[Flag Investors Logo]
FLAG INVESTORS
FAMILY OF FUNDS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Intermediate-Term Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares [Flag Investors Logo]
Tax-Free Income FLAG
Flag Investors Managed Municipal Fund Shares INVESTORS
Flag Investors Maryland Intermediate MARYLAND
Tax-Free Income Fund INTERMEDIATE
Current Income TAX-FREE
Flag Investors Cash Reserve Prime Shares INCOME FUND
P.O. Box 515 ANNUAL REPORT
Baltimore, Maryland 21203 MARCH 31, 1996
800-767-FLAG
Distributed by:
Alex. Brown & Sons
INCORPORATED
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
DIRECTORS AND OFFICERS
Richard T. Hale M. Elliott Randolph
Chairman President
Truman T. Semans Paul D. Corbin
Director Executive Vice President
James J. Cunnane Gary V. Fearnow
Director Vice President
John F. Kroeger Monica M. Hausner
Director Vice President
Louis E. Levy Edward J. Veilleux
Director Vice President
Eugene J. McDonald Brian C. Nelson
Director Vice President and Secretary
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Harry Woolf Laurie D. DePrine
Director Assistant Secretary
Investment Objective
An open-end mutual fund 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.
Investment Advisor
Investment Company Capital Corp.
135 East Baltimore Street
Baltimore, MD 21202
(800) 553-8080
Custodian
PNC Bank, N.A.
Transfer Agent
Investment Company Capital Corp.
Legal Counsel
Morgan, Lewis & Bockius LLP
Independent Auditors
Deloitte & Touche LLP
FUND HIGHLIGHTS (AS OF MARCH 31, 1996)
Portfolio Composition
SECTOR*
[pie chart appears here--plot points are listed below]
Transportation 1%
Housing 3%
Pre-refunded 6%
General Obligation--State 10%
Revenue 10%
Short-term Investments 11%
Hospital and Education 17%
General Obligation--Local 42%
QUALITY*
[pie chart appears here--plot points are listed below]
A 9%
AA 16%
AAA 60%
BBB 15%
Portfolio Data
Net Asset Value Per:
Class A Share $9.84
Institutional Share $9.93
Total Net Assets $19,133,564
Average Maturity 7.4 years
Average Duration 4.8 years
Maturity Breakdown:*
0-1 year 13%
1-5 years 10%
5-10 years 43%
10-15 years 19%
15+ years 15%
*Calculated as a percentage of the portfolio. The Quality Breakdown listed above
is calculated using Standard & Poor's ratings. The BBB classification includes
holdings that are not rated by Standard & Poor's. These holdings, however, are
rated by Moody's (see p. 5). These ratings are believed to be the most recent
ratings available as of March 31, 1996.
1
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Dear Shareholders:
We are pleased to report on the progress of your Fund for the year ended
March 31, 1996.
The past six-month period was one of distinct contrast for the municipal
bond market. After the ebullience of the fourth quarter of 1995, which saw
rates drift lower as concerns about tax reform subsided in the face of strong
demand and weak supply, the first quarter of 1996 witnessed an abrupt about-face
in the direction of interest rates (see chart below). Fears of renewed inflation
(apparent byproducts of surging job growth and rising commodity prices) sent
shock waves through the debt markets and caused bond prices to tumble. The
damage was devastating for long-term taxable bonds, especially Treasuries, which
came under abnormal selling pressure as speculators rushed to unwind leveraged
yen/dollar arbitrage trades. The municipal bond market, which enjoyed relatively
strong support from both retail and institutional buyers, primarily property and
casualty insurers, fared better.
Historical Yield Curves
3/31/94 - 3/31/96
[graph appears here--plot points listed below]
7-Year Municipal 30-Year Municipal
3/94 5.16% 6.07%
6/94 5.21 6.23
9/94 5.28 6.35
12/94 5.62 6.63
3/95 5.13 5.97
6/95 4.87 5.97
9/95 4.6 5.91
12/95 4.44 5.38
3/96 4.72 5.79
In this transitional environment for the debt markets, the Fund maintained
its forward progress and posted positive results. Indicative of its defensive,
intermediate-term bias and the attractiveness of this popular maturity range,
the Fund recorded a total return of 2.3% for the six months and 8.2% for the
twelve months ended March 31, 1996.
