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FLAG
INVESTORS
MARYLAND
INTERMEDIATE
TAX-FREE INCOME
FUND
ANNUAL REPORT
MARCH 31, 1997
<PAGE>
REPORT HIGHLIGHTS
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* Interest rates rose erratically during most of the past year. As a result,
your Fund had modest total returns of 1.9% for the six months and 4.1% for
the twelve months ended March 31, 1997.
* To take advantage of high yields, we extended the Fund's weighted average
maturity late last year. We used higher coupon issues to stabilize
principal volatility if rates should rise.
* While we remain optimistic about the tone of the municipal bond market, the
Federal Reserve Board's recent actions to raise short-term rates cannot be
ignored.
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to report on the progress of your Fund for the six and
twelve months ended March 31, 1997.
Against a late-cycle backdrop of a still-expanding economy and attendant
inflationary expectations, interest rates rose erratically during much of the
past twelve months, ending the year up slightly by 0.50%. While influenced by
this shift in rates, your Fund--and municipal bonds in general--made respectable
forward progress and delivered positive, albeit moderate, returns. As an asset
class, tax-exempt bonds had returns that were favorably affected by the timely
combination of continued strong retail and institutional demand, dwindling
forward supply and fading fears of tax reform and flat tax legislation. Although
returns are far below the double-digit returns of several years ago, they
reflect the durable resilience of this asset class and its appropriateness in
the portfolios of tax-weary investors.
With its intermediate-term maturity range, your Fund's Class A Shares
recorded a total return of 1.9% for the six months and 4.1% for the twelve
months ended March 31, 1997. Having taken steps during the winter to stabilize
the Fund's net asset value (NAV) at the $9.75 to $9.85 level, the bulk of these
returns has come from coupon interest income. Although adversely affected by the
nominal rise in rates, the Class A Shares' NAV has declined only four cents,
from $9.82 to $9.78, since September 30, 1996.
Specific total return comparisons are detailed in the chart below.
Total Return Comparisons(1)
- --------------------------------------------------------------------------------
Six Twelve Average
Periods Ended March 31, 1997 Months Months Maturity
- --------------------------------------------------------------------------------
Flag Investors Maryland Intermediate
- --------------------------------------------------------------------------------
Tax-Free Income Fund--Class A Shares 1.9% 4.1% 8.1 years
- --------------------------------------------------------------------------------
Lehman Brothers 7-Year Municipal Bond Index 2.3% 4.6% 6.9 years
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index 2.3% 5.5% 14.0 years
- --------------------------------------------------------------------------------
Lipper Other States Intermediate
- --------------------------------------------------------------------------------
Municipal Debt Funds Average 2.1% 3.9% n/a
- --------------------------------------------------------------------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales
charge were reflected, the quoted performance would be lower. Since
investment return and principal value will fluctuate, an investor's shares
may be worth more or less than their original cost when redeemed. The
Lehman Brothers 7-Year Municipal Bond Index and the Lehman Brothers
Municipal Bond Index are unmanaged indices that are widely recognized as
indicators of performance in the intermediate-term and long-term municipal
bond sectors, respectively. The Lipper Other States Intermediate Municipal
Debt Funds Average is an index of managed funds that invest in municipal
debt issues with dollar-weighted average maturities of 5 to 10 years and
are exempt from taxation on a specified state or city. Past performance is
not an indicator of future results. Please review the Additional
Performance Information on page 6.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
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Portfolio Considerations
In response to monthly reports of strong retail sales, housing starts and
employment gains, the general level of tax-exempt rates, in empathy with their
taxable counterparts, rose erratically during the winter months (see chart
below). Although we extended the Fund's weighted average maturity from 7.5 to
8.1 years late last year, we did so with higher coupon issues that would be less
susceptible to principal volatility should rates rise sharply. We continue to
commit new funds in the 7- to 10-year range at cyclical rates that we expect
will prove to be very attractive. With quality spreads so narrow (the yield
difference between AAA and lower quality A issues), we have found few reasons to
lower the Fund's quality bias just to increase its yield. This may have
penalized recent relative performance, but we are confident, given the tendency
of spreads to expand as rates rise, that we will have ample opportunities among
many of Maryland's A- and AA-rated issues in the months ahead.
