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[LOGO]
ALEX. BROWN
CAPITAL ADVISORY
& TRUST
MARYLAND INTERMEDIATE
TAX-FREE INCOME SHARES
(A Class of Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc.)
Prospectus -- January 10, 1997
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 will be between 3 and 10 years. (See
"Investment Program.")
Alex. Brown Capital Advisory & Trust Shares of the Fund ("ABCAT Shares")
are available solely for the discretionary accounts of Alex. Brown Capital
Advisory & Trust Company and its affiliates. (See "How to Invest in ABCAT
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, 1996, as amended through
January 10, 1997 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) 767-3524.
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.
TABLE OF CONTENTS
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Page
Fund Expenses ...................................... 2
Financial Highlights ............................... 3
Investment Program ................................. 5
Investment Restrictions ............................ 11
How to Invest in ABCAT Shares ...................... 11
How to Redeem ABCAT Shares ......................... 12
Dividends and Taxes ................................ 13
Management of the Fund ............................. 16
Investment Advisor ................................. 17
Distributor ........................................ 18
Custodian, Transfer Agent and Accounting Services .. 18
Performance Information ............................ 19
General Information ................................ 20
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.
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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.
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FUND EXPENSES
..............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
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Maximum Sales Charge Imposed on Purchases ............... None
Maximum Sales Charge Imposed on Reinvested Dividends .... None
Maximum Deferred Sales Charge ........................... None
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</TABLE>
ANNUAL FUND OPERATING EXPENSES
(NET OF FEE WAIVERS AND REIMBURSEMENTS):
(as a percentage of average daily net assets)
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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%*
==========
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</TABLE>
* Alex. Brown Capital Advisory & Trust Company intends, consistent with
applicable legal requirements, to reimburse its clients at the account level
in an amount such that the additional cost for client assets invested in
ABCAT Shares is .20%. Absent this arrangement, clients would be subject to
the expenses of the Fund shown above. In this regard, 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 ABCAT Shares' average daily net assets. Absent fee
waivers and/or reimbursements, Management Fees would be .35%, Other Expenses
would be .95% and Total Operating Expenses would be 1.30% of the ABCAT
Shares' average daily net assets.
EXAMPLE:
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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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* 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 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. (For
more complete descriptions of the various costs and expenses, see "How to Invest
in ABCAT Shares," "Investment Advisor" and "Distributor.") The ABCAT Shares have
not been offered prior to the date of this Prospectus. Accordingly, 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 Class A Shares,
another class of shares offered by the Fund, for the fiscal year ended March 31,
1996, less 12b-1 fees of .25%.
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Financial Highlights
The Fund has not offered the ABCAT Shares prior to the date of this
Prospectus. However, the Fund has offered Flag Investors Class A Shares since
October 1, 1993 and Flag Investors Institutional Shares since November 2, 1995.
Historical financial information about the Fund is not fully applicable to the
ABCAT Shares because the expenses paid by the Fund in the past differ from those
the ABCAT 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 have been derived from the Fund's financial statements for its other
classes of shares for the periods indicated and, except for the financial
statements for the six-month period ended September 30, 1996, which are
unaudited, have been audited by Deloitte & Touche LLP, independent auditors. The
financial statements and related notes for the fiscal year ended March 31, 1996
and the report thereon of Deloitte & Touche LLP, and the unaudited financial
statements for the six-month period ended September 30, 1996, are included in
the Statement of Additional Information. Additional performance information for
the Fund's other classes of shares is contained in the Fund's Annual Report for
the fiscal year ended March 31, 1996 and its Semi-Annual Report for the
six-month period ended September 30, 1996, each of which can be obtained at no
charge by calling the Fund at (800) 767-3524.
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(For a share outstanding throughout each period)
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Flag Investors
Institutional Shares Flag Investors Class A Shares
--------------------------------- --------------------------------------------------------------
For the Six For the Six
Months Ended For the Period Months Ended For the Period
September 30, November 2, 1995* September 30, October 1, 1993*
1996 through 30, 1996 For the Year Ended through
(Unaudited) March 31, 1996 Unaudited March 31, 1996 March 31, 1995 March 31, 1994
------------- ----------------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period .. $ 9.93 $ 9.93 $ 9.84 $ 9.52 $ 9.50 $ 10.00
--------- --------- --------- ---------- ---------- ----------
Income from Investment
Operations:
Net investment income ... 0.26 0.15 0.15 0.39 0.40 0.14
Net realized and unrealized
gain/(loss) on
investments .......... 0.04 (0.03) (0.06) 0.38 0.05 (0.53)
--------- --------- --------- ---------- ---------- ----------
Total from Investment
Operations ........... 0.22 0.12 0.21 0.77 0.45 (0.39)
--------- --------- --------- ---------- ---------- ----------
Less Distributions:
Dividends from net
investment income and
short-term gains ...... (0.24) (0.12) (0.15) (0.39) (0.40) (0.11)
Distributions in excess of
income ............... -- -- (0.08) (0.06) (0.03) --
--------- --------- --------- ---------- ---------- ----------
Total Distributions ..... (0.24) (0.12) (0.45) (0.43) (0.11) (0.23)
--------- --------- --------- ---------- ---------- ----------
Net asset value at end of
period ............... $ 9.91 $ 9.93 $ 9.82 $ 9.84 $ 9.52 $ 9.50
========= ========= ========= ========== ========== ==========
Total Return** ............. 2.23% 2.83% 2.13% 8.20% 5.12% (4.06)%
Ratios to Average Daily
Net Assets:
Expenses(1) ............. 0.45%(2) 0.45%(2) 0.70%(2) 0.70% 0.70% 0.29%(2)
Net investment income(3) . 4.60%(2) 4.45%(2) 4.35%(2) 4.09% 4.44% 3.84%(2)
Supplemental Data:
Net assets at end of period
(000) ................ $11,820 $7,068 $11,916 $12,066 $12,919 $11,872
Portfolio turnover rate . 18.96% 8.79% 18.96% 8.79% 33.00% 8.51%
</TABLE>
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* Commencement of operations.
** Total return does not reflect any applicable sales charges.
(1) Without the waiver of advisory fees and reimbursement of expenses, the ratio
of expenses to average daily net assets would have been 1.37% (annualized),
1.69%, 1.85% and 2.46% (annualized) for the Flag Investors Class A Shares
for the six months ended September 30, 1996, the years ended March 31, 1996
and March 31, 1995 and the period ended March 31, 1994, respectively, and
1.12% (annualized) and, 1.30% (annualized) for the Flag Investors
Institutional Shares for the six months ended September 30, 1996 and the
period ended March 31, 1996, respectively.
(2) Annualized.
(3) Without the waiver of advisory fees and reimbursement of expenses, the ratio
of net investment income to average daily net assets would have been 3.68%
(annualized), 3.13%, 3.29% and 1.68% (annualized) for the Flag Investors
Class A Shares for the six months ended September 30, 1996, the years ended
March 31, 1996 and March 31, 1995 and the period ended March 31, 1994,
respectively, and 3.93% (annualized) and 3.67% (annualized) for the Flag
Investors Institutional Shares for the six months ended September 30, 1996
and the period ended March 31, 1996, respectively.
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Investment Program
...............................................................................
INVESTMENT OBJECTIVE, 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 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 (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
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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 between 3 and 10 years. 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 by S&P or Moody's, 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 by S&P or Moody's 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 by S&P or Moody's, 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 in the
Statement of Additional Information.
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.
