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<TABLE>
<S> <C>
ISI
MANAGED
MUNICIPAL ISI
FUND SHARES INTERNATIONAL STRATEGY & INVESTMENT
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Edward S. Hyman Nancy Lazar
Chairman Vice President
Richard T. Hale Carrie L. Butler ISI
Vice Chairman Vice President
MANAGED MUNICIPAL
R. Alan Medaugh Margaret M. Beeler
Director and President Assistant Vice President FUND SHARES
James J. Cunnane Keith C. Reilly (A CLASS OF MANAGED MUNICIPAL FUND, INC.)
Director Assistant Vice President
MUNICIPALS
John F. Kroeger Joseph A. Finelli ----------
Director Treasurer
ANNUAL REPORT
Louis E. Levy Amy M. Olmert
Director Secretary OCTOBER 31, 1997
Eugene J. McDonald Laurie D. Collidge
Director Assistant Secretary
</TABLE>
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.
================================================================================
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
================================================================================
ISI Group Inc.
717 Fifth Avenue
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 fiscal year
ended October 31, 1997. In this year of volatile interest rates, the Fund
recorded a total return of 7.4%. From its inception on February 26, 1990 through
October 31, 1997, the Fund has posted a cumulative total return of 69.3%, which
translates into an average annual total return of 7.1%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
OVERVIEW
The general level of U.S. interest rates moved lower during the fiscal year
(please see chart below). Good inflation performance, despite a robust economy
and an evaporating federal government deficit, were key components of the
general decline. For additional information, please see our detailed Economic
Outlook for 1998, which follows this letter.
30-Year Municipal AAA General Obligation Yields
[GRAPH SHOWN HERE--SEE PLOT POINTS BELOW]
DATE YIELD
---- -----
10/31/97 5.12
10/30/97 5.12
10/29/97 5.14
10/28/97 5.16
10/27/97 5.16
10/24/97 5.20
10/23/97 5.21
10/22/97 5.27
10/21/97 5.24
10/20/97 5.25
10/17/97 5.25
10/16/97 5.22
10/15/97 5.22
10/14/97 5.20
10/13/97 5.21
10/10/97 5.21
10/ 9/97 5.18
10/ 8/97 5.14
10/ 7/97 5.08
10/ 6/97 5.10
10/ 3/97 5.13
10/ 2/97 5.13
10/ 1/97 5.14
9/30/97 5.17
9/29/97 5.15
9/26/97 5.15
9/25/97 5.17
9/24/97 5.15
9/23/97 5.18
9/22/97 5.15
9/19/97 5.15
9/18/97 5.15
9/17/97 5.15
9/16/97 5.15
9/15/97 5.20
9/12/97 5.23
9/11/97 5.26
9/10/97 5.24
9/ 9/97 5.22
9/ 8/97 5.23
9/ 5/97 5.26
9/ 4/97 5.25
9/ 3/97 5.25
9/ 2/97 5.28
9/ 1/97 5.30
8/29/97 5.30
8/28/97 5.28
8/27/97 5.29
8/26/97 5.29
8/25/97 5.29
8/22/97 5.29
8/21/97 5.25
8/20/97 5.23
8/19/97 5.22
8/18/97 5.22
8/15/97 5.24
8/14/97 5.23
8/13/97 5.25
8/12/97 5.25
8/11/97 5.25
8/ 8/97 5.22
8/ 7/97 5.15
8/ 6/97 5.16
8/ 5/97 5.16
8/ 4/97 5.16
8/ 1/97 5.14
7/31/97 5.06
7/30/97 5.06
7/29/97 5.09
7/28/97 5.11
7/25/97 5.11
7/24/97 5.11
7/23/97 5.10
7/22/97 5.13
7/21/97 5.17
7/18/97 5.17
7/17/97 5.15
7/16/97 5.18
7/15/97 5.23
7/14/97 5.23
7/11/97 5.23
7/10/97 5.25
7/ 9/97 5.25
7/ 8/97 5.27
7/ 7/97 5.27
7/ 4/97 5.29
7/ 3/97 5.29
7/ 2/97 5.34
7/ 1/97 5.36
6/30/97 5.38
6/27/97 5.33
6/26/97 5.34
6/25/97 5.32
6/24/97 5.31
6/23/97 5.29
6/20/97 5.27
6/19/97 5.28
6/18/97 5.28
6/17/97 5.29
6/16/97 5.29
6/13/97 5.29
6/12/97 5.32
6/11/97 5.36
6/10/97 5.37
6/ 9/97 5.40
6/ 6/97 5.40
6/ 5/97 5.44
6/ 4/97 5.44
6/ 3/97 5.46
6/ 2/97 5.47
5/30/97 5.47
5/29/97 5.51
5/28/97 5.52
5/27/97 5.52
5/26/97 5.50
5/23/97 5.50
5/22/97 5.50
5/21/97 5.50
5/20/97 5.49
5/19/97 5.49
5/16/97 5.49
5/15/97 5.50
5/14/97 5.50
5/13/97 5.53
5/12/97 5.52
5/ 9/97 5.53
5/ 8/97 5.55
5/ 7/97 5.56
5/ 6/97 5.55
5/ 5/97 5.56
5/ 2/97 5.56
5/ 1/97 5.57
4/30/97 5.59
4/29/97 5.60
4/28/97 5.67
4/25/97 5.67
4/24/97 5.65
4/23/97 5.63
4/22/97 5.61
4/21/97 5.62
4/18/97 5.62
4/17/97 5.62
4/16/97 5.65
4/15/97 5.62
4/14/97 5.67
4/11/97 5.64
4/10/97 5.64
4/ 9/97 5.63
4/ 8/97 5.65
4/ 7/97 5.64
4/ 4/97 5.66
4/ 3/97 5.63
4/ 2/97 5.63
4/ 1/97 5.63
3/31/97 5.66
3/28/97 5.63
3/27/97 5.63
3/26/97 5.59
3/25/97 5.56
3/24/97 5.57
3/21/97 5.57
3/20/97 5.57
3/19/97 5.54
3/18/97 5.52
3/17/97 5.52
3/14/97 5.50
3/13/97 5.52
3/12/97 5.49
3/11/97 5.49
3/10/97 5.46
3/ 7/97 5.47
3/ 6/97 5.49
3/ 5/97 5.47
3/ 4/97 5.46
3/ 3/97 5.46
2/28/97 5.44
2/27/97 5.44
2/26/97 5.44
2/25/97 5.38
2/24/97 5.41
2/21/97 5.39
2/20/97 5.37
2/19/97 5.35
2/18/97 5.33
2/17/97 5.33
2/14/97 5.33
2/13/97 5.38
2/12/97 5.41
2/11/97 5.43
2/10/97 5.43
2/ 7/97 5.45
2/ 6/97 5.50
2/ 5/97 5.48
2/ 4/97 5.49
2/ 3/97 5.49
1/31/97 5.51
1/30/97 5.54
1/29/97 5.54
1/28/97 5.52
1/27/97 5.56
1/24/97 5.54
1/23/97 5.51
1/22/97 5.51
1/21/97 5.52
1/20/97 5.53
1/17/97 5.53
1/16/97 5.53
1/15/97 5.53
1/14/97 5.52
1/13/97 5.55
1/10/97 5.55
1/ 9/97 5.47
1/ 8/97 5.49
1/ 7/97 5.48
1/ 6/97 5.46
1/ 3/97 5.44
1/ 2/97 5.45
1/ 1/97 5.39
12/31/96 5.39
12/30/96 5.36
12/27/96 5.38
12/26/96 5.42
12/25/96 5.42
12/24/96 5.42
12/23/96 5.42
12/20/96 5.42
12/19/96 5.43
12/18/96 5.47
12/17/96 5.49
12/16/96 5.44
12/13/96 5.42
12/12/96 5.45
12/11/96 5.45
12/10/96 5.38
12/ 9/96 5.37
12/ 6/96 5.40
12/ 5/96 5.36
12/ 4/96 5.31
12/ 3/96 5.29
12/ 2/96 5.31
11/29/96 5.32
11/28/96 5.36
11/27/96 5.36
11/26/96 5.36
11/25/96 5.39
11/22/96 5.41
11/21/96 5.41
11/20/96 5.42
11/19/96 5.44
11/18/96 5.46
11/15/96 5.44
11/14/96 5.43
11/13/96 5.45
11/12/96 5.45
11/11/96 5.49
11/ 8/96 5.49
11/ 7/96 5.50
11/ 6/96 5.49
11/ 5/96 5.48
11/ 4/96 5.53
11/ 1/96 5.55
10/31/96 5.54
Source: Bloomberg Inc.
