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(LOGO)
FLAG INVESTORS
MARYLAND INTERMEDIATE
TAX FREE INCOME FUND, INC.
(Institutional Shares)
This mutual fund (the "Fund") is designed to provide current income exempt
from federal income taxes and Maryland state and local income taxes
consistent with preservation of principal within an intermediate-term
maturity structure. The Fund will invest primarily in municipal obligations
issued by the State of Maryland and its political subdivisions, agencies or
instrumentalities. Under normal circumstances, the dollar weighted expected
average maturity of the portfolio normally will be not less than 3 and not
more than 10 years. (See "Investment Program.")
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
Participating Dealers and may be purchased only by eligible institutions or by
clients of investment advisory affiliates of Alex. Brown. (See "How to Invest in
Institutional Shares.")
This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated August 1, 1995, as amended through
November 1, 1995, has been filed with the Securities and Exchange Commission
(the "SEC") and is hereby incorporated by reference. It is available upon
request and without charge by calling the Fund at (800) 767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 1, 1995.
PROSPECTUS
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FLAG INVESTORS
MARYLAND INTERMEDIATE TAX FREE INCOME
FUND, INC.
(INSTITUTIONAL SHARES)
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135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
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Page
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1. Fund Expenses ................................... 2
2. Financial Highlights ............................ 3
3. Investment Program .............................. 4
4. Investment Restrictions ......................... 13
5. How to Invest in Institutional Shares ........... 13
6. How to Redeem Institutional Shares .............. 15
7. Telephone Transactions ........................... 16
8. Dividends and Taxes ............................. 17
9. Management of the Fund .......................... 20
10. Investment Advisor .............................. 21
11. Distributor ..................................... 21
12. Custodian, Transfer Agent, Accounting Services .. 22
13. Performance Information ......................... 22
14. General Information ............................. 23
Appendix ............................................. A-1
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| No person has been authorized to give any information or to make |
| representations not contained in this Prospectus in connection with any |
| offering made by this Prospectus and, if given or made, such information |
| must not be relied upon as having been authorized by the Fund or its |
| distributor. This Prospectus does not constitute an offering by the Fund or |
| by its distributor in any jurisdiction in which such offering may not |
| lawfully be made. |
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1
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1. FUND EXPENSES
...............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
_______________________________________________________________________________
Maximum Sales Charge Imposed on Purchases ............... None
Maximum Sales Charge Imposed on Reinvested Dividends .... None
Deferred Sales Charge ................................... None
_______________________________________________________________________________
ANNUAL FUND OPERATING EXPENSES
(NET OF FEE WAIVERS AND REIMBURSEMENTS):
(as a percentage of average daily net assets)
_______________________________________________________________________________
Management Fees (net of fee waivers) ................................. .00%*
12b-1 Fees ........................................................... None
Other Expenses (net of reimbursements)................................. .45%*
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Total Fund Operating Expenses (net of fee waivers and reimbursements) . .45%*
=======
_______________________________________________________________________________
* The Fund's investment advisor currently intends to waive its fee or to
reimburse the Fund on a voluntary basis to the extent required so that
Total Fund Operating Expenses do not exceed .45% of the Institutional Shares'
average daily net assets. Absent fee waivers and/or reimbursements,
Management Fees would be .35%, Other Expenses would be 1.25% and Total
Operating Expenses would be 1.60% of the Institutional Shares' average
daily net assets.
EXAMPLE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period*: 1 year 3 years 5 years 10 years
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$5 $15 $25 $58
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</TABLE>
* The example is based on Total Fund Operating Expenses, net of fee waivers
and reimbursements. Absent such fee waivers and reimbursements, expenses
would be higher.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor" and "Distributor.") The Expenses
and Example appearing in the table above are based on the Fund's expenses
(net of fee waivers and reimbursements) for the Flag Investors Shares,
another class of shares offered by the Fund, for the fiscal year ended March
31, 1995, less 12b-1 fees of .25%.
2
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2. Financial Highlights
...............................................................................
The Fund has not offered the Institutional Shares prior to the date of
this Prospectus. However, the Fund has offered another class of shares since
1993. Historical financial information about the Fund is not fully applicable
to the Institutional Shares because the expenses paid by the Fund in the past
differ from those the Institutional Shares will incur. (See "Fund Expenses.")
Nevertheless, historical information about the Fund may be useful to
investors if they take into account the differences in expenses. Accordingly,
the financial highlights included in this table are a part of the Fund's
financial statements for the Flag Investors Shares for the fiscal year ended
March 31, 1995 and have been audited by Deloitte & Touche LLP, independent
auditors. The financial statements and financial highlights for the Flag
Investors Shares for the fiscal year ended March 31, 1995 and the report
thereon of Deloitte & Touche LLP are included in the Statement of Additional
Information. Additional performance information for the Flag Investors Shares
is contained in the Fund's Annual Report for the fiscal year ended March 31,
1995 which can be obtained at no charge by calling the Fund at (800)
767-FLAG.
3
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(For a Share outstanding throughout each period)
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<TABLE>
<CAPTION>
Flag Investors Shares
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For the Period
For the Year October 1, 1993*
Ended through
March 31, 1995 March 31, 1994
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<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .............. $ 9.50 $ 10.00
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Income from Investment Operations:
Net investment income ............................... 0.40 0.14
Net realized and unrealized gain/(loss) on
investments ...................................... 0.05 (0.53)
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Total from Investment Operations .................... 0.45 (0.39)
Less Distributions:
Dividends from net investment income ................ (0.43) (0.11)
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Net asset value at end of period .................... $ 9.52 $ 9.50
============== ================
Total Return** ........................................ 5.12% (4.06)%
Ratios to Average Net Assets:
Expenses(2) ......................................... 0.70% 0.29%(1)
Net investment income(3) ............................ 4.44% 3.84%(1)
Supplemental Data:
Net assets at end of period ......................... $12,919 $11,872
Portfolio turnover rate ............................. 33% 9%
</TABLE>
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* Commencement of operations.
** Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees and reimbursement of expenses, the
ratio of expenses to average net assets would have been 1.85% and 2.46%
(annualized) for the year ended March 31, 1995 and the period ended March
31, 1994, respectively.
(3) Without the waiver of advisory fees and reimbursement of expenses, the
ratio of net investment income to average net assets would have been
3.29% and 1.68% (annualized) for the year ended March 31, 1995 and the
period ended March 31, 1994, respectively.
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3. Investment Program
...............................................................................
INVESTMENT OBJECTIVES, POLICIES AND RISK
CONSIDERATIONS
The Fund seeks to provide current income exempt from federal income taxes
and Maryland state and local income taxes consistent with preservation of
principal within an intermediate-term maturity structure. There is no
assurance this objective will be met.
Under normal conditions, the Fund expects to be as fully invested as
practicable in obligations which, in the opinion of bond counsel to the
issuers, produce interest exempt from federal income tax and Maryland
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state and local income tax and at least 65% of the Fund's total assets will
be invested in securities of Maryland issuers. These include municipal
obligations issued by the State of Maryland and its political subdivisions,
agencies or instrumentalities. The Fund may invest up to 35% of its assets in
obligations of other issuers of securities the interest on which is exempt
from Maryland state and local taxes. These issuers would include territories
or possessions of the United States. However, the Fund has no present
intention to invest in securities issued by such territories or possessions.
As a matter of fundamental policy, under normal conditions, the Fund will
invest at least 80% of its total assets in securities the interest on which
is exempt from federal and Maryland state and local income taxes and 80% of
the Fund's assets will be invested in municipal securities the income from
which is not subject to the alternative minimum tax. Income derived from
securities subject to the alternative minimum tax is not included when
computing income exempt from federal and Maryland state and local income
taxes. Under normal conditions, the Fund may invest up to 20% of its net
assets in municipal securities the income from which is not exempt from
Maryland state and local income taxes. For temporary, defensive purposes
when, in the opinion of the Fund's investment advisor, Investment Company
Capital Corp. ("ICC" or the "Advisor"), securities exempt from Maryland state
and local income tax are not readily available or of sufficient quality, the
Fund can invest up to 100% of its assets in securities which pay interest
which is exempt only from federal income taxes or in taxable U.S. Treasury
securities.
The Fund is a non-diversified investment company which means that more
than 5% of its assets may be invested in each of one or more issuers. Since a
relatively high percentage of assets of the Fund may be invested in the
obligations of a limited number of issuers, the value of shares of the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than the shares of a diversified investment company would be. The
Fund intends to satisfy the diversification requirements necessary to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
The Fund currently contemplates that it will not invest more than 25% of
its total assets (at market value at the time of purchase) in municipal
securities, the interest on which is paid from revenues of projects with
similar characteristics. See also "Special Considerations Relating To
Maryland Municipal Securities."
Under normal circumstances the Fund's portfolio will have a dollar
weighted average maturity of not less than 3 and not more than 10 years.
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The value of obligations purchased by the Fund will change as interest rates
change. Thus, a decrease in interest rates generally will result in an
increase in the value of shares of the Fund. Conversely, an increase in
interest rates will generally result in a decrease in the value of the shares
of the Fund. The magnitude of these fluctuations will be greater as the
average maturity of the Fund increases.
Municipal notes in which the Fund may invest will be limited to those
obligations (i) which are rated MIG-1 or VMIG-1 at the time of investment by
Moody's Investors Service, Inc. ("Moody's"), (ii) which are rated SP-1 at the
time of investment by Standard & Poor's Ratings Group ("S&P"), or (iii)
which, if not rated, are of comparable quality in the Advisor's judgement.
Municipal bonds in which the Fund may invest must be rated BBB or better by
S&P or Baa or better by Moody's at the time of investment or, if unrated must
be of comparable quality in the Advisor's judgement. Securities rated Baa or
BBB are deemed to have speculative characteristics. Tax-exempt commercial
paper will be limited to investments in obligations which are rated at least
A-1 by S&P or Prime-1 by Moody's at the time of investment or, if unrated,
are of comparable quality in the Advisor's judgement. These ratings may be
based in part on credit support provided by a bank or other entity.
Accordingly, a decline in the creditworthiness of the entity providing such
support could affect the rating of the security, as well as the payment of
interest and principal. For a description of the above ratings, see the
"Appendix".
The Fund may also enter into futures contracts and options on futures
contracts, although it has no present intention to do so. Gains recognized by
the Fund from such transactions would constitute taxable income to
shareholders.
The Fund may also purchase variable and floating rate demand notes and
bonds. The Advisor will invest in commitments to purchase securities on a
"when-issued" basis and reserves the right to engage in "put" transactions on
a daily, weekly or monthly basis.
...............................................................................
MUNICIPAL SECURITIES
Municipal securities that the Fund may purchase consist of (i) debt
obligations issued by or on behalf of public authorities to obtain funds to
be used for various public facilities, for refunding outstanding obligations,
for general operating expenses and for lending such funds to other public
institutions and facilities, and (ii) certain private activity and industrial
development bonds issued by or on behalf of public authorities to obtain
6
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funds to provide for the construction, equipment, repair or improvement of
privately operated facilities. Municipal notes include general obligation
notes, tax anticipation notes, revenue anticipation notes, bond anticipation
notes, certificates of indebtedness, demand notes, construction loan notes
and participation interests therein. Municipal bonds include general
obligation bonds, revenue or special obligation bonds, private activity
bonds, industrial development bonds and participation interests therein.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or
facility, tolls from a toll bridge, or lease payments, for example. The
payment of principal and interest on private activity and industrial
development bonds generally is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
The Fund may purchase municipal lease obligations, including certificates
of participation ("COPs") in municipal leases. The Fund may acquire municipal
lease obligations that may be assigned by the lessee to another party
provided the obligation continues to provide tax-exempt interest. The Fund
will not purchase municipal lease obligations to the extent it holds
municipal lease obligations and illiquid securities in an amount exceeding
10% of its net assets unless the Advisor determines that the municipal lease
obligations are liquid pursuant to guidelines established by the Board of
Directors of the Fund. Pursuant to these guidelines, the Advisor, in making
this liquidity determination, will consider, among other factors, the
strength and nature of the secondary market for such obligations, the
prospect for its future marketability and whether such obligations are rated.
The Fund expects that it will purchase only rated municipal lease
obligations. In addition, the Fund may purchase participation interests in
other municipal securities (such as industrial development bonds). (See
"Participation Interests.")
Municipal obligations purchased by the Fund which fall below the above
rating criteria after the purchase by the Fund shall be sold promptly.
...............................................................................
INSURED OBLIGATIONS
The Fund may invest in obligations that are insured as to the scheduled
payment of all installments of principal and interest as they fall due. The
purpose of this insurance is to minimize credit risks to the Fund and its
shareholders associated with defaults in Maryland municipal obligations owned
by the Fund. This insurance does not insure against market risk and therefore
does not guarantee the market value of the obligations in the Fund's investment
7
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portfolio upon which the net asset value of the Fund's shares is based. The
market value will continue to fluctuate in response to fluctuations in interest
rates or the bond market. Similarly, this insurance does not cover or guarantee
the value of the shares of the Fund. The ratings of the insured obligations may
be based in part on insurance provided by an insurance company. Accordingly, a
decline in the creditworthiness of the insurance company providing the insurance
could affect the rating of the security, as well as the payment of interest and
principal.
...............................................................................
PARTICIPATION INTERESTS
The Fund may invest in COPs representing participation interests in
municipal securities (such as AMT-Subject Bonds). A participation interest
may pay a fixed, floating or variable rate of interest and gives the
purchaser an undivided interest in the municipal security in the proportion
that the Fund's participation interest bears to the total principal amount of
the municipal security and provides a demand repurchase feature. Each
participation is backed by an irrevocable letter of credit or guarantee of a
bank that meets the prescribed quality standards of the Fund. The Fund has
the right to sell the instrument back to the issuing bank or draw on the
letter of credit on demand for all or any part of the Fund's participation
interest in the municipal security, plus accrued interest. Banks will retain
or receive a service fee, letter of credit fee and a fee for issuing
repurchase commitments in an amount equal to the excess of the interest paid
on the municipal securities over the negotiated yield at which the
instruments were purchased by the Fund. Participation interests in the form
to be purchased by the Fund are new instruments, and no ruling of the
Internal Revenue Service has been secured relating to their tax-exempt
status. The Fund intends to purchase participation interests based upon
opinions of counsel to the issuer to the effect that income from them is
tax-exempt to the Fund. For purposes of complying with diversification
requirements, the Fund will treat both the trust, or similar entity
established to issue COPs, and the issuers of the underlying municipal
securities as issuers. Also, the Fund will limit its investments in COPs to
less than 25% of its total assets.
...............................................................................