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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
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
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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 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
(i) may pay a fixed, floating or variable rate of interest; (ii) 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 (iii) 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
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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 the participation interests 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.
..............................................................................
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
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 estab-
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lished 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
When-issued securities are securities purchased for delivery beyond the
normal settlement date at a stated price and yield. The Fund will generally
not pay for such securities or start earning interest on them until they are
received. When-issued commitments will not be used for speculative purposes
and will be entered into only with the intention of actually acquiring the
securities. 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.
..............................................................................
SPECIAL CONSIDERATIONS RELATING TO MARYLAND MUNICIPAL SECURITIES
The Fund's concentration in securities issued by the State of Maryland and
its political subdivisions, agencies and instrumentalities involves greater
risk than a fund broadly invested across many states and municipalities. In
particular, changes in economic conditions and governmental policies of the
State of Maryland and its municipalities could adversely affect the value of
the Fund and the securities held by it. For further description of these
risks, see "Risk Factors Associated with a Maryland Portfolio" in the
Statement of Additional Information.
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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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How to Invest in ABCAT Shares
Alex. Brown Capital Advisory & Trust Company and its affiliates may acquire
ABCAT Shares on behalf of their discretionary accounts by placing orders with
the Fund's distributor (the "Distributor"). Beneficial ownership of ABCAT Shares
will be reflected on books maintained by Alex. Brown Capital Advisory & Trust
Company or an affiliate. There is no minimum for initial or subsequent
investments in ABCAT Shares.
It is the responsibility of Alex. Brown Capital Advisory & Trust Company
and its affiliates to transmit orders for ABCAT Share purchases and to deliver
required funds to the Distributor. Orders for purchases of ABCAT
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Shares are accepted on any day on which the New York Stock Exchange is open
for business (a "Business Day"). Purchase orders for ABCAT Shares will be
executed at the net asset value per share next determined after receipt of
the purchase order and immediately available funds. The Fund reserves the
right to suspend the sale of ABCAT Shares at any time or reject any order.
The net asset value per share is determined 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 its
share of the Fund's assets, deducting all liabilities, including liabilities
attributable to that specific class, and dividing the resulting amount by the
number of then outstanding shares of the class. For this purpose, portfolio
securities 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.
Such procedures may include the use of an independent pricing service which uses
prices based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and 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.
In the interest of economy and convenience and because of the operating
procedures for the ABCAT Shares, certificates representing such shares will
not be issued. Beneficial owners of ABCAT Shares ("Shareholders") will have
the same rights and ownership with respect to such shares as if certificates
had been issued.
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How to Redeem ABCAT Shares
ABCAT Shares may be redeemed by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, as appropriate, on any
Business Day by transmission of a redemption order through the Distributor, or
by regular or express mail to the Fund's transfer agent (the "Transfer
Agent") at its address listed under "Custodian, Transfer Agent and Accounting
Services." A redemption is effected at the net asset value per
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share next determined after receipt of the order in proper form. Redemption
orders received after 4:00 p.m. (Eastern Time), or the close of the New York
Stock Exchange, whichever is earlier, will be effected at the net asset value
next determined on the following Business Day. Payment for redeemed ABCAT
Shares will be made to, or at the direction of, Alex. Brown Capital Advisory
& Trust Company or an affiliate, as appropriate, for the benefit of
Shareholders. Payment will be made as promptly as feasible and, under most
circumstances, within three Business Days.
Dividends payable up to the date of the redemption of ABCAT Shares will be
paid on the next dividend payment date.
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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 other arrangements are made, 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 ABCAT Shares at net
asset value.
..............................................................................
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 continue to qualify as a "regulated investment
company" under the Code and to distribute to its investors all of its net
13
<PAGE>
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. The Fund will provide advice annually as to
the federal income tax consequences of distributions made during the year.
Dividends derived from the Fund's net exempt-interest income and
designated by the Fund as exempt-interest dividends may be treated by
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 ABCAT 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 ABCAT
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
14
<PAGE>
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,
regardless of whether such distributions are paid in cash or reinvested in
additional ABCAT 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 ABCAT Shares.
Ordinarily, Shareholders will include all dividends declared by the Fund
as income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
Shareholders and paid by the Fund in the year in which the dividends were
declared.
The Fund will provide advice annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult their tax advisors concerning the application of state and local
taxes to investments in the Fund.
The sale, exchange or redemption of ABCAT Shares is a taxable event 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 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 ("Mary
15
<PAGE>
land Exempt Obligations"), will be exempt from Maryland state and local
income taxes when distributed to a Shareholder. 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
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 of an issuer other than the State of
Maryland, its political subdivisions, or authorities is a preference item
taken into account for this purpose. 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.
..............................................................................
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
16
<PAGE>
Fund's executive officers and to the Advisor. Two Directors and all of the
officers of the Fund are officers or employees of the Distributor or the
Advisor. The other Directors of the Fund have no affiliation with the
Distributor or the Advisor.
The Fund's Directors and officers are as follows:
*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
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Scott J. Liotta Vice President
Rebecca W. Rimel Director Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
Laurie D. Collidge Assistant Secretary
- ------
* Messrs. Hale and Semans are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act of 1940 (the
"1940 Act").
==============================================================================
Investment Advisor
Investment Company Capital Corp. ("ICC"), the Fund's investment advisor,
is an indirect subsidiary of Alex. Brown Incorporated (described below) and
an affiliate of Alex. Brown Capital Advisory & Trust Company. ICC is also the
investment advisor to, and the Distributor 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 $ 5.3 billion of net assets
as of November 30, 1996. The address of ICC is 1 South 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 ABCAT Shares' average daily net assets. For the fiscal year ended March
31, 1996, ICC waived all advisory fees, amounting to $51,908, and reimbursed
expenses of $87,047.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")
17
<PAGE>
...............................................................................
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 22 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 17 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.
===============================================================================
Distributor
Alex. Brown & Sons Incorporated ("Alex Brown"), 1 South Street, Baltimore,
Maryland 21202, acts as distributor of each class of the Fund's shares. Alex.
Brown is an investment banking firm which offers a broad range of investment
services to individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated, which has engaged directly
and through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the ABCAT Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to
individuals and entities other than Fund shareholders.
===============================================================================
Custodian, Transfer Agent and
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. ICC, 1 South Street, Baltimore
Maryland 21202 is the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. As compensation for providing
18
<PAGE>
accounting services for the fiscal year ended March 31, 1996, ICC received
from the Fund a fee equal to .12% of the Fund's average daily net assets. (See
the Statement of Additional Information.) ICC also serves as the Fund's
investment advisor.
===============================================================================
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 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.
19
<PAGE>
Performance is generally a function of the type and quality of instruments
held by the Fund, operating expenses and market conditions.
==============================================================================
GENERAL INFORMATION
..............................................................................
DESCRIPTION OF SHARES
The Fund is an open-end management investment company organized under the
laws of the State of Maryland on July 23, 1993 and is authorized to issue 40
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 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 fiscal year end of the Fund is March 31.
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 "Alex. Brown Capital
Advisory & Trust Maryland Intermediate Tax-Free Income Shares." The Board has
no present intention of establishing any additional series of the Fund but
the Fund does have two other classes of shares in addition to the shares
offered hereby: "Flag Investors Maryland Intermediate Tax-Free Income Fund
Class A Shares", and "Flag Investors Maryland Intermediate Tax-Free Income
Fund Institutional Shares". Additional information concerning the Fund's
other classes of shares may be obtained by calling Alex. Brown at (800)
767-3524. 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 ABCAT 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
20
<PAGE>
meeting of shareholders be held for the purpose of considering the removal of
a Director from office, and if such a request is made, the Fund will assist
with shareholder communications in connection with the meeting.