PORTFOLIO MANAGEMENT
We believe top quality municipal bonds have good value, based on a
comparison with federally taxable U.S. Treasuries (please see table below).
Municipal After-Tax Yields
vs. U.S. Treasury Yields
30-Year Municipal
AAA Taxable U.S. After-Tax
Maturity G.O. Equivalent* Treasuries Advantage
- --------------------------------------------------------------------------------
5-year 4.16% 6.87% 5.71% +1.16%
- --------------------------------------------------------------------------------
30-year 5.12% 8.48% 6.15% +2.33%
*Based on a top federal tax rate of 39.6%.
Municipal bonds represent good value as can be seen from the table above.
At the same time, longer maturity municipals have early call provisions. As
yields fall, older issues "run into" their call provisions, shortening their
maturities. To protect the portfolio from the risk of early calls, our active
management seeks to swap older issues for new ones that have longer
call-protected provisions.
PERFORMANCE REVIEW
Municipal rates declined during the fiscal year, producing better total
returns for longer-term municipals than short-term issues. During the fiscal
year, the Fund retained a relatively long average maturity profile and benefited
from that general orientation. Please see the table on page 2 for a total return
comparison of each maturity range.
1
<PAGE>
================================================================================
ECONOMIC OUTLOOK FOR 1998
================================================================================
- -----------------------------------------------------
Performance Comparisons
Short to Long Maturity Municipals
- -----------------------------------------------------
Lehman Brothers Total Return
General Obligation Fiscal Year 1997
Municipal Bond Index (Oct. 1996-Oct. 1997)
- -----------------------------------------------------
1 year 4.7%
- -----------------------------------------------------
3 years 5.4%
- -----------------------------------------------------
5 years 6.5%
- -----------------------------------------------------
7 years 7.6%
- -----------------------------------------------------
10 years 8.9%
- -----------------------------------------------------
Long Term (17+ years) 10.2%
- -----------------------------------------------------
The Fund also has a high quality orientation, which means it performs best
when a slow economy puts pressure on weaker credits. A robust economy like we
have had recently eases credit quality concerns and produces better results for
medium quality issues (please see table below). Note the Lehman Brothers State
General Obligation (G.O.) Index has a better credit quality average rating than
the Lehman Brothers Local G.O. Index.
- -----------------------------------------------------
Performance Comparison for State
and Local General Obligations
- -----------------------------------------------------
Total Return
Fiscal Year 1997
G.O. Sector (Oct. 1996-Oct. 1997)
- -----------------------------------------------------
State 7.74%
- -----------------------------------------------------
Local 9.06%
- -----------------------------------------------------
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
November 21, 1997
OVERVIEW
The Pacific Rim economies seem likely to be weaker in two months than they
are now. Japan's economy, which has slipped into recession in our view, is
likely to be no better by early 1998. Because U.S. retail sales are clearly
sensitive to stock market swings, we are likely to see "moderate" retail sales
at best over the next few months. We are forecasting just 2.5% real growth with
only 1.5% inflation, producing just 4% nominal (Gross Domestic Product) growth.
Stock market corrections around the world reflect a package of tightening
moves that started nine months ago with Japan's Value Added Tax hike and the
U.S. Federal Reserve tightening to 5.5% on its Federal Funds Rate. The Pacific
Rim countries lifted interest rates to defend their currencies and cut
government spending to get International Monetary Fund assistance. The
Bundesbank and the Bank of England both tightened recently. Germany announced a
government spending freeze. Brazil announced a fiscal package that is the
equivalent of a $180 billion tightening in the U.S. economy. Russia raised rates
from 21% to 28%. The Asian crises are clearly impacting the region's banking
system and are therefore likely to have a greater influence on world economic
activity than expected. Federal Reserve Board Chairman Greenspan ended his
testimony before Congress in mid-November by saying "and where required, provide
temporary financial assistance." Since this is the exact same phrase he ended
his testimony with before our $3 billion Indonesian assistance package, another
Pacific Rim bailout is probably in the works.
Based on early estimates, it is possible that on a seasonally adjusted
annual rate basis, the U.S. ran a budget surplus in October. At the same time,
odds are that our trade deficit will widen as exports slow and we see a flood of
Asian imports. To the extent foreign demand for
2
<PAGE>
================================================================================
ECONOMIC OUTLOOK FOR 1998 (continued)
================================================================================
Treasuries is related to our trade deficit, a demand/supply imbalance for
Treasuries could develop, which could push up prices on Treasury investments.
Because of their importance, we have highlighted these topics for greater
analysis: the Pacific Rim Crises, Inflation and the U.S. Budget Deficit. Please
see ISI's Economic Forecast below.