10-Year AAA General Obligation
Municipal Yields
(3/31/96-3/31/97)
4.92
5.05
5.02
4.99
4.94
5.14
5.08
5.05
5.01
5.14
5.29
5.24
5.21
5.11
5.28
5.18
5.1
5.09
4.9
4.83
4.87
4.97
5.07
5.08
4.98
5.04
4.95
4.9
4.98
4.99
4.98
4.91
4.85
4.8
4.75
4.68
4.76
4.78
4.78
4.74
4.8
4.91
4.93
4.94
4.91
4.85
4.73
4.79
4.84
4.87
4.9
4.97
5.03
2
<PAGE>
- --------------------------------------------------------------------------------
Market Outlook
Like other capital market instruments, investor expectations coupled with
traditional supply and demand factors will continue to affect investment returns
from municipal bonds. For the balance of 1997, and well into the next year, we
remain optimistic about the general tone of the municipal bond market; however,
we cannot ignore recent preemptive actions on the part of the Federal Reserve
Board to raise short-term rates. Though we do not know the magnitude nor the
duration of Fed policy decisions, we do know that there are few similarities
between now and the last period of monetary restraint three years ago when
interest rates were artificially low and very stimulative. Although no two rate
cycles are the same, we do not think that a major Fed-induced monetary squeeze
is in the cards.
Favorable supply and demand characteristics within the municipal bond
market still bode well for strong performance relative to Treasuries and other
fixed-income securities. Although the yield ratio between taxable and tax-exempt
yields has declined over the last 18 months (see chart below), we expect the
demand-side trends of the past quarter to continue as retail and institutional
investors (primarily property and casualty insurers) grow more comfortable with
the inflation outlook and shift their portfolio bias toward asset allocations
favoring bonds over stocks. Likewise, the supply-side of the equation continues
to be influenced by a general contraction in the overall forward supply of
municipal underwritings. In Maryland, year-over-year first quarter underwritings
are down by 9%. Although issues surrounding tax-reform may re-emerge, we
consider current tax-exempt rate levels for Maryland-domiciled municipals--at
73% to 80% of comparable 10-year U.S. Treasury yields--still attractive for the
high tax bracket Maryland investor.
AAA-Rated Municipal Yields as a Percentage of U.S. Treasury Yields
- --------------------------------------------------------------------------------
Maturity of
AAA-Rated
Municipals 9/30/95 3/31/96 9/30/96 3/31/97
- --------------------------------------------------------------------------------
10-Year 77.7% 77.8% 74.3% 73.1%
- --------------------------------------------------------------------------------
20-Year 89.4% 82.0% 80.1% 79.3%
- --------------------------------------------------------------------------------
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
Dividend Policy
The Class A Shares' monthly dividend remains at $0.0375. In view of its
inherently defensive bias, the Fund has broad appeal for Maryland investors
whose portfolio objectives require a high level of tax-exempt current yield and
moderate principal volatility. We appreciate the confidence you have placed in
us.
Sincerely,
/s/ M. Elliott Randolph, Jr. /s/ Paul D. Corbin
M. Elliott Randolph, Jr. Paul D. Corbin
President Executive Vice President
April 14, 1997
4
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Portfolio Composition
SECTOR* QUALITY*
[PIE CHART APPEARS HERE] [PIE CHART APPEARS HERE]
Revenue................... 2% AAA.....64%
Short-term Investments.... 3% AA......18%
Housing................... 5% A....... 7%
Prerefunded...............12% BBB.....11%
Hospital and Education....17%
General Obligation-State..24%
General Obligation-Local..37%
Portfolio Statistics
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Net Asset Value Per:
- --------------------------------------------------------------------------------
Class A Share $9.78
- --------------------------------------------------------------------------------
Institutional Share $9.87
- --------------------------------------------------------------------------------
Total Net Assets $23,508,784
- --------------------------------------------------------------------------------
Average Maturity 8.1 years
- --------------------------------------------------------------------------------
Average Duration 5.2 years
- --------------------------------------------------------------------------------
Maturity Breakdown*:
- --------------------------------------------------------------------------------
0-1 year 1%
- --------------------------------------------------------------------------------
1-5 years 24%
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5-10 years 47%
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10-15 years 20%
- --------------------------------------------------------------------------------
15+ years 8%
- --------------------------------------------------------------------------------
- ------------
* Calculated as a percentage of net assets. The Quality Breakdown listed
above is calculated using Standard & Poor's ratings. The BBB classification
includes holdings that are not rated by Standard & Poor's, but are rated by
Moody's (see p. 9). These ratings are believed to be the most recent
ratings available as of March 31, 1997.
5
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on October
1, 1993 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses and the currently effective 1.50% maximum sales charge
for the Fund's Class A Shares.