..............................................................................
REPORTS
The Fund furnishes 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 ABCAT Shares should contact
their account manager at Alex. Brown Capital Advisory & Trust Company.
21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
1 South 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,
1 SOUTH STREET, BALTIMORE, MARYLAND 21202, OR
BY CALLING (800) 767- FLAG.
Statement of Additional Information Dated: August 1, 1996,
as amended through January 10, 1997
Relating to Prospectuses Dated:
August 1, 1996 -- Relating to the Flag Investors Class A Shares and the
Flag Investors Institutional Shares
and
January 10, 1997 -- Relating to the Alex. Brown Capital Advisory & Trust Shares
<PAGE>
TABLE OF CONTENTS
Page
----
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.............................. 20
8. Brokerage................................................ 24
9. Capital Stock............................................ 25
10. Semi-Annual Reports...................................... 26
11. Custodian, Transfer Agent and Accounting Services ....... 26
12. Independent Auditors .................................... 27
13. Performance Information.................................. 27
14. Control Persons and Principal Holders of
Securities............................................. 30
15. Financial Statements..................................... 30
<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 three classes of shares: Flag Investors Maryland
Intermediate Tax-Free Income Fund Class A Shares (the "Flag Investors Class A
Shares"), Flag Investors Maryland Intermediate Tax-Free Income Fund
Institutional Shares (the "Flag Investors Institutional Shares") and Alex. Brown
Capital Advisory & Trust Maryland Intermediate Tax-Free Income Shares (the
"ABCAT Shares") (collectively, the "Shares"). As used herein, the "Fund" refers
to Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc., and specific
references to any class of the Fund's Shares will be made using the name of such
class. The Flag Investors Class A Shares were formerly known as the Flag
Investors Shares.
There are three separate prospectuses for the Fund's Shares: one for
the Flag Investors Class A Shares, one for the Flag Investors Institutional
Shares and one for the ABCAT Shares. Each prospectus contains important
information concerning the class of Shares offered thereby and the Fund and may
be obtained without charge from Alex. Brown & Sons Incorporated ("Alex. Brown"),
1 South Street, Baltimore, Maryland 21202 (telephone: (800) 767-FLAG) or, with
respect to the Flag Investors Class A Shares and the Flag Investors
Institutional Shares, from Participating Dealers that offer shares to
prospective investors. Prospectuses for the Flag Investors Class A Shares may
also be obtained from Shareholder Servicing Agents. As used herein, the term
"Prospectus" describes information common to the prospectuses of the three
classes of the Fund's shares, unless the term "Prospectus" is modified by the
appropriate class designation. As used herein, the "Fund" refers to Flag
Investors Maryland Intermediate Tax-Free Income Fund, Inc. and specific
references to any class of the Fund's Shares will be made using the name of such
class. 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 Fund commenced
offering the Flag Investors Class A Shares on October 1, 1993 and the Flag
Investors Institutional Shares on November 2, 1995. The ABCAT Shares have not
been offered prior to the date of this Statement of Additional Information.
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
-1-
<PAGE>
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, 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.
The Fund may also invest in municipal lease obligations or participation
certificates issued by government authorities or entities to finance the
acquisition or construction of a project or equipment. The certificates
represent participations in a lease or installment purchase contract relating to
such project or equipment. Although such municipal lease obligations do not
constitute general obligations of the issuer to which the issuer's unlimited
taxing power is pledged, lease obligations are frequently backed by the issuer's
covenant to budget for, appropriate and make the payments due under the lease
obligation; however, certain lease obligations contain "non-appropriation"
clauses which provide that the issuer has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. These securities are a type of financing that
has not yet developed the depth of marketability associated
-2-
<PAGE>
with more conventional securities and may be illiquid. The Fund will not
purchase such lease obligations to the extent that it holds municipal lease
obligations or illiquid securities in an amount exceeding 10% of its net assets,
except that, if the Advisor determines that any municipal lease obligations are
liquid pursuant to guidelines adopted by the Board of Directors, such municipal
lease obligations shall not be included for purposes of calculating the
foregoing limit. 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 of its future marketability and whether such
obligations are rated. The Fund expects that it will purchase only rated
municipal lease obligations.
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.
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
-3-
<PAGE>
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
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
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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
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
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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.
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
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8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs.
The following investment restriction may be changed by a vote of the
majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered under
the Investment Company Act, except as permitted by federal law;
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 2.69 million in March 1996 with the majority
of jobs in trade, service, and government sectors. The national recession caused
a loss of jobs in Maryland after employment levels peaked in mid-1990 but
employment levels began to recover in mid-1992. Unemployment was 4.8% in March
1996, compared to a national average of 5.8%. The State's population in 1995 was
approximately 5.04 million with 83% concentrated in the Baltimore-Washington
corridor.
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
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annual appropriation. In 1995, $2,094,900,000 in state and local debt
was issued in Maryland, with approximately 50% representing general obligation
debt and 50% revenue bonds or lease-backed debt.
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
$2.89 billion in general obligation bonds outstanding as of March 31, 1996.
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 34.0% and 10.7%, respectively,
between fiscal years 1990 and 1994. 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 March 31, 1996 was $990.3
million. 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 and St. Mary's College of Maryland, 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 March 31, 1996 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 March 31, 1996, $113
million of lease and conditional purchase financings were outstanding.
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. The following
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discussion focuses only on the recent budgets of the State of Maryland. The
soundness of the State's budget, however, may have little or no correlation to
the financial strength (or weakness) of a particular political subdivision or a
particular obligor on conduit revenue bonds.
During the fiscal years 1991 through 1993, the national recession and
weakened economy caused shortfalls in the State's budgeted revenues and
increases in 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 years 1994 and 1995
with surpluses.
In April 1995, the State's General Assembly approved a $14.4 billion
budget for fiscal year 1996, an 8.2% increase over the fiscal year 1995 budget.
When the fiscal year budget was enacted, the State projected that it would end
the fiscal year with a general fund surplus of $3.1 million.
In December 1995 and March 1996, the State lowered its estimates of
general fund revenues by a total of $148 million. To address this reduction in
revenues, the State plans, among other things, to reduce general fund
appropriations and to transfer $78 million from the Revenue Stabilization
Account of the State Reserve Fund. The State expects the balance in the Revenue
Stabilization Account after this transfer to be $439 million.
In April 1996, the General Assembly of the State approved a $14.6
billion budget for fiscal year 1997, a 1.5% increase over the fiscal year 1996
budget. This budget includes funds sufficient to meet all fiscal year 1996
deficiencies and to meet all specific statutory funding requirements. The fiscal
year 1997 budget also incorporates $29 million in savings from revisions to the
State personnel system and reform to the welfare and Medicaid programs.
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.
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 health care institutions. 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
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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 daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) on
each day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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 attributable to the class, deducting any liabilities
attributable to the 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
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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 Class A
Shares by check, Flag Investors Institutional Shares by wire transfer of funds
and ABCAT Shares by transfer of funds by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, 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 certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
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
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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.
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).
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.
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.
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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. Individuals
whose modified income exceeds certain base amounts are required to include in
gross income up to 85% of their social security benefits. Further, the Fund may
not be an appropriate investment for persons who are "substantial users" of
facilities financed by industrial development bonds or are "related persons" to
such users. A "substantial user" is defined generally to include certain persons
who regularly use a facility in their trade or business. Such persons should
consult their tax advisor before investing in the Fund.