PUTS
A "put" feature permits the Fund to sell a security at a fixed price prior
to maturity. The underlying municipal securities subject to a put may be sold
at any time at the market rates. The Fund will purchase only securities
subject to a put where the put is an integral part of the security as
8
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originally issued. Such puts may not be marketable or assignable. Therefore, the
put would have value only to the Fund. In certain cases a premium may be paid
for put features. The payment of a premium will have the effect of reducing the
yield otherwise payable on the security. The purpose of engaging in transactions
involving puts is to maintain flexibility and liquidity to permit the Fund to
meet redemptions and remain as fully invested as possible in municipal
securities. The Fund's ability to enforce a put obligation is subject to the
risk that the seller may default on its obligation to purchase the security. The
Fund will limit its put transactions to institutions which the Advisor believes
present minimal credit risk. The Fund will ordinarily invest no more than 40% of
its net assets at any time in securities subject to puts.
...............................................................................
REPURCHASE AGREEMENTS
The Fund may agree to purchase U.S. Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury securities include Treasury bills, Treasury notes, Treasury bonds
and Separate Trading of Registered Interest and Principal of Securities
("STRIPS"), all of which are direct obligations of the U.S. Government and
are supported by the full faith and credit of the United States. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisor. Default by the
seller may, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, the Fund may be delayed or limited in
its ability to sell the collateral.
...............................................................................
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
The Fund may purchase variable and floating rate demand notes and bonds,
which are tax-exempt obligations normally having stated maturities in excess
of one year, but which permit the holder to demand payment of principal
either at any time or at specified intervals. The interest rates on these
obligations fluctuate from time to time in response to changes in the market
interest rates. Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. Where these
obligations are not secured by letters of credit or other credit support
9
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arrangements, the Fund's right to redeem will be dependent on the ability of
the borrower to pay principal and interest on demand. Each demand note and
bond purchased by the Fund will meet the quality criteria established for the
purchase of other municipal obligations. The Advisor, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations in the Fund's portfolio.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments generally will be
traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. The Fund will not
invest more than 10% of its net assets in floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on less
than seven days' notice if there is no secondary market available for these
obligations.
...............................................................................
WHEN-ISSUED SECURITIES
New issues of municipal obligations are usually offered on a when- issued
basis, which means that delivery and payment for such municipal obligations
normally take place within 45 days after the date of the commitment to
purchase. The payment obligation and the interest rate that will be received
on a when-issued security are fixed at the time the purchase commitment is
entered into, although no interest on such security accrues to the Fund prior
to payment and delivery. A segregated account of the Fund consisting of cash,
cash equivalents or U.S. Government securities or other high quality liquid
debt securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. Additional cash or liquid debt securities will be added to the
account when necessary. While the Fund will purchase securities on a
when-issued basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable to limit the effects of adverse market action. The securities so
purchased or sold are subject to market fluctuation so, at the time of
delivery of the securities, their value may be more or less than the purchase
or sale price. The Fund will ordinarily invest no more than 40% of its net
assets at any time in municipal obligations purchased on a when-issued basis.
...............................................................................
ZERO COUPON TREASURY SECURITIES
The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes, and bonds which have been stripped of their
10
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unmatured interest coupons and receipts or certificates representing
interests in such stripped debt obligations and coupons. A zero coupon
security pays no interest to its holder during its life. Its value to an
investor consists of the difference between its face value at the time of
maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred to as a
"deep discount" price).
Currently U.S. Treasury securities issued without coupons include Treasury
bills and Treasury STRIPS. In addition, a number of banks and brokerage firms
separate the principal portions from the coupon portions of the U.S. Treasury
bonds and notes and sell them separately in the form of receipts or
certificates representing undivided interests in these instruments (which
instruments are generally held by a bank in a custodial or trust account).
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, those securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest. In certain circumstances, the Fund could fail to
recoup its initial investment in those securities.
...............................................................................
SPECIAL CONSIDERATIONS RELATING TO MARYLAND
MUNICIPAL SECURITIES
The Fund's concentration in securities issued by the State of Maryland and
its political subdivisions involves greater risk than a fund broadly invested
across many states and municipalities. Specifically, the credit quality of
the Fund will depend upon the continued financial strength of the State of
Maryland, as well as the financial condition of numerous public bodies and
municipalities. As of October 11, 1995, the State was rated Aaa by Moody's and
AAA by S&P and AAA by Fitch Investors Services, Inc.
For more than a century, the State of Maryland has paid the principal and
interest on its general obligation bonds when due, and has not issued
short-term tax anticipation notes, or made any other similar short-term
borrowings for its own needs. In 1985, however, the State issued bond
anticipation notes in connection with a savings and loan crisis; all such
notes have been discharged. There is no general debt limit imposed by the
State Constitution or public general laws. State and local debt on a per
capita basis or as a percentage of property values have increased by 33.4%
and 7.1%, respectively, since 1990.
11
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During fiscal years 1991 through 1993, the national recession and weakened
regional economy caused shortfalls in the State's budgeted revenues and
increases in the demand for State services. During that period the State was
forced both to cut local aid and other State expenditures and to raise taxes.
Showing improvement from prior years, the State ended its fiscal year 1994 with
a general fund surplus of $60 million on a budgetary basis and $161.8 million on
deposit in the Revenue Stabilization Account of the State Reserve Fund. The
State's finances continued to improve in fiscal year 1995, with revenues
exceeding estimate by $217 million and expenditures at $184 million above
budget. The State ended its fiscal year 1995 with a General Fund undesignated
fund balance of $26.5 million (after reservation of $106 million for fiscal year
1996 expenses) and an additional $286.1 million on deposit in the Revenue
Stabilization Account of the State Reserve Fund.
In April 1995, the General Assembly of the State approved a $14.4 billion
budget for fiscal year 1996, an 8.2% increase over the fiscal year 1995 budget.
This budget includes funds sufficient to meet all fiscal year 1995 deficiencies,
to provide cost of living adjustments for state employees and $161 million of
increased aid to local governments. When the fiscal year 1996 budget was
enacted, the State projected that it would end the fiscal year with a general
fund surplus of $7.8 million; The State projects a year-end General Fund balance
of $34.3 million and an additional $518 million in the Revenue Stabilization
Account of the State Reserve Fund.
The Fund expects to invest a substantial portion of its assets in the debt
obligations of local governments and public authorities. While local
governments in Maryland are predominantly reliant on independent revenue
sources, such as property taxes, they are not immune to budget shortfalls
caused by cutbacks in State aid. The Fund may purchase obligations issued by
public authorities in Maryland which are not backed by the full faith and
credit of the State or a local government and may or may not be subject to
annual appropriations from the State's general fund. In addition, certain
Maryland counties are subject to voter approved limitations on property tax
increases or increases in governmental spending.
The Fund may also invest in certain sectors with unique risks. These
include but are not limited to investments in health care issues, solid waste
revenue issues, and other private activity bonds without governmental
backing. The U.S. hospital industry has been under significant pressure to
reduce expenses and limit length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. There may be substantial
operating, legal, economic and regulatory risks associated with solid waste
facilities which can affect the security for the bonds.
Credit ratings and the financial and economic condition of the State,
local governments, public authorities, and other borrowers in which the Fund
may invest are subject to change at any time.
A more detailed discussion of these and other considerations is contained
in the Statement of Additional Information.
12
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4. Investment Restrictions
The Fund's investment program is subject to a number of restrictions which
reflect both self imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 and 2 below are matters
of fundamental policy and may not be changed without the affirmative vote of
a majority of the Fund's outstanding shares. Investment restriction number 3
may be changed by a vote of the majority of the Board of Directors. The Fund
will not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry, provided that this limitation does not apply to
investments in tax-exempt securities issued by governments or political
subdivisions of governments (for these purposes the U.S. Government and
its agencies and instrumentalities are not considered an issuer);
2) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
3) Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven
days.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. How to Invest in Institutional Shares
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of Alex.
Brown may purchase Institutional Shares through Alex. Brown, 135 East Baltimore
Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers"), or by completing the Application Form attached to
this Prospectus and returning it, together with payment of the purchase price,
as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000. There is
no minimum for clients of investment advisory affiliates of Alex. Brown or for
subsequent investments. The Fund reserves the right to reject any order for the
purchase of Institutional Shares.
13
<PAGE>
Orders for purchases of Institutional Shares are accepted on any day on which
the New York Stock Exchange is open for business ("Business Day"). Purchase
orders for Institutional Shares will be executed at the net asset value per
share next determined after receipt of the purchase order. Purchases made
through Alex. Brown or a Participating Dealer must be in accordance with such
entity's payment procedures. The Fund reserves the right to suspend the sale of
Institutional Shares at any time at the discretion of Alex. Brown and ICC.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of that class. For this
purpose portfolio securities are given their market value where feasible.
Portfolio securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Advisor to be over-the-counter, are valued at the quoted bid prices provided
by principal market makers. If a portfolio security is traded primarily on a
national exchange on the valuation date, the last quoted sale price is
generally used. Securities or other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under procedures established from time to time and monitored by the
Fund's Board of Directors.
Institutional Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
...............................................................................
PURCHASES BY EXCHANGE
Shareholders of other Flag Investors Funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined on
the same day, provided that the exchange request is received prior to 4:00 p.m.
(Eastern Time), or the close of the New York Stock Exchange, whichever is
earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone
Transactions" below) or by regular or express mail at its address listed under
"Custodian, Transfer Agent, Accounting Services." The exchange privilege may be
exercised only in those states where the Institutional shares of such other
funds may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate this offer of exchange at any time on 60 days' prior written notice to
shareholders.
14
<PAGE>
...............................................................................
OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are confirmed
and credited to the shareholder's account on the Fund's books maintained by
ICC or its agents. Shareholders will have the same rights and ownership with
respect to such shares as if certificates had been issued.
===============================================================================
6. How to Redeem Institutional Shares
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at its
address listed under "Custodian, Transfer Agent, Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up to
$500,000). (See "Telephone Transactions" below.)
A redemption request is effected at the net asset value per share next
determined after receipt of the order in proper form. Redemption orders received
after 4:00 p.m. (Eastern Time) will be effected at the next net asset value next
determined on the following Business Day. Payment for redeemed Institutional
Shares will be made by wire transfer of funds to the shareholder's bank or to a
Participating Dealer, as appropriate, upon receipt of a duly authorized
redemption request as promptly as feasible and, under most circumstances, within
two Business Days.
Dividends payable up to the date of the redemption of Institutional Shares
will be paid on the next dividend payment date. If all of the Institutional
Shares in an account have been redeemed on the dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' notice.
15
<PAGE>
===============================================================================
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or
express mail at its address listed under "Custodian, Transfer Agent, Accounting
Services." Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted for
their accounts. This election may be made on the Application Form or at any time
thereafter by completing and returning appropriate documentation supplied by the
Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. Neither the
Fund nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or market
changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by express mail or
facsimile. (See "How to Invest in Institutional Shares -- Purchases by Exchange"
and "How to Redeem Institutional Shares.")
16
<PAGE>
===============================================================================
8. DIVIDENDS AND TAXES
...............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income (including net short-term capital gains) in
the form of monthly dividends. The Fund may distribute to shareholders any
net capital gains (net long-term capital gains less net short-term capital
losses) on an annual basis or, alternatively, may elect to retain net capital
gains and pay tax thereon.
Unless the shareholder elects otherwise, all income dividends (consisting of
dividend and interest income and the excess, if any, of net short-term capital
gains over net long-term capital losses) and net capital gains distributions, if
any, will be reinvested in additional Institutional Shares at net asset value.
However, shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent, Accounting
Services"), either directly or through Alex. Brown or a Participating Dealer, at
least five days before the next date on which dividends or distributions will be
paid.
...............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund intends to qualify as a "regulated investment company" under the
Code and to distribute to its investors all of its net investment income
(including its net tax-exempt income) and net short-term and long-term
capital gain income, if any, so that it is not required to pay federal taxes
on amounts so distributed. In addition, the Fund expects to make sufficient
distributions prior to the end of each calendar year to avoid liability for
federal excise tax. Shareholders will be advised at least annually as to the
federal income tax consequences of distributions made during the year.
17
<PAGE>
Dividends derived from the Fund's net exempt-interest income and
designated by the Fund as exempt-interest dividends may be treated by the
Fund's shareholders as items of interest excludable from their gross income
for federal income tax purposes if the Fund qualifies as a regulated
investment company and if, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets consists of securities
the interest on which is excluded from gross income. Although exempt-interest
dividends are excludable from a shareholder's gross income for regular income
tax purposes, they may have collateral federal income tax consequences,
including alternative minimum tax consequences. (See the Statement of
Additional Information.)
Current federal tax law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of
exempt-interest dividends. All or a portion of the interest on indebtedness
incurred or continued by a shareholder to purchase or carry Institutional
Shares is not deductible for federal income tax purposes. Furthermore,
entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by "private activity bonds" or
"industrial development bonds" should consult their tax advisers before
purchasing Institutional Shares.
Under the Code, dividends attributable to interest on certain "private
activity bonds" issued after August 7, 1986, will be included in alternative
minimum taxable income for the purpose of determining liability (if any) for
the alternative minimum tax for individuals and for corporations.
Additionally, in the case of corporations, all tax-exempt interest dividends
will be taken into account in determining "adjusted current earnings" (as
defined for federal income tax purposes) for purposes of computing the
alternative minimum tax imposed on corporations.
To the extent, if any, that dividends paid to investors are derived from
taxable income, such dividends will be subject to federal income tax. In
addition, as substantially all of the Fund's income is expected to be derived
from earned interest, it is anticipated that no portion of the Fund's
distributions will be eligible for the corporate dividends-received
deduction. If the Fund purchases a municipal security at a market discount,
any gain realized by the Fund upon sale or redemption of the municipal
obligation shall be treated as taxable interest income to the extent such
gain does not exceed the market discount and any gain realized in excess of
the market discount will be treated as capital gain. Distributions of net
investment income and/or the excess, if any, of net short-term capital gains
over net long-term capital losses are taxable to investors as ordinary income,
18
<PAGE>
regardless of whether such distributions are paid in cash or reinvested in
additional Institutional Shares. Distributions of net capital gains (the
excess of net long-term capital gains over net short-term capital losses)
that are designated by the Fund as capital gain dividends are taxable to
investors as long-term capital gains, regardless of the length of time the
investor owned the Institutional Shares.
Dividends declared payable to shareholders of record in October, November
or December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been paid by the Fund and received by the
shareholders in the year in which the dividends were declared.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult their tax advisers concerning the application of state and local
taxes to investments in the Fund.
The sale, exchange or redemption of shares is a taxable transaction to the
shareholder.
...............................................................................