Since the Lehman Brothers Municipal Bond Index is unmanaged and does not
reflect management styles, investment policies or certain fees and expenses
similar to the Fund's, we will begin to compare the Fund's performance to an
additional benchmark, the Lipper Other States Intermediate Municipal Debt Funds
Average. The average is a composite of the performance of similar tax-exempt
managed funds, so the funds' management styles, investment policies and
management, distribution and operating expenses are reflected in the average's
results.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the Lehman Brothers Municipal Bond Index and the Lehman
Brothers 7-Year Municipal Bond Index are not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of these two indices would
have had to own the securities that they represent. Acquiring these securities
would require a considerable amount of money and would incur expenses that are
not reflected in the index results. While the Lipper Other States Intermediate
Municipal Debt Funds Average is unmanaged, it is a composite of the performance
of managed funds that do reflect ongoing management, distribution and operating
expenses similar to those applicable to the Fund. The average, however, does not
reflect the funds' sales charges. An investor who wished to replicate the total
return of this average would have had to own the funds that it represents.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate, an
investor's shares may be worth more or less than their original cost when
redeemed. Past performance is not an indicator of future results.
6
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class A Shares*
October 1, 1993-March 31, 1997
Lipper
Flag Lehman Other
Investors Lehman Brothers States
Maryland Brothers 7-Year Intermediate
Intermediate Municipal Municipal Municipal
Tax-Free Bond Bond Debt Funds
Income Fund Index Index Average
9,850 10,000 10,000 10,000
9,450 9,565 9,714 9,683
9,541 9,738 9,912 9,814
9,933 10,277 10,330 10,200
10,508 10,827 10,926 10,673
10,748 11,138 11,162 10,878
10,977 11,479 11,411 11,094
11,184 11,745 11,678 11,307
Average Annual Total Return*
- --------------------------------------------------------------------------------
Periods Ended 3/31/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares 2.49% -- 3.25%
- --------------------------------------------------------------------------------
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** October 1, 1993.
7
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Institutional Shares*
November 2, 1995-March 31, 1997
Lipper
Flag Lehman Other
Investors Lehman Brothers States
Maryland Brothers 7-Year Intermediate
Intermediate Municipal Municipal Municipal
Tax-Free Bond Bond Debt Funds
Income Fund Index Index Average
10,000 10,000 10,000 10,000
10,151 10,096 10,053 10,063
10,116 9,975 10,018 9,988
10,157 10,051 10,062 10,017
10,342 10,281 10,242 10,187
10,572 10,543 10,494 10,400
10,548 10,519 10,482 10,382
Average Annual Total Return*
- --------------------------------------------------------------------------------
Periods Ended 3/31/97 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------------
Institutional Shares 4.27% -- 3.85%
- --------------------------------------------------------------------------------
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** 11/2/95.
8
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets March 31, 1997
<TABLE>
<CAPTION>
Percent
Par Ratings Value of Net
(000) (Moody's/S&P)* (Note 1) Assets
- ---------------------------------------------------------------------------------------
MUNICIPAL BONDS -- 96.8%
<S> <C>
$ 500 Baltimore County, MD, Consolidated
Public Improvement
5.00%, 6/1/03 Aaa/AAA $ 505,250 2.1%
1,000 Baltimore County, MD, Consolidated
Public Improvement
5.50%, 6/1/04 Aaa/AAA 1,037,660 4.4
500 Baltimore County, MD, Metropolitan
District, 61st Issue
6.80%, 4/1/00 Aaa/AAA 531,220 2.3
250 Cecil County, MD (FGIC Insured),
Refunding Consolidated Public
Improvement Project,
Callable 12/1/03 @ $102
5.00%, 12/1/06 Aaa/AAA 247,155 1.1
500 Charles County, MD, Refunding
Consolidated Public Improvement,
Callable 6/1/01 @ $102
6.25%, 6/1/02 Aa3/AA- 533,025 2.3
500 Charles County, MD, Refunding
