<TABLE>
<S> <C>
===========================================
ISI
Managed ISI
Municipal
Fund Shares INTERNATIONAL STRATEGY & INVESTMENT
- ----------------------------------------------------------===========================================
Directors and Officers
Edward S. Hyman Nancy Lazar
Chairman Vice President
Richard T. Hale Edward J. Veilleux
Vice Chairman Vice President
R. Alan Medaugh Scott J. Liotta
Director and President Vice President and Secretary ISI
MANAGED MUNICIPAL
James J. Cunnane Carrie L. Butler FUND SHARES
Director Vice President
(A Class of Managed Municipal Fund, Inc.)
John F. Kroeger Joseph A. Finelli
Director Treasurer
Louis E. Levy Laurie D. Collidge
Director Assistant Secretary
Eugene J. McDonald
Director
Investment Objective
A mutual fund designed to provide a
high level of total return with
relative stability of principal as
well as the secondary objective of
high current income through
investment in a portfolio
consisting primarily of municipal
obligations, the interest on which
is exempt from federal income tax. MUNICIPALS
----------
============================================
Investment Advisor
============================================
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
============================================
Shareholder Servicing Agent
============================================
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
============================================
Distributor ----------------------------------
============================================ SEMI-ANNUAL REPORT
ISI Group Inc.
717 Fifth Avenue April 30, 1997
New York, NY 10022 ----------------------------------
(800) 955-7175
<PAGE>
================================================================================
Investment Advisor's Report
================================================================================
We are pleased to report on the progress of your Fund for the period ended
April 30, 1997. As of this date, the Fund recorded a 6-month total return of
1.2% and a 12-month total return of 5.7%. Since its inception on February 26,
1990, the Fund has produced a cumulative total return of 59.6%, which translates
into an average annual total return of 6.7%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
Overview
Over the last 12 months, long-term, high-quality municipal yields moved in
a fairly wide 70 basis point (0.70%) range, but interest rates opened and closed
the period at roughly the same yield (see chart below).
=================================================
30-Year Municipal AAA General Obligation Yields
=================================================
[Graph appears here--see plot points below]
DATE YIELD
4/30/96 5.73
5/1/96 5.73
5/2/96 5.84
5/3/96 5.86
5/6/96 5.86
5/7/96 5.88
5/8/96 5.87
5/9/96 5.87
5/10/96 5.80
5/13/96 5.78
5/14/96 5.73
5/15/96 5.71
5/16/96 5.76
5/17/96 5.73
5/20/96 5.69
5/21/96 5.67
5/22/96 5.69
5/23/96 5.69
5/24/96 5.69
5/27/96 5.69
5/28/96 5.68
5/29/96 5.72
5/30/96 5.76
5/31/96 5.82
6/3/96 5.87
6/4/96 5.85
6/5/96 5.85
6/6/96 5.82
6/7/96 5.97
6/10/97 5.99
6/11/96 5.97
6/12/96 5.97
6/13/96 5.96
6/14/96 5.92
6/17/96 5.90
6/18/96 5.87
6/19/96 5.87
6/20/96 5.90
6/21/96 5.89
6/24/96 5.89
6/25/96 5.85
6/26/96 5.83
6/27/96 5.82
6/28/96 5.77
7/1/96 5.77
7/2/96 5.80
7/3/96 5.80
7/4/96 5.80
7/5/96 5.94
7/8/96 5.96
7/9/96 5.92
7/10/96 5.87
7/11/96 5.85
7/12/96 5.82
7/15/96 5.83
7/16/96 5.81
7/17/96 5.78
7/18/96 5.73
7/19/96 5.74
7/22/96 5.75
7/23/96 5.73
7/24/96 5.72
7/25/96 5.70
7/26/96 5.70
7/29/96 5.72
7/30/96 5.70
7/31/96 5.67
8/1/96 5.59
8/2/96 5.51
8/5/96 5.51
8/6/96 5.49
8/7/96 5.48
8/8/96 5.47
8/9/96 5.44
8/12/96 5.44
8/13/96 5.48
8/14/96 5.48
8/15/96 5.50
8/16/96 5.49
8/19/96 5.52
8/20/96 5.53
8/21/96 5.55
8/22/96 5.56
8/23/96 5.61
8/26/96 5.64
8/27/96 5.63
8/28/96 5.62
8/29/96 5.66
8/30/96 5.71
9/2/96 5.71
9/3/96 5.73
9/4/96 5.75
9/5/96 5.78
9/6/96 5.75
9/9/96 5.73
9/10/96 5.75
9/11/96 5.76
9/12/96 5.73
9/13/96 5.64
9/16/96 5.61
9/17/96 5.64
9/18/96 5.65
9/19/96 5.69
9/20/96 5.69
9/23/96 5.69
9/24/96 5.67
9/25/96 5.65
9/26/96 5.60
9/27/96 5.60
9/30/96 5.61
10/1/96 5.59
10/2/96 5.56
10/3/96 5.54
10/4/96 5.47
10/7/96 5.50
10/8/96 5.50
10/9/96 5.53
10/10/96 5.56
10/11/96 5.55
10/14/96 5.55
10/15/96 5.56
10/16/96 5.60
10/17/96 5.58
10/18/96 5.57
10/21/96 5.57
10/22/96 5.59
10/23/96 5.60
10/24/96 5.62
10/25/96 5.62
10/28/96 5.63
10/29/96 5.58
10/30/96 5.56
10/31/96 5.54
11/1/96 5.55
11/4/96 5.53
11/5/96 5.48
11/6/96 5.49
11/7/96 5.50
11/8/96 5.49
11/11/96 5.49
11/12/96 5.45
11/13/96 5.45
11/14/96 5.43
11/15/96 5.44
11/18/96 5.46
11/19/96 5.44
11/20/96 5.42
11/21/96 5.41
11/22/96 5.41
11/25/96 5.39
11/26/96 5.36
11/27/96 5.36
11/28/96 5.36
11/29/96 5.32
12/2/96 5.31
12/3/96 5.29
12/4/96 5.31
12/5/96 5.36
12/6/96 5.40
12/9/96 5.37
12/10/96 5.38
12/11/96 5.45
12/12/96 5.45
12/13/96 5.42
12/16/96 5.44
12/17/96 5.49
12/18/96 5.47
12/19/96 5.43
12/20/96 5.42
12/23/96 5.42
12/24/96 5.42
12/25/96 5.42
12/26/96 5.42
12/27/96 5.38
12/30/96 5.36
12/31/96 5.39
1/1/97 5.39
1/2/97 5.45
1/3/97 5.44
1/6/97 5.46
1/7/97 5.48
1/8/97 5.49
1/9/97 5.47