MARYLAND TAX DISCLOSURE
To the extent the Fund qualifies as a regulated investment company under the
Code, it will be subject to tax only on (1) that portion of its income on which
tax is imposed for federal income tax purposes under Section 852(b)(1) of the
Code and (2) that portion of its income which consists of federally tax exempt
interest on obligations other than Maryland Exempt Obligations (hereinafter
defined) to the extent such interest is not paid to Fund shareholders in the
form of exempt-interest dividends. To the extent dividends paid by the Fund
represent interest excludable from gross income for federal income tax purposes,
that portion of exempt-interest dividends that represents interest received by
the Fund on obligations issued by the State of Maryland, its political
subdivisions, Puerto Rico, the U.S. Virgin Islands, or Guam and their respective
authorities or municipalities ("Maryland Exempt Obligations"), will be exempt
from Maryland state and local income taxes when distributed to a shareholder of
the Fund. Except as noted below, all other dividend distributions will be
subject to Maryland state and local income taxes.
Capital gains distributed by the Fund to a shareholder or any gains
realized by a shareholder from a redemption or sale of shares must be
recognized for Maryland state and local income tax purposes to the extent
recognized for federal income tax purposes. However, capital gains
distributions included in the gross income of shareholders for federal income
19
<PAGE>
tax purposes are subtracted from capital gains income for Maryland income tax
purposes to the extent such distributions are derived from the disposition of
debt obligations issued by the State of Maryland, its political subdivisions and
authorities.
Dividends received by a shareholder from the Fund that are derived from
interest on U.S. government obligations will be exempt from Maryland state and
local income taxes. Entities subject to the financial institution franchise tax
will generally be subject to tax on distributions from the Fund.
In the case of individuals, Maryland presently imposes an income tax on items
of tax preference with reference to such items as defined in the Code for
purposes of calculating the federal alternative minimum tax. Interest paid on
certain private activity bonds is a preference item for purposes of calculating
the federal alternative minimum tax. Accordingly, if the Fund holds such bonds,
the excess of 50% of that portion of exempt interest dividends which is
attributable to interest on such bonds over a threshold amount may be taxable by
Maryland. Interest on indebtedness incurred or continued (directly or
indirectly) by a shareholder in order to purchase or carry shares of the Fund
will not be deductible for Maryland state and local income tax purposes.
Individuals will not be subject to personal property tax on their shares of the
Fund. Shares of the Fund held by a Maryland resident at death may be subject to
Maryland inheritance and estate taxes.
===============================================================================
9. Management of the Fund
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers and to ICC. Two Directors and all of the officers of the
Fund are officers or employees of Alex. Brown or ICC. The other Directors of
the Fund have no affiliation with Alex. Brown or ICC.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Richard T. Hale Chairman M. Elliott Randolph, Jr. President
*Truman T. Semans Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
N. Bruce Hannay Director Gary V. Fearnow Vice President
John F. Kroeger Director Monica M. Hausner Vice President
Louis E. Levy Director Brian C. Nelson Vice President and Secretary
Eugene J. McDonald Director Diana M. Ellis Treasurer
*Rebecca W. Rimel Director Laurie D. DePrine Assistant Secretary
Harry Woolf Director
</TABLE>
- --------------
* Messrs. Hale and Semans are, and Ms. Rimel may be, "interested persons" of
the Fund within the meaning of Section 2(a)(19) under the Investment
Company Act of 1940 (the "1940 Act").
20
<PAGE>
===============================================================================
10. Investment Advisor
Investment Company Capital Corp., the Fund's investment advisor, is a
wholly-owned subsidiary of Alex. Brown, the Fund's distributor. ICC is also
the investment advisor to, and Alex. Brown acts as distributor for other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash
Reserve Fund, Inc., which funds had approximately $4.1 billion of net assets
as of September 30, 1995. The address of ICC is 135 East Baltimore Street,
Baltimore, Maryland 21202.
ICC is responsible for the general management of the Fund, as well as for
decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates under standards
established and periodically reviewed by the Board of Directors. ICC
currently intends to waive, on a voluntary basis, its annual fee to the
extent necessary so that Total Fund Operating Expenses do not exceed .45% of
the Institutional Shares' average daily net assets. For the fiscal year ended
March 31, 1995, ICC waived all advisory fees and reimbursed expenses of
$90,867.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
...............................................................................
PORTFOLIO MANAGERS
Messrs. M. Elliott Randolph, Jr., the Fund's President, and Paul D.
Corbin, the Fund's Executive Vice President, have shared primary
responsibility for managing the Fund's assets since inception.
M. Elliott Randolph has 21 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1988-1991 he was a
Principal with Monument Capital Management, Inc.
Paul D. Corbin has over 16 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1984-1991 he served as
the Senior Vice President in charge of Fixed Income Portfolio Management at
First National Bank of Maryland.
===============================================================================
11. Distributor
Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, acts as
distributor of each class of the Fund's shares. Alex. Brown is an investment
21
<PAGE>
banking firm which offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned subsidiary
of Alex. Brown Incorporated, which has engaged directly and through subsidiaries
and affiliates in the investment business since 1800. Alex. Brown is a member of
the New York Stock Exchange and other leading securities exchanges.
Headquartered in Baltimore, Maryland, Alex. Brown has offices throughout the
United States and, through subsidiaries, maintains offices in London, England,
Geneva, Switzerland and Tokyo, Japan. Alex. Brown receives no compensation for
distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
===============================================================================
12. Custodian, Transfer Agent, Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive,
Lester, Pennsylvania 19113, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore
Maryland 21202 (telephone: (800) 553-8080) is the Fund's transfer and
dividend disbursing agent. ICC also provides accounting services to the Fund.
As compensation for such accounting services, ICC receives from the Fund an
annual fee equal to $13,000, plus a percentage of the Fund's average daily
net assets in excess of $10 million at a maximum rate of .10% of net assets
and declining at various asset levels to a minimum rate of .001% on net
assets of $1 billion or more. (See the Statement of Additional Information.)
ICC also serves as the Fund's investment advisor.
===============================================================================
13. Performance Information
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
relevant indices. Any quotations of yield of the Fund will be determined by
dividing the net investment income earned by the Fund during a 30 day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. The Fund may also advertise a
"tax-equivalent yield", which is calculated by determining the rate of return
that would have to be achieved on a fully taxable investment to produce the
after-tax equivalent of the Fund's yield, assuming certain tax brackets
22
<PAGE>
for a shareholder. All advertisements of performance will show the average
annual total return over one, five and ten year periods or, if such periods have
not yet elapsed, shorter periods corresponding to the life of the Fund. Such
total return quotations will be computed by finding average annual compounded
rates of return over such periods that would equate an assumed initial
investment of $1,000 to the ending redeemable value according to the required
standardized calculation. The standardized calculation is required by the SEC to
provide consistency and comparability in investment company advertising and is
not equivalent to a yield calculation.
If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which
such comparative data and indices are stated, which is normally total return
rather than yield.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual
funds such as Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund.
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Institutional Shares may be purchased, although not
included in calculations of performance, will reduce performance results.
===============================================================================
14. GENERAL INFORMATION
...............................................................................
DESCRIPTION OF SHARES
The Fund was incorporated under the laws of the State of Maryland on July
23, 1993 and is authorized to issue 35 million shares of capital stock, par
value of $.001 per share, all of which shares are designated common stock.
Each share has one vote and shall be entitled to dividends and distributions
23
<PAGE>
when and if declared by the Fund. In the event of liquidation or dissolution of
the Fund, each share would be entitled to its pro rata portion of the Fund's
assets after all debts and expenses have been paid.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
Maryland Intermediate Tax Free Income Fund Institutional Shares." The Board
has no present intention of establishing any additional series of the Fund
but the Fund does have another class of shares in addition to the shares
offered hereby: Flag Investors Maryland Intermediate Tax Free Income Fund
Shares. Shares of that class are subject to a maximum front-end sales charge
of 1.5% and a .25% 12b-1 fee. Different classes of the Fund may be offered to
certain investors and holders of such shares may be entitled to certain
exchange privileges not offered to Institutional Shares. All classes of the
Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different distribution fees or sales
load structures and the net asset value per share of the classes may differ at
times.
...............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.
...............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors, Deloitte
& Touche LLP.
...............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
...............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact Alex. Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080 or a
Participating Dealer, as appropriate.
24
<PAGE>
APPENDIX
The following descriptions or ratings have been published by Standard &
Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's").
...............................................................................
Description of Municipal Bond Ratings
Bonds rated AAA have the highest rating S&P assigns to debt obligations. Such
a rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong and in the majority of instances they
differ from AAA issues only in small degree. Bonds rated A have a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. Bonds rated BBB have an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rate categories.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large, or an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds rated Aa by Moody's are
judged to be of high quality by all standards. Together with bonds rated Aaa,
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. Bonds rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
...............................................................................
Description of Municipal Note Ratings
Moody's highest rating for state and municipal and other short-term notes is
MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 and VMIG-1 are of
the best quality. They have strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market for
refinancing.
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
- -- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
...............................................................................
Description of Commercial Paper Ratings
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Issues rated A are further refined by use of the numbers 1+,
1, 2 and 3 to indicate the relative degree of safety. Issues rated A-1+ are
those with an "overwhelming degree" of credit protection. Those rated A-1
reflect a "very strong" degree of safety regarding timely payment. Those rated
A-2 reflect a safety regarding timely payment but not as high as A-1.
Commercial paper issues rated Prime-1 by Moody's are judged by Moody's to be
of the highest quality on the basis of relative repayment capacity.
A-1
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX FREE INCOME FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
==============================================================================
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Maryland Intermediate Tax Free Income Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080
8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
If you are paying by check, make check payable to "Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc." and mail with this Application. If you
are paying by wire, see instructions below.
==============================================================================
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Name on Account
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ------------------------------------------------------------------------------
Tax ID Number
[ ] Corporation [ ] Partnership [ ] Trust
[ ] Non-Profit or Charitable Organization [ ] Other -------------------------
If a Trust, please provide the following:
- -----------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
Mailing Address
- -----------------------------------------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
=============================================================================
INITIAL INVESTMENT
The initial minimum purchase for the Institutional Shares of the Fund is
$500,000. There is no minimum for clients of investment advisory affiliates
of Alex. Brown or for subsequent investments.
Indicate the amount to be invested and the method of payment:
___A. By Mail: Enclosed is a check in the amount of $________ payable to Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc.
___B. By Wire: A bank wire in the amount of $_______has been sent from
_____________________ ___________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for initial
investment:
o Send completed Application by overnight carrier to Alex. Brown & Sons
Incorporated/Flag Investors Funds at the address listed above.
o Call 1-800-553-8080 to obtain investor's new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust Company
("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7528191
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. --
Institutional Shares
o The amount to be invested
o "For further credit to ______________________________________."
(Investor's Fund Account Number)
<PAGE>
==============================================================================
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in cash
==============================================================================
TELEPHONE TRANSACTIONS
I understand that the investor will automatically have telephone redemption
privileges (for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both of
the boxes below:
No, the investor does not want:
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account designated
below.
==============================================================================
BANK ACCOUNT DESIGNATION
(This Section Must Be Completed)
Please attach a blank, voided check to provide account and bank routing
information.
_____________________________________________________________________________
Name of Bank Branch
_____________________________________________________________________________
Bank Address City/State/Zip
_____________________________________________________________________________
Name(s) on Account
_____________________________________________________________________________
Account Number A.B.A. Number
<PAGE>
=============================================================================
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE
I have received a copy of the Fund's prospectus dated November 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is the investor's correct taxpayer identification
number and (2) that the investor is not subject to backup withholding as a
result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified the investor that it is no longer subject to
backup withholding. [ ] Check here if the investor is subject to backup
withholding.
If a non-resident alien, please indicate country of residence:_______________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that the investor may bear
the risk of loss in the event of fraudulent use of such privileges. If the
investor does not want telephone redemption or exchange privileges, I have so
indicated on this Application.
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
==============================================================================
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
________* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
__________________________________ _________________________________________
Name/Title Signature Date
_________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
<PAGE>
==============================================================================
CERTIFICATE OF AUTHORITY
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATION (With a Board of
Directors or Board of Trustees.)
I ________________________, Secretary of the above-named investor, do hereby
certify that a meeting on ______, at which a quorum was present throughout, the
Board of Directors (Board of Trustees) of the investor duly adopted a resolution
which is in full force and effect and in accordance with the investor's charter
and by-laws, which resolution did the following: (1) empowered the
officers/trustees executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names and titles of
the officers of the investor and to notify ICC when changes in officers occur;
and (4) authorized the Secretary to certify that such a resolution has been duly
adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ___ day of ________, 199_ Secretary ________________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
_____________________________________________________________________________
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of Certificate B and attach it
to the Application).
______________________________________________________________________________
Signature and title Date
______________________________________________________________________________
Signature and title Date
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------
FLAG INVESTORS MARYLAND INTERMEDIATE TAX FREE INCOME FUND, INC.
135 E. Baltimore Street
Baltimore, Maryland 21202
-----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING ALEX. BROWN & SONS INCORPORATED, 135
EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202, OR
BY CALLING (800) 767-FLAG.
Statement of Additional Information Dated: August 1, 1995,
as amended through November 1, 1995
Relating to Prospectus as Dated:
August 1, 1995, relating to the Flag Investors Shares
and
November 1, 1995, relating to the Institutional Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. General Information and History ................................................................... 1
2. Investment Objectives and Policies ................................................................... 1
3. Valuation of Shares and Redemption .................................................................. 10
4. Federal Tax Treatment of Dividends and
Distributions ................................................................................... 11
5. Management of the Fund .......................................................................... 14
6. Investment Advisory and Other Services ......................................................... 19
7. Distribution of Fund Shares.......................................................................... 21
8. Brokerage............................................................................................ 24
9. Capital Stock ................................................................................... 25
10. Semi-Annual Reports .......................................................................... 26
11. Custodian, Transfer Agent, Accounting Services ................................................ 26
12. Independent Auditors .......................................................................... 27
13. Performance Information.............................................................................. 27
14. Control Persons and Principal Holders of
Securities......................................................................................... 29
15. Financial Statements .......................................................................... 29
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. (the
"Fund") is an open-end management investment company. Under the rules and
regulations of the Securities and Exchange Commission (the "SEC"), all mutual
funds are required to furnish prospective investors with certain information
concerning the activities of the company being considered for investment. The
Fund currently offers two classes of shares: Flag Investors Maryland
Intermediate Tax Free Income Fund Shares (the "Flag Investors Shares") and Flag
Investors Maryland Intermediate Tax Free Income Fund Institutional Shares (the
"Institutional Shares") (collectively, the "Shares"). As used herein, the "Fund"
refers to Flag Investors Maryland Intermediate Tax Free Income Fund, Inc., and
specific references to either class of the Fund's Shares will be made using the
name of such class.