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.
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,
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<PAGE>
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, 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, 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 advisors 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 dates
of birth and their principal occupations during the last five years are set
forth below. Unless otherwise indicated, the address of each Director and
executive officer is 1 South Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman and Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director
and President, Investment Company Capital Corp. (registered
investment advisor) Chartered Financial Analyst.
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Director,
Investment Company Capital Corp. (registered investment
advisor); Formerly, Vice Chairman, Alex. Brown & Sons
Incorporated.
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<PAGE>
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri
63141. Managing Director, CBC Capital (merchant banking),
1993-Present; Formerly, Senior Vice-President and Chief
Financial Officer, General Dynamics Corporation (defense),
1989-1993 and Director, The Arch Fund (registered investment
company).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960.
Director/Trustee, AIM Funds (registered investment companies);
Formerly, Consultant, Wendell & Stockel Associates, Inc.
(consulting firm) and General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (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, retired 1990.
EUGENE J. McDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West
Main Street, Durham, North Carolina 27705. President, Duke
Management Company (investments); Executive Vice President,
Duke University (education, research and healthcare);
Director, Central Carolina Bank & Trust (banking), Key Funds
(registered investment companies), and AMBAC Treasurers Trust
(registered investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, 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.
M. ELLIOTT RANDOLPH, President (1/10/42)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present.
PAUL D. CORBIN, Executive Vice President (7/24/52)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present.
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<PAGE>
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Vice President,
Armata Financial Corp. (registered broker-dealer); Executive
Vice President, Investment Company Capital Corp. (registered
investment advisor).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and
Manager, Special Products Department, Alex. Brown & Sons
Incorporated.
MONICA M. HAUSNER, Vice President (10/26/61)
Vice President, Fixed Income Management Department, Alex.
Brown & Sons Incorporated, March 1992-Present; Formerly,
Assistant Vice President, First National Bank of Maryland,
1984-1992.
SCOTT J. LIOTTA, Vice President (3/18/65)
Manager, Fund Administration, Alex. Brown & Sons Incorporated,
July 1996-Present; Formerly, Manager and Foreign Markets
Specialist, Putnam Investments Inc. (registered investment
companies), April 1994-July 1996; and Supervisor, Brown
Brothers Harriman & Co. (domestic and global custody), August
1991-April 1994.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice
President, Investment Company Capital Corp. (registered
investment advisor), September 1995-Present; Formerly, Vice
President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company, Inc. (investments), 1980-August 1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April
1995 - Present; Formerly, Legal Advisor, Federated Investors
(registered investment advisor), 1991-1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present.
- ----------
* Messrs. Hale and Semans are Directors who are "interested persons", as
defined in the Investment Company Act.
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 and as
Director of each of the other funds in the Fund Complex. Messrs. Cunnane,
Kroeger, Levy and McDonald serve as Directors of each fund in the Fund Complex.
Ms. Rimel serves as Director of six 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. Liotta serves as Vice President, Mr.
Finelli serves as Treasurer, Mr. Stoken serves as Secretary and Ms. Collidge
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 Executive Vice President of two funds and
as Vice President of
-16-
<PAGE>
one fund in the Fund Complex. 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.
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"), 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 or she serves. In addition,
the Chairman of the Fund Complex's Audit Committee receives an aggregate annual
fee from the Fund Complex. Payment of such fees and expenses are allocated among
all such funds described above in direct proportion to their relative net
assets. For the fiscal year ended March 31, 1996, Non-Interested Directors' fees
attributable to the assets of the Fund totaled approximately $1,000. The
following table shows aggregate compensation payable to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
March 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation for Pension or Retirement Total Compensation from the Fund and
Position the Fiscal Year Ended Benefits Accrued as Part of Fund Complex Payable to Directors for
March 31, 1996 Fund Expenses the Fiscal Year Ended March 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Richard T. Hale $0 $0 $0
Chairman and Director
*Truman T. Semans $0 $0 $0
Director
James J. Cunnane $123(1) + $39,000 for service on 13
Director Boards in the Fund Complex(2)
**N. Bruce Hannay $112(1) + $32,572 for service on 13
Director Boards in the Fund Complex(2)
John F. Kroeger $146(1) + $45,950 for service on 13
Director Boards in the Fund Complex
Louis E. Levy $123(1) + $39,000 for service on 13
Director Boards in the Fund Complex(2)
Eugene J. McDonald $123(1) + $39,000 for service on 13
Director Boards in the Fund Complex(2)
***Rebecca W. Rimel $130(1) + $29,250 for service on 6
Director Boards in the Fund Complex
****Harry Woolf $123(1) + $39,000 for service on 13
Director Boards in the Fund Complex(2)
</TABLE>
- ---------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
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<PAGE>
** Retired on January 31, 1996 and is now deceased.
*** Elected to the Board on June 1, 1995.
**** Retired on December 31, 1996.
+ The Fund Complex has adopted a retirement plan for eligible Directors, as
described below. The actuarially computed pension expense for the year
ended March 31, 1996 was approximately $7,000.
1 None 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 six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by such Participant in his or
her last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he or she served after completion of
the first five years, up to a maximum annual benefit of 50% of the fee earned by
such participant in his or her last year of service. The fee will be paid
quarterly, for life, by each Fund for which he or she serves. The Retirement
Plan is unfunded and unvested. Mr. Kroeger has qualified but has not received
benefits. The Fund has two Participants, a Director who retired effective
December 31, 1994 and a Director who retired effective December 31, 1996, who
have qualified for the Retirement Plan by serving thirteen and fourteen years,
respectively, as Directors in the Fund Complex and each of whom will be paid a
quarterly fee of $4,875 by the Fund Complex for the rest of his life. Another
Participant, who retired on January 31, 1996 and died on June 2, 1996 was paid
fees of $3,214 by the Fund Complex under the Retirement Plan in the fiscal year
ended March 31, 1996. Such fees are allocated to each fund in the Fund Complex
based upon the relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; and for Ms. Rimel 1
year, respectively.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<C> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his or her annual compensation pursuant to a
Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy and McDonald, and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select various Flag Investors and Alex. Brown Cash
Reserve Funds in which all or part of their deferral account shall be deemed to
be invested. Distributions from the deferring Directors' deferral accounts will
be paid in cash, in generally equal quarterly installments over a period of ten
years.
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
applies to the personal investing activities of all
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<PAGE>
directors and officers of the Fund, as well as to designated officers, directors
and employees of ICC and Alex. Brown. As described below, the Code of Ethics
imposes significant restrictions on ICC'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 covered employees of ICC, certain
directors or officers of Alex. Brown, and all Fund Directors who are "interested
persons", preclear personal securities investments (with certain 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 special 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. Officers,
directors and employees of ICC and Alex. Brown may comply with codes of ethics
instituted by those entities so long as they contain similar requirements and
restrictions.
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 Financial Corporation and an indirect subsidiary of
Alex. Brown Incorporated. 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 distributed by Alex. Brown, the Fund's
distributor.
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,
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 Class A Shares' average daily net assets and .45% of the Flag
Investors Institutional Shares' and the ABCAT Shares' respective average daily
net assets. The services of ICC to the Fund are not exclusive and ICC is free to
render similar services to others.