ISI ECONOMIC FORECAST
- ---------------------------------------------------------------------
97:1Q 97:2Q 97:3Q 97:4Q* 98:1Q* 98:2Q*
- ---------------------------------------------------------------------
Real GDP 4.9% 3.3% 3.5% 2.5% 2.5% 2.5%
- ---------------------------------------------------------------------
GDP Deflator** 2.4% 1.8% 1.4% 1.5% 1.5% 1.5%
- ---------------------------------------------------------------------
30-Year Bond Yields*** 7.1% 6.8% 6.4% 6.2% 6.0% 5.7%
- ---------------------------------------------------------------------
Fed Funds Rate*** 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
- ---------------------------------------------------------------------
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
THE PACIFIC RIM CRISES
Thailand and Hong Kong have been at the center of the most recent series of
financial crises. The history of these events indicates that they often lower
Treasury bond yields (please see chart below). The positive influence on
financial assets comes about from this normal event cycle. The crisis surfaces
when the building pressure on the economic system causes a weak link to break.
At that point the problem is exposed and efforts are made to fix it.
30-YEAR TREASURY YIELD
NOV. 10 6.14%
[Graph appears here--See plot points below]
68:1 5.39
68:2 5.38
68:3 5.59
68:4 5.46
68:5 5.55
68:6 5.40
68:7 5.29
68:8 5.23
68:9 5.28
68:10 5.44
68:11 5.56
68:12 5.88
69:1 5.99
69:2 6.11
69:3 6.22
69:4 6.03
69:5 6.11
69:6 6.28
69:7 6.27
69:8 6.22
69:9 6.55
69:10 6.50
69:11 6.74
69:12 6.91
70:1 6.92
70:2 6.67
70:3 6.72
70:4 6.85
70:5 7.24
70:6 7.34
70:7 6.92
70:8 7.08
70:9 6.88
70:10 6.88
70:11 6.58
70:12 6.28
71:1 6.18
71:2 6.14
71:3 5.94
71:4 6.00
71:5 6.32
71:6 6.38
71:7 6.38
71:8 6.27
71:9 6.05
71:10 5.92
71:11 5.86
71:12 6.00
72:1 6.01
72:2 6.06
72:3 6.06
72:4 6.16
72:5 6.07
72:6 6.01
72:7 6.01
72:8 5.94
72:9 6.05
72:10 6.01
72:11 5.79
72:12 5.96
73:1 6.78
73:2 6.88
73:3 6.91
73:4 6.86
73:5 6.99
73:6 7.06
73:7 7.29
73:8 7.62
73:9 7.25
73:10 7.18
73:11 7.30
73:12 7.29
74:1 7.48
74:2 7.46
74:3 7.73
74:4 8.01
74:5 8.14
74:6 8.10
74:7 8.26
74:8 8.60
74:9 8.60
74:10 8.37
74:11 7.99
74:12 7.91
75:1 7.88
75:2 7.71
75:3 7.99
75:4 8.36
75:5 8.22
75:6 8.04
75:7 8.17
75:8 8.50
75:9 8.57
75:10 8.35
75:11 8.28
75:12 8.23
76:1 8.01
76:2 8.03
76:3 7.97
76:4 7.86
76:5 8.13
76:6 8.03
76:7 8.00
76:8 7.91
76:9 7.78
76:10 7.70
76:11 7.64
76:12 7.30
77:1 7.48
77:2 7.64
77:3 7.80
77:4 7.73
77:5 7.80
77:6 7.64
77:7 7.64
77:8 7.68
77:9 7.64
77:10 7.77
77:11 7.85
77:12 7.94
78:1 8.18
78:2 8.25
78:3 8.23
78:4 8.34
78:5 8.43
78:6 8.50
78:7 8.65
78:8 8.47
78:9 8.47
78:10 8.67
78:11 8.75
78:12 8.88
79:1 8.94
79:2 9.00
79:3 9.03
79:4 9.08
79:5 9.19
79:6 8.92
79:7 8.93
79:8 8.98
79:9 9.17
79:10 9.85
79:11 10.30
79:12 10.12
80:1 10.60
80:2 12.13
80:3 12.34
80:4 11.40
80:5 10.36
80:6 9.81
80:7 10.24
80:8 11.00
80:9 11.34
80:10 11.59
80:11 12.37
80:12 12.40
81:1 12.14
81:2 12.80
81:3 12.69
81:4 13.20
81:5 13.60
81:6 12.96
81:7 13.59
81:8 14.17
81:9 14.67
81:10 14.68
81:11 13.35
81:12 13.45
82:1 14.22
82:2 14.22
82:3 13.53
82:4 13.37
82:5 13.24
82:6 13.92
82:7 13.55
82:8 12.77
82:9 12.07
82:10 11.17
82:11 10.54
82:12 10.54
83:1 10.63
83:2 10.88
83:3 10.63
83:4 10.48
83:5 10.53
83:6 10.93
83:7 11.40
83:8 11.82
83:9 11.63
83:10 11.58
83:11 11.75
83:12 11.88
84:1 11.75
84:2 11.95
84:3 12.38
84:4 12.65
84:5 13.43
84:6 13.44
84:7 13.21
84:8 12.54
84:9 12.29
84:10 11.98
84:11 11.56
84:12 11.52
85:1 11.45
85:2 11.47
85:3 11.81
85:4 11.47
85:5 11.05
85:6 10.45
85:7 10.50
85:8 10.56
85:9 10.61
85:10 10.50
85:11 10.06
85:12 9.54
86:1 9.40
86:2 8.93
86:3 7.96
86:4 7.39
86:5 7.52
86:6 7.57
86:7 7.27
86:8 7.33
86:9 7.62
86:10 7.70
86:11 7.52
86:12 7.37
87:1 7.39
87:2 7.54
87:3 7.55
87:4 8.25
87:5 8.78
87:6 8.57
87:7 8.64
87:8 8.97
87:9 9.59
87:10 9.61
87:11 8.95
87:12 9.12
88:1 8.83
88:2 8.43
88:3 8.63
88:4 8.95
88:5 9.23
88:6 9.00
88:7 9.14
88:8 9.32
88:9 9.06
88:10 8.89
88:11 9.02
88:12 9.01
89:1 8.93
89:2 9.01
89:3 9.17
89:4 9.03
89:5 8.83
89:6 8.27
89:7 8.08
89:8 8.12
89:9 8.15
89:10 8.00
89:11 7.90
89:12 7.90
90:1 8.26
90:2 8.50
90:3 8.56
90:4 8.76
90:5 8.73
90:6 8.46
90:7 8.50
90:8 8.86
90:9 9.03
90:10 8.86
90:11 8.54
90:12 8.24
91:1 8.27
91:2 8.03
91:3 8.29
91:4 8.21
91:5 8.27
91:6 8.47
91:7 8.45
91:8 8.14
91:9 7.95
91:10 7.93
91:11 7.92
91:12 7.70
92:1 7.58
92:2 7.85
92:3 7.97
92:4 7.96
92:5 7.89
92:6 7.84
92:7 7.60
92:8 7.39
92:9 7.34
92:10 7.53
92:11 7.61
92:12 7.44
93:1 7.34
93:2 7.09
93:3 6.82
93:4 6.85
93:5 6.92
93:6 6.81
93:7 6.63
93:8 6.32
93:9 6.00
93:10 5.94
93:11 6.21
93:12 6.25
94:1 6.29
94:2 6.49
94:3 6.91
94:4 7.27
94:5 7.41
94:6 7.40
94:7 7.58
94:8 7.49
94:9 7.71
94:10 7.94
94:11 8.08
94:12 7.87
95:1 7.85
95:2 7.61
95:3 7.45
95:4 7.36
95:5 6.95
95:6 6.57
95:7 6.72
95:8 6.86
95:9 6.55
95:10 6.37
95:11 6.26
95:12 6.06
96:1 6.05
96:2 6.24
96:3 6.60
96:4 6.79
96:5 6.93
96:6 7.06
96:7 7.03
96:8 6.84
96:9 7.03
96:10 6.81
96:11 6.48
96:12 6.55
97:1 6.83
97:2 6.69
97:3 6.93
97:4 7.09
97:5 6.94
97:6 6.77
97:7 6.51
97:8 6.58
97:9 6.50
97:10 6.33
97:11 6.11
97:12 NA
Source: ISI Inc.