As indicated in the chart below, the Fund exceeded its Lipper peer group
average by a substantial margin for both the six- and twelve-month periods.
Within the Lipper Universe of Other States Intermediate Municipal Debt Funds,
the Fund's performance ranked #1 out of a universe of 68 comparable-purpose
funds for the year ended March 31, 1996.*
Specific total return comparisons are detailed below. These figures assume
the reinvestment of dividends and capital gains, but exclude the impact of any
sales charge.
Total Return Comparisons**
Weighted
Six Twelve Average
Periods ended 3/31/96: Months Months Maturity
Flag Investors Maryland
Intermediate Tax-Free
Income Fund 2.3% 8.2% 7.4 years
Lehman Brothers 7-Year
Municipal Bond Index 2.2% 8.1% 6.9 years
Lehman Brothers Long-Term
Municipal Bond Index 3.9% 9.2% 27.2 years
Lipper Other States
Intermediate
Municipal Debt
Funds Average 1.9% 6.6% n/a
*Lipper Analytical Services' Other States Intermediate Municipal Debt Funds
category includes municipal debt issues with dollar-weighted average maturities
of five to ten years that are exempt from taxation by a specified city or state.
This category links Maryland with 16 other states that do not have enough
intermediate-term bond funds to have a state specific category. Funds are
categorized according to investment objective and are ranked by total return
performance relative to other funds in their respective categories. Performance
figures used in these rankings do not include the impact of any sales charge.
**The unmanaged indices listed above are widely recognized as indicators of
performance in their respective sectors. Since investment return and principal
value will fluctuate, an investor's shares may be worth more or less than their
original cost when redeemed. Past performance is not an indicator of future
results. Please review the Additional Performance Information on page 4.
2
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Portfolio Considerations
After the Fund's remarkable return of 14.9% for the year ended December 31,
1995, we doubted seriously that the bond market could come back for an encore
and, absent further accommodation from the Federal Reserve, that rates could
fall much lower. Although encouraged by the large net inflow of approximately $6
million into the Fund, we have been reluctant to alter its defensive maturity
bias and subject its net asset value to needless market volatility.
In order to reduce the Fund's systematic risk level (susceptibility to
rising rates), we shortened the Fund's weighted average maturity from 8.5 years
to 7.4 years. Where appropriate, we applied new cash inflows toward cash
instruments and high coupon 4- and 5-year pre-refunded bonds which, escrowed
with U.S. government securities, tend to be less price sensitive than their
current coupon counterparts in periods of rising interest rates. While not borne
out in the performance results of the past six months, these defensive measures
have insulated the Fund well from the recent rise in rates. Moreover, they have
given us considerable flexibility to deploy reserves at higher rate levels.
Market Outlook
Like other capital markets, investor expectations coupled with traditional
supply and demand factors will continue to affect investment returns from
municipal bonds. For the balance of 1996, we are constructive on the overall
tone of the municipal bond markets. We expect many of the demand-side trends of
the past quarter to continue as investors grow more comfortable with the
inflation outlook, which we expect will stabilize at a 2.5% rate (CPI) well into
1997. We expect, also, that the recent back-up in rates will recede and prove to
have been a cyclical aberration in what will ultimately be an extended secular
decline in interest rates.
Although further rate cuts by the Federal Reserve may be months away, we
consider current tax-exempt rate levels for Maryland-domiciled municipals, at
75% to 80% of comparable ten-year U.S. Treasury yields, very attractive for the
high tax bracket Maryland investor (see chart top right). Moreover, the supply
side of the equation continues to be favorably influenced by a general
contraction in the aggregate supply of tax-exempt bonds, by an estimated $47
billion in the United States in 1995, as maturities, refundings and redemptions
run their course.