-19-
<PAGE>
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 30, 1996. 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 years ended March 31, 1996 and March
31, 1995 and for the Fund's initial fiscal period ended March 31, 1994, ICC
waived all advisory fees ($51,908, $45,630 and $12,065, respectively). In
addition, for the same period, ICC reimbursed the Fund for other expenses
aggregating $87,047, $90,867 and $63,115, respectively. Absent such waivers and
reimbursements, the Fund's total operating expenses would have been 1.69%, 1.85%
and 2.46%, respectively, of the Flag Investors Class A Shares' average daily net
assets and for the period ended March 31, 1996, 1.30% (annualized) of the
Institutional Shares' average daily net assets.
In addition to its services as investment advisor, ICC also provides
accounting services to the Fund and serves as the Fund's transfer and dividend
disbursing agent. (See "Custodian, Transfer Agent and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the distributor of each class of the Fund's
Shares pursuant to three separate Distribution Agreements, one for the Flag
Investors Class A Shares (the "Flag Investors Class A Distribution Agreement"),
one for the Flag Investors Institutional Shares (the "Flag Investors
Institutional Distribution Agreement") and one for the ABCAT Shares (the "ABCAT
Distribution Agreement") (collectively, the "Distribution Agreements").
The Flag Investors Class A Shares
The Flag Investors Class A Distribution Agreement provides that Alex.
Brown has the exclusive right to distribute the Flag Investors Class A Shares
either directly or through other broker-dealers. The Flag Investors Class A
Distribution Agreement further provides that Alex. Brown will: (a) solicit and
receive orders for the purchase of Flag Investors Class A 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 Class A Shares. The Flag Investors
Class A Distribution Agreement further provides that, in connection with the
distribution of Flag Investors Class A 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.
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<PAGE>
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 services for the Flag
Investors Class A 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 Class A Shares. Alex. Brown expects to allocate most of its annual fee
to its investment representatives and up to all of its fee to Participating
Dealers. For the fiscal years ended March 31, 1996 and March 31, 1995 and for
the period from October 1, 1993 (commencement of operations) through March 31,
1994, Alex. Brown received distribution fees of $32,318, $32,593 and $8,617,
respectively.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Flag Investors Class A Shares (the "Flag Investors Class A Plan"). Under
the Flag Investors Class A Plan, the Fund pays a fee to Alex. Brown for
distribution and other shareholder servicing assistance as set forth in the Flag
Investors Class A 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 Class A Distribution Agreement, including the
Flag Investors Class A Plan and a form of Sub-Distribution Agreement, was
approved by the sole shareholder of the Fund on October 1, 1993. The Flag
Investors Class A Distribution Agreement has an initial term of two years and
the Flag Investors Class A Distribution Agreement and the Flag Investors Class A
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 Class A Plan was
most recently approved in this manner by the Fund's Board of Directors on
September 25, 1995.
In approving the Flag Investors Class A Plan, the Directors concluded,
in the exercise of reasonable business judgment, that there was a reasonable
likelihood that the Flag Investors Class A Plan would benefit the Fund and its
shareholders. The Flag Investors Class A Plan will be renewed only if the
Directors make a similar determination in each subsequent year. The Flag
Investors Class A Plan may not be amended to increase materially the fee to be
paid pursuant to the Flag Investors Class A Distribution Agreement without the
approval of the shareholders of the Fund. The Flag Investors Class A Plan may be
terminated at any time and the Flag Investors Class A 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 Class A Shares (as
defined under "Capital Stock"). Any Sub-Distribution Agreement may be terminated
in the same manner at any time. The Flag Investors Class A Distribution
Agreement and any Sub-Distribution Agreement shall automatically terminate in
the event of assignment.
During the continuance of the Flag Investors Class A 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 Class A
Plan to Alex. Brown pursuant to the Flag Investors Class A 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 Class A 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.
For the fiscal year ended March 31, 1996, the Fund paid $32,318 to
Alex. Brown, the Fund's distributor, pursuant to the Flag Investors Class A
Plan. Alex. Brown, in turn, paid the distribution-related expenses of the Fund
including one or more of the following: advertising expenses; printing and
mailing of prospectuses to other
-21-
<PAGE>
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges.
In addition, with respect to the Flag Investors Class A 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 Class A Plan, amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Alex. Brown under the Flag Investors Class A Plan. Payments under the
Flag Investors Class A 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 Class A 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 Class A Plan does not provide for any charges to the Fund for
excess amounts expended by Alex. Brown and, if the Flag Investors Class A Plan
is terminated in accordance with its terms, the obligation of the Fund to make
payments to Alex. Brown pursuant to the Flag Investors Class A Plan will cease
and the Fund will not be required to make any payments past the date the related
Flag Investors Class A Distribution Agreement terminates.
For the fiscal years ended March 31 1996, March 31, 1995 and March 31,
1994, Alex. Brown received sales commissions on the Flag Investors Class A
Shares of $11,719, $48,153 and $126,180, respectively, and from such amounts
retained $11,719, $48,153, and $125,242 for each such year, respectively.
The Flag Investors Institutional Shares and the ABCAT Shares
The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement provide that Alex. Brown has the exclusive right to
distribute the related class of shares, either directly or through Participating
Dealers, and further provide that Alex. Brown will solicit and receive orders
for the purchase of Flag Investors Institutional Shares or ABCAT Shares, as
appropriate, accept or reject such orders on behalf of the Fund in accordance
with the Fund's currently effective Prospectus for such 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 related class of shares.
Alex. Brown has not undertaken to sell any specific number of Flag Investors
Institutional or ABCAT Shares. The Flag Investors Institutional Distribution
Agreement and the ABCAT Distribution Agreement further provide that, in
connection with the distribution of the related class of
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<PAGE>
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.
The ABCAT Shares are available solely for the discretionary accounts of Alex.
Brown Capital Advisory & Trust Company and its affiliates.
Alex. Brown receives no compensation for distributing the Flag
Investors Institutional Shares or the ABCAT Shares.
With respect to the Flag Investors 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. It is not currently
anticipated that Alex. Brown will enter into Sub-Distribution Agreements for the
ABCAT Shares.
The Flag Investors 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. The ABCAT Distribution Agreement was approved
by the Fund's Board of Directors on September 30, 1996. Each such Agreement 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. Each Agreement 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 shares of the class (as defined under Capital Stock). The Flag
Investors Institutional Distribution Agreement, the ABCAT 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;
-23-
<PAGE>
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.
The address of Alex. Brown is 1 South 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
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<PAGE>
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 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.
For the fiscal year ended March 31, 1996, 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, 1996, 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, 1996, the
Fund held a 5.3% repurchase agreement issued by Goldman Sachs & Co.
which was valued at $2,177,000.
9. CAPITAL STOCK
The Fund is authorized to issue 40 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 four classes of shares: Flag Investors Maryland Intermediate Tax-
Free Income Fund Class A Shares, Flag Investors Maryland Intermediate Tax-Free
Income Fund Class B Shares, Flag Investors Maryland Intermediate Tax-Free Income
Fund Institutional Shares and Alex. Brown Capital Advisory & Trust Maryland
Intermediate Tax-Free Income Shares. The Flag Investors Institutional Shares are
offered only to certain eligible institutions and to clients of investment
advisory affiliates of Alex. Brown. The ABCAT Shares are offered only to clients
of Alex. Brown Capital Advisory & Trust Company and its affiliates. The Flag
Investors 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
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<PAGE>
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.