1/10/97 5.55
1/13/97 5.55
1/14/97 5.52
1/15/97 5.53
1/16/97 5.53
1/17/97 5.53
1/20/97 5.53
1/21/97 5.52
1/22/97 5.51
1/23/97 5.51
1/24/97 5.54
1/27/97 5.56
1/28/97 5.52
1/29/97 5.54
1/30/97 5.54
1/31/97 5.51
2/3/97 5.49
2/4/97 5.49
2/5/97 5.48
2/6/97 5.50
2/7/97 5.45
2/10/97 5.43
2/11/97 5.43
2/12/97 5.41
2/13/97 5.38
2/14/97 5.33
2/17/97 5.33
2/18/97 5.33
2/19/97 5.35
2/20/97 5.37
2/21/97 5.39
2/24/97 5.41
2/25/97 5.38
2/26/97 5.44
2/27/97 5.44
2/28/97 5.44
3/3/97 5.46
3/4/97 5.46
3/5/97 5.47
3/6/97 5.49
3/7/97 5.47
3/10/97 5.46
3/11/97 5.49
3/12/97 5.49
3/13/97 5.52
3/14/97 5.50
3/17/97 5.52
3/18/97 5.52
3/19/97 5.54
3/20/97 5.57
3/21/97 5.57
3/24/97 5.57
3/25/97 5.56
3/26/97 5.59
3/27/97 5.63
3/28/97 5.63
3/31/97 5.66
4/1/97 5.63
4/2/97 5.63
4/3/97 5.63
4/4/97 5.66
4/7/97 5.64
4/8/97 5.65
4/9/97 5.63
4/10/97 5.64
4/11/97 5.64
4/14/97 5.67
4/15/97 5.62
4/16/97 5.65
4/17/97 5.62
4/18/97 5.62
4/21/97 5.62
4/22/97 5.61
4/23/97 5.63
4/24/97 5.65
4/25/97 5.67
4/28/97 5.67
4/29/97 5.60
4/30/97 5.59
Source: Bloomberg, Inc.
The volatility this year had as much to do with national politics,
specifically the outlook for major tax cuts, as it did with the economy,
inflation, etc. We think rates will be heading lower over the next year, which,
given the Fund's maturity orientation, should produce a competitive total
return. Please see our Economic Outlook that follows this letter for more
details. Municipals have retained their status as one of the few means by which
interest income can be sheltered from federal taxes. Municipal bonds' taxable
equivalent yield at current levels of interest rates and taxes means they also
have good value.
Municipals Have Good Value
The Fund had an average yield to maturity on its bond investments of 5.39%
and an average maturity of 14.4 years on April 30. To gauge the relative
attractiveness of this asset class versus the taxable bond market it is
necessary to use a tax rate. The top federal bracket is 39.6%, and if that were
used for the analysis, the taxable equivalent yield of a 5.39% tax-free
municipal would be a taxable rate of 8.92%. At the same time, Treasuries in the
15-year maturity range were yielding 6.95%. This comparison indicates that
municipals have good underlying after-tax income appeal.
The outlook for municipals also turns on political and supply analysis. The
political environment since the 1996 election has emphasized budget compromises
that provide some new tax breaks but little danger of a change in municipals'
basic status as the premier interest income tax shelter. The municipal supply
picture is also favorable, pointing to less municipal new issuance going
forward. State and local government operating budgets are solidly in surplus,
$37.4 billion as of year-end 1996, thereby capping new issue volume.
Portfolio Management
The Fund has maintained its high credit quality orientation. We have
continued to reduce the portfolio's electric power issues as they approach
credit problems surrounding rate deregulation. Prerefunded and general
obligation bonds have been increased over the last year. Please see the table
below that focuses on these sections of the portfolio.
================================================================================
Portfolio Structure
================================================================================
April 1997 April 1996 %
Category % of Portfolio % of Portfolio Change
- --------------------------------------------------------------------------------
Prerefunded and
General Obligations 73.4% 69.1% +4.3%
- --------------------------------------------------------------------------------
Electric Power 5.1% 7.6% -2.5%
1
<PAGE>
The Fund's high-quality orientation did not lead to a better total return
over the last year. Credit quality yield spreads narrowed. For example, 20-year
BBB1-quality general obligations had a 60 basis point (0.60%) yield advantage a
year ago but now the spread is close to 44 basis points (0.44%). Please see the
chart below.
================================================================================
Historical Yield Spreads
(General Obligation BBB1 Yield--AAA Yield)
================================================================================
[Graph appears here--see plot points below]
DATE YIELD SPREAD
4/30/96 60
5/1/96 60
5/2/96 60
5/3/96 59
5/6/96 58
5/7/96 58
5/8/96 58
5/9/96 57
5/10/96 57
5/13/96 57
5/14/96 57
5/15/96 56
5/16/96 55
5/17/96 55
5/20/96 55
5/21/96 55
5/22/96 56
5/23/96 56
5/24/96 55
5/27/96 n.a.
5/28/96 55
5/29/96 55
5/30/96 55
5/31/96 56
6/3/96 55
6/4/96 55
6/5/96 55
6/6/96 55
6/7/96 55
6/10/96 55
6/11/96 57
6/12/96 57
6/13/96 57
6/14/96 56
6/17/96 56
6/18/96 56
6/19/96 56
6/20/96 57
6/21/96 57
6/24/96 57
6/25/96 59
6/26/96 59
6/27/96 59
6/28/96 58
7/1/96 58
7/2/96 57
7/3/96 57
7/4/96 n.a.
7/5/96 59
7/8/96 58
7/9/96 59
7/10/96 58
7/11/96 58
7/12/96 58
7/15/96 57
7/16/96 57
7/17/96 57
7/18/96 57
7/19/96 57
7/22/96 57
7/23/96 58
7/24/96 59
7/25/96 59
7/26/96 59
7/29/96 60
7/30/96 60
7/31/96 61
8/1/96 61
8/2/96 62
8/5/96 62
8/6/96 63
8/7/96 62
8/8/96 62
8/9/96 62
8/12/96 n.a.