After two rounds of the Pacific Rim crises, the U.S. economy is likely to
slow in the near term, cutting growth the next two quarters by roughly 0.5% from
our earlier forecast. The currency value of the U.S. dollar should be bolstered
by its status as a safe haven. Typically as events unfold, the Federal Reserve
lowers its Federal Funds Rate. This event sequence normally results in higher
prices for top quality assets such as U.S. Treasuries.
INFLATION
Inflation has subsided around the industrial world. In the U.S., the recent
declines in "nominal" interest rates have been accompanied by a sizable fall in
inflation. The result is that despite falling interest rates, the "real" rates
have moved modestly higher (please see chart below).
REAL U.S. LONG BOND YIELD
SEP. 4.67%
[Graph appears here--See plot points below]
%
-----
74:1 -0.83
74:2 -1.51
74:3 -1.66
74:4 -1.31
74:5 -1.71
74:6 -1.96
74:7 -2.21
74:8 -1.91
74:9 -2.54
74:10 -2.88
74:11 -3.17
74:12 -3.10
75:1 -2.75
75:2 -2.18
75:3 -1.04
75:4 -0.36
75:5 0.05
75:6 0.01
75:7 -0.02
75:8 0.93
75:9 1.53
75:10 1.49
75:11 1.49
75:12 1.57
76:1 1.54
76:2 1.92
76:3 2.03
76:4 2.05
76:5 2.24
76:6 2.36
76:7 2.62
76:8 2.46
76:9 2.26
76:10 2.16
76:11 2.26
76:12 1.92
77:1 1.93
77:2 1.45
77:3 1.28
77:4 0.87
77:5 0.88
77:6 0.61
77:7 0.65
77:8 0.82
77:9 0.98
77:10 1.17
77:11 1.17
77:12 1.32
78:1 1.46
78:2 1.78
78:3 1.59
78:4 1.47
78:5 1.33
78:6 1.24
78:7 1.34
78:8 1.06
78:9 0.85
78:10 0.81
78:11 0.91
78:12 0.99
79:1 0.82
79:2 0.69
79:3 0.60
79:4 0.66
79:5 0.62
79:6 0.27
79:7 -0.06
79:8 -0.25
79:9 -0.44
79:10 0.20
79:11 0.46
79:12 -0.11
80:1 0.08
80:2 1.19
80:3 0.96
80:4 0.18
80:5 -0.72
80:6 -1.10
80:7 -0.56
80:8 0.09
80:9 0.50
80:10 0.85
80:11 1.60
80:12 2.02
81:1 1.91
81:2 2.62
81:3 3.00
81:4 3.71
81:5 4.44
81:6 4.01
81:7 4.76
81:8 5.50
81:9 6.18
81:10 6.50
81:11 5.36
81:12 5.68
82:1 6.87
82:2 7.65
82:3 7.50
82:4 7.77
82:5 7.48
82:6 7.85
82:7 7.55
82:8 7.24
82:9 6.94
82:10 5.87
82:11 5.53
82:12 5.76
83:1 5.95
83:2 6.33
83:3 6.09
83:4 5.30
83:5 5.56
83:6 6.38
83:7 7.06
83:8 7.36
83:9 7.09
83:10 7.35
83:11 7.53
83:12 7.66
84:1 7.63
84:2 7.56
84:3 7.88
84:4 8.50
84:5 9.54
84:6 9.64
84:7 9.57
84:8 8.94
84:9 8.82
84:10 8.52
84:11 8.19
84:12 8.12
85:1 8.06
85:2 8.05
85:3 8.25
85:4 7.99
85:5 7.41
85:6 6.71
85:7 6.81
85:8 6.94
85:9 6.93
85:10 6.72
85:11 6.06
85:12 5.32
86:1 5.18
86:2 5.17
86:3 4.88
86:4 4.69
86:5 4.86
86:6 4.84
86:7 4.58
86:8 4.69
86:9 4.87
86:10 5.16
86:11 5.17
86:12 5.18
87:1 4.94
87:2 4.66
87:3 4.18
87:4 4.42
87:5 4.96
87:6 4.78
87:7 4.75
87:8 4.84
87:9 5.46
87:10 5.25
87:11 4.49
87:12 4.76
88:1 4.88
88:2 4.78
88:3 4.87
88:4 4.99
88:5 5.18
88:6 4.85
88:7 4.76
88:8 5.07
88:9 4.69
88:10 4.54
88:11 4.71
88:12 4.46
89:1 4.04
89:2 3.89
89:3 3.96
89:4 3.66
89:5 3.42
89:6 3.15
89:7 3.17
89:8 3.47
89:9 3.71
89:10 3.43
89:11 3.32
89:12 3.36
90:1 3.63
90:2 3.77
90:3 3.77
90:4 4.28
90:5 4.32
90:6 3.77
90:7 3.75
90:8 3.50
90:9 3.35
90:10 3.04
90:11 2.78
90:12 2.63
91:1 2.83
91:2 2.77
91:3 3.50
91:4 3.55
91:5 3.64
91:6 4.15
91:7 4.21
91:8 4.28
91:9 4.40
91:10 4.83
91:11 4.63
91:12 4.32
92:1 4.40
92:2 4.65
92:3 4.49
92:4 4.47
92:5 4.51
92:6 4.40
92:7 4.04
92:8 4.40
92:9 4.16
92:10 4.16
92:11 4.49
92:12 4.44
93:1 4.34
93:2 4.06
93:3 3.95
93:4 3.96
93:5 4.13
93:6 4.21
93:7 4.31
93:8 3.54
93:9 3.61
93:10 3.48
93:11 3.75
93:12 3.86
94:1 4.18
94:2 4.42
94:3 4.73
94:4 5.21
94:5 5.31
94:6 5.05
94:7 4.97
94:8 4.73
94:9 4.86
94:10 5.32
94:11 5.44
94:12 5.19
95:1 4.83
95:2 4.67
95:3 4.60
95:4 4.42
95:5 4.02
95:6 3.82
95:7 4.15
95:8 4.39
95:9 4.26
95:10 4.11
95:11 4.13
95:12 3.86
96:1 3.94
96:2 4.09
96:3 4.38
96:4 4.52
96:5 4.65
96:6 4.77
96:7 4.60
96:8 4.54
96:9 4.54
96:10 4.19
96:11 3.70
96:12 3.78
97:1 4.18
97:2 4.02
97:3 4.44
97:4 4.83
97:5 4.86
97:6 4.68
97:7 4.59
97:8 4.68
97:9 4.67
97:10 NA
97:11 NA
Source: ISI Inc.
