to 6.67%.
Calculated according to the first alternative computation,
which assumes no sales charge and reinvestment of all distributions, for the
one year period ended October 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in either ISI Managed Municipal Fund Shares or
Flag Investors Managed Municipal Fund Class A Shares was $11,542, resulting in
an average total return equal to 15.42%. For the five year period ended
October 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in either ISI Managed Municipal Fund Shares or Flag Investors
Managed Municipal Fund Class A Shares was $14,510, resulting in an average
annual total return equal to 7.7%. For the period from February 26, 1990
(effectiveness of the Fund's registration statement) through the end of the
Fund's most recent fiscal year on October 31, 1995, the ending redeemable
value of a hypothetical $10,000 investment in ISI Managed Municipal Fund
Shares was $15,606, resulting in an average annual total return for such
Shares equal to 8.2%. For the period from October 23, 1990 (initial public
offering of the Flag Investors Managed Municipal Fund Class A Shares) through
the end of the Fund's most recent fiscal year on October 31, 1995, the ending
redeemable value of a hypothetical $10,000 investment in Flag Investors
Managed Municipal Fund Class A Shares was $15,220, resulting in an average
annual total return for such Shares equal to 8.0%.
Any yield quotation of the Fund is based on the annualized
net investment income per share of the Fund over a 30 day period. The yield
for the Fund is calculated by dividing the net investment income per share of
the Fund earned during the period by the maximum offering price per share of
the Fund on the last day of that period. The resulting figure is then
annualized. Net investment income per share is determined by dividing (i) the
dividends and interest earned by the Fund during the period, minus accrued
expenses for the period, by (ii) the average number of Fund shares entitled to
receive dividends during the period multiplied by the maximum offering price
per share on the last day of the period. The Fund's yield calculations assume
a maximum sales charge of 4.45% for the ISI Managed Municipal Fund Shares and
4.50% for the Flag Investors Managed Municipal Fund Class A Shares. The Fund's
taxable-equivalent yield is calculated by determining the rate of return that
- 25 -
<PAGE>
would have to be achieved on a fully taxable investment to produce the
after-tax equivalent on the Fund's yield. In calculating taxable-equivalent
yield, the Fund assumes certain brackets for shareholders.
For the 30 day period ended October 31, 1995, the yield for
the ISI Managed Municipal Fund Shares was 4.34% and the yield for the Flag
Investors Managed Municipal Fund Class A Shares was 4.34%. For the same 30 day
period, the taxable-equivalent yield (for an investor in the 31% tax bracket)
was 6.29% for the ISI Managed Municipal Fund Shares and 6.29% for the Flag
Investors Managed Municipal Fund Class A Shares.
The Fund's annual portfolio turnover rate (the lesser of
the value of the purchases or sales for the year divided by the average
monthly market value of the portfolio during the year, excluding U.S.
Government securities and securities with maturities of one year or less) may
vary from year to year, as well as within a year, depending on market
conditions. For the fiscal years ended October 31, 1995 and October 31, 1994,
the Fund's portfolio turnover rate was 55% and 37%, respectively.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 8, 1996, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
outstanding Shares.
Flag Investors Shares
Alex. Brown & Sons Incorporated 5.59%
FBO 201-57665-18
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Incorporated 86.10%*
135 East Baltimore Street
Baltimore, MD 21202
- ---------------
*As of such date, to Fund managements's knowledge, Alex. Brown owned
beneficially less than 1% of such shares.
As of such date directors and officers, as a group, owned
beneficially and of record less than 1% of the Fund's outstanding Shares of
either class.
16. FINANCIAL STATEMENTS.
See next page.