8/13/96 62
8/14/96 62
8/15/96 61
8/16/96 59
8/19/96 58
8/20/96 57
8/21/96 56
8/22/96 56
8/23/96 54
8/26/96 54
8/27/96 53
8/28/96 54
8/29/96 53
8/30/96 53
9/2/96 n.a.
9/3/96 54
9/4/96 53
9/5/96 52
9/6/96 51
9/9/96 51
9/10/96 51
9/11/96 51
9/12/96 51
9/13/96 53
9/16/96 53
9/17/96 53
9/18/96 54
9/19/96 54
9/20/96 54
9/23/96 54
9/24/96 54
9/25/96 54
9/26/96 55
9/27/96 55
9/30/96 56
10/1/96 56
10/2/96 57
10/3/96 58
10/4/96 57
10/7/96 56
10/8/96 56
10/9/96 55
10/10/96 56
10/11/96 55
10/14/96 55
10/15/96 54
10/16/96 53
10/17/96 52
10/18/96 52
10/21/96 53
10/22/96 53
10/23/96 53
10/24/96 53
10/25/96 52
10/28/96 51
10/29/96 49
10/30/96 49
10/31/96 50
11/1/96 50
11/4/96 50
11/5/96 52
11/6/96 52
11/7/96 53
11/8/96 54
11/11/96 54
11/12/96 55
11/13/96 57
11/14/96 57
11/15/96 57
11/18/96 56
11/19/96 56
11/20/96 56
11/21/96 55
11/22/96 55
11/25/96 55
11/26/96 55
11/27/96 55
11/28/96 n.a.
11/29/96 55
12/2/96 56
12/3/96 57
12/4/96 57
12/5/96 56
12/6/96 56
12/9/96 56
12/10/96 56
12/11/96 56
12/12/96 56
12/13/96 56
12/16/96 56
12/17/96 56
12/18/96 59
12/19/96 59
12/20/96 59
12/23/96 57
12/24/96 57
12/25/96 57
12/26/96 56
12/27/96 58
12/30/96 58
12/31/96 59
1/1/97 59
1/2/97 58
1/3/97 56
1/6/97 56
1/7/97 57
1/8/97 56
1/9/97 56
1/10/97 55
1/13/97 54
1/14/97 54
1/15/97 54
1/16/97 56
1/17/97 56
1/20/97 56
1/21/97 56
1/22/97 58
1/23/97 58
1/24/97 59
1/27/97 58
1/28/97 58
1/29/97 56
1/30/97 55
1/31/97 54
2/3/97 53
2/4/97 53
2/5/97 54
2/6/97 54
2/7/97 56
2/10/97 58
2/11/97 56
2/12/97 56
2/13/97 54
2/14/97 54
2/17/97 54
2/18/97 51
2/19/97 49
2/20/97 48
2/21/97 46
2/24/97 46
2/25/97 47
2/26/97 45
2/27/97 45
2/28/97 45
3/3/97 45
3/4/97 45
3/5/97 44
3/6/97 44
3/7/97 44
3/10/97 45
3/11/97 45
3/12/97 45
3/13/97 45
3/14/97 45
3/17/97 46
3/18/97 46
3/19/97 46
3/20/97 46
3/21/97 47
3/24/97 47
3/25/97 46
3/26/97 46
3/27/97 47
3/28/97 47
3/31/97 46
4/1/97 48
4/2/97 48
4/3/97 48
4/4/97 48
4/7/97 48
4/8/97 49
4/9/97 49
4/10/97 49
4/11/97 49
4/14/97 50
4/15/97 50
4/16/97 49
4/17/97 49
4/18/97 48
4/21/97 48
4/22/97 47
4/23/97 46
4/24/97 45
4/25/97 45
4/28/97 45
4/29/97 45
4/30/97 44
Source: Bloomberg, Inc.
We think credit quality will again be an important component of municipal
total return when economic growth slows, which typically leads to the
reemergence of credit problems.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- ----------------------
R. Alan Medaugh
President
May 19, 1997
================================================================================
Economic Outlook
================================================================================
Overview
Evidence of slower second quarter growth continues to mount, highlighted
recently by declining auto sales, sluggish department store sales in April and
high initial unemployment claims. The March surge in wholesale inventories
suggests that rising first quarter nonfarm inventories will pull down growth in
the second half of 1997 as excess inventories decline. We lean toward the view
that another 25 basis point (0.25%) increase in short-term rates lies ahead. We
see it as an insurance policy against a tight labor market and high capacity
utilization sparking a return of inflation. Early in 1998 we expect the Fed will
be able to reverse the increase. Please see our forecast table below.
================================================================================
ISI FORECAST
================================================================================
96:4Q 97:1Q 97:2Q* 97:3Q* 97:4Q* 98:1Q*
================================================================================
Real GDP 3.8% 5.6% 2.5% 2.0% 1.5% 1.5%
- --------------------------------------------------------------------------------
GDP Deflator** 1.5% 2.2% 1.5% 1.5% 1.5% 1.5%
- --------------------------------------------------------------------------------
30-Year Bond
Yields*** 6.6% 7.1% 6.7% 6.5% 6.5% 6.2%
- --------------------------------------------------------------------------------
Fed Funds
Rate*** 5.2% 5.5% 5.7% 5.7% 5.7% 5.5%
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
Inflation
The Greenspan Federal Reserve has presided over an economy producing strong
job formation but little inflation. The inflation performance has been a happy
surprise for bond investors. So far, strong growth has not produced price
increases; for example, among manufacturing companies, the strong growth has not
given them pricing power. Please see the chart on page 3 that shows ISI's
Manufacturing Company Pricing Power Index.