The major forces behind the decline of inflation are:
o Global Competition
o Demographics
o Technology
o Reduced Government Spending
3
<PAGE>
================================================================================
ECONOMIC OUTLOOK FOR 1998 (concluded)
================================================================================
The opening up of world trade has meant new plants can be built in low wage
areas and the products can be exported to high wage home markets. As a result,
pressure on U.S. real wages and a drive for corporate efficiency have marked the
last 10 years. The declining cost of technology has also been a major factor in
boosting capital spending and lowering the world inflation rate. Technology
represents a growing section of the overall economy, so the percentage of the
U.S. economy experiencing deflation has grown over the last 10 years. Baby
boomers have reached the age when people are seen beginning to save for
retirement. This change from consumption to savings is an important shift in the
economy. Finally, governments from the U.S. and Germany to Brazil and Thailand
have been cutting their spending. This has often been magnified by tax
increases. The result is less fiscal stimulus and lower inflation.
THE U.S. BUDGET DEFICIT
A remarkable feature of the U.S. government's policy has been the virtual
elimination of the deficit. The swing since 1992 has been a very large $300
billion a year (please see chart, top right).
FEDERAL DEFICIT
12-Mo. Sum Sep. -$41.3
[Graph appears here--See plot points below]
DEFICIT
12 Mo. Sum
----------
78:1 -51.9
78:2 -52.6
78:3 -57.5
78:4 -58.4
78:5 -50.2
78:6 -51.9
78:7 -50.2
78:8 -48.6
78:9 -47.4
78:10 -46.5
78:11 -43.2
78:12 -41.0
79:1 -40.3
79:2 -37.5
79:3 -32.5
79:4 -31.2
79:5 -31.9
79:6 -28.3
79:7 -28.3
79:8 -27.1
79:9 -26.2
79:10 -25.8
79:11 -26.0
79:12 -24.8
80:1 -27.2
80:2 -29.2
80:3 -31.5
80:4 -35.1
80:5 -43.1
80:6 -48.1
80:7 -55.5
80:8 -56.3
80:9 -58.3
80:10 -58.9
80:11 -59.6
80:12 -65.7
81:1 -66.9
81:2 -69.5
81:3 -69.7
81:4 -66.3
81:5 -67.0
81:6 -66.2
81:7 -59.3
81:8 -59.2
81:9 -60.5
81:10 -58.8
81:11 -60.4
81:12 -61.7
82:1 -58.3
82:2 -60.9
82:3 -65.2
82:4 -70.5
82:5 -74.5
82:6 -81.6
82:7 -90.7
82:8 -101.3
82:9 -110.9
82:10 -121.5
82:11 -133.2
82:12 -140.9
83:1 -152.2
83:2 -163.4
83:3 -171.8
83:4 -179.1
83:5 -192.3
83:6 -195.3
83:7 -198.7
83:8 -200.3
83:9 -195.2
83:10 -195.7
83:11 -191.8
83:12 -189.5
84:1 -187.8
84:2 -181.3
84:3 -174.2
84:4 -174.9
84:5 -168.2
84:6 -171.5
84:7 -171.0
84:8 -169.1
84:9 -172.5
84:10 -175.2
84:11 -177.7
84:12 -180.1
85:1 -182.4
85:2 -181.1
85:3 -186.9
85:4 -188.4
85:5 -191.6
85:6 -190.0
85:7 -190.7
85:8 -195.4
85:9 -200.2
85:10 -197.8
85:11 -200.6
85:12 -203.0
86:1 -202.9
86:2 -206.4
86:3 -209.6
86:4 -209.2
86:5 -211.2
86.6 -214.5
86:7 -216.1
86:8 -216.2
86:9 -221.6
86:10 -218.1
86:11 -214.1
86:12 -211.0
87:1 -206.5
87:2 -208.7
87:3 -204.6
87:4 -188.7
87:5 -186.3
87:6 -184.0
87:7 -180.1
87:8 -178.0
87:9 -159.8
87:10 -162.3
87:11 -161.2
87:12 -154.2
88:1 -158.1
88:2 -151.4
88:3 -148.6
88:4 -161.1
88:5 -152.4
88:6 -146.3
88:7 -147.1
88:8 -145.7
88:9 -148.5
88:10 -149.1
88:11 -149.2
88:12 -153.9
89:1 -151.3
89:2 -154.2
89:3 -151.7
89:4 -145.7
89:5 -137.6
89:6 -135.9
89:7 -134.6
89:8 -133.2
89:9 -143.7
89:10 -145.8
89:11 -144.8
89:12 -149.9
90:1 -143.8
90:2 -149.9
90:3 -165.2
90:4 -170.5
90:5 -190.6
90:6 -204.2
90:7 -208.1
90:8 -210.9
90:9 -217.0
90:10 -218.7
90:11 -231.4
90:12 -234.7
91:1 -245.1
91:2 -233.0
91:3 -226.4
91:4 -231.0
91:5 -236.1
91:6 -242.1
91:7 -254.2
91:8 -268.8
91:9 -273.2
91:10 -275.2
91:11 -272.5
91:12 -265.1
92:1 -276.0
92:2 -293.0
92:3 -306.1
92:4 -318.7
92:5 -318.0
92:6 -316.5
92:7 -308.8
92:8 -299.6
92:9 -291.4
92:10 -288.0
92:11 -285.3
92:12 -290.9
93:1 -283.6
93:2 -283.3
93:3 -274.8
93:4 -269.6
93:5 -268.8
93:6 -261.0
93:7 -261.9
93:8 -254.6
93:9 -251.2
93:10 -254.6
93:11 -253.8
93:12 -253.1
94:1 -240.6
94:2 -231.5
94:3 -213.8
94:4 -217.8
94:5 -201.1
94:6 -197.0
94:7 -191.0
94:8 -189.8
94:9 -188.1
94:10 -183.4
94:11 -179.5
94:12 -173.4
95:1 -179.3
95:2 -171.4
95:3 -179.5
95:4 -163.1
95:5 -168.4
95:6 -160.7
95:7 -154.8
95:8 -158.5
95:9 -153.8
95:10 -148.6
95:11 -146.2
95:12 -142.2
96:1 -136.9
96:2 -137.9
96:3 -144.6
96:4 -133.9
96:5 -129.3
96:6 -135.5
96:7 -137.4
96:8 -134.3
96:9 -132.0
96:10 -131.4
96:11 -121.0
96:12 -122.5
97:1 -121.2
97:2 -123.3
97:3 -106.3
97:4 -82.0
97:5 -78.5
97:6 -63.4
97:7 -56.0
97:8 -46.4
97:9 -41.3
97:10 NA
97:11 NA
97:12 NA
Source: ISI Inc.