After-Tax Yield Comparison
AA-Rated G.O. vs. U.S. Treasury
As of 3/31/96
[graph appears here--plot points are listed below]
G.O. Treasury
1 Year 3.52% 3.269%
2 Year 3.92 3.500
3 Year 4.18 3.567
4 Year 4.33 3.627
5 Year 4.48 3.684
7 Year 4.72 3.741
10 Year 5.02 3.824
15 Year 5.52 3.875
20 Year 5.71 3.927
25 Year 5.76 3.978
30 Year 5.79 4.03
Although the topic of tax reform has abated to some degree as budget
negotiations became mired in partisan rhetoric, we cannot ignore the reality
that issues surrounding tax reform may continue to adversely affect the
municipal bond market from time to time. Whatever the outcome, we are confident
that the Fund's intermediate-term focus is aptly suitable for most tax-exempt
investors until these tax reform issues are fully resolved.
Dividend Policy
The Fund's monthly dividend remains at $0.0375. In view of its inherently
defensive bias, the Fund has broad appeal for Maryland investors whose portfolio
objectives require a high level of tax-exempt current yield and moderate
principal volatility. We appreciate the confidence you have placed in us.
Sincerely,
/s/ M. Elliott Randolph, Jr. /s/ Paul D. Corbin
M. Elliott Randolph, Jr. Paul D. Corbin
President Executive Vice President
April 15, 1996
3
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth
AVERAGE ANNUAL TOTAL RETURN*
% Return With
Periods ended 3/31/96: Sales Charge**
One Year 6.58%
Since Inception (10/1/93) 2.93%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
October 1, 1993 - March 31, 1996
[graph appears here--plot points listed below]
Flag Investors
Maryland Lehman Brothers
Lehman Brothers Intermediate 7-Year
Municipal Bond Tax-Free Municipal Bond
Index Income Fund Index
10/93 $10,000 $ 9,850 $10,000
3/94 9,565 9,450 9,714
9/94 9,737 9,541 9,911
3/95 10,277 9,993 10,330
9/95 10,826 10,508 10,928
3/96 11,137 10,748 11,164
*These figures assume the reinvestment of dividends and capital gains
distributions. The Lehman Brothers Municipal Bond Index and the Lehman Brothers
7-Year Municipal Bond Index are unmanaged indices and are widely recognized as
indicators of performance in the intermediate-term municipal bond sector. The
average maturity of the Lehman Brothers Municipal Bond Index is 14.4 years and
the average maturity of the Lehman Brothers 7-Year Municipal Bond Index is 6.9
years, as compared to the Fund's 7.4-year weighted average maturity. Past
performance is not an indicator of future results.
**Assumes maximum sales charge of 1.50%.
of a $10,000 hypothetical investment from the Fund's inception through the most
recent fiscal year-end and must reflect the impact of the Fund's total expenses
and its currently effective 1.50% maximum sales charge.
While this table is required by SEC rules, such comparisons are of limited
utility since the indices shown are not adjusted for sales charges and ongoing
management, distribution and operating expenses applicable to the Fund. An
investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The Fund's total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
4
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF NET ASSETS MARCH 31, 1996
<TABLE>
<CAPTION>
Ratings Percent
Par (Moody's Value of Net
(000) S&P(1) (Note A) Assets
<C> <S> <C> <C> <C>
MUNICIPAL BONDS - 90.9%
General Obligation - 57.0%
$500 Anne Arundel County, MD, Solid Waste Project
4.50%, 2/1/03 Aa/AA+ $ 494,180 2.6%
500 Baltimore County, MD, Metropolitan District, 64th Issue,
Callable 8/1/03 @ $102
4.50%, 8/1/06 Aaa/AAA 476,095 2.5
500 Baltimore County, MD, Metropolitan District, 61st Issue
6.80%, 4/1/00 Aaa/AAA 543,360 2.8
350 Baltimore County, MD, Mortgage Revenue,
Callable 11/1/03 @ $102
6.60%, 11/1/14 NR*/AAA 363,052 1.9