2
<PAGE>
================================================================================
Economic Outlook (continued)
===============================================================================
ISI MANUFACTURING COMPANIES
PRICING POWER SURVEY
0=Weak 100=Strong May 9: 24.7
[Graph appears here--see plot points below]
1/7/94 20.8
1/14/94 20.8
1/21/94 20.8
1/28/94 21.4
2/4/94 21.4
2/11/94 16.7
2/18/94 16.7
2/25/94 16.7
3/4/94 25.0
3/11/94 25.0
3/18/94 24.1
3/25/94 24.1
4/1/94 24.1
4/8/94 20.8
4/15/94 20.8
4/22/94 20.8
4/29/94 23.6
5/6/94 23.6
5/13/94 23.6
5/20/94 27.8
5/27/94 27.8
6/3/94 32.5
6/10/94 32.5
6/17/94 33.9
6/24/94 33.9
7/1/94 33.9
7/8/94 35.3
7/15/94 35.3
7/22/94 35.3
7/29/94 35.3
8/5/94 33.9
8/12/94 33.9
8/19/94 33.9
8/26/94 43.6
9/2/94 43.6
9/9/94 45.8
9/16/94 45.8
9/23/94 52.8
9/30/94 52.8
10/7/94 52.8
10/14/94 52.8
10/21/94 54.4
10/28/94 54.4
11/4/94 56.9
11/11/94 56.9
11/18/94 57.5
11/25/94 57.5
12/2/94 57.8
12/9/94 57.8
12/16/94 58.9
12/23/94 58.9
12/30/94 60.6
1/6/95 60.6
1/13/95 60.8
1/20/95 60.8
1/27/95 61.4
2/3/95 61.4
2/10/95 56.9
2/17/95 56.9
2/24/95 56.9
3/3/95 58.9
3/10/95 58.9
3/17/95 57.8
3/24/95 57.8
3/31/95 54.4
4/7/95 54.4
4/14/95 57.2
4/21/95 57.2
4/28/95 56.7
5/5/95 56.7
5/12/95 57.2
5/19/95 57.2
5/26/95 52.5
6/2/95 52.5
6/9/95 48.3
6/16/95 48.3
6/23/95 43.1
6/30/95 43.1
7/7/95 41.8
7/14/95 41.8
7/21/95 41.8
7/28/95 41.8
8/4/95 45.7
8/11/95 45.7
8/18/95 45.7
8/25/95 45.7
9/1/95 45.4
9/8/95 45.4
9/15/95 42.5
9/22/95 42.5
9/29/95 42.1
10/6/95 42.1
10/13/95 40.4
10/20/95 40.4
10/27/95 39.9
11/3/95 39.9
11/10/95 37.8
11/17/95 37.8
11/24/95 37.8
12/1/95 37.8
12/8/95 36.7
12/15/95 36.7
12/22/95 34.2
12/29/95 34.2
1/5/96 34.2
1/12/96 34.2
1/19/96 29.4
1/26/96 29.4
2/2/96 28.9
2/9/96 28.9
2/16/96 28.6
2/23/96 28.6
3/1/96 28.1
3/8/96 28.1
3/15/96 28.5
3/22/96 28.5
3/29/96 29.0
4/5/96 29.0
4/12/96 29.0
4/19/96 29.0
4/26/96 29.3
5/3/96 29.3
5/10/96 31.0
5/17/96 31.0
5/24/96 31.5
5/31/96 31.5
6/7/96 34.4
6/14/96 34.4
6/21/96 34.4
6/28/96 34.4
7/5/96 32.5
7/12/96 32.5
7/19/96 32.8
7/26/96 32.8
8/2/96 32.2
8/9/96 32.2
8/16/96 32.2
8/23/96 32.2
8/30/96 32.2
9/6/96 32.2
9/13/96 31.9
9/20/96 31.9
9/27/96 31.1
10/4/96 31.1
10/11/96 30.6
10/18/96 30.6
10/25/96 30.8
11/1/96 30.8
11/8/96 30.3
11/15/96 30.3
11/22/96 30.0
11/29/96 30.0
12/6/96 28.8
12/13/96 28.8
12/20/96 27.2
12/27/96 27.2
1/3/97 27.2
1/10/97 27.2
1/17/97 26.9
1/24/97 26.9
1/31/97 28.1
2/7/97 28.1
2/14/97 28.9
2/21/97 28.9
2/28/97 26.4
3/7/97 26.4
3/14/97 26.4
3/21/97 26.4
3/28/97 25.6
4/4/97 25.6
4/11/97 25.0
4/18/97 25.0
4/25/97 25.0
5/2/97 25.0
5/9/97 24.7
5/16/97 24.7
5/23/97 NA
Source: ISI Inc.
Other leading indicators of inflation have also registered little inflation
in the pipeline today. The closely watched Employment Cost Index for the first
quarter of 1997 showed overall labor costs growing at only 2.9% year over year.
The Journal of Commerce Commodity Index, which tracks raw industrial commodity
prices, hit a two-year low in early May. The Federal Reserve "Beige Book" is a
survey-based analysis approach that covers all 12 Federal Reserve Districts. The
May release also found limited inflation for both prices and wages. If growth
slows in the upcoming quarter, the low inflation picture would prove a good
investing background for bonds.
Economic Growth
Three areas are pointing to slower growth ahead. First, interest rates for
long-term Treasuries are about 7% while 30-year mortgage rates are about 8%. The
relatively higher interest rates when contrasted to inflation have already cut
the pace of mortgage refinancing in half. Second, the slowdown pattern under way
now in consumer installment debt growth has typically led to a significant drop
in retail sales. As a gauge of the extent consumers are using credit, credit
card chargeoffs just hit a seven-year high. Third, foreign economies are
struggling to retain modest growth. ISI tracks economic activity in 28 foreign
economies. We construct a Foreign (Strength - Weakness) diffusion index. After a
runup in late 1996, foreign activity has returned to a negative reading (please
see chart below).