Important information concerning the Fund is included in the Fund's current
Prospectuses which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800)767-FLAG) or, from Participating Dealers that offer
shares to prospective investors. Prospectuses for the Flag Investors Shares may
also be obtained from Shareholder Servicing Agents. Some of the information
required to be in this Statement of Additional Information is also included in
the Fund's current Prospectuses. To avoid unnecessary repetition, references are
made to related sections of the Prospectuses. In addition, the Prospectuses and
this Statement of Additional Information omit certain information about the Fund
and its business that is contained in the Registration Statement respecting the
Fund and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on July 23,
1993. The Fund filed a registration statement with the SEC registering itself as
an open-end non-diversified management investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and its Shares
under the Securities Act of 1933, as amended. The Institutional Shares, which
were not offered prior to the date of this Statement of Additional Information
are sold without a sales charge and are offered only to certain eligible
institutions and to clients of investment advisory affiliates of Alex. Brown.
Under a license agreement dated October 1, 1993 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVES AND POLICIES
The Fund is designed to provide current income exempt from federal
income taxes and Maryland state and local income taxes consistent with
preservation of principal within an intermediate-term maturity structure. As
described in the Prospectus, the Fund will attempt to achieve its objective by
investing primarily in municipal obligations issued by the State of Maryland and
its political subdivisions, agencies or instrumentalities. There can be no
assurance that the Fund's investment objective will be achieved.
Municipal Obligations
Municipal obligations include debt securities issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities,
-1-
<PAGE>
the interest on which is exempt from federal income tax. For a discussion of
quality, maturity and other criteria the Fund applies in investing in municipal
obligations, see "Investment Objectives, Policies and Risk Considerations" in
the Prospectus.
Municipal obligations can be classified into three principal categories:
"general obligation bonds", "revenue bonds" and "notes". General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue bonds are payable from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source,
but not from the general taxing power of the issuer. Revenue bonds include "tax
exempt industrial development bonds", i.e., bonds issued by or on behalf of
public authorities to obtain funds for privately-operated facilities. Tax-exempt
industrial development bonds do not generally carry the pledge of the credit of
the issuing municipality, but are generally guaranteed by the corporate entity
on whose behalf they are issued. Notes are short-term instruments used to
provide for short-term capital or operating needs. They are obligations of the
issuing municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues.
Other Tax-Exempt Instruments
Other tax-exempt instruments which are permissible investments include
floating rate notes. Investments in such floating rate instruments will normally
involve industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate (such as the
prime rate) at a major commercial bank, and that the Fund can demand payment of
the obligation at all times or at stipulated dates on short notice (not to
exceed 30 days) at par plus accrued interest. Such obligations are frequently
secured by letters of credit or other credit support arrangements provided by
banks. The quality of the underlying credit or of the bank, as the case may be,
must, in the opinion of the Fund's investment advisor, Investment Company
Capital Corp. ("ICC" or the "Advisor") be comparable to the long-term bond or
commercial paper ratings stated in the Prospectus. The Advisor will monitor the
earning power, cash flow and liquidity ratios of the issuers of such instruments
and the ability of an issuer of a demand instrument to pay principal and
interest on demand.
Money Market Securities
From time to time the Fund may purchase taxable short-term securities.
These securities include direct obligations of the U.S. Government which consist
of bills, notes and bonds issued by the U.S. Treasury. Obligations issued by
agencies of the U.S. Government, while not direct obligations of the U.S.
Government, are either backed by the full faith and credit of the U.S. or are
guaranteed by the U.S. Treasury or supported by the issuing agencies' right to
borrow from the U.S. Treasury.
The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market, prior
to maturity. Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Time deposits earn a specified rate of
interest over a definite period of time; however time deposits cannot be traded
in the secondary market. Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods and furnish dollar
exchanges. Maturities are generally six months or less.
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<PAGE>
The commercial paper which may be purchased includes variable amount
master demand notes which may or may not be backed by bank letters of credit.
These notes permit the investment of fluctuating amounts at varying market rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. Such notes provide that the interest rate on the amount outstanding
varies on a daily, weekly or monthly basis depending upon a stated short-term
interest rate index. Both the lender and the borrower have the right to reduce
the amount of outstanding indebtedness at any time. There is no secondary market
for the notes. It is not generally contemplated that such instruments will be
traded. Variable or floating rate instruments bear interest at a rate which
varies with changes in market rates. The holder of an instrument with a demand
feature may tender the instrument back to the issuer at par prior to maturity. A
variable amount master demand note is issued pursuant to a written agreement
between the issuer and the holder, its amount may be increased by the holder or
decreased by the holder or issuer, it is payable on demand, and the rate of
interest varies based upon an agreed formula. The quality of the underlying
credit must, in the opinion of the Advisor, be equivalent to the ratings
applicable to permitted investments for the Fund. The Advisor will monitor on an
ongoing basis the earning power, cash flow, and liquidity ratios of the issuers
of such instruments and will similarly monitor the ability of an issuer of a
demand instrument to pay principal and interest on demand.
Puts
The Fund may engage in put transactions. The Advisor has the authority
to purchase securities at a price which would result in a yield to maturity
lower than that generally offered by the seller at the time of purchase when the
Fund can simultaneously acquire the right to sell the securities back to the
seller, the issuer, or a third party (the "writer") at an agreed-upon price at
any time during a stated period or on a certain date. Such a right is generally
denoted as a "standby commitment" or a "put". The purpose of engaging in
transactions involving puts is to maintain flexibility and liquidity to permit
the Fund to meet redemptions and remain as fully invested as possible in
municipal securities. The right to put the securities depends on the writer's
ability to pay for the securities at the time the put is exercised. The Fund
would limit its put transactions to institutions which the Advisor believes
present minimum credit risks, and the Advisor would use its best efforts
initially to determine and continue to monitor the financial strength of the
sellers of the options by evaluating their financial statements and such other
information as is available in the marketplace. It may, however, be difficult to
monitor the financial strength of the writers because adequate current financial
information may not be available. In the event that any writer is unable to
honor a put for financial reasons, the Fund would be a general creditor (i.e.,
on a parity with all other unsecured creditors) of the writer. Furthermore,
particular provisions of the contract between the Fund and the writer may excuse
the writer from repurchasing the securities; for example, a change in the
published rating of the underlying securities or any similar event that has an
adverse effect on the issuer's credit or a provision in the contract that the
put will not be exercised except in certain special cases, for example, to
maintain portfolio liquidity. The Fund could, however, at any time sell the
underlying portfolio security in the open market or wait until the portfolio
security matures, at which time it should realize the full par value of the
security.
The securities purchased subject to a put, may be sold to third persons
at any time, even though the put is outstanding, but the put itself, unless it
is an integral part of the security as originally issued, may not be marketable
or otherwise assignable. Therefore, the put would have value only to the Fund.
Sale of the securities to third parties or lapse of time with the put
unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, the Fund could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Fund, the Fund could, of course, sell the security. The
maturity of the underlying security will generally be different from that of the
put. There will be no limit to the percentage of portfolio securities that the
Fund may purchase subject to a put but the amount paid directly or indirectly
for premiums on all puts outstanding will not exceed 2% of the value of the
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<PAGE>
total assets of the Fund calculated immediately after any such put is acquired.
For the purpose of determining the "maturity" of securities purchased subject to
an option to put, and for the purpose of determining the dollar-weighted average
maturity of the Fund including such securities the Fund will consider "maturity"
to be the first date on which it has the right to demand payment from the writer
of the put although the final maturity of the security is later than such date.
Futures Contracts and Options on Futures Contracts
The Fund may invest in futures contracts and related options including
futures contracts on fixed income securities and contracts based on municipal
bond or other financial indices.
The Fund may buy or sell financial futures contracts or purchase options
on such futures as a hedge against anticipated interest rate changes. A futures
contract sale creates an obligation by the Fund, as seller, to deliver the
specified type of financial instrument called for in the contract at a specified
future time for a specified price or, in "cash settlement" futures contracts, to
pay to (or receive from) the buyer in cash the difference between the price in
the futures contract and the market price of the instrument on the specified
date, if the market price is higher (or lower, as the case may be). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right for the premium paid to assume
a position in a futures contract (a long position if the option is a call and a
short position if the option is a put).
The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission ("CFTC") with which
the Fund must comply in order not to be deemed a commodity pool operator within
the meaning and intent of the Commodity Exchange Act and the regulations
promulgated thereunder.
Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified debt
securities which initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. An investment in options involves payment of a premium for the
option without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions constitute bona
fide hedging transactions or be undertaken incidental to the Fund's activities
in the securities markets. In accordance with CFTC regulations, the Fund may not
purchase or sell futures contracts or options thereon if immediately thereafter
the sum of the amounts of initial margin deposits on the Fund's existing futures
positions and premiums paid for options on futures would exceed 5% of the fair
market value of the Fund's total assets. The Advisor reserves the right to
comply with such different standard as may be established by CFTC rules and
regulations with respect to the purchase or sale of futures contracts or options
thereon.
The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In addition, futures and futures option markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a transaction without incurring losses substantially
greater than the initial deposit. Although the contemplated use of these
contracts should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in the value of such position. The ability
of the Fund to hedge successfully will depend on the Advisor's ability to
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<PAGE>
forecast pertinent market movements, which cannot be assured. Finally, the daily
deposit requirements in futures contracts create an ongoing greater potential
financial risk than do options purchased by the Fund, where the exposure is
limited to the cost of the initial premium. Losses due to hedging transactions
will reduce net asset value. Income earned by the Fund from its hedging
activities generally will be treated as capital gains.
Other Investment Practices
In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.
Repurchase Agreements. The Fund may enter into repurchase agreements
with financial institutions, such as banks and broker-dealers, deemed to be
creditworthy by the Fund's Board of Directors under criteria established with
the guidance of the Fund's Advisor. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, usually not more than seven days from the date of purchase, thereby
determining the yield during the purchaser's holding period. The value of
underlying securities will at least be equal at all times to the total amount of
the repurchase obligation, including the interest factor. The Fund makes payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of a custodian or bank acting as agent. The underlying
securities, which in the case of the Fund are securities of the U.S. Treasury
only, may have maturity dates exceeding one year. The Fund does not bear the
risk of a decline in value of the underlying securities unless the seller
defaults under its repurchase obligation. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and loss including (a) possible
decline in the value of the underlying security while the Fund seeks to enforce
its rights thereto, (b) possible subnormal levels of income and lack of access
to income during this period and (c) expenses of enforcing its rights.
When-Issued Securities. The Fund may purchase debt obligations on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of commitment to purchase. The Fund will make commitments
to purchase obligations on a when-issued basis only with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues to the purchaser during this period. The payment obligation and the
interest rate that will be received on the securities are each fixed at the time
the purchaser enters into the commitment. Purchasing obligations on a
when-issued basis is a form of leveraging and can involve a risk that the yields
available in the market when the delivery takes place may actually be higher
than those obtained in the transaction itself. In that case there could be an
unrealized loss at the time of delivery.
Segregated accounts will be established with the Fund's custodian and
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
Determining Average Portfolio Maturity
For purposes of calculating the Fund's dollar-weighted average portfolio
maturity, the maturity of a portfolio instrument will be deemed to be the period
remaining (calculated from the trade date or such other date on which the Fund's
interest in the instrument is subject to market action) until the date noted on
the face of the instrument as the date on which the principal amount must be
paid, or in the case of an instrument called for redemption, the date on
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<PAGE>
which the redemption payment must be made. However, because the maturity of an
instrument should correspond to its price and volatility characteristics, the
Fund may shorten the maturity of a variable or floating rate instrument subject
to a demand feature if it determines that there is not more than a minimal risk
that the demand feature will not be honored. In the case of a demand feature the
exercise of which is contingent on the continued credit quality of the
underlying security or other conditions, this would include a determination that
there is minimal risk that any condition precluding honoring the demand feature
will occur.
Therefore, to determine the maturity of portfolio securities, an
instrument that has a variable rate, the principal amount of which is scheduled
on the face of the instrument to be paid in 397 calendar days or less, will be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A variable rate instrument that is subject to
a demand feature will be deemed to have a maturity equal to the longer of the
period remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand. A floating
rate instrument that is subject to a demand feature will be deemed to have a
maturity equal to the period remaining until the principal amount can be
recovered through demand. A repurchase agreement will be deemed to have a
maturity equal to the period remaining until the date on which the repurchase of
the underlying securities is scheduled to occur, or, where no date is specified,
but the agreement is subject to a demand, the notice period applicable to a
demand for the repurchase of the securities.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are in
addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate;
2. Purchase or sell commodities or commodities contracts, except that
the Fund may invest in financial futures and options thereon;
3. Act as an underwriter of securities within the meaning of the U.S.
federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
4. Issue senior securities;
5. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies and may
make loans through the use of repurchase agreements;
6. Effect short sales of securities;
7. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions); or
8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs.
-6-
<PAGE>
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;
2. Invest in shares of any other investment company registered under the
Investment Company Act, other than in connection with a merger, consolidation,
reorganization or acquisition of assets;
3. Purchase or retain the securities of any issuer if to the knowledge
of the Fund any officer or Director of the Fund or its investment advisor owns
beneficially more than .5% of the outstanding securities of such issuer and
together they own beneficially more than 5% of the securities of such issuer;
4. Invest in companies for the purpose of exercising management or
control;
5. Purchase or sell puts or calls, or any combination thereof, except
that the Fund may purchase put options and invest in futures contracts and
options on futures contracts as disclosed in the Fund's Prospectus;
6. Invest in real estate limited partnerships or oil, gas or mineral
leases; or
7. Purchase warrants.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. For the fiscal year ended
March 31, 1995 and for the fiscal period ended March 31, 1994, the Fund's
portfolio turnover rate was 33% and 9%, respectively.
Risk Factors Associated With a Maryland Portfolio
The Fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition to
the State of Maryland and its agencies, there are 23 counties and 156
incorporated municipalities in Maryland (including Baltimore City), many of
which have outstanding debt. As described below, a number of Maryland public
authorities also issue debt.
Economy. The economy of the State of Maryland continues to demonstrate
relatively strong performance, with personal income well above the national
average. Total State employment was 2.73 million in July, 1995 with the majority
of jobs in trade, service, and government sectors. The national recession caused
a loss of jobs in Maryland since employment levels peaked in mid-1990 but
employment levels began to recover in mid-1992. Unemployment was 5.1% in August,
1995, compared to a national average of 5.6%. The State's population in 1994 was
approximtely 5 million, with 83% concentrated in the Baltimore-Washington
corridor.