- 26 -
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1995
<TABLE>
<CAPTION>
RATING*
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
MUNICIPAL BONDS--89.2%
GENERAL OBLIGATION--49.3%
Charlotte, NC:
5.00%, 2007................................................. Aaa/AAA $ 2,000 $ 2,016,980
5.00%, 2008................................................. Aaa/AAA 1,500 1,499,880
5.30%, 2011................................................. Aaa/AAA 1,590 1,594,913
5.30%, 2012................................................. Aaa/AAA 1,120 1,118,734
5.30%, 2012................................................. Aaa/AAA 2,325 2,322,373
5.80%, 2016................................................. Aaa/AAA 2,500 2,589,375
DuPage County Jail Project, IL, 5.60%, 2021................... Aa/AAA 1,600 1,576,512
Florida Board of Education, Refunding Public Education:
5.00%, 2008................................................. Aa/AA 2,000 1,981,500
6.125%, 2012 ............................................... Aa/AA 2,250 2,341,778
6.50%, 2012................................................. Aa/AA 2,500 2,688,250
5.75%, 2019................................................. Aa/AA 3,500 3,477,460
5.125%, 2022 ............................................... Aa/AA 5,000 4,608,600
Franklin County, OH:
5.45%, 2009................................................. Aaa/AAA 1,500 1,523,190
5.50%, 2013................................................. Aaa/AAA 1,000 999,950
Henrico County, VA:
5.20%, 2007................................................. Aaa/AAA 1,300 1,323,699
5.20%, 2008................................................. Aaa/AAA 1,200 1,213,032
5.25%, 2009................................................. Aaa/AAA 1,000 1,005,720
Maryland State & Local Facilities, Second Series,
5.125%, 2010................................................ Aaa/AAA 3,000 2,955,300
Missouri State Building, Series "A", 5.00%, 2010.............. Aaa/AAA 2,000 1,954,960
Montgomery County, MD:
5.60%, 2004................................................. Aaa/AAA 1,000 1,067,060
5.00%, 2009................................................. Aaa/AAA 1,500 1,469,025
5.00%, 2010................................................. Aaa/AAA 1,500 1,452,435
Plano, TX--Independent School District, 5.00%, 2011........... Aaa/AAA 3,000 2,837,100
South Carolina Capital Improvement:
5.00%, 2006................................................. Aaa/AA+ 2,090 2,112,363
5.25%, 2007................................................. Aaa/AA+ 1,000 1,023,970
State of Georgia, Series "D":
5.25%, 2009................................................. Aaa/AA+ 1,580 1,592,198
5.00%, 2010................................................. Aaa/AA+ 2,000 1,944,940
</TABLE>
[LOGO]
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONTINUED) October 31, 1995
<TABLE>
<CAPTION>
RATING*
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
GENERAL OBLIGATION (CONTINUED)
State of Tennessee:
5.50%, 2009................................................. Aaa/AA+ $ 1,535 $ 1,572,008
5.55%, 2010................................................. Aaa/AA+ 1,000 1,020,350
State of Texas:
5.25%, 2013................................................. Aa/AA 3,250 3,154,385
6.00%, 2014................................................. Aa/AA 2,000 2,051,940
Wake County, NC, 4.80%, 2010.................................. Aaa/AAA 3,500 3,317,160
Washington Suburban Sanitary District, MD, 5.375%, 2010....... Aa1/AA 1,810 1,817,312
-------------
65,224,452
-------------
ELECTRIC AND GAS UTILITY REVENUE--15.2%
Jacksonville Electric Authority Revenue, FL,
St. John's River Power:
5.20%, 2013................................................. Aa1/AA 2,000 1,919,760
5.25%, 2028................................................. Aa1/AA 2,000 1,864,020
Omaha Public Power District Electric Revenue, NE:
Series "A", 5.25%, 2004..................................... Aa/AA 2,000 2,066,060
Series "D", 5.10%, 2008..................................... Aa/AA 1,000 990,940
Series "D", 5.25%, 2013..................................... Aa/AA 2,000 1,942,400
Series "A", 5.50%, 2017..................................... Aa/AA 1,500 1,470,405
Salt River Agricultural Project, AZ:
5.20%, 2008................................................. Aa/AA 1,000 1,002,610
5.75%, 2019................................................. Aa/AA 4,000 3,964,240
San Antonio Electric and Gas Revenue, TX:
Series "A", 4.90%, 2008..................................... Aa1/AA 4,000 3,867,680
Series "A", 6.50%, 2012..................................... Aa1/AA 1,000 1,048,250
-------------
20,136,365
-------------
TRANSPORTATION REVENUE--10.1%
Florida Transportation Revenue, 5.80%, 2018................... Aa/AA 2,000 1,999,820
Kansas Transportation Revenue:
5.40%, 2009................................................. Aa/AA 2,000 2,026,180
Series "A", 5.40%, 2009..................................... Aa/AA 2,500 2,532,725
Maryland State Department of Transportation, 5.375%, 2006..... Aa/AA 1,500 1,548,030
Portland, OR, Metro, 5.25%, 2007.............................. Aa/AA+ 1,500 1,524,075
State of South Carolina, 5.00%, 2009.......................... Aaa/AA+ 2,700 2,655,990
Virginia State Transportation Authority, 6.00%, 2010.......... Aa/AA 1,000 1,037,360
-------------
13,324,180
-------------
</TABLE>
[LOGO]
<PAGE>
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MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONTINUED) October 31, 1995
<TABLE>
<CAPTION>
RATING*
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
WATER AND SEWER UTILITY REVENUE--5.1%
Chicago, IL, 6.30%, 2009...................................... Aa/AA $ 1,000 $ 1,074,850
DuPage Water Commission, IL, 5.25%, 2011...................... Aa/AA 2,500 2,410,125
Orlando Utility Commission, FL, 5.125%, 2019.................. Aa1/AA 3,500 3,230,255
-------------
6,715,230
-------------
PREREFUNDED ISSUES--6.7%
Jacksonville, FL, Electric Authority Revenue, Scherer 4-1-A,