FOREIGN [STRENGTH-WEAKNESS]
13 Wk. Avg. May 12: -0.1
[Graph appears here--see plot points below]
26 SEP 94 3.1
3 OCT 94 3.8
10 OCT 94 4.1
17 OCT 94 4.8
24 OCT 94 6.0
31 OCT 94 5.6
7 NOV 94 4.6
14 NOV 94 5.2
21 NOV 94 5.4
28 NOV 94 5.8
5 DEC 94 6.5
12 DEC 94 7.1
19 DEC 94 6.5
26 DEC 94 6.5
2 JAN 95 8.4
9 JAN 95 7.8
16 JAN 95 7.2
23 JAN 95 6.0
30 JAN 95 5.8
6 FEB 95 6.4
13 FEB 95 5.3
20 FEB 95 5.8
27 FEB 95 6.7
6 MAR 95 7.2
13 MAR 95 6.7
20 MAR 95 7.4
27 MAR 95 7.3
3 APR 95 6.4
10 APR 95 7.4
17 APR 95 6.9
24 APR 95 6.2
1 MAY 95 6.2
8 MAY 95 5.3
15 MAY 95 5.6
22 MAY 95 5.6
29 MAY 95 4.1
5 JUN 95 2.1
12 JUN 95 1.3
19 JUN 95 0.5
26 JUN 95 1.1
3 JUL 95 0.5
10 JUL 95 0.3
17 JUL 95 0.9
24 JUL 95 0.4
31 JUL 95 -0.6
7 AUG 95 -1.2
14 AUG 95 -1.0
21 AUG 95 -2.8
28 AUG 95 -2.7
4 SEP 95 -3.1
11 SEP 95 -2.5
18 SEP 95 -2.5
25 SEP 95 -3.6
2 OCT 95 -3.8
9 OCT 95 -4.8
16 OCT 95 -5.2
23 OCT 95 -5.2
30 OCT 95 -5.4
6 NOV 95 -3.9
13 NOV 95 -4.8
20 NOV 95 -4.9
27 NOV 95 -4.8
4 DEC 95 -4.5
11 DEC 95 -4.4
18 DEC 95 -4.5
25 DEC 95 -5.0
1 JAN 96 -4.8
8 JAN 96 -4.5
15 JAN 96 -5.0
22 JAN 96 -5.8
29 JAN 96 -5.2
5 FEB 96 -5.4
12 FEB 96 -5.9
19 FEB 96 -4.5
26 FEB 96 -4.0
4 MAR 96 -3.6
11 MAR 96 -4.5
18 MAR 96 -5.4
25 MAR 96 -4.7
1 APR 96 -5.7
8 APR 96 -6.4
15 APR 96 -5.8
22 APR 96 -5.3
29 APR 96 -5.6
6 MAY 96 -5.7
13 MAY 96 -5.9
20 MAY 96 -7.2
27 MAY 96 -6.2
3 JUN 96 -6.2
10 JUN 96 -5.7
17 JUN 96 -5.5
24 JUN 96 -5.2
1 JUL 96 -5.0
8 JUL 96 -4.7
15 JUL 96 -4.0
22 JUL 96 -4.4
29 JUL 96 -5.2
5 AUG 96 -6.2
12 AUG 96 -5.7
19 AUG 96 -5.2
26 AUG 96 -5.1
2 SEP 96 -4.6
9 SEP 96 -2.8
16 SEP 96 -2.7
23 SEP 96 -2.4
30 SEP 96 -1.7
7 OCT 96 -0.5
14 OCT 96 -1.3
21 OCT 96 -0.5
28 OCT 96 0.7
4 NOV 96 2.4
11 NOV 96 2.5
18 NOV 96 3.8
25 NOV 96 5.2
2 DEC 96 6.3
9 DEC 96 5.4
16 DEC 96 6.2
23 DEC 96 5.3
30 DEC 96 5.8
6 JAN 97 5.1
13 JAN 97 4.6
20 JAN 97 4.5
27 JAN 97 4.5
3 FEB 97 4.0
10 FEB 97 4.8
17 FEB 97 4.1
24 FEB 97 1.8
3 MAR 97 1.8
10 MAR 97 1.0
17 MAR 97 2.0
24 MAR 97 3.3
31 MAR 97 2.7
7 APR 97 2.7
14 APR 97 2.6
21 APR 97 2.2
28 APR 97 1.5
5 MAY 97 0.5
12 MAY 97 -0.1
19 MAY 97 -0.7
26 MAY 97 NA
Source: ISI Inc.
3
<PAGE>
================================================================================
Economic Outlook (concluded)
================================================================================
With foreign economies struggling to hold on to modest growth, U.S. exports
seem unlikely to stimulate near-term economic growth. There are factors working
to improve the U.S. economy, such as high equity prices and high consumer
confidence, but we expect the forces cited earlier will rule, producing slower
growth over the balance of 1997.
The Impact of Smaller Budget Deficits
A decline in the federal government deficit is a powerful influence on
economic growth and inflation but it also influences the capital markets.
Smaller deficits free up capital for alternative investments. The change in the
annual net financing requirement has been very dramatic (please see table, top
right).
================================================================================
Federal Government Deficit
================================================================================
12-month Sum in Billions
August 1992 September 1997*
- --------------------------------------------------------------------------------
Treasury Interest Paid $200 $250
- --------------------------------------------------------------------------------
Treasury Issuance $324 $ 70
---- ----
- --------------------------------------------------------------------------------
Net Financing
Requirement +$124 -$180
*Estimated
We see low inflation and dwindling Treasury issuance as strong secular
forces able to create a declining interest rate environment. They will be active
near-term market influences when the economy is seen slowing.
4
<PAGE>
================================================================================
Portfolio Diversification by State
================================================================================
[Map of the United States appears here]
=======================================================================
State Allocation
=======================================================================
% of % of
Municipal Municipal
Bonds Bonds
--------- ---------
Florida 17.9% Minnesota 3.2%
Texas 15.2 Mississippi 2.6
Virginia 8.4 Ohio 2.3
Maryland 7.6 Delaware 1.9
North Carolina 6.9 Utah 1.8
South Carolina 4.9 Colorado 1.8
Illinois 4.6 Hawaii 1.7
Tennessee 4.3 Indiana 1.4
Kansas 4.1 Washington 1.4
Arizona 3.4 Oregon 1.4
Georgia 3.2 =========
Total 100.0%
5
<PAGE>
================================================================================
Additional Performance Information
================================================================================
The shareholder letter included in this report contains statistics
designed to help you evaluate the performance of your Fund's management.
The Securities and Exchange Commission (SEC) requires that when we report
such figures, we also include the Fund's total return, according to a
standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the Fund's currently effective 4.45%
maximum sales charge.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 3/31/97: Sales Charge
- --------------------------------------------------------------------------------
One Year -0.25%
- --------------------------------------------------------------------------------
Five Years 5.18%
- --------------------------------------------------------------------------------
Since Inception (2/26/90) 6.00%
- --------------------------------------------------------------------------------
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each
time period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares
may be worth more or less than their original cost when redeemed. Past
performance is not an indication of future results.