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Debt. The State of Maryland and its political subdivisions issue four
basic types of debt having varying degrees of credit risk: general obligation
bonds backed by the unlimited taxing power of the issuer, revenue bonds secured
by specific pledged taxes or revenue streams, conduit revenue bonds payable from
the repayment of certain loans to entities such as hospitals and universities,
and tax-exempt lease obligations (including certificates of participation in the
same), the payments under which are subject to annual appropriation. In 1994,
$3,420,500,000 in state and local debt was issued in Maryland, with
approximately 44% representing general obligation debt and 56% revenue bonds or
lease-backed debt, compared to 35% general obligation and 65% revenue backed
bonds nationally.
Total combined tax supported debt outstanding of the State, Baltimore
City, and all of the counties, municipalities, and special districts within
Maryland totaled $12 billion as of June 30, 1994. The State of Maryland had
$2.62 billion in general obligation bonds outstanding as of December 31, 1995.
General obligation debt of the State of Maryland is rated Aaa by Moody's, AAA by
Standard & Poor's and AAA by Fitch; there can be no assurance that these ratings
will continue. There is no general limit on state general obligation bonds
imposed by the State Constitution or laws; state general obligation bonds are
payable from ad valorem taxes and, under the State Constitution, may not be
issued unless the debt is authorized by a law levying an annual tax or taxes
sufficient to pay the debt service within 15 years and prohibiting the repeal of
the tax or taxes or their use for another purpose until the debt has been paid.
State and local general obligation debt on a per capita basis and as a
percentage of property values have increased by 33.4% and 7.1%, respectively
since 1990. Although the State may borrow up to $100 million in short-term notes
in anticipation of taxes and revenues, the State has not made use of this
authority.
Many agencies and instrumentalities of the State government are authorized to
borrow money under legislation which expressly provides that the obligations
shall not be deemed to constitute a debt or a pledge of the faith and credit of
the State. The Department of Transportation issues limited, special obligations
payable primarily from fixed-rate excise taxes and other revenues related mainly
to highway use, the amount of which was limited by the General Assembly to
$1.054 billion for fiscal year 1996 (ending June 30, 1996); the principal amount
of such bonds outstanding as of June 30, 1995 was $1.047 billion. The Maryland
Transportation Authority, the Community Development Administration of the
Department of Housing and Community Development, the Maryland Stadium Authority,
the Maryland Environmental Service, the public educational institutions (which
include the University of Maryland System, Morgan State University, St. Mary's
College of Maryland and Baltimore City Community College), the Maryland Food
Center Authority and the Maryland Water Quality Financing Administration also
have issued and have outstanding bonds, the principal of and interest on which
are payable solely from specified sources, principally fees or loan payments
generated from use of the facilities, enterprises financed by the bonds, or
other dedicated fees. None of these bonds constitute debts or pledges of the
faith and credit of the State. The issuers of these obligations are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from that of the State's general
obligation bonds. Total outstanding revenue and enterprise debt of these State
units at June 30, 1995 was approximately $3.7 billion.
Certain State agencies also execute capital lease or conditional
purchase agreements to finance certain facilities; all of the payments under
these arrangements are subject to annual appropriation by the State. In the
event that appropriations are not made, the State and its agencies may not be
held contractually liable for the lease payments. As of June 30, 1995, $125
million of lease and conditional purchase financings were outstanding.
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In addition, the Maryland Health and Higher Educational Facilities
Authority, the Maryland Industrial Development Financing Authority, the
Northeast Maryland Waste Disposal Authority and the Maryland Economic
Development Corporation issue conduit revenue bonds, the proceeds of which are
lent to borrowers eligible under relevant State and federal law. These bonds are
payable solely from the loan payments made by the borrowers, and their credit
quality vary with the financial strengths of the respective borrowers.
Financial. To a large degree, the risk of the portfolio is dependent
upon the financial strength of the State of Maryland, its political subdivisions
and the obligors on conduit revenue bonds. During the 1991, 1992 and 1993 fiscal
years, Maryland experienced the effects of the national recession and a weakened
economy. During this period, the State experienced unanticipated shortfalls in
revenues. At the same time, the State experienced increased expenditures for
public assistance. To address this situation, the State reduced appropriations,
including aid to local governments, on several instances.
As a result of successive rounds of cuts in local and other State
expenditures and increases in taxes, the financial situation of the State
stabilized in fiscal year 1993 with revenues coming in, at or above budgeted
amounts, permitting the State to conclude fiscal year 1993 with a general fund
surplus (budgetary basis) of $10.5 million (after $24.5 million of transfers to
reserve accounts) and a $50.9 million balance in the Revenue Stabilization
Account of the State Reserve Fund. Demonstrating continued improvement, the
State ended its fiscal year 1994 with a general fund surplus of $60 million on a
budgetary basis and $161.8 million on deposit in the Revenue Stabilization
Account of the State Reserve Fund. The State's finances continued to improve in
fiscal year 1995, with revenues exceeding estimate by $217 million and
expenditures at $184 million above budget. The State ended its fiscal year 1995
with a General Fund undesignated fund balance of $26.5 million (after
reservation of $106 million for fiscal year 1996 expenses) and an additional
$286.1 million on deposit in the Revenue Stabilization Account of the State
Reserve Fund.
In April, 1995 the State's General Assembly approved a $14.4 billion budget
for fiscal year 1996, an 8.2% increase above the fiscal year 1995 spending
level. This budget did not include any expenditures based upon additional
revenue from new or broad-based taxes, but included a $330 million appropriation
to the State Reserve Fund, providing $20 million to its Economic Development
Account, $120 million to the Revenue Stabilization Account and $190 million to a
new Citizen Tax Reduction and Fiscal Reserve Account, a reserve which may be
used either to effect future income tax reduction or to offset the impact of
federal fiscal policies. When the fiscal year 1996 budget was enacted, the State
projected that it would end the fiscal year with a general fund surplus of $7.8
million; The State projects a year-end General Fund balance of $34.3 million and
an additional $518 million in the Revenue Stabilization Account of the State
Reserve Fund.
Other Maryland Issuers
Many local Maryland governments have also suffered from fiscal stress
and general declines in financial performance. Recessionary impacts have
resulted in downturns in real estate related receipts, declines in the growth of
income tax revenues, lower cash positions and reduced interest income. To
compensate for reductions in State aid to local governments, local governments
closed this gap by increasing property and other taxes, program cuts, and
curtailing pay raises. Certain counties in Maryland are subject to voter
approval limitations on property tax levy increases or on increases in
governmental spending which limits their flexibility in responding to external
changes. Various tax initiatives to reform existing tax structures in certain
counties were placed on the November, 1992 election ballot and were adopted.
Future initiatives, if proposed and adopted, could create pressure on the
counties and other local governments and their ability to raise revenues. The
Fund cannot predict the impact of any such future tax limitations on debt
quality.
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Many Maryland counties have established agencies with bond issuing
authority, such as housing authorities. Maryland municipalities also have the
power to issue conduit revenue bonds. Maryland local governments and their
authorities are subject to various risks and uncertainties, and the credit
quality of the bonds issued by them may vary considerably from that of State
general obligation bonds.
Sectors. Certain areas of potential investment concentration present
unique risks. In recent years, 6 to 12% of tax-exempt debt issues in Maryland
has been for public or non-profit hospitals. A significant portion of the Fund's
assets may be invested in health care issues. Since 1983, the hospital industry
has been under significant pressure to reduce expenses and limit length of stay,
a phenomenon which has negatively affected the financial health of many
hospitals. While each issue is separately secured by the individual hospital's
revenues, third party reimbursement mechanisms for patient care are common to
the group. At the present time Maryland hospitals operate under a system which
reimburses hospitals according to a State administered set of rates and charges
rather than the Federal Diagnosis Related Group (DRG) system for Medicare
payments. Since 1983, Maryland hospitals have operated below the national
average in terms of Medicare cost increases, allowing them to continue operating
under a Medicare waiver. However, any loss of this waiver in the future may have
an adverse impact upon the credit quality of Maryland hospitals. Additionally,
national focus on health care reform and any resulting legislation may further
impact the financial condition of hospitals in Maryland and other states.
The Fund may from time to time invest in solid waste revenue bonds which
have exposure to environmental, technological and market risks which could
affect the security and value of the bonds. Such risks include construction
delay or shortfalls in construction funds due to increased regulation, and
market disruption and revenue variability due to recent court decisions and
legislative proposals.
Investments in Puerto Rico
Although the Fund has no present intention to do so, from time to time,
the Fund may invest in obligations of the Commonwealth of Puerto Rico and its
public corporations exempt from federal and Maryland state and local income
taxes. These investments will not be considered Maryland municipal securities
for purposes of the Fund's policy to invest, under normal market conditions, 65%
of its assets in Maryland municipal securities. The majority of the
Commonwealth's debt is issued by ten public agencies that are responsible for
many of the island's public functions, such as water, wastewater, highways,
telecommunications, education, and public construction. As of May 31, 1995,
outstanding public sector debt issued by the Commonwealth and its public
corporations totaled $15.9 billion.
Investment in Puerto Rico obligations requires a careful assessment of
certain risk factors. These include reliance on substantial federal assistance
and favorable tax programs, above average levels of unemployment and low wealth
levels, and an economy vulnerable to adverse shifts in energy prices and U.S.
foreign trade/monetary policies. These risks are countered by strong security
provisions, a long history of timely debt repayment, and improved financial
practices.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business on
all weekdays except for the following holidays: New Year's Day, Presidents' Day,
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<PAGE>
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Fund reserves the right to suspend the sale of Shares at any
time.
Net asset value per share of a class is calculated by valuing all
assets held by the Fund, deducting liabilities attributable to all shares and
any liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities will be given their market value where feasible.
Portfolio securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Advisor to be over-the-counter, are valued at the quoted bid prices provided by
principal market makers. If a portfolio security is traded primarily on a
national exchange on the valuation date, the last quoted sale price will
generally be used. Securities or other assets for which market quotations are
not readily available are valued at their fair market value as determined in
good faith under procedures established from time to time and monitored by the
Fund's Board of Directors. Such procedures may include (i) the use of an
independent pricing service which uses prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type, (ii) indications as
to values from dealers, and (iii) general market conditions. Debt obligations
with maturities of 60 days or less will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Flag Investors Shares
by check and Institutional Shares by wire transfer of funds, as described in the
Prospectus relating to each class of Shares. However, if the Board of Directors
determines that it would be in the best interests of the remaining shareholders
to make payment of the redemption price in whole or in part by a distribution in
kind of securities from the portfolio of the Fund in lieu of cash, in conformity
with applicable rules of the SEC, the Fund will make such distributions in kind.
If Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares" and such valuation will be
made as of the same time the redemption price is determined. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussion here and in
the Fund's Prospectus is not intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
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<PAGE>
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
The Fund expects to qualify as a regulated investment company under
Subchapter M of the Code. However, to qualify as a regulated investment company
for any taxable year, the Fund must (1) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies and other income (including, but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement") and (2)
derive less than 30% of its gross income each taxable year (exclusive of certain
gains from designated hedging transactions that are offset by unrealized losses
on offsetting positions) from gains on the sale or other disposition of any of
the following investments if such investments are held for less than three
months (the "Short-Short Gain Test"): (a) stock or securities (as defined in
Section 2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies), and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts on foreign currencies) are not directly related to
the regulated investment company's principal business of investing in stock or
securities (or options and futures with respect to stocks or securities). The
Short-Short Gain Test will not prevent the Fund from disposing of investments
at a loss, since the recognition of a loss before the expiration of the
three-month holding period is disregarded.
In addition, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Fund has not invested more than 5%
of the value of its total assets in securities of such issuer and as to which
the Fund does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. government
securities and securities of other regulated investment companies), or in two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses (the "Asset
Diversification Test"). Generally, the Fund will not lose its status as a
regulated investment company if it fails to meet the Asset Diversification Test
solely as a result of a fluctuation in value of portfolio assets not
attributable to a purchase.
As noted in the Prospectus, exempt-interest dividends are excludable
from a shareholder's gross income for regular federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative minimum
tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at rates up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be imposed
in two circumstances. First, exempt-interest dividends derived from certain
"private activity bonds" issued after August 7, 1986, will generally be an item
of tax preference for both corporate and non-corporate taxpayers. Second,
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporation's alternative minimum
taxable income for purposes of determining the Alternative Minimum Tax and the
Environmental Tax.
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<PAGE>
Under Subchapter M, the Fund is exempt from federal income tax on its
taxable net investment income and net capital gains which it distributes to
shareholders, provided generally that it distributes at least 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gains over net long-term capital loss) for the year (the
"Distribution Requirement") and complies with the other requirements of the Code
described above. The Distribution Requirement for any year may be waived if a
regulated investment company establishes to the satisfaction of the Internal
Revenue Service that it is unable to satisfy the Distribution Requirement by
reason of distributions previously made for the purpose of avoiding liability
for federal excise tax (discussed below).
For purposes of the Distribution Requirement (as well as for other
purposes), the Fund will be required to treat as interest income any recognized
market discount on debt obligations which it holds. Generally, market discount
is the amount by which the stated redemption price of a bond exceeds the amount
paid by a purchaser of the bond (most common where the value of a bond decreases
after original issue as a result of a decline in the creditworthiness of the
issuer or an increase in prevailing interest rates). Generally, upon the
disposition of a bond bearing market discount or receipt of any principal
payment with respect to such a bond, market discount is recognized by treating a
portion of the proceeds as interest income. The application of these rules (and
the rules regarding original issue discount) to debt obligations held by the
Fund could affect (i) the amount and timing of distributions to shareholders and
(ii) the ability of the Fund to satisfy the Distribution Requirement.
If capital gain distributions have been made with respect to Shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions. Any gain or loss recognized on a sale or redemption of Shares of
the Fund by a shareholder who is not a dealer in securities will generally be
treated as a long-term capital gain or loss if the Shares have been held for
more than twelve months and otherwise will be generally treated as a short-term
capital gain or loss. Any loss recognized by a shareholder upon the sale or
redemption of Shares of the Fund held for six months or less, however, will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder with respect to such Shares. If Shares on which a net capital gain
distribution has been received are subsequently sold or redeemed and such Shares
have been held for six months or less, any loss recognized will be treated as a
long-term capital loss to the extent of the long-term capital gain distribution.
The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter S
corporations may also be subject to taxes on their "passive investment income,"
which could include exempt-interest dividends. Individuals whose "modified
income" exceeds a base amount will be subject to federal income tax up to
one-half of their social security benefits. Modified income currently includes
adjusted gross income, one-half of social security benefits and tax-exempt
interest, including exempt-interest dividends paid by the Fund. Beginning in
1994, individuals whose modified income exceeds certain base amounts are
required to include in gross income up to 85% of their social security benefits.
Issuers of bonds purchased by the Fund (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Shareholders should be aware
that exempt-interest dividends may become subject to federal income taxation
retroactively to the date of issuance of the bonds to which such dividends are
attributable if such representations are determined to have been inaccurate or
if the issuers (or the beneficiary) of the bonds fail to comply with certain
covenants made at that time.