Despite tax cuts and a bit more spending next year, we think the budget
will register a surplus. This is a significant shift for the capital markets
freeing up massive amounts to finance the private economy. The results of
reduced Treasury borrowings should directly influence the level of rates, and
the freeing up of investment capital allows for greater productivity in the
private sector.
4
<PAGE>
================================================================================
PORTFOLIO DIVERSIFICATION BY STATE
================================================================================
[MAP OF THE U.S. APPEARS HERE]
State Allocation
% of % of
Municipal Municipal
Bonds Bonds
--------- ---------
Texas 15.7% Virginia 2.8%
Florida 13.8 Illinois 2.5
Minnesota 8.5 Ohio 2.4
North Carolina 7.2 Delaware 1.9
Tennessee 6.0 Utah 1.9
Washington 5.2 Colorado 1.8
South Carolina 5.1 Hawaii 1.7
Wisconsin 4.9 Oregon 1.4
Kansas 4.2 Indiana 1.4
Maryland 3.8 Missouri 1.0
Georgia 3.4 ----------
Arizona 3.4 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. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on
February 26, 1990 through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its currently effective 4.45% maximum
sales charge.
While the following chart is required by SEC rules, such comparisons are of
limited utility since the indices shown are not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the
SEC calculation includes the impact of the currently effective 4.45% maximum
sales charge. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 9/30/97: Sales Charge
- --------------------------------------------------------------------------------
One Year 3.44%
- --------------------------------------------------------------------------------
Five Years 5.34%
- --------------------------------------------------------------------------------
Since Inception (2/26/90) 6.47%
- --------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT*
February 26, 1990-October 31, 1997
ISI Managed Lehman Brothers Lehman Brothers Consumer
Municipal General Obligation Prerefunded Price
Fund Index (G.O.) Municipal Index Index (CPI)
9,555 10,000 10,000 10,000
9,916 10,346 10,413 10,420
10,992 11,510 11,462 10,722
11,658 12,448 12,380 11,065
13,332 14,126 13,658 11,375
12,466 13,627 13,453 11,671
14,388 15,513 14,872 11,998
15,060 16,372 15,555 12,358
16,178 17,733 16,535 12,618
* These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.45% maximum sales charge. The
Lehman Brothers indices listed above are unmanaged. Although the G.O.
Index reflects general municipal market performance, the Prerefunded
Index is a better indicator of the Fund due to its higher quality
characteristics. The Fund is invested entirely in AA-rated or better
issues. Management is not aware of any single index that contains
securities with substantially the same characteristics as those of the
Fund. The CPI is a widely used measure of inflation. The CPI performance
is based on data released on 11/18/97. Past performance is not an
indicator of future results.
6
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Net Assets OCTOBER 31, 1997
<TABLE>
<CAPTION>
RATING* MARKET
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL BONDS--93.5%
GENERAL OBLIGATION--73.9%
Arlington, TX, Independent School District, 5.75%, 2021 Aaa/NR** $5,000 $ 5,131,100
Charlotte, NC:
5.30%, 2011 Aaa/AAA 1,590 1,653,203
5.30%, 2012 Aaa/AAA 2,325 2,408,724
5.30%, 2012 Aaa/AAA 1,120 1,160,331
5.80%, 2016 Aaa/AAA 2,500 2,642,725
Chicago, IL, 6.30%, 2009 Aa2/AA 1,000 1,119,360
Dallas, TX, 5.00%, 2010 Aa1/AAA 1,750 1,764,753
Delaware State, Series "A", 5.125%, 2016 Aa1/AA+ 2,150 2,133,209
DuPage County, IL, Jail Project, 5.60%, 2021 Aaa/AAA 1,600 1,670,032
Florida Board of Education, Refunding Public Education:
6.125%, 2012 Aa2/AA+ 2,250 2,402,730
5.50%, 2021 Aa2/AA+ 2,000 2,009,400
5.125%, 2022 Aa2/AA+ 5,000 4,833,650
Florida State Department of Transportation,
5.80%, 2018 Aa2/AA+ 2,000 2,085,540
Franklin County, OH:
5.45%, 2009 Aaa/AAA 1,500 1,569,330
5.50%, 2013 Aaa/AAA 1,000 1,025,510
Georgia State, Series "D":
5.25%, 2009 Aaa/AAA 1,580 1,653,296
5.00%, 2010 Aaa/AAA 2,000 2,031,940
Grand Prairie, TX, School District, 5.20%, 2018 Aaa/AAA 2,000 1,980,060
Henrico County, VA, 5.25%, 2009 Aaa/AAA 1,000 1,032,600
Maryland State & Local Facilities, Second Series,
5.125%, 2010 Aaa/AAA 3,000 3,076,860
Metropolitan Government of Nashville,
Davidson County, TN, 5.125%, 2019 Aa2/AA 4,000 3,945,320
Minneapolis, MN, Sports Arena:
5.00%, 2011 Aaa/AAA 1,710 1,716,823
5.00%, 2012 Aaa/AAA 1,920 1,923,014
Minneapolis, MN, Series "B", 5.20%, 2013 Aaa/AAA 3,200 3,222,272
Minnesota State, 5.00%, 2014 Aaa/AAA 2,500 2,469,000
Missouri State Building, Series "A", 5.75%, 2014 Aaa/AAA 1,000 1,060,540
Plano, TX, Independent School District, 5.00%, 2011 Aaa/AAA 3,000 2,979,630
Portland, OR, Metro, 5.25%, 2007 Aa/AA+ 1,500 1,561,425
Salt Lake County, UT, 5.25%, 2010 Aaa/AA+ 2,000 2,054,420
</TABLE>
7
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Net Assets (continued) October 31, 1997
<TABLE>
<CAPTION>
RATING* MARKET
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
GENERAL OBLIGATION--CONCLUDED
South Carolina Capital Improvement:
5.00%, 2009 Aaa/AAA $2,700 $ 2,754,324
5.625%, 2014 Aaa/AAA 2,700 2,824,362
State of Tennessee:
Series "A", 5.50%, 2009 Aaa/AA+ 1,535 1,608,388
Series "A", 5.55%, 2010 Aaa/AA+ 1,000 1,044,830
State of Texas, 6.00%, 2014 Aa2/AA 2,000 2,131,500
Virginia State, 5.375%, 2012 Aaa/AAA 1,000 1,027,970
Washington State:
Series "A", 5.60%, 2010 Aa1/AA+ 1,500 1,570,935
Series "R", 5.00%, 2014 Aa1/AA+ 2,250 2,207,452
Series "E", 5.00%, 2022 Aa1/AA+ 2,000 1,912,500
Wisconsin State Series:
Series 1, 5.00%, 2015 Aa2/AA 1,000 978,320