400 Calvert County, MD, Refunding Consolidated Public
Improvement Project, Callable 7/15/03 @ $102
4.80%, 7/15/07 Aa/A+ 382,284 2.0
200 Carroll County, MD, Refunding Consolidated Public
Improvement Project
4.60%, 11/1/03 Aa/AA 198,274 1.0
250 Cecil County, MD (FGIC Insured), Refunding Consolidated
Public Improvement Project, Callable 12/1/03 @ $102
5.00%, 12/1/06 Aaa/AAA 248,350 1.3
500 Charles County, MD, Refunding Consolidated Public
Improvement Project, Series 94
6.00%, 6/1/99 Aa/AA- 524,620 2.7
400 Frederick County, MD, Refunding, Series "C"
4.60%, 8/1/03 Aa/AA- 396,636 2.1
500 Frederick, MD, Refunding and Improvement (FGIC Insured)
5.80%, 12/1/02 Aaa/AAA 531,620 2.7
200 Howard County, MD, Refunding Consolidated
Public Improvement Project, Series "A"
4.875%, 8/15/02 Aaa/AA+ 203,442 1.0
500 Howard County, MD, Unlimited Consolidated
Public Improvement Project, Series "A"
Pre-refunded 5/15/00 @ $100
7.00%, 5/15/08 Aaa/AAA 547,560 2.8
500 Kent County, MD, College, Project & Refunding-
Washington College, Callable 7/1/99 @ $102
7.70%, 7/1/18 Baa/NR** 544,140 2.8
375 Laurel, MD, Refunding, Series "A" Project, (MBIA Insured),
Callable 7/1/01 @ $102
6.60%, 7/1/03 Aaa/AAA 413,126 2.2
500 Maryland National Capital Park & Planning Commission
(Prince George's County), Callable 7/1/05 @ $101
5.00%, 7/1/08 Aa/AA 490,980 2.6
</TABLE>
5
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF NET ASSETS (continued) MARCH 31, 1996
<TABLE>
<CAPTION>
Ratings Percent
Par (Moody's Value of Net
(000) S&P(1) (Note A) Assets
<C> <S> <C> <C> <C>
General Obligation - (continued)
$500 Maryland State and Local Facilities Loan, Second Series,
Callable 4/15/03 @ $100
5.00%, 4/15/04 Aaa/AAA $ 507,400 2.7%
Maryland State and Local Facilities Loan, Third Series,
Callable 7/15/01 @ $101
600 4.30%, 7/15/03 Aaa/AAA 584,202 3.1
300 6.50%, 7/15/04 Aaa/AAA 326,196 1.7
100 Maryland State Capital Improvement and Refunding,
Callable 5/15/02 @ $102
6.00%, 5/15/07 Aaa/AAA 106,420 0.6
450 Maryland State Capital Improvement and Refunding
4.90%, 4/15/03 Aaa/AAA 456,683 2.4
600 Montgomery County, MD, Refunding Consolidated Public
Improvement Project, Series "A"
4.50%, 10/1/03 Aaa/AAA 594,348 3.1
500 Ocean City, MD, Refunding (MBIA Insured)
5.00%, 3/15/03 Aaa/AAA 506,440 2.6
250 Prince George's County, MD, Refunding Consolidated
Public Improvement Project, Series "A" (MBIA Insured),
Callable 3/1/02 @ $102
5.40%, 9/1/02 Aaa/AAA 261,003 1.4
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 259,300 1.4
250 St. Mary's County, MD, Metropolitan Commission,
Callable 11/1/03 @ $102
5.65%, 11/1/07 A/A+ 258,398 1.4
250 Washington Suburban Sanitary District, MD
Pre-refunded 11/1/01 @ $102
6.40%, 11/1/04 Aaa/AAA 276,343 1.4
360 Washington Suburban Sanitary District, MD
8.00%, 1/1/02 Aa1/AA 420,250 2.2
10,914,702 57.0
Other Revenue - 32.5%
100 Baltimore, MD, Convention Center,
Callable 9/1/04 @ $100(FGIC Insured)
5.60%, 9/1/06 Aaa/AAA 102,902 0.5
245 Charles County, MD, Housing Revenue (MBIA Insured),
Callable 7/1/03 @ $102
5.375%, 7/1/09 Aaa/AAA 245,081 1.3
</TABLE>
6
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF NET ASSETS (continued) MARCH 31, 1996
<TABLE>
<CAPTION>
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P(1) (Note A) Assets
<C> <S> <C> <C> <C>
Other Revenue - (continued)
$400 Maryland State Center for Physics Headquarters
5.80%, 1/1/01 NR*/BBB $ 401,851 2.2%
100 Maryland State Community Development Administration,
Single Family Program, Third Series
4.55%, 4/1/02 Aa/NR* 98,924 0.5
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Frederick Memorial Hospital
(FGIC Insured)
4.70%, 7/1/02 Aaa/AAA 199,236 1.0