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<PAGE>
If for any taxable year, the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
such distributions will generally be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits. However, in the case
of corporate shareholders, such distributions will generally be eligible for the
70% dividends received deduction for "qualifying dividends."
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who (1)
has provided the Fund either an incorrect tax identification number or no number
at all, (2) who is subject to backup withholding by the Internal Revenue Service
for failure to properly report payments of interest or dividends, or (3) who has
failed to certify to the Fund that such shareholder is not subject to backup
withholding.
The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year.
The Code imposes a nondeductible 4% excise tax on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the calendar year plus 98% of their capital gains net
income for the one-year period ending on October 31 of such calendar year. The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, an investment company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year.
The Fund intends to make sufficient distributions of its ordinary income
and capital gains net income prior to the end of each calendar year to avoid
liability for excise tax. However, shareholders should note that the Fund may in
certain circumstances be required to liquidate portfolio investments in order to
make sufficient distributions to avoid excise tax liability, and, in addition,
that the liquidation of such investments in such circumstances may affect the
ability of the Fund to satisfy the Short-Short Gain Test.
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting an investment in the Fund and also as to the application of the
rules set forth above to a shareholder's particular circumstances.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their respective ages and
their principal occupations during the last five years are set forth below.
Unless otherwise indicated, the address of each Director and executive officer
is 135 East Baltimore Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman and Director (50)
Managing Director, Alex. Brown & Sons Incorporated.
*TRUMAN T. SEMANS, Director (68)
Managing Director, Alex. Brown & Sons Incorporated; Formerly,
Vice Chairman, Alex. Brown & Sons Incorporated.
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JAMES J. CUNNANE, Director (57)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (merchant banking), 1993-Present;
Formerly, Senior Vice-President and Chief Financial Officer,
General Dynamics Corporation (defense) (1989-1993) and Director,
The Arch Fund (mutual fund).
N. BRUCE HANNAY, Director (74)
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice
President, Research and Patents, AT&T Bell Laboratories;
Formerly, Director, Rohm & Haas Company (diversified chemicals),
General Signal Corp. (control equipment & systems) and Plenum
Publishing Corp.
JOHN F. KROEGER, Director (71)
Swan Road, P.O. Box 464, Martingham, St. Michaels, Maryland
21663. Director/Trustee AIM Funds; Formerly, Consultant, Wendell
& Stockel Associates, Inc. (consulting firm) and
General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (62)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (banking and finance); Chairman of the
Quality Control Inquiry Committee, American Institute of
Certified Public Accountants; Formerly, Trustee, Merrill Lynch
Funds for Institutions, 1991-1993, Adjunct Professor, Columbia
University-Graduate School of Business, 1991-1992 and Partner,
KPMG Peat Marwick.
EUGENE J. MCDONALD, Director (63)
Duke Management Company, Erwin Square, Suite 1000, 2200 West
Main Street, Durham, North Carolina 27705. President, Duke
Management Company (investments); Executive Vice President, Duke
University (education, research and healthcare).
*REBECCA W. RIMEL, Director (44)
Pew Charitable Trust, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103. President and Chief
Executive Officer, The Pew Charitable Trusts; Director and
Executive Vice President, The Glenmede Trust Company; Formerly,
Executive Director, The Pew Charitable Trusts.
HARRY WOOLF, Director (72)
Institute for Advanced Study, South Olden Lane, Princeton, New
Jersey 08540. Professor-at-Large Emeritus, Institute for
Advanced Study; Director, Merrill Lynch Cluster C Funds
(registered investment companies) and ATL and Spacelabs Medical
Corp. (medical equipment); Family Health International
(nonprofit research and education).
M. ELLIOTT RANDOLPH, President (53)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present;
Principal, Monument Capital Management, Inc., 1988-1991; Senior
Vice President and Chief Investment Officer, First
National Bank of Maryland, 1976-1988.
PAUL D. CORBIN, Executive Vice President (43)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present;
Senior Vice President, First National Bank of Maryland,
1985-1991.
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EDWARD J. VEILLEUX, Vice President (52)
Principal, Alex. Brown & Sons Incorporated; President,
Investment Company Capital Corp. (registered investment
advisor); and Vice President, Armata Financial Corp. (registered
broker-dealer).
GARY V. FEARNOW, Vice President (50)
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
MONICA M. HAUSNER, Vice President (34)
Vice President, Fixed Income Management Department, Alex. Brown
& Sons Incorporated, March 1992-Present; Formerly, Assistant
Vice President, First National Bank of Maryland, 1984-1992.
BRIAN C. NELSON, Vice President and Secretary (36)
Vice President, Alex. Brown & Sons Incorporated, Investment
Company Capital Corp. (registered investment advisor) and Armata
Financial Corp. (registered broker-dealer).
DIANA M. ELLIS, Treasurer (44)
Manager, Portfolio Accounting Department, Investment Company
Capital Corp. (registered investment advisor); Mutual Fund
Accounting Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Accounting Manager, Downtown Press Inc.
(printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary (29)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student 1989-1991.
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* Messrs. Hale and Semans are Directors who are "interested persons", as
defined in the Investment Company Act. Ms. Rimel will be treated by
the Fund as if she could be deemed to be an "interested person".
Directors and officers of the Fund are also directors and officers of some or
all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates. There are currently 12 funds in
the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund
complex (the "Fund Complex"). Mr. Semans serves as a Director of eight funds in
the Fund Complex. Mr. Hale serves as President and Director of one fund, Vice
President of one fund and Director of 10 other funds in the Fund Complex.
Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald, and Woolf serve as Directors
of each fund in the Fund Complex. Ms. Rimel serves as Director of five funds in
the Fund Complex. Mr. Veilleux serves as Executive Vice President of one fund
and as Vice President of each of the other funds in the Fund Complex. Mr. Nelson
serves as Vice President and Secretary, Ms. Ellis serves as Treasurer and
Ms. DePrine serves as Assistant Secretary, respectively, of each fund in the
Fund Complex. Mr. Randolph serves as President of two funds and Vice President
of one fund in the Fund Complex. Mr. Corbin serves as Vice President of three
funds and Mr. Fearnow serves as Vice President of 10 funds in the Fund Complex.
Ms. Hausner serves as Vice President of three funds in the Fund Complex.
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Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business. All
such transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons. Additional
transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity from the
Fund. Officers and Directors of the Fund who are officers or directors of Alex.
Brown may be considered to have received remuneration indirectly. As
compensation for his or her services as Director, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") and Ms. Rimel, receives an aggregate annual fee (plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
his or her attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he serves.
Payment of such fees and expenses are allocated among all such funds described
above in direct proportion to their relative net assets. For the fiscal year
ended March 31, 1995, Non-Interested Directors' fees attributable to the assets
of the Fund totalled approximately $1,000. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, in the fiscal year ended March 31, 1995.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Total Compensation
From the Fund in the From the Fund
Fiscal Year Ended and Fund Complex
March 31, 1995 Paid to Directors
in the Fiscal Year
Ended March 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Richard T. Hale, Chairman and Director $0 $0
*Truman T. Semans, Director $0 $0
**James J. Cunnane, Director $33(1)** $9,750 for service on 13
Boards in the Fund Complex** (2)
N. Bruce Hannay, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex (2)
John F. Kroeger, Director $145(1) $42,900 for service on 13
Boards in the Fund Complex (2)
***Louis E. Levy, Director $104(1) *** $29,250 for service on 13
Boards in the Fund Complex *** (2)
Eugene J. McDonald, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex (2)
*/****Rebecca W. Rimel, Director N/A **** N/A ****
Harry Woolf, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex (2)
</TABLE>
* A Director who is, or may be, an "interested person" as defined in the
Investment Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
**** Elected to the Board on June 1, 1995.
(1) $0 of this amount has been deferred pursuant to a deferred
compensation plan.
(2) One of these funds ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of five years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned by him in his last year of
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service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Messrs. Hannay, Kroeger
and Woolf have qualified but have not received benefits, and no such benefits
are being accrued for them since they have not yet retired. The Fund has one
Participant, a Director who retired effective December 31, 1994, who has
qualified for the Retirement Plan and who will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
Beginning in December, 1994, any Director who receives fees
from the Fund is permitted to defer a minimum of 50%, or up to all, of his
annual compensation pursuant to a Deferred Compensation Plan.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Code of
Ethics significantly restricts the personal investing activities of all
employees of ICC and the directors and officers of Alex. Brown. As described
below, the Code of Ethics imposes additional, more onerous, restrictions on the
Fund's investment personnel, including the portfolio managers and employees who
execute or help execute a portfolio manager's decisions or who obtain
contemporaneous information regarding the purchase or sale of a security by the
Fund.
The Code of Ethics requires that all employees of ICC, any
director or officer of Alex. Brown, and all Non-Interested Directors, preclear
any personal securities investments (with limited exceptions, such as
non-volitional purchases or purchases which are part of an automatic dividend
reinvestment plan). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to investment
personnel include a ban on acquiring any securities in an initial public
offering, a prohibition from profiting on short-term trading in securities and
preclearance of the acquisition of securities in private placements.
Furthermore, the Code of Ethics provides for trading "blackout periods" that
prohibit trading by investment personnel and certain other employees within
periods of trading by the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On October 1, 1993, the sole shareholder of the Fund approved an
Investment Advisory Agreement between the Fund and ICC. ICC is a wholly-owned
subsidiary of Alex. Brown, the Fund's distributor. ICC is also the investment
advisor to Alex. Brown Cash Reserve Fund, Inc., Flag Investors Telephone Income
Fund, Inc., Flag Investors Value Builder Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Flag
Investors Intermediate-Term Income Fund, Inc., Flag Investors Real Estate
Securities Fund, Inc. and Flag Investors Equity Partners Fund, Inc., which are
also distributed by Alex. Brown.
Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. Any investment program undertaken by ICC will
at all times be subject to policies and control of the Fund's Board of
Directors. ICC will provide the Fund with office space for managing its affairs,
with the services of required executive personnel and with certain clerical and
bookkeeping services and facilities. These services are provided by ICC without
reimbursement by the Fund for any costs. ICC shall not be liable to the Fund or
its shareholders for any act or omission by ICC or any losses sustained by the
Fund or its shareholders, except in the case of willful misfeasance, bad faith,
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<PAGE>
gross negligence, or reckless disregard of duty. As compensation for its
services, ICC receives an annual fee from the Fund, payable monthly, at the
annual rate of .35% of the Fund's average daily net assets. ICC has voluntarily
agreed to reduce its annual fee, if necessary, or to make payments to the Fund
to the extent required so that the Fund's annual expenses do not exceed .70% of
the Flag Investors Shares' average daily net assets and .45% of the
Institutional Shares' average daily net assets. The services of ICC to the Fund
are not exclusive and ICC is free to render similar services to others.
ICC has also agreed to reduce its aggregate fees on a monthly basis for
any fiscal year to the extent required so that the amount of the ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs and
indemnification related thereto) paid or incurred by the Fund for such fiscal
year does not exceed the expense limitations applicable to the Fund imposed by
the securities laws or regulations of the states in which the Shares are
registered or qualified for sale, as such limitations may be raised or lowered
from time to time. Currently, the most restrictive of such expense limitations
requires the Advisor to reduce its fees to the extent required so that ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs and
indemnification related thereto) do not exceed 2.5% of the first $30 million of
the Fund's average daily net assets, 2.0% of the next $70 million of the Fund's
average daily net assets and 1.5% of the Fund's average daily net assets in
excess of $100 million. In addition, if required to do so by any applicable
state securities laws or regulations, ICC will reimburse the Fund to the extent
required to prevent the expense limitations of any state law or regulation from
being exceeded.
The Investment Advisory Agreement has an initial term of two years and
will continue in effect from year to year thereafter if such continuance is
specifically approved at least annually by the Fund's Board of Directors,
including a majority of the Non-Interested Directors who have no direct or
indirect financial interest in such agreement, by votes cast in person at a
meeting called for such purpose, or by a vote of a majority of the outstanding
Shares (as defined under "Capital Stock"). The Investment Advisory Agreement was
most recently approved for continuance by the Fund's Board of Directors on
September 25, 1995. The Fund or ICC may terminate the Investment Advisory
Agreement on sixty days' written notice without penalty. The Investment Advisory
Agreement will terminate automatically in the event of assignment (as defined in
the Investment Company Act). For the fiscal year ended March 31, 1995 and for
the Fund's initial fiscal period ended March 31, 1994, ICC waived all advisory
fees ($45,630 and $12,065, respectively). In addition, for the same period, ICC
reimbursed the Fund for other expenses aggregating $90,867 and $63,115,
respectively. Absent such waivers and reimbursements, the Fund's total operating
expenses would have been 1.85% and 2.46%, respectively, of the Fund's average
daily net assets.
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
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<PAGE>
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the distributor of each class of the Fund's
Shares pursuant to two separate Distribution Agreements, one for the Flag
Investors Shares (the "Flag Investors Distribution Agreement") and one for the
Institutional Shares (the "Institutional Distribution Agreement") (collectively,
the "Distribution Agreements").
The Flag Investors Shares
The Flag Investors Distribution Agreement provides that Alex. Brown has
the exclusive right to distribute Flag Investors Shares either directly or
through other broker-dealers. The Distribution Agreement further provides that
Alex. Brown will: (a) solicit and receive orders for the purchase of Flag
Investors Shares; (b) accept or reject such orders on behalf of the Fund in
accordance with the Fund's currently effective Prospectus and transmit such
orders as are accepted to the Fund's transfer agent as promptly as possible; (c)
receive requests for redemptions and transmit such redemption requests to the
Fund's transfer agent as promptly as possible; and (d) respond to inquiries from
shareholders concerning the status of their accounts and the operations of the
Fund. Alex. Brown has not undertaken to sell any specific number of Flag
Investors Shares. The Flag Investors Distribution Agreement further provides
that, in connection with the distribution of Flag Investors Shares, Alex. Brown
will be responsible for all of the promotional expenses. The services provided
by Alex. Brown to the Fund are not exclusive, and Alex. Brown is free to provide
similar services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker-dealers have
agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
As compensation for providing distribution for the Flag Investors
Shares as described above, Alex. Brown receives an annual fee, paid monthly,
equal to .25% of the average daily net assets of the Flag Investors Shares. As
compensation for providing distribution services for the fiscal year ended March
31, 1995 and the period from October 1, 1993 (commencement of operations)
through March 31, 1994 Alex. Brown received from the Fund aggregate commissions
and fees in the amount of $32,593 and $8,617, respectively, and from such fees
paid $28,431 and $2,667, respectively, to its investment representatives and
$494 and $0, respectively, to outside broker-dealers as compensation. Alex.