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 AND 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., 1
South Street, Baltimore, Maryland 21202, serves as transfer and dividend
disbursing agent and provides certain accounting services to the Fund under a
Master Services Agreement between the Fund and ICC. As compensation for
providing dividend and transfer agency services, the Fund pays ICC up to $10.62
per account per year, plus reimbursement for out-of-pocket expenses incurred in
connection therewith. ICC, as the Fund's Transfer Agent, has received fees for
the fiscal year ended March 31, 1996 which totaled $9,919.
ICC also provides certain accounting services to the Fund. As
compensation for providing accounting services, ICC receives 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%
-26-
<PAGE>
$ 40,000,001 - $ 50,000,000 .050%
$ 50,000,001 - $ 60,000,000 .040%
$ 60,000,001 - $ 70,000,000 .030%
$ 70,000,001 - $ 100,000,000 .020%
$100,000,001 - $ 500,000,000 .015%
$500,000,001 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with provision of ICC's accounting
services under the Master Services Agreement: express delivery service,
independent pricing and storage.
For the fiscal year ended March 31, 1996, ICC received accounting fees
of $17,831.
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
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<PAGE>
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 (1.50% for the Flag Investors Class A
Shares) 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 Flag Investors
Institutional Shares and the ABCAT Shares are sold without a sales load.
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, 1996, the ending redeemable value of a hypothetical $1,000 payment for the
Flag Investors Class A Shares was $1,066, resulting in an annual total return
for such Shares equal to 6.58%. For the period from the effectiveness of the
Fund's registration statement on October 1, 1993 through the fiscal year ended
March 31, 1996, the ending redeemable value of a hypothetical $1,000 payment for
Flag Investors Class A Shares was $1,075, resulting in an average annual total
return for such Shares equal to 2.93%.
Calculated according to SEC rules, for the period from commencement of
operations of the Institutional Shares on November 2, 1995, through the period
ended March 31, 1996, the ending redeemable value of a hypothetical $1,000
payment for Flag Investors Institutional Shares was $1,012, resulting in an
aggregate total return for such Shares equal to 1.16%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the one-year period
ended March 31, 1996, the ending redeemable value of a hypothetical $10,000
investment in Flag Investors Class A Shares was $10,820, resulting in an annual
total return for such Shares equal to 8.20%. For the period from the
effectiveness of the Fund's registration statement on October 1, 1993 through
the fiscal year ended March 31, 1996, the ending redeemable
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<PAGE>
value of a hypothetical $10,000 investment in Flag Investors Class A Shares was
$1,091, resulting in an average annual total return equal to 3.55%.
Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period of
commencement of operations of the Flag Investors Institutional Shares on
November 2, 1995 through the period ended March 31, 1996, the ending redeemable
value of a hypothetical $10,000 investment in Flag Investors Institutional
Shares was $1,012, resulting in an aggregate total return for such Shares equal
to 1.16%.
The ABCAT Shares were not offered prior to the date of this Statement
of Additional Information.
Yield Calculations
The Fund's yield for the 30 day period ended March 31, 1996 was 4.13%
for the Flag Investors Class A Shares and 4.43% for the Flag Investors
Institutional Shares 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% for the Flag
Investors Class A Shares and no sales charge for the Flag Investors
Institutional Shares or the ABCAT Shares. 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.
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 30 day period ended March 31, 1996, for a shareholder
in the 31% bracket, was 5.99% for the Flag Investors Class A Shares and 6.42%
for the Flag Investors Institutional Shares.
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.
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<PAGE>
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. For the fiscal years
ended March 31, 1996 and March 31, 1995, the Fund's portfolio turnover rate was
8.79% and 33%, respectively. A high level of portfolio turnover may generate
relatively high transaction costs and may increase the amount of taxes payable
by the Fund's shareholders.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 20, 1996, the following persons owned of record or
beneficially 5% or more of the Fund's total outstanding Shares:
Alex. Brown & Sons Incorporated 53.9%*
135 E. Baltimore Street
Baltimore, MD 21202
Lauer & Co. Cust. 39.64%
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market Street, Suite 1200
Philadelphia, PA 19103-7301
As of September 20, 1996, to Fund management's knowledge, Directors and
officers as a group owned less than 1% of the Fund's total outstanding Shares.
- ----------
* As of September 20, 1996, to Fund management's knowledge, Alex.
Brown & Sons, Incorporated owned beneficially less than 5% of such
Shares.
15. FINANCIAL STATEMENTS
See next page.
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<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>
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<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>
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<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>
-33-
<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.
-34-
<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.
-35-
<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.
-36-
<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.
-37-
<PAGE>
[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.
-38-
<PAGE>
[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
-39-
<PAGE>
[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.
-40-
<PAGE>
[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.
-41-
<PAGE>
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 A Shares 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
-42-
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
Statement of Net Assets September 30, 1996
(Unaudited)
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P)(1) (Note A) Assets
- -------------------------------------------------------------------------------------------------------------------
<S><C>
MUNICIPAL BONDS -- 94.7%
General Obligation -- 54.3%
$ 500 Baltimore County, MD, Consolidated Public Improvements
5.00%, 6/1/03 Aaa/AAA $ 508,470 2.1%
1,000 Baltimore County, MD, Consolidated Public Improvements
5.50%, 6/1/04 Aaa/AAA 1,044,400 4.4
500 Baltimore County, MD, Metropolitan District, 64th Issue,
Callable 8/1/03 @ $102
4.50%, 8/1/06 Aaa/AAA 473,285 2.0
500 Baltimore County, MD, Metropolitan District, 61st Issue
6.80%, 4/1/00 Aaa/AAA 537,790 2.3
400 Calvert County, MD, Refunding Consolidated Public
Improvement Project, Callable 7/15/03 @ $102
4.80%, 7/15/07 Aa/A+ 382,236 1.6
250 Cecil County, MD (FGIC Insured), Refunding
Consolidated Public Improvement Project,
Callable 12/1/03 @ $102
5.00%, 12/1/06 Aaa/AAA 247,432 1.0
500 Charles County, MD, Refunding Consolidated Public
Improvement Project, Series 94
6.00%, 6/1/99 Aa/AA- 520,420 2.2
500 Frederick, MD, Refunding and Improvement (FGIC Insured)