500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Good Samaritan Hospital
5.40%, 7/1/04 A1/A 504,930 2.6
750 Maryland State Health and Higher Education Facilities
Authority, Revenue for Greater Baltimore Medical Center,
Variable Rate
3.30% at 3/31/96, 7/1/25 (Weekly put option) A1/NR* 750,000 3.9
555 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* 584,670 3.1
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Howard County General Hospital
4.55%, 7/1/98 Baa1/BBB 200,328 1.0
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 294,786 1.5
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Suburban Hospital
4.75%, 7/1/03 A1/A 292,788 1.5
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 152,631 0.8
250 Maryland State Health and Higher Education Facilities
Authority, Revenue for Washington County Hospital
(MBIA Insured)
4.45%, 1/1/02 Aaa/AAA 245,972 1.3
Maryland State Stadium Authority Lease,
Ocean City Convention Center
300 4.80%, 12/15/03 Aa/AA 301,131 1.6
200 4.80%, 12/15/05 Aa/AA 197,300 1.0
</TABLE>
7
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF NET ASSETS (concluded) MARCH 31, 1996
<TABLE>
<CAPTION>
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P(1) (Note A) Assets
<C> <S> <C> <C> <C>
Other Revenue - (concluded)
$400 Maryland State Transportation Authority,
Transportation Facility Projects Revenue
6.625%, 7/1/03 Aaa/AAA $ 422,056 2.2%
300 Montgomery County, MD, Maryland Housing Opportunities
Commission, Series "A," Callable 7/1/03 @ $102
4.70%, 7/1/04 Aa/NR* 296,547 1.6
350 Northeast, MD, Waste Disposal Authority Recovery Revenue
(MBIA Insured)
6.65%, 1/1/97 Aaa/AAA 358,117 2.0
500 University of Maryland Systems Auxiliary Facilities &
Tuition Revenue, Series "B"
Pre-refunded 10/1/02 @ $102
6.40%, 4/1/06 Aa/AAA 555,750 2.9
6,205,000 32.5
Transportation Revenue - 1.4%
275 Washington, D.C., Metropolitan Area Transportation
Authority for Gross Revenue (FGIC Insured)
4.50%, 1/1/01 Aaa/AAA 273,471 1.4
Total Municipal Bonds
(Cost $17,407,140) 17,393,173 90.9
REPURCHASE AGREEMENT - 11.4%
2,177 Goldman Sachs & Co., 5.3%
Dated 3/29/96, to be repurchased on 4/1/96, collateralized by
U.S. Treasury Bonds with a market value of $2,199,517.
(Cost $2,177,000) 2,177,000 11.4
Total Investment in Securities
(Cost $19,584,141)** 19,570,173 102.3
Other Liabilities in Excess of Other Assets, Net (436,609) (2.3)
Net Assets--100.0% $19,133,564 100.0%
Net Asset Value Per:
Class A Share ($12,065,983 / 1,225,743 shares outstanding) $9.84
Institutional Share
($7,067,581 / 711,488 shares outstanding) $9.93
Maximum Offering Price Per:
Class A Share ($9.84 / 0.985) $9.99
Institutional Share $9.93
</TABLE>
(1) The Moody's and Standard & Poor's ratings are believed to be the most recent
ratings available as of March 31, 1996.
* Not rated.
** Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
8
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
INVESTMENT INCOME (NOTE A):
Interest $ 716,618
EXPENSES:
Investment advisory fee (Note B) 51,908
Legal 36,987
Distribution fee (Note B) 32,318
Printing and postage 28,581
Audit 24,901
Accounting fee (Note B) 17,831
Organizational expense (Note A) 10,252
Transfer agent fees (Note B) 9,919
Custodian fee 8,168
Miscellaneous 8,025
Registration fees 7,215
Pricing 5,000
Directors' fees 999
Insurance 436
Total expenses 242,540
Less: Fees waived and expenses reimbursed (Note B) (138,955)
Net expenses 103,585
Net investment income 613,033
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions (2,588)
Change in unrealized appreciation of investments 434,427
Net realized and unrealized gain on investments 431,839
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,044,872
See accompanying Notes to Financial Statements.