Consolidated Public Improvement
6.00%, 6/1/99 Aa3/AA- 516,390 2.2
500 Frederick, MD, Refunding and
Improvement (FGIC Insured)
5.80%, 12/1/02 Aaa/AAA 524,010 2.2
1,000 Howard County, MD, Refunding
Consolidated Public Improvement
Project, Series "A"
5.75%, 2/15/01 Aaa/AA+ 1,037,790 4.4
375 Laurel, MD, Refunding, Series "A"
(MBIA Insured), Prerefunded
7/1/01 @ $102
6.60%, 7/1/03 Aaa/AAA 408,220 1.7
500 Maryland National Capital Park &
Planning Commission, Prince George's
County, Park Aquisition &
Development, Series T-2,
Callable 7/1/05 @ $101
5.00%, 7/1/08 Aa2/AA 490,690 2.1
</TABLE>
9
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- -------------------------------------------------------------------------------
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Percent
Par Ratings Value of Net
(000) (Moody's/S&P)* (Note 1) Assets
- ---------------------------------------------------------------------------------------
<S> <C>
$ 500 Maryland State Capital Improvement
and Refunding
4.90%, 4/15/03 Aaa/AAA $ 502,585 2.1%
500 Maryland State Capital Improvement
and Refunding, Callable
4/15/03 @ $100
5.00%, 4/15/04 Aaa/AAA 503,355 2.1
500 Maryland State and Local Facilities Loan,
First Series
4.00%, 2/15/03 Aaa/AAA 475,780 2.0
100 Maryland State and Local Facilities Loan,
First Series, Callable 5/15/02 @ $102
6.00%, 5/15/07 Aaa/AAA 105,597 0.5
1,000 Maryland State and Local Facilities Loan,
Second Series
5.25%, 6/15/05 Aaa/AAA 1,019,280 4.3
1,250 Maryland State and Local Facilities Loan,
Second Series, Callable 6/15/06 @ $101
5.25%, 6/15/09 Aaa/AAA 1,247,663 5.3
1,000 Maryland State and Local Facilities Loan,
Third Series
5.00%, 10/15/06 Aaa/AAA 996,980 4.2
300 Maryland State and Local Facilities Loan,
Third Series, Callable 7/15/01 @ $101
6.50%, 7/15/04 Aaa/AAA 323,670 1.4
1,000 Montgomery County, MD,
Consolidated Public Improvement
Project, Series "A", Callable
10/1/04 @ $102
5.75%, 10/1/07 Aaa/AAA 1,049,230 4.5
500 Ocean City, MD, Refunding
(MBIA Insured)
5.00%, 3/15/03 Aaa/AAA 502,285 2.1
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 257,190 1.1
</TABLE>
10
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent
Par Ratings Value of Net
(000) (Moody's/S&P)* (Note 1) Assets
- ---------------------------------------------------------------------------------------
<S> <C>
$ 250 Prince George's County, MD,
Refunding Consolidated Public
Improvement Project (AMBAC Insured),
Callable 3/15/03 @ $102
5.50%, 3/15/05 Aaa/AAA $ 257,455 1.1%
250 St. Mary's County, MD,
Metropolitan Commission,
Callable 11/1/03 @ $102
5.65%, 11/1/07 A/A+ 257,698 1.1
250 Washington Suburban Sanitary
District, MD, Prerefunded
11/1/01 @ $102
6.40%, 11/1/04 #AAA/AAA 271,370 1.2
360 Washington Suburban Sanitary
District, MD
8.00%, 1/1/02 Aa1/AA 408,046 1.7
1,000 Washington Suburban Sanitary
District, MD, Callable 6/1/03 @ $102
5.00%, 6/1/06 Aa1/AA 992,680 4.3
----------- ----
15,002,274 63.8
----------- ----
Other Revenue -- 33.0%
350 Baltimore County, MD, Mortgage
Revenue (FHA Insured),
Callable 11/1/03 @ $102
6.60%, 11/1/14 NR**/AAA 364,382 1.5
100 Baltimore, MD, Convention Center
(FGIC Insured), Callable 9/1/04 @ $100
5.60%, 9/1/06 Aaa/AAA 102,678 0.4
230 Charles County, MD, Housing
Revenue (MBIA Insured),
Callable 7/1/03 @ $102
5.375%, 7/1/09 Aaa/AAA 228,859 1.0
100 Frederick County, MD, College
Revenue for Hood College,
Callable 7/1/00 @ $102
6.95%, 7/1/02 Baa1/NR** 108,437 0.5
700 Kent County, MD, College, Project &
Refunding--Washington College
Project, Callable 7/1/99 @ $102
7.70%, 7/1/18 Baa2/NR** 752,507 3.2
</TABLE>
11
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
Percent
Par Ratings Value of Net
(000) (Moody's/S&P)* (Note 1) Assets
- ---------------------------------------------------------------------------------------
<S> <C>
$ 400 Maryland State Health and Higher
Education Facilities Authority,
Revenue for Bon Secours Heartland,
Issue A, Prerefunded 7/1/00 @ $102
7.375%, 9/1/17 NR**/A+ $ 433,711 1.8%
500 Maryland State Health and Higher
Education Facilities Authority,
Revenue for Good Samaritan Hospital
5.40%, 7/1/04 A1/A 505,390 2.2
1,000 Maryland State Health and Higher
Education Facilities Authority,
Revenue for Greater Baltimore Medical
Center, Prerefunded 7/1/01 @ $102