6.75%, 2021................................................. Aaa/AA 1,000 1,119,190
Lower Colorado River Authority, Jr Lien, 4th Supply,
5.25%, 2015................................................. Aaa/AAA 2,000 1,904,660
State of Hawaii, General Obligation:
7.00%, 2006................................................. NR/AA 750 830,760
6.125%, 2010 ............................................... Aaa/AA 1,000 1,083,560
Washington Suburban, Water Supply, MD, 5.10%, 2005............ Aa1/AA 2,000 2,050,220
Washington Suburban, Administration Building Construction, MD,
5.00%, 2005................................................. Aa1/AA 1,850 1,882,357
-------------
8,870,747
-------------
OTHER REVENUE--2.8%
Indianapolis Local Public Import Board, IN, 6.00%, 2018....... Aaa/AA+ 1,500 1,526,340
University of Texas, TX, 6.50%, 2011.......................... Aaa/AA+ 2,000 2,137,580
-------------
3,663,920
-------------
TOTAL MUNICIPAL BONDS
(Cost $115,885,052)......................................... 117,934,894
-------------
REPURCHASE AGREEMENT--9.8%
GOLDMAN SACHS & CO., 5.75%
Dated 10/31/95, to be repurchased on 11/1/95, collateralized
by U.S. Treasury Notes with a market value of $13,242,384.
(Cost $12,982,000).......................................... 12,982 12,982,000
-------------
</TABLE>
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<PAGE>
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MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONCLUDED) October 31, 1995
<TABLE>
<CAPTION>
VALUE
(NOTE A)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES--99.0%
(Cost $128,867,052)**............................................................... $ 130,916,894
OTHER ASSETS IN EXCESS OF LIABILITIES, NET--1.0%...................................... 1,355,190
-------------
NET ASSETS--100.0%.................................................................... $ 132,272,084
-------------
-------------
NET ASSET VALUE AND REDEMPTION PRICE PER:
FLAG INVESTORS CLASS A SHARE
($45,979,713 DIVIDED BY 4,316,870 shares outstanding).............................. $10.65
-------------
-------------
ISI CLASS SHARE
($86,292,371 DIVIDED BY 8,103,509 shares outstanding).............................. $10.65
-------------
-------------
MAXIMUM OFFERING PRICE PER:
FLAG INVESTORS CLASS A SHARE
($10.65 DIVIDED BY .955)........................................................... $11.15
-------------
-------------
ISI CLASS SHARE
($10.65 DIVIDED BY .9555).......................................................... $11.15
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
*The Moody's and Standard & Poor's ratings indicated are believed to be the
most recent ratings available as of October 31, 1995. Ratings of issues have
not been audited by Coopers & Lybrand L.L.P.
**Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest................................................................................... $ 7,465,269
------------
EXPENSES:
Investment advisory fee (Note B)........................................................... 531,628
Distribution fee (Note B).................................................................. 332,267
Administration fees (Note B)............................................................... 265,814
Transfer agent fees (Note B)............................................................... 81,033
Accounting fee (Note B).................................................................... 59,938
Printing and postage....................................................................... 49,148
Custodian fees............................................................................. 29,009
Registration fees (Note A)................................................................. 28,066
Legal...................................................................................... 27,564
Audit...................................................................................... 26,474
Miscellaneous.............................................................................. 11,255
Organizational expense (Note A)............................................................ 7,878
Directors' fees............................................................................ 7,501
Insurance.................................................................................. 5,619
------------
Total expenses........................................................................... 1,463,194
Less: Fees waived (Note B)................................................................. (266,827)
------------
Net expenses............................................................................. 1,196,367
------------
Net investment income...................................................................... 6,268,902
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions............................................... 599,805
Change in unrealized appreciation/(depreciation) of investments............................ 12,223,598
------------
Net gain on investments.................................................................... 12,823,403
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................................... $ 19,092,305
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31,
--------------------------------
1995 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income......................................................... $ 6,268,902 $ 6,148,504
Net realized gain from security transactions.................................. 599,805 1,853,758
Change in appreciation/(depreciation) of investments.......................... 12,223,598 (17,711,072)
--------------- ---------------
Net increase/(decrease) in net assets resulting from operations............... 19,092,305 (9,708,810)
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares............................................... (2,270,726) (2,282,670)
Flag Investors Class B Shares............................................... -- (66,885)