9
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
March 31, March 31,
1996 1995
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 613,033 $ 564,967
Net loss from security transactions (2,588) (116,538)
Change in unrealized appreciation
of investments 434,427 122,723
Net increase in net assets resulting
from operations 1,044,872 571,152
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares (528,695) (606,205)
Flag Investors Institutional Shares (60,193) --
Distributions in excess of income (Class A Shares) (68,882) (8,865)
Total distributions (657,770) (615,070)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 10,461,018 5,832,374
Value of shares issued in reinvestment of dividends 402,890 415,255
Cost of shares repurchased (5,036,544) (5,156,129)
Total increase in net assets derived from
capital share transactions 5,827,364 1,091,500
Total increase in net assets 6,214,466 1,047,582
NET ASSETS:
Beginning of period 12,919,098 11,871,516
End of period $19,133,564 $12,919,098
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year For the Year For the Period
Ended Ended October 1, 1993*
March 31, March 31, through
1996 1995 March 31, 1994
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 9.52 $ 9.50 $ 10.00
Income from Investment Operations:
Net investment income 0.39 0.40 0.14
Net realized and unrealized gain/(loss)
on investments 0.38 0.05 (0.53)
Total from Investment Operations 0.77 0.45 (0.39)
Less Distributions:
Dividends from net investment income (0.39) (0.40) (0.11)
Distributions in excess of income (0.06) (0.03) --
Net asset value at end of period $ 9.84 $ 9.52 $ 9.50
Total Return(1) 8.20% 5.12% (4.06)%
Ratios to Average Net Assets:
Expenses(2) 0.70% 0.70% 0.29%**
Net investment income(3) 4.09% 4.44% 3.84%**
Supplemental Data:
Net assets at end of period (000) $12,066 $12,919 $11,872
Portfolio turnover rate 8.79% 33.00% 8.51%
</TABLE>
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales loads.
(2) Without the waiver of advisory fees and reimbursement of expenses (Note B),
the ratio of expenses to average net assets would have been 1.69%, 1.85% and
2.46% for the years ended March 31, 1996, 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
3.13%, 3.29% and 1.68%for the years ended March 31, 1996, 1995, and the
period ended March 31, 1994, respectively.
See accompanying Notes to Financial Statements.
11
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[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(For a share outstanding throughout the period)
For the Period
November 2, 1995*
through
March 31, 1996
Per Share Operating Performance:
Net asset value at beginning of period $ 9.93
Income from Investment Operations:
Net investment income 0.15
Net realized and unrealized loss
on investments (0.03)
Total from Investment Operations 0.12
Less Distributions:
Dividends from net investment income
and short-term gains (0.12)
Net asset value at end of period $ 9.93
Total Return 2.83%**
Ratios to Average Net Assets:
Expenses(1) 0.45%**
Net investment income(2) 4.45%**
Supplemental Data:
Net assets at end of period (000) $7,068
Portfolio turnover rate 8.79%
* Commencement of operations.
** Annualized.
(1) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.30% for the period November 2, 1995
through March 31, 1996.
(2) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 3.67% for the period November
2, 1995 through March 31, 1996.
See accompanying Notes to Financial Statements.
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[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
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, by
offering Class A Shares, which are subject to a maximum front-end sales
charge of 1.50% and a 0.25% distribution fee. On November 2, 1995, the Fund
began offering Institutional Shares, which are not subject to a front-end
sales charge or a distribution fee. 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 invests more
broadly.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary
of significant accounting policies followed by the Fund.
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 face value so determined in good
faith by the Investment Advisor under procedures established and monitored by
the Board of Directors. Short-term obligations with maturities of 60 days or
less are valued at amortized cost which approximates market.
Repurchase Agreements - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at 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
under Sub-chapter M of the Internal Revenue Code and to make requisite
distributions to the shareholders that will be sufficient to relieve it from
all or substantially all federal income and excise taxes. The Fund's policy
is to distribute to shareholders substantially all of its long-term taxable
net investment income on a monthly basis and net realized capital gains
annually, if any.