5.80%, 12/1/02 Aaa/AAA 528,300 2.2
500 Howard County, MD, Unlimited Consolidated Public
Improvement Project, Series "A"
Pre-refunded 5/15/00 @ $100
7.00%, 5/15/08 AAA/AAA 541,520 2.3
375 Laurel, MD, Refunding, Series "A" Project (MBIA Insured),
Callable 7/1/01 @ $102
6.60%, 7/1/03 Aaa/AAA 415,590 1.8
500 Maryland National Capital Park & Planning Commission
(Prince George's County), Callable 7/1/05 @ $101
5.00%, 7/1/08 Aa/AA 488,245 2.1
500 Maryland State and Local Facilities Loan, First Series
4.00%, 2/15/03 Aaa/AAA 474,540 2.0
100 Maryland State and Local Facilities Loan, First Series,
Callable 5/15/02 @ $102
6.00%, 5/15/07 Aaa/AAA 105,954 0.5
</TABLE>
43
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
Statement of Net Assets (continued) September 30, 1996
(Unaudited)
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P)(1) (Note A) Assets
- -------------------------------------------------------------------------------------------------------------------
<S><C>
General Obligation-- (continued)
$ 500 Maryland State Capital Improvement and Refunding,
Callable 4/15/03 @ $100
5.00%, 4/15/04 Aaa/AAA $ 505,545 2.1%
1,000 Maryland State and Local Facilities Loan, Second Series
5.25%, 6/15/05 Aaa/AAA 1,024,490 4.3
1,250 Maryland State and Local Facilities Loan, Second Series,
Callable 6/15/06 @ $101
5.25%, 6/15/09 Aaa/AAA 1,244,175 5.2
300 Maryland State and Local Facilities Loan, Third Series,
Callable 7/15/01 @ $101
6.50%, 7/15/04 Aaa/AAA 325,302 1.4
500 Maryland State Capital Improvement and Refunding
4.90%, 4/15/03 Aaa/AAA 505,565 2.1
1,000 Montgomery County, MD, Refunding Consolidated
Public Improvement Project, Series "A"
5.75%, 10/1/07 Aaa/AAA 1,048,040 4.4
500 Ocean City, MD, Refunding (MBIA Insured)
5.00%, 3/15/03 Aaa/AAA 504,655 2.1
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 259,595 1.1
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 258,008 1.1
250 St. Mary's County, MD, Metropolitan Commission,
Callable 11/1/03 @ $102
5.65%, 11/1/07 A/A+ 257,285 1.1
250 Washington Suburban Sanitary District, MD
Pre-refunded 11/1/01 @ $102
6.40%, 11/1/04 AAA/AAA 274,157 1.2
360 Washington Suburban Sanitary District, MD
8.00%, 1/1/02 Aa1/AA 414,328 1.7
12,889,327 54.3
Other Revenue -- 39.2%
350 Baltimore County, MD, Mortgage Revenue (FHA Insured)
6.60%, 11/1/14 NR(2)/AAA 366,016 1.5
</TABLE>
44
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
Statement of Net Assets (continued) September 30, 1996
(Unaudited)
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P)(1) (Note A) Assets
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Other Revenue-- (continued)
$ 100 Baltimore, MD, Convention Center (FGIC Insured)
5.60%, 9/1/06 Aaa/AAA $ 102,826 0.5%
240 Charles County, MD, Housing Revenue (MBIA Insured),
Callable 7/1/03 @ $102
5.375%, 7/1/09 Aaa/AAA 238,994 1.0
700 Kent County, MD, College, Project & Refunding--
Washington College Project
7.70%, 7/1/18 Baa/NR(2) 760,753 3.2
400 Maryland State Health and Higher Education
Facilities Authority, Revenue for Bon Secours
Heartlands, Issue A
Pre-refunded 7/1/00 @ $102
7.375%, 9/1/17 AAA/A+ 436,888 1.8
500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Good Samaritan Hospital
5.40%, 7/1/04 A1/A 505,000 2.1
1,000 Maryland State Health and Higher Education Facilities
Authority, Revenue for Greater Baltimore Medical Center
Pre-refunded 7/1/01 @ $102
6.75%, 7/1/19 AAA/AAA 1,106,420 4.7
580 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(2) 603,113 2.5
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Howard County General Hospital
4.55%, 7/1/98 Baa1/BBB 199,920 0.9
250 Maryland State Health and Higher Education Facilities
Authority, Revenue for Johns Hopkins University Hospital
6.00%, 7/1/07 Aa/AA- 271,228 1.1
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 292,521 1.2
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Suburban Hospital
4.75%, 7/1/03 A1/A 291,540 1.2
</TABLE>
45
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
Statement of Net Assets (continued) September 30, 1996
(Unaudited)
Ratings Percent
Par (Moody's/ Value of Net
(000) S&P)(1) (Note A) Assets
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Other Revenue-- (continued)
Maryland State Health and Higher Education Facilities
Authority, Revenue for University of Maryland
Medical Systems, Callable 7/1/03 @ $102
(FGIC Insured)
$ 160 5.375%, 7/1/13 Aaa/AAA $ 155,766 0.8%
1,000 5.40%, 7/1/08 Aaa/AAA 1,001,430 4.2
250 Maryland State Health and Higher Education Facilities
Authority, Revenue for Washington County Hospital
(MBIA Insured)
4.45%, 1/1/02 Aaa/AAA 245,508 1.0
400 Maryland State Industrial Development Financing Authority,
Revenue for American Center Physics Headquarters
5.80%, 1/1/01 NR(2)/BBB 403,928 1.7
Maryland State Stadium Authority Lease,
Ocean City Convention Center
300 4.80%, 12/15/03 Aa/AA 300,051 1.3
200 4.80%, 12/15/05 Aa/AA 196,368 0.8
400 Maryland State Transportation Authority,
Transportation Facility Projects Revenue
6.625%, 7/1/03 AAA/AAA 422,104 1.8
500 Montgomery County, MD, Housing Opportunity,
Series "A"
5.40%, 7/1/16 Aa/NR(2) 503,895 2.1
350 Northeast, MD, Waste Disposal Authority Recovery
Revenue (MBIA Insured)
6.65%, 1/1/97 Aaa/AAA 352,471 1.5
500 University of Maryland Systems Auxiliary Facilities
& Tuition Revenue, Series B
Pre-refunded 10/1/02 @ $102
6.40%, 4/1/06 Aa/AAA 552,685 2.3
9,309,425 39.2
Transportation Revenue -- 1.2%
275 Washington, D.C., Metropolitan Area Transportation
Authority for Gross Revenue (FGIC Insured)
4.50%, 1/1/01 Aaa/AAA 273,930 1.2
Total Municipal Bonds
(Cost $22,446,368) 22,472,682 94.7
</TABLE>
46
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
Statement of Net Assets (concluded) September 30, 1996
(Unaudited)
Percent
Par Value of Net
(000) (Note A) Assets
- -------------------------------------------------------------------------------------------------------------------
<S><C>
REPURCHASE AGREEMENT -- 4.6%
$1,096 Goldman Sachs & Co., 5.65%
Dated 9/30/96, to be repurchased on 10/1/96,
collateralized by U.S. Treasury Notes with a
market value of $1,118,264.
(Cost $1,096,000) $ 1,096,000 4.6%
Total Investment in Securities
(Cost $23,542,368)(3) 23,568,682 99.3
Other Assets in Excess of Liabilities, Net 167,365 0.7
Net Assets $23,736,047 100.0%
Net Asset Value Per:
Class A Share
($11,916,246 / 1,213,395 shares outstanding) $9.82
Institutional Share
($11,819,801 / 1,192,705 shares outstanding) $9.91
Maximum Offering Price Per:
Class A Share ($9.82 / 0.985) $9.97
Institutional Share $9.91
</TABLE>
(1) The Moody's and Standard and Poor's ratings are believed to be the
most recent ratings available as of September 30, 1996.
(2) Not rated.
(3) Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
47
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Statement of Operations For the Six Months Ended September 30, 1996
(Unaudited)
INVESTMENT INCOME (NOTE A):
Interest $536,970
EXPENSES:
Investment advisory fee (Note B) 37,257
Legal 20,000
Distribution fee (Note B) 15,077
Accounting fee (Note B) 12,010
Audit 11,999
Printing and postage 11,249
Custodian fee 9,999
Organizational expense (Note A) 5,126
Miscellaneous 4,302
Registration fees 3,599
Transfer agent fees (Note B) 3,250
Directors' fees 500
Insurance 265
Total expenses 134,633
Less:Fees waived and expenses reimbursed (Note B) (71,207)
Net expenses 63,426
Net investment income 473,544
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions (44,582)
Change in unrealized appreciation or depreciation of investments 40,281
Net realized and unrealized loss on investments (4,301)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $469,243
See accompanying Notes to Financial Statements.