ISI Class Shares............................................................ (3,998,176) (3,798,949)
Net realized short-term gains:
Flag Investors Class A Shares............................................... (267,415) (480,259)
Flag Investors Class B Shares............................................... -- (23,856)
ISI Class Shares............................................................ (471,717) (799,441)
Net realized long-term gains:
Flag Investors Class A Shares............................................... (418,234) (188,158)
Flag Investors Class B Shares............................................... -- (8,131)
ISI Class Shares............................................................ (691,139) (304,477)
--------------- ---------------
Total distributions........................................................... (8,117,407) (7,952,826)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares.................................................. 11,188,171 25,859,047
Value of shares issued in reinvestment of dividends........................... 4,794,976 4,783,791
Cost of shares repurchased.................................................... (28,195,599) (23,600,871)
--------------- ---------------
Increase/(decrease) in net assets derived from
capital share transactions................................................... (12,212,452) 7,041,967
--------------- ---------------
Total decrease in net assets.................................................. (1,237,554) (10,619,669)
NET ASSETS:
Beginning of year............................................................. 133,509,638 144,129,307
--------------- ---------------
End of year................................................................... $ 132,272,084 $ 133,509,638
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A and ISI Class Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)*
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year................... $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................. 0.48 0.46 0.50 0.50 0.57
Net realized and unrealized
gain/(loss) on investments.......................... 0.98 (1.15) 0.94 0.22 0.49
--------- --------- --------- --------- ---------
Total from Investment Operations...................... 1.46 (0.69) 1.44 0.72 1.06
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income
and net realized short-term gains................... (0.54) (0.56) (0.61) (0.65) (0.69)
Distributions from net realized
long-term gains..................................... (0.08) (0.04) (0.04) (0.12) --
--------- --------- --------- --------- ---------
Total distributions................................... (0.62) (0.60) (0.65) (0.77) (0.69)
--------- --------- --------- --------- ---------
Net asset value at end of year........................ $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN:
Flag Investors Class A Shares......................... 15.42% (6.49)% 14.36% 6.06% 10.85%
ISI Class Shares...................................... 15.42% (6.49)% 14.36% 6.06% 10.85%
RATIOS TO AVERAGE NET ASSETS:
Expenses1............................................. 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income2................................ 4.72% 4.37% 4.38% 4.78% 5.57%
SUPPLEMENTAL DATA:
Net assets at end of period:
Flag Investors Class A Shares....................... $ 45,980 $ 49,903 $ 53,486 $ 45,536 $ 38,491
ISI Class Shares.................................... $ 86,292 $ 83,607 $ 88,378 $ 51,420 $ 20,053
Portfolio turnover rate............................... 55% 37% 68% 95% 86%
</TABLE>
- --------------------------------------------------------------------------------
* Computed based upon average shares outstanding.
1 Without the waiver of advisory and administration fees (Note B), the ratio of
expenses to average net assets would have been 1.10%, 1.11%, 1.14%, 1.27% and
1.47% for the years ended October 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
2 Without the waiver of advisory and administration fees (Note B), the ratio of
net investment income to average net assets would have been 4.52%, 4.16%,
4.14%, 4.41% and 4.99% for the years ended October 31, 1995, 1994, 1993, 1992
and 1991, respectively.
See accompanying Notes to Financial Statements.
[LOGO]
<PAGE>
[LOGO]
MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Managed
Municipal Fund, Inc. (the "Fund") was organized as a Maryland Corporation on
January 15, 1990 and commenced operations February 26, 1990. The Fund is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. At October 31, 1995, the Fund
consisted of two classes of shares: ISI Managed Municipal Fund Shares ("ISI
Class") and Flag Investors Managed Municipal Fund Class A Shares ("Flag
Investors Class A"). As of March 1, 1994, the previously offered Flag
Investors Managed Municipal Fund Class B Shares ("Flag Investors Class B")
were no longer issuing new shares. All Class B Shares not exchanged into
Class A Shares or previously redeemed were redeemed as of October 19, 1994.
Significant accounting policies are as follows:
SECURITY VALUATION - Municipal bonds are valued on the basis of quotations
provided by a pricing service that 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. Securities or other assets for which market quotations are
not readily available are valued at their face 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.
REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at not less than the repurchase price. The agreement is
conditioned upon the collateral being deposited under the Federal Reserve
book-entry system.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. Accordingly,
periodic reclassifications are made within the Fund's capital accounts to
reflect income and capital gains available for distribution under income tax
regulations.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold 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.