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It
is authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative
or directly from the Fund at 1-800-955-7175. Read it carefully before you
invest.
- --------------------------------------------------------------------------------
6
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Statement of Net Assets
April 30, 1997
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL BONDS--92.7%
General Obligation--61.1%
Arlington, Texas, Independent School District, 5.75%, 2021 Aaa/NR $5,000 $ 4,954,700
Charlotte, NC:
5.30%, 2011 Aaa/AAA 1,590 1,585,278
5.30%, 2012 Aaa/AAA 1,120 1,111,062
5.30%, 2012 Aaa/AAA 2,325 2,306,447
5.80%, 2016 Aaa/AAA 2,500 2,576,825
Chicago, IL, 6.30%, 2009 Aa/AA 1,000 1,078,940
Dallas, TX, 5.00%, 2010 Aaa/AAA 1,750 1,692,075
Delaware State, Series "A", 5.125%, 2016 Aa1/AA+ 2,150 2,029,278
DuPage County, IL, Jail Project, 5.60%, 2021 Aaa/AAA 1,600 1,567,008
Florida Board of Education, Refunding Public Education:
6.125%, 2012 Aa2/AA+ 2,250 2,337,075
5.50%, 2021 Aa2/AA+ 2,000 1,915,040
5.125%, 2022 Aa2/AA+ 5,000 4,532,050
Franklin County, OH:
5.45%, 2009 Aaa/AAA 1,500 1,519,410
5.50%, 2013 Aaa/AAA 1,000 993,500
Georgia State, Series "D":
5.00%, 2010 Aaa/AA+ 2,000 1,945,080
5.25%, 2009 Aaa/AA+ 1,580 1,588,390
Grand Prairie, TX, School District, 5.20%, 2018 Aaa/AAA 2,000 1,865,080
Henrico County, VA:
5.20%, 2008 Aaa/AAA 1,200 1,205,496
5.25%, 2009 Aaa/AAA 1,000 1,002,430
Maryland State & Local Facilities, Second Series, 5.125%, 2010 Aaa/AAA 3,000 2,941,680
Minneapolis, MN, Sports Arena:
5.00%, 2011 Aaa/AAA 1,710 1,635,393
5.00%, 2012 Aaa/AAA 1,920 1,822,886
Mississippi State, 5.25%, 2014 Aa3/AA 3,000 2,886,570
Montgomery County, MD:
5.60%, 2004 Aaa/AAA 1,000 1,041,200
5.00%, 2009 Aaa/AAA 1,500 1,468,710
Plano, TX, Independent School District, 5.00%, 2011 Aaa/AAA 3,000 2,836,650
Portland, OR, Metro, 5.25%, 2007 Aa/AA+ 1,500 1,506,930
Salt Lake County, UT, 5.25%, 2010 Aaa/AA+ 2,000 1,988,340
South Carolina Capital Improvement, 5.00%, 2009 Aaa/AAA 2,700 2,652,534
South Carolina State Highway, Series "B", 5.625%, 2014 Aaa/AAA 2,700 2,723,166
</TABLE>
7
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Statement of Net Assets (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
General Obligation--concluded
State of Tennessee:
Series "A", 5.50%, 2009 Aaa/AA+ $1,535 $ 1,565,193
Series "A", 5.55%, 2010 Aaa/AA+ 1,000 1,014,500
Series "B", 6.00%, 2005 Aaa/AA+ 2,000 2,136,020
State of Texas, 6.00%, 2014 Aa/AA 2,000 2,047,940
State of Virginia, 5.375%, 2016 Aaa/AAA 2,500 2,451,650
Washington State, Series "A", 5.60%, 2010 Aa2/AA 1,500 1,510,560
- ---------------------------------------------------------------------------------------------------------------------------
72,035,086
- ---------------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue--5.1%
Jacksonville, FL, Electric Authority Revenue,
St. John's River Power, 5.25%, 2028 Aa1/AA 2,000 1,836,320
Orlando, FL, Utility Commission, 5.125%, 2019 Aa1/AA 3,500 3,185,140
San Antonio, TX, Electric & Gas Revenue, Series "A",
6.50%, 2012 Aa1/AA 1,000 1,041,790
- ---------------------------------------------------------------------------------------------------------------------------
6,063,250
- ---------------------------------------------------------------------------------------------------------------------------
Prerefunded Issues--12.3%
Arizona Highway Transportation Board, 6.00%, 2010 #AAA/AAA 3,480 3,652,051
Florida Board of Education, Refunding Public Education,
6.50%, 2012 #AAA/AA+ 2,500 2,705,775
Howard County, MD, Consolidated Public Improvements,
Series "A", 6.90%, 2002 #AAA/AAA 1,000 1,064,270
Jacksonville, FL, Electric Authority Revenue, Scherer 4-1-A,
6.75%, 2021 #AAA/AA 1,000 1,079,110
Lower Colorado River Authority, Jr. Lien, 4th Supply,
5.25%, 2015 #AAA/AAA 2,000 1,937,200
State of Hawaii, General Obligation:
7.00%, 2006 Aaa/** 750 800,085
6.125%, 2010 NR/** 1,000 1,055,410
University of Texas, 6.50%, 2011 #AAA/AAA 2,000 2,164,500
- ---------------------------------------------------------------------------------------------------------------------------
14,458,401
- ---------------------------------------------------------------------------------------------------------------------------
Transportation Revenue--9.4%
Florida Transportation Revenue, 5.80%, 2018 Aa2/AA+ 2,000 1,999,820
Kansas Transportation Revenue:
5.40%, 2009 Aa/AA 2,000 2,006,680
5.40%, 2009 Aa/AA 2,500 2,508,350
Virginia State Transportation Authority:
5.00%, 2008 Aa/AA 1,100 1,076,250
5.125%, 2009 Aa/AA 2,500 2,450,475
6.00%, 2010 Aa/AA 1,000 1,028,400
- ---------------------------------------------------------------------------------------------------------------------------
11,069,975
- ---------------------------------------------------------------------------------------------------------------------------
8
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Statement of Net Assets (concluded)
April 30, 1997
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Water and Sewer Utility Revenue--3.6%
DuPage, IL, Water Commission, 5.25%, 2011 Aa1/AA $2,500 $ 2,411,150
Washington Suburban Sanitary District, MD, 5.375%, 2010 Aa1/AA 1,810 1,784,027
- ---------------------------------------------------------------------------------------------------------------------------
4,195,177
- ---------------------------------------------------------------------------------------------------------------------------
Other Revenue--1.3%
Indianapolis Local Public Improvement Board, IN,
6.00%, 2018 Aaa/AA+ 1,500 1,514,550
- ---------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost $108,842,182) 109,336,439
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--6.0%
Goldman Sachs & Co., 5.25%
Dated 4/30/97, to be repurchased on 5/1/97,
collateralized by U.S. Treasury Notes with a
market value of $7,191,200.