48
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
September 30, 1996 Ended
(Unaudited) March 31, 1996
- ---------------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 473,544 $ 613,033
Net loss from security transactions (44,582) (2,588)
Change in unrealized appreciation or depreciation
of investments 40,281 434,427
Net increase in net assets resulting
from operations 469,243 1,044,872
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares (183,424) (528,695)
Flag Investors Institutional Shares (214,489) (60,193)
Distributions in excess of income (Class A Shares) (92,287) (68,882)
Total distributions (490,200) (657,770)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 6,350,316 10,461,018
Value of shares issued in reinvestment of dividends 241,576 402,890
Cost of shares repurchased (1,968,452) (5,036,544)
Total increase in net assets derived from
capital share transactions 4,623,440 5,827,364
Total increase in net assets 4,602,483 6,214,466
NET ASSETS:
Beginning of period 19,133,564 12,919,098
End of period $23,736,047 $19,133,564
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
49
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Financial Highlights--Flag Investors Class A Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six For the Year For the Period
Months Ended Ended October 1, 1993(1)
Sept. 30, 1996 March 31, through
(Unaudited) 1996 1995 March 31, 1994
- --------------------------------------------------------------------------------------------------------
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 9.84 $ 9.52 $ 9.50 $ 10.00
Income from Investment Operations:
Net investment income 0.15 0.39 0.40 0.14
Net realized and unrealized gain/(loss)
on investments 0.06 0.38 0.05 (0.53)
Total from Investment Operations 0.21 0.77 0.45 (0.39)
Less Distributions:
Dividends from net investment income (0.15) (0.39) (0.40) --
Distributions in excess of income (0.08) (0.06) (0.03) (0.11)
Total distributions (0.23) (0.45) (0.43) (0.11)
Net asset value at end of period $ 9.82 $ 9.84 $ 9.52 $ 9.50
Total Return(2) 2.13% 8.20% 5.12% (4.06)%
Ratios to Average Daily Net Assets:
Expenses(4) 0.70%(3) 0.70% 0.70% 0.29%(3)
Net investment income(5) 4.35%(3) 4.09% 4.44% 3.84%(3)
Supplemental Data:
Net assets at end of period (000) $11,916 $12,066 $12,919 $11,872
Portfolio turnover rate 18.96% 8.79% 33.00% 8.51%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note
B), the ratio of expenses to average daily net assets would have been
1.37%, 1.69%, 1.85% and 2.46% for the six months ended September 30,
1996, the years ended March 31, 1996 and 1995 and the period ended March
31, 1994, respectively.
(5) Without the waiver of advisory fees and reimbursement of expenses (Note
B), the ratio of net investment income to average daily net assets would
have been 3.68%, 3.13%, 3.29% and 1.68% for the six months ended
September 30, 1996, the years ended March 31, 1996 and 1995 and the
period ended March 31, 1994, respectively.
See accompanying Notes to Financial Statements.
50
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
Financial Highlights--Flag Investors Institutional Shares
(For a share outstanding throughout each period)
For the Six For the Period
Months Ended November 2, 1995(1)
September 30, 1996 through
(Unaudited) March 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $ 9.93 $ 9.93
Income from Investment Operations:
Net investment income 0.26 0.15
Net realized and unrealized loss
on investments (0.04) (0.03)
Total from Investment Operations 0.22 0.12
Less Distributions:
Dividends from net investment income
and short-term gains (0.24) (0.12)
Net asset value at end of period $ 9.91 $ 9.93
Total Return 2.23% 2.83%(2)
Ratios to Average Daily Net Assets:
Expenses(3) 0.45%(2) 0.45%(2)
Net investment income(4) 4.60%(2) 4.45%(2)
Supplemental Data:
Net assets at end of period (000) $11,820 $7,068
Portfolio turnover rate 18.96% 8.79%(2)
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses
to average daily net assets would have been 1.12% and 1.30% for the
six months ended September 30, 1996 and the period ended March 31, 1996,
respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 3.93% and
3.67% for the six months ended September 30, 1996 and the period
ended March 31, 1996, respectively.
See accompanying Notes to Financial Statements.
51
<PAGE>
[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 distribution fee of 0.25%. 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. The Fund invests 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 obligations for which quotations are readily
available are valued at the most recent quote price provided by
investment dealers. Municipal obligations may be valued on the basis of
prices provided by an independent pricing service when such prices are
determined by the Investment Advisor to reflect the fair market value of
such obligations. Securities for which market quotations are not readily
available are valued at fair value as 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
Financial Corp., 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
52
<PAGE>
[Flag Investors Logo]
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
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 six months ended
September 30, 1996, ICC waived fees of $37,257 and reimbursed expenses of
$33,950.
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 $12,010 for accounting services for the six
months ended September 30, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $3,250 for
transfer agent services for the six months ended September 30, 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 six months ended September 30, 1996, distribution fees
aggregated $15,077. Alex. Brown received no commissions from the Fund
for the six months ended September 30, 1996.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the period January 1, 1996 through September 30, 1996
was approximately $300, and the accrued liability was approximately $1,700.
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:
53
<PAGE>
Class A Shares
--------------------------------
For the Six
Months Ended For the
Sept. 30, 1996 Year Ended
(Unaudited) March 31, 1996
Shares sold 48,710 318,331
Shares issued to share-
holders on reinvestment
of dividends 17,668 39,023
Shares redeemed (78,726) (488,564)
Net decrease in shares
outstanding (12,348) (131,210)
Proceeds from sale
of shares $ 466,536 $ 3,133,248
Value of reinvested
dividends 171,878 382,490
Cost of shares redeemed (761,781) (4,810,545)
Net decrease from capital
share transactions $(123,367) $(1,294,807)
Institutional Shares
---------------------------------
For the Six For the Period
Months Ended Nov. 2, 1995*
Sept. 30, 1996 through
(Unaudited) March 31, 1996
Shares sold 596,573 731,839
Shares issued to share-
holders on reinvestment
of dividends 7,099 2,037
Shares redeemed (122,454) (22,388)
Net increase in shares
outstanding 481,218 711,488
Proceeds from sale
of shares $5,883,780 $7,327,770
Value of reinvested
dividends 69,698 20,400
Cost of shares redeemed (1,206,671) (225,999)
Net increase from capital
share transactions $4,746,807 $7,122,171
*Commencement of operations.
54
<PAGE>
[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 $8,931,162 and $3,806,183,
respectively, for the six months ended September 30, 1996.
At September 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $165,256
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $138,942.
E. Net Assets - At September 30, 1996, net assets for Flag Investors Class A
Shares consisted of:
Paid-in capital $12,075,617
Accumulated net
realized loss from
security transactions (144,908)
Unrealized appreciation
of investments 77,824
Overdistribution of net
investment income (92,287)
$11,916,246
At September 30, 1996, net assets for Flag Investors Institutional Shares
consisted of:
Paid-in capital $11,868,977
Accumulated net realized loss
from security transactions (19,695)
Unrealized depreciation
of investments (51,510)
Undistributed net investment
income 22,029
$11,819,801
55
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Ratings
S & P - Commercial paper rated A-1+ or A-1 by S&P has the
following characteristics. Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management is unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
Moody's Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial
paper rating assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationship which exists with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
P-1, P-2 or P-3.
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Regarded as having 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 rated categories.
BB, B, CCC, and CC and C -- Regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
A-1
<PAGE>
D -- In default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa -- Bonds which are rated Aaa 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
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.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group 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 the
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.
A -- 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 some time in the
future.
Baa -- Bonds which are 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.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