Brown expects to allocate most of its annual fee to its investment
representatives and up to all of its fee to broker-dealers who enter into
Sub-Distribution Agreements with Alex. Brown.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Flag Investors Shares (the "Flag Investors Plan"). Under the Flag
Investors Plan, the Fund pays a fee to Alex. Brown for distribution and other
shareholder servicing assistance as set forth in the Flag Investors Distribution
Agreement, and Alex. Brown is authorized to make payments out of its fee to its
investment representatives and to participating broker-dealers. The Flag
Investors Distribution Agreement, including the Flag Investors Plan and a form
of Sub-Distribution Agreement, was approved by the sole shareholder of the Fund
on October 1, 1993. The Flag Investors Distribution Agreement has an initial
term of two years and the Flag Investors Distribution Agreement and the
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<PAGE>
Flag Investors Plan encompassed therein will remain in effect from year to year
as specifically approved at least annually by the Fund's Board of Directors and
by the affirmative vote of a majority of the Non-Interested Directors by votes
cast in person at a meeting called for such purpose. The Flag Investors Plan was
most recently approved in this manner by the Fund's Board of Directors on
September 25, 1995.
In approving the Flag Investors Plan, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable likelihood
that the Flag Investors Plan would benefit the Fund and its shareholders. The
Flag Investors Plan will be renewed only if the Directors make a similar
determination in each subsequent year. The Flag Investors Plan may not be
amended to increase materially the fee to be paid pursuant to the Distribution
Agreement without the approval of the shareholders of the Fund. The Flag
Investors Plan may be terminated at any time and the Flag Investors Distribution
Agreement may be terminated at any time upon sixty days' notice, in either case
without penalty, by the vote of a majority of the Fund's Non-Interested
Directors or by a vote of a majority of the outstanding Flag Investors Shares
(as defined under "Capital Stock"). Any Sub-Distribution Agreement may be
terminated in the same manner at any time. The Flag Investors Distribution
Agreement and any Sub-Distribution Agreement shall automatically terminate in
the event of assignment.
During the continuance of the Flag Investors Plan, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Flag Investors Plan to Alex. Brown
pursuant to the Flag Investors Distribution Agreement and to broker-dealers
pursuant to Sub-Distribution Agreements. Such reports will be made by the
persons authorized to make such payments. In addition, during the continuance of
the Flag Investors Plan, the selection and nomination of the Fund's
Non-Interested Directors will be committed to the discretion of the
Non-Interested Directors then in office.
In addition, with respect to the Flag Investors Shares, the Fund may
enter into Shareholder Servicing Agreements with certain financial institutions,
such as banks, to act as Shareholder Servicing Agents, pursuant to which Alex.
Brown will allocate a portion of its distribution fee as compensation for such
financial institutions' ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review the
Prospectus and this Statement of Additional Information in conjunction with any
such institution's fee schedule. In addition, state securities laws on this
issue may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers pursuant
to state law.
Under the Flag Investors Plan, amounts allocated to Participating
Dealers and Shareholder Servicing Agents may not exceed amounts payable to Alex.
Brown under the Flag Investors Plan. Payments under the Flag Investors Plan are
made as described above regardless of Alex. Brown's actual cost of providing
distribution services and may be used to pay Alex. Brown's overhead expenses. If
the cost of providing distribution services to the Fund in connection with the
sale of the Flag Investors Shares is less than .25% of the Fund's average daily
net assets for any period, the unexpended portion of the distribution fee may be
retained by Alex. Brown. The Flag Investors Plan does not provide for any
charges to the Fund for excess amounts expended by Alex. Brown and, if the Flag
Investors Plan is terminated in accordance with its terms, the obligation of the
Fund to make payments to Alex. Brown pursuant to the Flag Investors Plan will
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cease and the Fund will not be required to make any payments past the date the
related Flag Investors Distribution Agreement terminates.
The Institutional Shares
The Institutional Distribution Agreement provides that Alex. Brown has
the exclusive right to distribute the Institutional Shares, either directly or
through Participating Dealers, and further provides that Alex. Brown will
solicit and receive orders for the purchase of Institutional Shares, accept or
reject such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus for the Institutional Shares and transmit such orders as
are accepted to the Fund's transfer agent as promptly as possible, receive
requests for redemption and transmit such redemption requests to the Fund's
transfer agent as promptly as possible, respond to inquiries from the Fund's
shareholders concerning the status of their accounts with the Fund, maintain
such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors, and take all actions deemed
necessary to carry into effect the distribution of the Institutional Shares.
Alex. Brown has not undertaken to sell any specific number of Institutional
Shares. The Institutional Distribution Agreement further provides that, in
connection with the distribution of Institutional Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services provided by Alex.
Brown to the Fund are not exclusive, and Alex. Brown is free to provide similar
services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown receives no compensation for distributing the Institutional
Shares.
Alex. Brown and Participating Dealers have entered into
Sub-Distribution Agreements under which such Participating Dealers have agreed
to process investor purchase and redemption orders and respond to inquiries from
shareholders concerning the status of their accounts and the operations of the
Fund.
The Institutional Distribution Agreement was approved by the Fund's
Board of Directors on September 25, 1995 and by the sole shareholder of the
class on October 31, 1995. It has an initial term of two years and will remain
in effect from year-to-year thereafter if specifically approved at least
annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast at a meeting called for
such purpose. It may be terminated at any time upon sixty days' written notice,
without penalty by the vote of a majority of the Fund's Non-Interested Directors
or by a vote of the outstanding institutional Shares (as defined under Capital
Stock). The Institutional Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment.
General Information
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and of independent auditors, in connection with any
matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by Alex. Brown or ICC.
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The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ICC is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission rates.
Purchases and sales of securities on a securities exchange are effected through
broker-dealers who charge a commission for their services. ICC may direct
purchase and sale orders to any broker-dealer, including, to the extent and in
the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown acts as a principal; that is, an
order will not be placed with Alex. Brown if execution of the trade involves
Alex. Brown serving as a principal with respect to any part of the Fund's order,
nor will the Fund buy or sell over-the-counter securities with Alex. Brown
acting as market maker.
If Alex. Brown is participating in an underwriting or selling group,
the Fund may not buy portfolio securities from the group except in accordance
with rules of the SEC. The Fund believes that the limitation will not affect its
ability to carry out its present investment objective.
ICC's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ICC may, in its discretion, effect brokerage transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ICC to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ICC with clients other than the Fund. Similarly, any research services received
by ICC through placement of portfolio transactions of other clients may be of
value to ICC in fulfilling its obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to ICC
by a broker-dealer. ICC is of the opinion that because the material must be
analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing ICC's research and analysis.
Therefore, it may tend to benefit the Fund by improving ICC's investment advice.
ICC's policy is to pay a broker-dealer higher commissions for particular
transactions than might be charged if a different broker-dealer had been chosen
when, in ICC's opinion, this policy furthers the overall objective of obtaining
best price and execution. Subject to periodic review by the Fund's Board of
Directors, ICC is also authorized to pay broker-dealers other than Alex. Brown
higher commissions on brokerage transactions for the Fund in order to secure
research and investment services described above. The allocation of orders among
broker-dealers and the commission rates paid by the Fund will be reviewed
periodically by the Board of Directors.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
Rule 17e-1 also contains requirements for the review of such transactions by the
Board of Directors and requires ICC to furnish reports and to maintain
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records in connection with such reviews. The Distribution Agreement between
Alex. Brown and the Fund does not provide for any reduction in the distribution
fee to be received by Alex. Brown from the Fund as a result of profits resulting
from brokerage commissions on transactions of the Fund effected through Alex.
Brown. In the fiscal year ended March 31, 1995, the Fund paid no brokerage
commissions to Alex. Brown
ICC manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ICC. ICC may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
During the fiscal year ended March 31, 1995, Alex. Brown directed no
transactions to broker-dealers and paid no related commissions to broker dealers
because of research services provided.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of March 31, 1995, the
Fund held a 6.10% repurchase agreement issued by Goldman Sachs & Co. which was
valued at $67,000.
9. CAPITAL STOCK
The Fund is authorized to issue 35 million Shares of common stock,
par value $.001 per share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated three classes of shares: Flag Investors Maryland Intermediate Tax
Free Income Fund Shares, Flag Investors Maryland Intermediate Tax Free Income
Fund Class B Shares, and Flag Investors Maryland Intermediate Tax Free Income
Fund Institutional Shares. The Institutional Shares are offered only to certain
eligible institutions and to clients of investment advisory affiliates of Alex.
Brown. The Class B Shares are not currently being offered. Shares of the Fund,
regardless of series or class would have equal rights with respect to voting,
except that with respect to any matter affecting the rights of the holders of a
particular series or class, the holders of each series or class would vote
separately. In general, each series would be managed separately and shareholders
of each series would have an undivided interest in the net assets of that
series. For tax purposes, the series would be treated as separate entities.
Generally, each class of Shares would be identical to every other class in a
particular series and expenses of the Fund (other than 12b-1 and any applicable
service fees) would be prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class exclusively
will be voted on by the holders of such class.
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Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund. There are no preemptive, conversion or exchange
rights applicable to any of the Shares. The issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.
As used in this Statement of Additional Information the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent auditors.
11. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been retained
to act as custodian of the Fund's investments. PNC Bank receives such
compensation from the Fund for its services as Custodian as may be agreed to
from time to time by PNC Bank and the Fund. Investment Company Capital Corp.,
135 East Baltimore Street, Baltimore, Maryland 21202, has been retained to act
as transfer and dividend disbursing agent. As compensation for providing these
services, the Fund pays ICC up to $15.00 per account per year, plus
reimbursement for out of pocket expenses incurred in connection therewith. ICC
has served as the Fund's Transfer Agent since February 28, 1994 and for such
services for the fiscal year ended March 31, 1995 received fees of $6,359.
ICC also provides certain accounting services to the Fund. As
compensation for these services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly as shown below.
Average Net Assets Accounting Services Fee
------------------ -----------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,001 - $ 20,000,000 .100%
$ 20,000,001 - $ 30,000,000 .080%
$ 30,000,001 - $ 40,000,000 .060%
$ 40,000,001 - $ 50,000,000 .050%
$ 50,000,001 - $ 60,000,000 .040%
$ 60,000,001 - $ 70,000,000 .030%
$ 70,000,001 - $ 99,999,999 .020%
$100,000,001 - $ 500,000,000 .015%
$500,000,001 - $1,000,000,000 .005%
over $1,000,000,000 .001%
-26-
<PAGE>
In addition, the Fund will reimburse ICC for the following out of
pocket expenses incurred in connection with provision of ICC's accounting
services: express delivery service, independent pricing and storage.
For the fiscal year ended March 31, 1995 ICC received accounting fees
of $16,037.
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP. Deloitte & Touche LLP has offices at 117 Campus Drive, Princeton,
New Jersey 08540.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end non-diversified management investment companies and to
stock or other relevant indices or averages in advertisements or in certain
reports to shareholders, performance will generally be stated both in terms of
total return and in terms of yield. However, the Fund may also from time to time
state the performance of the Fund solely in terms of total return.
Total Return Calculations
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the Fund's registration statement (or the later commencement of
operations of a Series or Class). During its first year of operations, the Fund
may, in lieu of annualizing its total return, use an aggregate total return
calculated in the same manner. In calculating the ending redeemable value, the
maximum sales load is deducted from the initial $1,000 payment and all dividends
and distributions by the Fund are assumed to have been reinvested at net asset
value as described in the Prospectus on the reinvestment dates during the
period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestments would be included as
would any recurring account charges that might be imposed by the Fund. The
Institutional Shares are sold without a sales load.
-27-
<PAGE>
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Morningstar Inc., the Fund calculates its aggregate and average annual total
return for the specified periods of time by assuming the investment of $10,000
in Shares and assuming the reinvestment of each dividend or other distribution
at net asset value on the reinvestment date. For this alternative computation,
the Fund assumes that the $10,000 invested in Shares is net of all sales charges
(as distinguished from the computation required by the SEC where the $1,000
payment is reduced by sales charges before being invested in Shares). The Fund
will, however, disclose the maximum sales charges and will also disclose that
the performance data do not reflect sales charges and that inclusion of sales
charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC rules, and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
Calculated according to SEC rules, for the one-year period ended March
31, 1995, the ending redeemable value of a hypothetical $1,000 payment for the
Flag Investors Shares was $1,035, resulting in a total return for such Shares
equal to 3.54%. For the period from the effectiveness of the Fund's registration
statement on October 1, 1993 through the fiscal year ended March 31, 1995 the
ending redeemable value of a hypothetical $1,000 payment for Flag Investors
Shares was $958 resulting in an average annual total return for such Shares
equal to -4.5%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the one-year period
ended March 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in Flag Investors Shares was $1,051, resulting in a total return for
such Shares equal to 5.1%. For the period from the effectiveness of the Fund's
registration statement on October 1, 1993 through the fiscal year ended March
31, 1995, the ending redeemable value of a hypothetical $10,000 investment in
the Flag Investors Shares was $10,085 resulting in an average annual total
return equal to 7.60%.
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
Yield Calculations
The Fund's yield for the Flag Investors Shares for the 30 day period
ended March 31, 1995 was 3.66% and was computed in the manner discussed below.
The yield of the Fund is calculated by dividing the net investment income per
Share earned by the Fund during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and annualizing the
result on a semiannual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the result and then doubling the
difference. The Fund's yield calculations assume a maximum sales charge of
1.50%. The Fund's net investment income per Share earned during the period is
based on the average daily number of Shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements.
-28-
<PAGE>
The Fund may also advertise a "tax-equivalent yield", which is
calculated by determining the rate of the return that would have to be achieved
on a fully taxable investment to produce the after-tax equivalent of the Fund's
yield, assuming certain tax brackets for a shareholder. The Fund's tax-
equivalent yield for the Flag Investors Shares, based on the 30 day period ended
March 31, 1995 was 5.30% for a shareholder in the 31% bracket.
Except as noted below, for the purpose of determining net investment
income earned during the period, interest earned on debt obligations held by the
Fund is calculated by computing the yield to maturity of each obligation based
on the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, based on the purchase price (plus actual
accrued interest), dividing the result by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued interest) in order
to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset value
per share. Undeclared earned income is net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be and is declared as a dividend shortly thereafter.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 10, 1995, the following persons owned of record or
beneficially 5% or more of the Fund's total outstanding Flag Investors Shares:
Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202 owned beneficially 93.24% of the Fund's outstanding Shares.
As of such date, Directors and officers as a group owned less than 1%
of the total outstanding Flag Investors Shares.
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
15. FINANCIAL STATEMENTS
See next page.