(Cost $7,120,000) 7,120 7,120,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment in Securities--98.8%
(Cost $115,962,182)*** 116,456,439
Other Assets in Excess of Liabilities, Net--1.2% 1,391,690
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets--100.0% $117,848,129
===========================================================================================================================
Net Asset Value and Redemption Price Per:
ISI Class Share
($79,059,361 / 7,579,385 shares outstanding) $10.43
======
Flag Investors Class A Share
($38,788,768 / 3,717,678 shares outstanding) $10.43
======
Maximum Offering Price Per:
ISI Class Share
($10.43 / .9555) $10.92
======
Flag Investors Class A Share
($10.43 / .955) $10.92
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available as of April 30, 1997.
** Prerefunded bonds backed by U.S. Treasury Securities. Absent prerefunding,
this obligation is rated Aa3/A+.
*** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Statement of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):
Interest $3,265,505
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note B) 241,980
Distribution fee (Note B) 152,692
Administration fees (Note B) 120,990
Accounting fee (Note B) 28,911
Transfer agent fees (Note B) 28,100
Printing and postage 17,108
Legal 14,999
Audit 14,321
Registration fees (Note A) 12,735
Miscellaneous 11,217
Custodian fees 10,594
Directors' fees 5,400
Insurance 2,386
- --------------------------------------------------------------------------------
Total expenses 661,433
Less: Fees waived (Note B) (116,969)
- --------------------------------------------------------------------------------
Net expenses 544,464
- --------------------------------------------------------------------------------
Net investment income 2,721,041
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 174,825
Change in unrealized appreciation or depreciation
of investments (1,283,244)
- --------------------------------------------------------------------------------
Net loss on investments (1,108,419)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,612,622
================================================================================
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Statement of Changes in Net Assets
For the Six
Months Ended For the Year
April 30, 1997 Ended
(Unaudited) October 31, 1996
- --------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,721,041 $ 5,787,049
Net realized gain from security transactions 174,825 281,659
Change in appreciation or depreciation
of investments (1,283,244) (272,341)
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 1,612,622 5,796,367
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
ISI Class Shares (1,830,220) (3,828,729)
Flag Investors Class A Shares (890,824) (1,958,320)
Net realized short-term gains:
ISI Class Shares (280,786) (545,496)
Flag Investors Class A Shares (136,103) (286,075)
Net realized long-term gains:
ISI Class Shares (79,536) (82,292)
Flag Investors Class A Shares (38,304) (43,313)
- --------------------------------------------------------------------------------
Total distributions (3,255,773) (6,744,225)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 1,230,031 8,278,327
Value of shares issued in reinvestment of
dividends 1,824,816 3,789,940
Cost of shares repurchased (9,467,718) (17,488,342)
- --------------------------------------------------------------------------------
Decrease in net assets derived from
capital share transactions (6,412,871) (5,420,075)
- --------------------------------------------------------------------------------
Total decrease in net assets (8,056,022) (6,367,933)
- --------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 125,904,151 132,272,084
- --------------------------------------------------------------------------------
End of period $117,848,129 $125,904,151
================================================================================
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Managed Municipal Fund, Inc.
================================================================================
Financial Highlights--ISI Class and Flag Investors Class A Shares
(For a shares outstanding throughout each period)(1)
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended October 31,
April 30, 1997 -------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning
of period $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36
- ---------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.23 0.48 0.48 0.46 0.50 0.50
Net realized and unrealized
gain/(loss) on investments (0.10) -- 0.98 (1.15) 0.94 0.22
- ---------------------------------------------------------------------------------------------------
Total from Investment Operations 0.13 0.48 1.46 (0.69) 1.44 0.72
- ---------------------------------------------------------------------------------------------------
Less Distributions:
Distributions from net investment
income and short-term gains (0.27) (0.54) (0.54) (0.56) (0.61) (0.65)
Distributions from net realized
long-term gains (0.01) (0.01) (0.08) (0.04) (0.04) (0.12)
- ---------------------------------------------------------------------------------------------------
Total distributions (0.28) (0.55) (0.62) (0.60) (0.65) (0.77)
- ---------------------------------------------------------------------------------------------------
Net asset value at end of period $ 10.43 $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31
===================================================================================================
Total Return(2) 1.24% 4.67% 15.42% (6.49)% 14.36% 6.06%
Ratios to Average Daily Net Assets:
Expenses(3) 0.90%(5) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(4) 4.50%(5) 4.48% 4.72% 4.37% 4.38% 4.78%
Supplemental Data:
Net assets at end of period:
ISI Class Shares $79,059 $84,712 $86,292 $83,607 $88,378 $51,420
Flag Investors Class A Shares $38,789 $41,193 $45,980 $49,903 $53,486 $45,536
Portfolio turnover rate 11%(5) 32% 55% 37% 68% 95%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Computed based upon average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory and administration fees (Note B), the ratio
of expenses to average daily net assets would have been 1.09% (annualized),
1.13%, 1.10%, 1.11%, 1.14% and 1.27% for the six months ended April 30,
1997 and the years ended October 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(4) Without the waiver of advisory and administration fees (Note B), the ratio
of net investment income to average daily net assets would have been 4.31%
(annualized), 4.25%, 4.52%, 4.16%, 4.14% and 4.41% for the six months ended
April 30, 1997 and the years ended October 31, 1996, 1995, 1994, 1993 and
1992, respectively.
(5) Annualized.
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
A. Significant Accounting Policies -- Managed Municipal Fund, Inc. (the
"Fund"), which was organized as a Maryland Corporation on January 15, 1990,
commenced operations February 26, 1990. The Fund is registered under the
Investment Company Act of 1940 as a diversified, open-end Investment
Management Company. It is designed to provide a high level of total return
with relative stability of principal as well as the secondary objective of
high current income through investment in a portfolio consisting primarily
of municipal obligations, the interest on which is exempt from federal
income tax.