Series "B", 5.00%, 2016 Aa2/AA 3,500 3,409,350
Series "B", 5.00%, 2018 Aa2/AA 1,000 966,400
----------
86,753,128
----------
ELECTRIC AND GAS UTILITY REVENUE--0.3%
San Antonio, TX, Electric & Gas Revenue,
Series "A", 6.50%, 2012 Aa1/AA 315 327,269
----------
PREREFUNDED ISSUES--13.1%
Arizona Highway Transportation Board, 6.00%, 2010 #AAA(dagger)/AAA 3,480 3,680,935
Florida Board of Education, Refunding Public Education,
6.50%, 2012 #AAA(dagger)/AA+ 2,500 2,756,925
Howard County, MD, Consolidated Public Improvements,
Series "A", 6.90%, 2002 #AAA(dagger)/AAA 1,000 1,068,090
Jacksonville, FL, Electric Authority Revenue, Scherer 4-1-A,
6.75%, 2021 #AAA(dagger)/AA 1,000 1,087,740
Lower Colorado River Authority, Jr. Lien, 4th Supply,
5.25%, 2015 #AAA(dagger)/AAA 2,000 2,029,320
San Antonio, TX, Electric & Gas Revenue,
Series "A", 6.50%, 2012 #AAA(dagger)/AA 685 716,537
State of Hawaii, General Obligation:
7.00%, 2006 Aaa/(dagger)(dagger) 750 802,958
6.125%, 2010 NR**/(dagger)(dagger) 1,000 1,065,630
University of Texas, 6.50%, 2011 #AAA(dagger)/AAA 2,000 2,190,460
----------
15,398,595
----------
</TABLE>
8
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Net Assets (continued) October 31, 1997
<TABLE>
<CAPTION>
RATING* MARKET
(MOODY'S/ PAR VALUE
ISSUER S&P) (000) (NOTE A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
TRANSPORTATION REVENUE--4.9%
Kansas Transportation Revenue:
5.40%, 2009 Aa/AA $ 2,000 $ 2,075,060
5.40%, 2009 Aa/AA 2,500 2,587,575
Virginia State Transportation Authority, 6.00%, 2010 Aa/AA 1,000 1,060,130
-----------
5,722,765
-----------
OTHER REVENUE--1.3%
Indianapolis, IN, Local Public Improvement Board,
6.00%, 2018 Aaa/AA+ 1,500 1,555,620
----------
TOTAL MUNICIPAL BONDS
(Cost $105,730,300) 109,757,377
REPURCHASE AGREEMENT--8.6%
GOLDMAN SACHS & CO., 5.60%
Dated 10/31/97, to be repurchased on 11/3/97,
collateralized by U.S. Treasury Notes with a
market value of $10,343,302.
(Cost $10,140,000) 10,140 10,140,000
-----------
TOTAL INVESTMENT IN SECURITIES--102.1%
(Cost $115,870,300)*** 119,897,377
LIABILITIES IN EXCESS OF OTHER ASSETS, NET--(2.1%) (2,503,641)
-----------
NET ASSETS--100.0% $117,393,736
============
</TABLE>
9
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Net Assets (concluded) October 31, 1997
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER:
ISI CLASS SHARE
($79,003,488 / 7,322,827 shares outstanding) $10.79
======
FLAG INVESTORS CLASS A SHARE
($38,390,248 / 3,557,464 shares outstanding) $10.79
======
MAXIMUM OFFERING PRICE PER:
ISI CLASS SHARE
($10.79 / 0.9555) $11.29
======
FLAG INVESTORS CLASS A SHARE
($10.79 / 0.9550) $11.30
======
- --------------------------------------------------------------------------------
* The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available as of October 31, 1997.
Ratings of issues have not been audited by Coopers & Lybrand
L.L.P.
** Not rated.
*** Also aggregate cost for federal tax purposes.
(dagger) Moody's #AAA rating indicates advance refunded issues secured
by escrowed funds held in cash, held in trust or invested in
direct non-callable U.S. government obligations or non-callable
obligations unconditionally guaranteed by the U.S. government.
(dagger)(dagger) Prerefunded bonds backed by U.S. Treasury securities. Absent
prerefunding, this obligation is rated Aa3/A+.
See Notes to Financial Statements.
10
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Operations For the Year ended October 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):
Interest $6,440,149
----------
EXPENSES:
Investment advisory fee (Note B) 480,975
Distribution fee (Note B) 300,610
Administration fee (Note B) 240,488
Accounting fee (Note B) 58,038
Transfer agent fee (Note B) 56,933
Printing and postage 34,500
Legal 30,248
Audit 28,879
Registration fees 25,681
Miscellaneous 25,414
Custodian fee (Note B) 21,363
Directors' fees 7,819
Insurance 4,811
----------
Total expenses 1,315,759
Less: Fees waived (Note B) (233,385)
----------
Net expenses 1,082,374
----------
Net investment income 5,357,775
----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 1,002,650
Change in unrealized appreciation or depreciation of investments 2,249,576
----------
Net gain on investments 3,252,226
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,610,001
==========
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 5,357,775 $ 5,787,049
Net realized gain from security transactions 1,002,650 281,659
Change in unrealized appreciation or depreciation
of investments 2,249,576 (272,341)
----------- -----------
Net increase in net assets
resulting from operations 8,610,001 5,796,367
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM (NOTE A):
Net investment income and net realized short-term gains:
ISI Class Shares (3,948,488) (4,374,225)
Flag Investors Class A Shares (1,919,815) (2,244,395)
Net realized mid-term and long-term gains:
ISI Class Shares (267,980) (82,292)
Flag Investors Class A Shares (129,060) (43,313)
----------- -----------
Total distributions (6,265,343) (6,744,225)
----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTEC):
Proceeds from sale of shares 5,846,126 8,278,327
Value of shares issued in reinvestment of dividends 3,443,291 3,789,940
Cost of shares repurchased (20,144,490) (17,488,342)
----------- -----------
Decrease in net assets derived from capital share
transactions (10,855,073) (5,420,075)
----------- -----------
Total decrease in net assets (8,510,415) (6,367,933)
NET ASSETS:
Beginning of year 125,904,151 132,272,084
----------- -----------
End of year $117,393,736 $125,904,151
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
12
<PAGE>
================================================================================
MANAGED MUNICIPAL FUND, INC.