-29-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets March 31, 1995
<TABLE>
<CAPTION>
RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
MUNICIPAL BONDS - 97.3%
GENERAL OBLIGATION - 65.8%
$500 Anne Arundel County,MD,Solid Waste Project
4.50%,2/1/03................................ Aa/AA+ $467,580 3.6%
500 Baltimore County,MD,Metropolitan District,64th Issue,
Callable 8/1/03 @ $102
4.50%,8/1/06................................ Aaa/AA+ 448,440 3.5
500 Baltimore County,MD Metropolitan District,61st Issue,
6.80%,4/1/00................................ Aaa/AA+ 540,530 4.2
400 Calvert County,MD,Refunding Consolidated Public.
Improvement Project,Callable 7/15/03 @ $102
4.80%,7/15/07............................... Aa/A+ 364,828 2.8
250 Cecil County,MD (FGIC Insured),Refunding Consolidated
Public Improvement Project,Callable 12/1/03 @ $102
5.00%,12/1/06............................... Aaa/AAA 242,457 1.9
500 Charles County,MD,Refunding Consolidated Public
Improvement Project
6.00%,6/1/99................................ Aa/AA- 522,185 4.0
400 Frederick County,MD,Refunding,Series "C"
4.60%,8/1/03................................ Aa/AA- 376,928 2.9
500 Frederick,MD,Refunding and Improvement (FGIC Insured)
5.80%,12/1/02............................... Aaa/AAA 519,045 4.0
350 Harford County,MD,Refunding Consolidated
Public Improvement
4.40%,12/1/01............................... Aa/AA- 333,232 2.6
200 Howard County,MD,Refunding Consolidated
Public Improvement Project,Series "A"
4.875%,8/15/02.............................. Aa1/AA+ 196,890 1.5
Maryland State and Local Facilities Loan,Third Series,
Callable 7/15/01 @ $101
600 4.30%,7/15/03................................................. Aaa/AAA 552,918 4.3
300 6.50%,7/15/04................................................. Aaa/AAA 323,838 2.5
500 Maryland State Capital Improvement and Refunding,
Callable 4/15/03 @ $100
5.00%,4/15/04............................... Aaa/AAA 492,495 3.8
750 Maryland State Capital Improvement and Refunding
4.90%,4/15/03............................... Aaa/AAA 736,800 5.7
</TABLE>
-30-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONTINUED) March 31, 1995
<TABLE>
<CAPTION>
RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
GENERAL OBLIGATION - (CONTINUED)
$275 Montgomery County,MD,Maryland National Capital
Park & Planning Commission,Series "N-2"
4.40%,7/1/01................................ Aaa/AAA $ 262,521 2.0%
600 Montgomery County,MD,Refunding Consolidated Public
Improvement Project,Series "A"
4.50%,10/1/03............................... Aaa/AAA 564,354 4.4
500 Ocean City,MD,Refunding (MBIA Insured)
5.00%,3/15/03............................... Aaa/AAA 490,030 3.8
250 Prince George's County,MD,Refunding Consolidated
Improvement Project,Series "A"(MBIA Insured)
Callable 3/1/02 @ $102
5.40%,9/1/02................................ Aaa/AAA 254,415 2.0
250 Prince George's County,MD,Refunding Consolidated
Public Improvement Project,Callable 3/15/03 @ $102
(AMBAC Insured)
5.50%,3/15/05............................... Aaa/AAA 250,560 1.9
300 Rockville, MD, Refunding
4.60%,4/15/01............................... Aa1/AA+ 291,219 2.3
250 Washington Suburban Sanitary District, MD,
Prerefunded 11/1/01 @ $102
6.40%,11/1/04............................... Aaa/AAA 272,290 2.1
8,503,555 65.8
OTHER REVENUE - 29.5%
350 Baltimore County, MD, Mortgage Revenue, Silver Spring
Apartments, Callable 11/1/03 @ $102
6.60%,11/1/14............................... NR*/AAA 361,270 2.8
100 Baltimore, MD Convention Center,
Callable 9/1/04 @ $100 (FGIC Insured)
5.60%,9/1/06................................ Aaa/AAA 101,014 0.8
250 Charles County, MD, Housing Revenue, (MBIA Insured)
Callable 7/1/03 @ $102
5.375%,7/1/09............................... Aaa/AAA 234,237 1.8
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Frederick Memorial
Hospital (FGIC Insured)
4.70%,7/1/02................................ Aaa/AAA 190,752 1.5
</TABLE>
-31-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONTINUED) March 31, 1995
<TABLE>
<CAPTION>
RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
OTHER REVENUE - (CONTINUED)
$500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Good Samaritan
Hospital
5.40%,7/1/04................................ A/A $ 486,485 3.8%
500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Harford Memorial and
Fallston General Hospitals
Callable 7/1/97 @ $102
8.50%,7/1/14................................ Baa1/NR* 530,585 4.1
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Howard County General
Hospital
4.55%,7/1/98................................ Baa1/BBB 193,132 1.5
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Peninsula Regional
Medical, Callable 7/1/03 @ $102
5.00%,7/1/06................................ A/A 274,761 2.1
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Suburban Hospital
4.75%,7/1/03................................ A1/A 279,177 2.2
160 Maryland State Health and Higher Education Facilities
Authority, Revenue for University of Maryland
Medical Systems Callable 7/1/03 @ $102
(FGIC Insured)
5.375%,7/1/13............................... Aaa/AAA 148,312 1.1
250 Maryland State Health and Higher Education Facilities
Authority, Revenue for Washington County
Hospital (MBIA Insured)
4.45%,1/1/02................................ Aaa/AAA 234,940 1.8
400 Maryland State Center for Physics Headquarters
5.80%,1/1/01................................ NR*/BBB 397,640 3.1
100 Maryland State Community Development Administration,
Single Family Program, Third Series
4.55%,4/1/02................................ Aa/NR* 93,273 0.7
300 Montgomery County, MD, Maryland Housing Opportunities
Commission, Callable 7/1/03 @ $102
4.70%,7/1/04................................ Aa/NR* 278,226 2.2
3,803,804 29.5
</TABLE>
-32-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONCLUDED) March 31, 1995
<TABLE>
<CAPTION>
RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
TRANSPORTATION REVENUE - 2.0%
$275 Washington,D.C.,Metropolitan Area Transportation Authority
for Gross Revenue (FGIC Insured)
4.50%,1/1/01.............................. Aaa/AAA $ 261,316 2.0%
TOTAL MUNICIPAL BONDS
(Cost $13,017,069)........................ 12,568,675 97.3
REPURCHASE AGREEMENT - 0.5%
67 GOLDMAN SACHS & CO. 6.10%
Dated 3/31/95,to be repurchased on 4/3/95,
collateralized by U.S.Treasury Bonds with a
market value of $69,198
(Cost $67,000)............................... 67,000 0.5
TOTAL INVESTMENT IN SECURITIES
(Cost $13,084,069)**......................... 12,635,675 97.8
OTHER ASSETS IN EXCESS OF LIABILITIES, NET................ 283,423 2.2
NET ASSETS................................................ $12,919,098 100.0%
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE
($12,919,098 divided by 1,356,953
shares outstanding).......................... $9.52
MAXIMUM OFFERING PRICE PER SHARE
($9.52 divided by .985)...................... $9.66
</TABLE>
1 The Moody's or Standard & Poor's ratings are believed to be the most
recent ratings available as of March 31, 1995.
* Not rated.
** Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
-33-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Operations For the Year Ended March 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest............................................. $ 670,403
EXPENSES:
Investment advisory fee (Note B)..................... 45,630
Legal................................................ 41,366
Distribution fee (Note B)............................ 32,593
Audit................................................ 29,681
Printing and postage................................. 23,071
Custodian fee........................................ 19,876
Accounting fee (Note B).............................. 16,037
Organizational expense (Note A)...................... 10,249
Miscellaneous........................................ 8,619
Registration fees.................................... 7,189
Transfer agent fees (Note B)......................... 6,359
Directors'fees....................................... 1,000
Insurance............................................ 263
Total expenses...................................... 241,933
Less: Fees waived and expenses reimbursed (Note B)... (136,497)
Net expenses........................................ 105,436
Net investment income................................ 564,967
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions......... (116,538)
Change in unrealized appreciation of
investments........................................ 122,723
Net realized and unrealized gain on investments...... 6,185
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $ 571,152
</TABLE>
See accompanying Notes to Financial Statements.
-34-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED OCTOBER 1, 1993*
MARCH 31, THROUGH
1995 MARCH 31, 1994
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 564,967 $ 133,281
Net realized loss from security transactions........... (116,538) (895)
Change in unrealized appreciation/(depreciation)
of investments........................................ 122,723 (571,117)
Net increase/(decrease) in net assets
resulting from operations......................... 571,152 (438,731)
DIVIDENDS TO SHAREHOLDERS FROM (NOTE F):
Net investment income.................................. (606,205) (92,043)
Distributions in excess of income...................... (8,865) -
Total distributions.................................... (615,070) (92,043)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 617,845 and 1,355,851
shares, respectively................................. 5,832,374 13,460,866
Value of 44,409 and 6,380 shares issued in
reinvestment of dividends,respectively................ 415,255 63,163
Cost of 554,945 and 122,587 shares repurchased,
respectively.......................................... (5,156,129) (1,221,739)
Total increase in net assets derived from capital
share transactions................................... 1,091,500 12,302,290
Total increase in net assets........................ 1,047,582 11,771,516
NET ASSETS:
Beginning of period.................................... 11,871,516 100,000**
End of period.......................................... $12,919,098 $11,871,516
</TABLE>
* Commencement of Operations.
** On October 1, 1993, the Fund sold 10,000 shares to a subsidiary of
Alex. Brown & Sons Incorporated for $100,000.
See accompanying Notes to Financial Statements.
-35-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED OCTOBER 1, 1993*
MARCH 31, THROUGH
1995 MARCH 31, 1994
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period... $9.50 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.40 0.14
Net realized and unrealized gain/(loss)
on investments......................... 0.05 (0.53)
Total from Investment Operations....... 0.45 (0.39)
LESS DISTRIBUTIONS:
Dividends from net investment income..... (0.43) (0.11)
Net asset value at end of period......... $9.52 $9.50
TOTAL RETURN............................... 5.12% (4.06)%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2).............................. 0.70% 0.29%(1)
Net investment income(3)................. 4.44% 3.84%(1)
SUPPLEMENTAL DATA:
Net assets at end of period (000)........ $12,919 $11,872
Portfolio turnover rate.................. 33% 9%
</TABLE>
*Commencement of Operations.
(1) Annualized.
(2) Without the waiver of advisory fees and reimbursement of expenses (Note B),
the ratio of expenses to average net assets would have been 1.85% and 2.46%
(annualized) for the year ended March 31,1995 and the period ended March 31,
1994, respectively.
(3) Without the waiver of advisory fees and reimbursement of expenses (Note B),
the ratio of net investment income to average net assets would have been
3.29% and 1.68% (annualized) for the year ended March 31,1995 and the period
ended March 3, 1994, respectively.
See accompanying Notes to Financial Statements.
-36-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Maryland Intermediate
Tax-Free Income Fund, Inc. (the "Fund") was organized as a Maryland Corporation
on July 23, 1993 and commenced operations October 1, 1993. The Fund is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company designed to provide current income
exempt from federal income taxes and Maryland state and local income taxes
consistent with preservation of principal within an intermediate-term maturity
structure by investing primarily in municipal obligations issued by the State of
Maryland and its political subdivisions,agencies or instrumentalities.
The Fund's concentration in securities involves greater risk than one that
broadly invests.
SECURITY VALUATION - Municipal bonds are valued on the basis of quotations
provided by a pricing service which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Securities or other assets for which market quotations are
not readily available are valued at their fair value so determined in good faith
by the Investment Advisor under procedures established and monitored by the
Board of Directors. Short-term obligations with maturities of 60 days or less
are valued at amortized cost which approximates market.
REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be required
on a daily basis to maintain as collateral the value of the securities subject
to the agreement at no less than the repurchase price. The agreement is
conditional upon the collateral being deposited under the Federal Reserve
book-entry system.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to the shareholders which will be sufficient
to relieve it from all or substantially all federal income and excise taxes. The
Fund's policy is to distribute to shareholders substantially all of its net
investment income and net realized capital gains.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes amortization of
premiums.
Costs incurred by the Fund in connection with its organization,
registration, and the initial public offering of shares have been deferred and
are being amortized on the straight-line method over a five-year period
beginning on the date on which the Fund commenced its investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp.("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at the annual rate of 0.35% of the first
$1 billion of the Fund's average daily net assets; 0.30% of the Fund's average
daily net assets in excess of $1 billion but not exceeding $1.5 billion; and
0.25% of the Fund's average daily net assets in excess of $1.5 billion.
-37-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Notes to Financial Statements (CONCLUDED)
ICC has agreed to reduce its aggregate fees attributable to the Fund or
make payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder of
any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain expenses
at not more than 0.70% of the Fund's average daily net assets. For the year
ended March 31, 1995, CC waived fees of $45,630 and reimbursed expenses of
$90,867, of which $69,925 is recorded as a receivable due from the advisor.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $16,037 for accounting services for the year ended March
31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $6,359 for transfer
agent services for the year ended March 31, 1995.
As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee calculated daily and paid monthly, at an annual rate
equal to 0.25% of the Fund's average daily net assets. For the year ended March
31, 1995, distribution fees aggregated $32,593. Alex. Brown received no
commissions from the Fund for the year ended March 31, 1995.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 30
million shares of $.001 par value common stock.
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment
securities, other than short-term obligations, aggregated $6,512,463 and
$3,976,886, respectively, for the year ended March 31, 1995.
At March 31, 1995, aggregated gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $29,296 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $477,690.
E. NET ASSETS - At March 31, 1995, net assets consisted of:
Paid-in-capital......... $13,484,925
Accumulated net realized
loss from security
transactions.......... (117,433)
Unrealized depreciation
of investments........ (448,394)
-----------
$12,919,098
F. DISTRIBUTIONS - Of the net investment income distributions paid monthly
by the Fund during the taxable year ended March 31, 1995, 96.30% qualify as
tax-exempt interest dividends for federal income tax purposes. Additionally,
there were no capital gains distributed by the Fund during the year.
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<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Independent Auditors' Report
The Board of Directors and Shareholders,
Flag Investors Maryland Intermediate Tax-Free
Income Fund,Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Maryland Intermediate Tax-Free Income Fund, Inc. as of March 31, 1995, the
related statements of operations for the year then ended and changes in net
assets and the financial highlights for the year then ended and for the period
October 1, 1993 (commencement of operations) to March 31, 1994. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
March 31, 1995 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
Maryland Intermediate Tax-Free Income Fund, Inc. as of March 31, 1995, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton,New Jersey
April 30,1995
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