The Fund consists of two share classes: ISI Managed Municipal Fund Shares
("ISI Class"), which commenced February 26, 1990, and Flag Investors Managed
Municipal Fund Class A Shares ("Flag Investors Class A"), which commenced
October 23, 1990.
The ISI Class Shares have a 4.45% maximum front-end sales charge and the
Flag Investors Class A Shares have a 4.50% maximum front-end sales charge.
Both classes have a 0.25% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the
date of the financial statements; 2) the contingent assets and liabilities
that we disclose at the date of the financial statements; and 3) the
revenues and expenses that we report for the period. Our estimates could be
different from the actual results. The Fund's significant accounting
policies are:
Security Valuation -- Municipal obligations are usually traded in the
over-the-counter market. When there is an available market quotation, the
Fund values a municipal obligation by using the most recent price provided
by an investment dealer. The Fund utilizes the services of an independent
pricing vendor to obtain prices. When a market quotation is unavailable, the
Investment Advisor determines a fair value using procedures that the Board
of Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost.
Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement is
a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
Federal Income Taxes -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income and net realized capital gains, it will
be exempt from most, if not all, federal income and excise taxes. As a
result, the Fund has made no provisions for federal income taxes.
Security Transactions, Investment Income, Distributions and Other -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Interest
income is recorded on an accrual basis and includes the pro rata scientific
method for amortization of premiums and accretion of discounts when
appropriate. Income and common expenses are allocated to each class based on
its
13
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
respective average net assets. Class specific expenses are charged directly
to each class. Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC") is the Fund's
administrator. As compensation for its advisory services, the Fund pays ISI
an annual fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the annual rate of 0.40%. As
compensation for its administrative services, the Fund pays ICC an annual
fee based on the Fund's average daily net assets. This fee is calculated
daily and paid monthly at the annual rate of 0.20%.
ISI and ICC have agreed to reduce their fees proportionately when necessary
so that the Fund's annual expenses are no more than 0.90% of the Fund's
average daily net assets. For the six months ended April 30, 1997, ISI
waived fees of $77,979 and ICC waived fees of $38,990.
As compensation for its accounting services, the Fund pays ICC an annual fee
that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $28,911 for accounting services for the six months
ended April 30, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $28,100
for transfer agent services for the six months ended April 30, 1997.
As compensation for providing distribution services for the ISI Class, the
Fund paid Armata Financial Corp., an affiliate of Alex. Brown & Sons
Incorporated ("Alex. Brown"), an annual fee that was calculated daily and
paid monthly. This fee was paid at an annual rate equal to 0.25% of the ISI
Class' average daily net assets. Beginning April 1, 1997, ISI Group Inc.
assumed the role of distributor of the ISI Class. As compensation for
providing distribution services for the Flag Investors Class A Shares, the
Fund pays Alex. Brown an annual fee that is calculated daily and paid
monthly. This fee is paid at an annual rate equal to 0.25% of the Flag
Investors Class A Shares' average daily net assets. For the six months ended
April 30, 1997, distribution fees aggregated $152,692, of which $103,178 was
attributable to the ISI Class Shares and $49,514 was attributable to the
Flag Investors Class A Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
November 1, 1996 through April 30, 1997 was $2,046, and the accrued
liability was $18,728.
C. Capital Share Transactions -- The Fund is authorized to issue up to 40
million shares of $.001 par value capital stock (20 million ISI Class, 15
million Flag Investors Class A, 2.5 million Flag Investors Class B, 500,000
Flag Investors Class D and 2 million undesignated). Transactions in shares
of the Fund were as follows:
ISI Class Shares
---------------------------------
For the Six
Months Ended For the
April 30, 1997 Year Ended
(Unaudited) Oct. 31, 1996
-------------- -------------
Shares sold 94,358 585,014
Shares issued to share-
holders on reinvest-
ment of dividends 120,321 246,345
Shares redeemed (646,136) (924,026)
- --------------------------------------------------------------------------------
Net decrease in shares
outstanding (431,457) (92,667)
================================================================================
Proceeds from sale
of shares $ 991,901 $ 6,198,720
Value of reinvested
dividends 1,263,768 2,588,981
Cost of shares
redeemed (6,799,476) (9,754,108)
- --------------------------------------------------------------------------------
Net decrease from
capital share
transactions $(4,543,807) $ (966,407)
================================================================================
14
<PAGE>
================================================================================
Notes to Financial Statements (concluded)
================================================================================
Flag Investors Class A Shares
-------------------------------
For the Six
Months Ended For the
April 30, 1997 Year Ended
(Unaudited) Oct. 31, 1996
-------------- -------------
Shares sold 22,849 200,140
Shares issued to share-
holders on reinvest-
ment of dividends 53,519 114,250
Shares redeemed (253,027) (736,822)
- --------------------------------------------------------------------------------
Net decrease in shares
outstanding (176,659) (422,432)
================================================================================
Proceeds from sale
of shares $ 238,130 $ 2,079,607
Value of reinvested
dividends 561,048 1,200,959
Cost of shares
redeemed (2,668,242) (7,734,234)
- --------------------------------------------------------------------------------
Net decrease from
capital share
transactions $(1,869,064) $(4,453,668)
================================================================================
D. Investment Transactions -- Excluding short-term obligations, purchases of
investment securities aggregated $6,551,646 and sales of investment
securities aggregated $13,600,943 for the six months ended April 30, 1997.
On April 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,875,728
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $1,381,471.
E. Net Assets -- On April 30, 1997, net assets consisted of:
Paid-in capital:
ISI Class Shares $ 79,695,495
Flag Investors
Class A Shares 37,824,163
Overdistribution of net realized
gains from security
transactions (165,786)
Unrealized appreciation of
investments 494,257
------------
$117,848,129
============
F. Merger Agreement -- On April 6, 1997, Bankers Trust New York Corporation and
Alex. Brown Incorporated announced that they had signed a definitive
agreement to merge. The merger, which is expected to be completed by the
fourth quarter of 1997, is subject to customary closing conditions,
including certain regulatory and shareholder approvals.
15