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.
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Notes to Financial Statements (CONTINUED)
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH
AFFILIATES AND OTHER FEES - International Strategy & Investment Inc. ("ISI")
serves as the Fund's advisor and Investment Company Capital Corp. ("ICC")
serves as the Fund's administrator. As compensation for its advisory
services, ISI receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .40% of average daily net assets. As
compensation for its administrative services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, at the annual rate of .20% of
the average daily net assets.
ISI and ICC have agreed to reduce their respective annual fees
proportionately, if necessary, so that ordinary expenses of the Fund for any
fiscal year do not exceed .90% of the average daily net assets of Flag
Investors Class A and ISI Class Shares. For the year ended October 31, 1995,
ISI and ICC waived fees of $177,885 and $88,942, respectively.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $59,938 for accounting services for the year
ended October 31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $81,033 for
transfer agent services for the year ended October 31, 1995.
As compensation for providing distribution services, Armata Financial Corp.
receives from the Fund an annual fee, calculated daily and paid monthly, at
the annual rate equal to .25% of the average daily net assets of the ISI
Class Shares. Alex. Brown receives from the Fund an annual fee, calculated
daily and paid monthly, at an annual rate equal to .25% of the average daily
net assets of the Flag Investors Class A Shares. For the year ended October
31, 1995, distribution fees were $332,267, of which $212,053 were allocated
to ISI Class Shares and $120,214 were allocated to Flag Investors Class A
Shares.
C. CAPITAL SHARE TRANSACTIONS - The Fund is
authorized to issue up to 40 million shares of capital stock, par value $.001
per share, all of which shares are designated as common stock. Transactions
in shares of the Fund were as follows:
<TABLE>
<CAPTION>
FLAG INVESTORS CLASS A SHARES
-----------------------------
FOR THE YEAR ENDED OCTOBER
31,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
Shares sold.................. 323,698 848,807
Shares issued to shareholders
on reinvestment of
dividends.................. 161,945 151,892
Shares redeemed.............. (1,256,958) (731,595)
-------------- -------------
Net increase/(decrease) in
shares outstanding......... (771,315) 269,104
-------------- -------------
-------------- -------------
Proceeds from sale of
shares..................... $ 3,206,244 $ 9,023,622
Reinvested dividends......... 1,628,993 1,598,305
Net asset value of shares
redeemed................... (12,775,509) (7,676,030)
-------------- -------------
Net increase/(decrease) from
capital share
transactions............... $ (7,940,272) $ 2,945,897
-------------- -------------
-------------- -------------
</TABLE>
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Notes to Financial Statements (CONCLUDED)
<TABLE>
<CAPTION>
ISI CLASS SHARES
------------------------------
FOR THE YEAR
ENDED
OCTOBER 31,
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Shares sold................. 794,506 1,571,915
Shares issued to
shareholders on
reinvestment of
dividends................. 314,194 295,003
Shares redeemed............. (1,531,414) (1,301,711)
-------------- --------------
Net increase/(decrease) in
shares outstanding........ (422,714) 565,207
-------------- --------------
-------------- --------------
Proceeds from sale of
shares.................... $ 7,981,927 $ 16,706,525
Reinvested dividends........ 3,165,983 3,097,338
Net asset value of shares
redeemed.................. (15,420,090) (13,560,159)
-------------- --------------
Net increase/(decrease) from
capital share
transactions.............. $ (4,272,180) $ 6,243,704
-------------- --------------
-------------- --------------
</TABLE>
D. INVESTMENT TRANSACTIONS - Purchases and sales
of investment securities, other than short-term obligations, aggregated
$59,189,092 and $68,868,013, respectively, for the year ended October 31,
1995.
At October 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,952,974 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $903,132.
E. NET ASSETS - At October 31, 1995, net assets
consisted of:
<TABLE>
<S> <C>
Paid-in Capital:
Flag Investors Class A
Shares........................ $ 44,149,431
ISI Class Shares............... 85,210,662
Undistributed net realized short-
term gains from security
transactions................... 862,149
Unrealized appreciation of
investments.................... 2,049,842
-------------
$ 132,272,084
-------------
-------------
</TABLE>
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MANAGED MUNICIPAL FUND
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Report of Independent Accountants
To the Shareholders and Directors of
Managed Municipal Fund, Inc.
We have audited the accompanying statement of net assets of Managed
Municipal Fund, Inc. as of October 31, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the 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
October 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, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Managed Municipal Fund, Inc. as of October 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for the
period then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
December 1, 1995
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