Other - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis. Costs incurred by the Fund
in connection with its organization, registration and the initial public
offering of shares have been deferred and are being amortized on the
straight-line method over a five-year period beginning on the date on which
the Fund commenced its investment activities.
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
13
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[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
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 next $500 million of the Fund's
average daily net assets; and 0.25% of the Fund's average daily net assets in
excess of $1.5 billion.
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. ICChas
voluntarily agreed to waive its fees to the extent required to maintain
expenses at no more than 0.70% of the average daily net assets for Class A
Shares and 0.45% for Institutional Shares. For the year ended March 31, 1996,
ICC waived fees of $51,908 and reimbursed expenses of $87,047.
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 $17,831 for accounting services for the year ended
March 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $9,919 for
transfer agent services for the year ended March 31, 1996.
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 Class A
Shares. For the year ended March 31, 1996, distribution fees aggregated
$32,318. Alex. Brown received no commissions from the Fund for the year
ended March 31, 1996.
Flag Investors/ISI Fund complex has adopted a retirement plan for eligible
Directors. The pension expense and liability for the year ended March 31,
1996 were not material.
C. Capital Share Transactions - The Fund is authorized to issue up to 35 million
shares of $.001 par value common stock (25 million Class A, 2 million Class
B, 5 million Institutional and 3 million undesignated). Transactions in
shares of the Fund were as follows:
Class A Shares
For the Year Ended March 31,
1996 1995
Shares sold 318,331 617,845
Shares issued to share-
holders on reinvestment
of dividends 39,023 44,409
Shares redeemed (488,564) (554,945)
Net increase/(decrease) in
shares outstanding (131,210) 107,309
Proceeds from sale
of shares $ 3,133,248 $ 5,832,374
Reinvested dividends 382,490 415,255
Net asset value of shares
redeemed (4,810,545) (5,156,129)
Net increase/(decrease)
from capital share
transactions $(1,294,807) $ 1,091,500
Institutional Shares
For the Period
November 2, 1995*
through
March 31, 1996
Shares sold 731,839
Shares issued to shareholders
on reinvestment of dividends 2,037
Shares redeemed (22,388)
Net increase in shares
outstanding 711,488
Proceeds from sale
of shares $7,327,770
Reinvested dividends 20,400
Net asset value of shares
redeemed (225,999)
Net increase from capital share
transactions $7,122,171
*Commencement of operations.
14
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[FLAG INVESTORS LOGO]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
D. Investment Transactions - Purchases and sales of investment securities, other
than short-term obligations, aggregated $5,680,137 and $1,226,844,
respectively, for the year ended March 31, 1996.
At March 31, 1996, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $125,072 and aggregate
gross unrealized depreciation for all securities in which there is an excess
of tax cost over value was $139,040.
E. Net Assets - At March 31, 1996, net assets for Flag Investors Class A Shares
consisted of:
Paid-in capital $12,198,984
Accumulated net
realized loss from
security transactions (120,021)
Unrealized appreciation
of investments 64,767
Overdistribution of net
investment income (77,747)
$12,065,983
At March 31, 1996, net assets for Flag Investors Institutional Shares
consisted of:
Paid-in capital $7,122,171
Unrealized depreciation
of investments (78,735)
Undistributed net
investment income 24,145
$7,067,581
F. Distributions - Of the net investment income distributions paid monthly by
the Fund during the taxable year ended March 31, 1996, 94.78% qualify as
tax-exempt interest dividends for federal income tax purposes. Additionally,
there were no capital gains distributed by the Fund during the year.
G. Capital Loss Carryforward - At March 31, 1996, there was a tax capital loss
carryforward of $120,021 of which $36,982 expires in 2003 and $83,039 expires
in 2004. This carryforward will be used to offset future net capital gains,
if any.
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1996, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, the financial
highlights of the Class AShares for each of the years in the two-year period
then ended and the period October 1, 1993 (commencement of operations) to March
31, 1994 and the financial highlights of the Institutional Shares for the period
November 2, 1995 (commencement of operations) to March 31, 1996. 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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, 1996