================================================================================
FINANCIAL HIGHLIGHTS--ISI CLASS AND FLAG INVESTORS CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.52 0.48 0.48 0.46 0.50
Net realized and unrealized
gain/(loss) on investments 0.24 -- 0.98 (1.15) 0.94
------- ------- ------- ------- -------
Total from Investment Operations 0.76 0.48 1.46 (0.69) 1.44
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Distributions from net investment income
and net realized short-term gains (0.52) (0.54) (0.54) (0.56) (0.61)
Distributions from net realized
mid-term and long-term gains (0.03) (0.01) (0.08) (0.04) (0.04)
------- ------- ------- ------- -------
Total distributions (0.55) (0.55) (0.62) (0.60) (0.65)
------- ------- ------- ------- -------
Net asset value at end of year $ 10.79 $ 10.58 $ 10.65 $ 9.81 $ 11.10
======= ======= ======= ======= =========
TOTAL RETURN(1) 7.43% 4.67% 15.42% (6.49)% 14.36%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses(2) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(3) 4.46% 4.48% 4.72% 4.37% 4.38%
SUPPLEMENTAL DATA:
Net assets at end of year:
ISI Class Shares $79,003 $84,712 $86,292 $83,607 $88,378
Flag Investors Class A Shares $38,390 $41,193 $45,980 $49,903 $53,486
Portfolio turnover rate 26% 32% 55% 37% 68%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory and administration fees (Note 2), the
ratio of expenses to average daily net assets would have been 1.10%,
1.13%, 1.10%, 1.11% and 1.14% for the years ended October 31, 1997,
1996, 1995, 1994 and 1993, respectively.
(3) Without the waiver of advisory and administration fees (Note 2), the
ratio of net investment income to average daily net assets would have
been 4.26%, 4.25%, 4.52%, 4.16% and 4.14% for the years ended October
31, 1997, 1996, 1995, 1994 and 1993, respectively.
See Notes to Financial Statements.
13
<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
and commenced operations February 26, 1990, 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. Under certain circumstances, it is
necessary to reclassify prior year information in order to conform to the
current year's presentation. 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
14
================================================================================
NOTES TO FINANCIAL STATEMENTS (continued)
================================================================================
discounts when appropriate. Income and common expenses are allocated to
each class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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"), an indirect subsidiary
of Bankers Trust New York Corporation, 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 year ended October 31, 1997, ISI waived
fees of $157,087 and ICC waived fees of $76,298.
Certain officers and directors of the Fund are also officers or directors of
the Fund's investment advisor or administrator.
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 $58,038 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $56,933
for transfer agent services for the year ended October 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's
custodian. From September 22, 1997 to October 31, 1997, the Fund accrued
$2,341 in custody expenses.
As compensation for providing distribution services for the ISI Class, the
Fund pays ISI Group Inc. ("ISI Group"), which is affiliated with ISI, an
annual fee that is calculated daily and paid monthly. This fee is paid at an
annual rate equal to 0.25% of the ISI Class' average daily net assets. Prior
to April 1, 1997, Armata Financial Corp. served as the distributor for the
ISI Class for the same compensation and on substantially the same terms as
ISI Group. As compensation for providing distribution services for the Flag
Investors Class A Shares, the Fund pays ICC Distributors, Inc. ("ICC
Distributors"), a member of the Forum Financial Group of companies, 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. Prior to September 1, 1997, Alex. Brown & Sons
Incorporated served as the distributor for the Flag Investors Class A Shares
for the same compensation and on substantially the same terms as ICC
Distributors. For the year ended October 31, 1997, distribution fees
aggregated $300,610, of which $202,335 was attributable to the ISI Class
Shares and $98,275 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 year
ended October 31, 1997 was $6,920 and the accrued liability was $19,880.
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 are listed on the following page.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS (concluded)
================================================================================
ISI CLASS SHARES
----------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCT. 31, 1997 OCT. 31, 1996
------------- -------------
Shares sold 382,670 585,014
Shares issued to share-
holders on reinvest-
ment of dividends 224,594 246,345
Shares redeemed (1,295,279) (924,026)
----------- -----------
Net decrease in shares
outstanding (688,015) (92,667)
=========== ===========
Proceeds from sale
of shares $ 4,060,401 $ 6,198,720
Value of reinvested
dividends 2,370,561 2,588,981
Cost of shares
redeemed (13,720,577) (9,754,108)
----------- -----------
Net decrease from
capital share
transactions $(7,289,615) $ (966,407)
=========== ===========
FLAG INVESTORS CLASS A SHARES
-----------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCT. 31, 1997 OCT. 31, 1996
------------- -------------
Shares sold 167,474 200,140
Shares issued to share-
holders on reinvest-
ment of dividends 101,621 114,250
Shares redeemed (606,069) (736,822)
----------- -----------
Net decrease in shares
outstanding (336,974) (422,432)
=========== ===========
Proceeds from sale
of shares $ 1,785,725 $ 2,079,607
Value of reinvested
dividends 1,072,730 1,200,959
Cost of shares
redeemed (6,423,913) (7,734,234)
----------- -----------
Net decrease from
capital share
transactions $(3,565,458) $(4,453,668)
=========== ===========
D. INVESTMENT TRANSACTIONS -- Excluding short-term obligations, purchases of
investment securities aggregated $30,711,360 and sales of investment
securities aggregated $41,685,157 for the year ended October 31, 1997.
On October 31, 1997, aggregate net unrealized appreciation over tax cost for
portfolio securities was $4,027,077, of which $4,186,285 related to
appreciated securities and $159,208 related to depreciated securities.
E. NET ASSETS -- On October 31, 1997, net assets consisted of:
Paid-in capital:
ISI Class Shares $ 76,949,687
Flag Investors
Class A Shares 36,127,769
Undistributed net realized
long-term gains from
security transactions 289,203
Unrealized appreciation of
investments 4,027,077
------------
$117,393,736
============
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
16
<PAGE>
================================================================================
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, 1997, 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, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Managed Municipal Fund, Inc. as of October 31, 1997, 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 each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
November 26, 1997
17
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