6.75%, 7/1/19 #AAA/AAA 1,092,440 4.6
640 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** 657,050 2.8
200 Maryland State Health and Higher
Education Facilities Authority, Revenue
for Howard County General Hospital
4.55%, 7/1/98 Baa1/BBB 200,422 0.9
250 Maryland State Health and Higher
Education Facilities Authority,
Revenue for Johns Hopkins University
6.00%, 7/1/07 Aa2/AA- 264,490 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 A2/A 292,818 1.2
300 Maryland State Health and Higher
Education Facilities Authority,
Revenue for Suburban Hospital
4.75%, 7/1/03 A1/A+ 291,294 1.2
1,000 Maryland State Health and Higher
Education Facilities Authority,
Revenue for University of Maryland
Medical Systems, Callable
7/1/03 @ $102 (FGIC Insured)
5.40%, 7/1/08 Aaa/AAA 1,005,860 4.3
</TABLE>
12
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent
Par Ratings Value of Net
(000) (Moody's/S&P)* (Note 1) Assets
- ---------------------------------------------------------------------------------------
<S> <C>
$ 400 Maryland State Industrial Development
Authority, Revenue for American
Center Physics Headquarters
5.80%, 1/1/01 NR**/BBB $ 403,708 1.7%
500 Montgomery County, MD, Maryland
Housing Opportunities Commission,
Single Family Mortgage Revenue,
Callable 7/1/06 @ $102
5.40%, 7/1/16 Aa2/NR** 502,090 2.2
500 University of Maryland Systems
Auxiliary Facilities & Tuition Revenue,
Series B, Prerefunded 10/1/02 @ $102
6.40%, 4/1/06 Aa3/AAA 546,740 2.4
----------- -----
7,752,876 33.0
----------- -----
Total Municipal Bonds
(Cost $22,741,883) 22,755,150 96.8
----------- -----
REPURCHASE AGREEMENT -- 1.2%
293 Goldman Sachs & Co., 6.25%
Dated 3/31/97, to be repurchased on 4/1/97,
collateralized by U.S. Treasury Notes with
a market value of $299,276.
(Cost $293,000) 293,000 1.2
----------- -----
Total Investments in Securities
(Cost $23,034,883)*** 23,048,150 98.0
Other Assets in Excess of Liabilities, Net 460,634 2.0
----------- -----
Net Assets $23,508,784 100.0%
=========== =====
Net Asset Value Per:
Class A Share
($11,537,534 / 1,179,735 shares outstanding) $9.78
=====
Institutional Share
($11,971,250 / 1,212,724 shares outstanding) $9.87
=====
Maximum Offering Price Per:
Class A Share
($9.78 / 0.985) $9.93
=====
Institutional Share $9.87
=====
</TABLE>
- ------------
* The Moody's and Standard and Poor's ratings are believed to be the most
recent ratings available as of March 31, 1997.
** Not rated.
*** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
March 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $1,138,292
----------
Expenses:
Investment advisory fee (Note 2) 79,698
Legal 47,690
Printing and postage 30,587
Distribution fee (Note 2) 29,887
Accounting fee (Note 2) 25,202
Audit 21,100
Registration fees 16,492
Transfer agent fees (Note 2) 11,297
Organizational expense (Note 1) 10,224
Custodian fee 3,056
Directors' fees 1,511
Miscellaneous 337
Insurance 300
----------
Total expenses 277,381
Less: Fees waived and expenses reimbursed (Note 2) (144,578)
----------
Net expenses 132,803
----------
Net investment income 1,005,489
----------
Net realized and unrealized gain/(loss) on investments:
Net realized loss from security transactions (85,513)
Change in unrealized appreciation or depreciation
of investments 27,235
----------
Net realized and unrealized loss on investments (58,278)
----------
Net increase in net assets resulting from operations $ 947,211
==========
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended March 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 1,005,489 $ 613,033
Net loss from security transactions (85,513) (2,588)
Change in unrealized appreciation or
depreciation of investments 27,235 434,427
----------- -----------
Net increase in net assets resulting
from operations 947,211 1,044,872
----------- -----------
Distributions to Shareholders from:
Net investment income:
Class A Shares (513,444) (528,695)
Institutional Shares (509,983) (60,193)
Distributions in excess of income
(Class A Shares) (32,984) (68,882)
----------- -----------
Total distributions (1,056,411) (657,770)
Capital Share Transactions (Note 3):
Proceeds from sale of shares 7,978,261 10,461,018
Value of shares issued in reinvestment
of dividends 455,395 402,890
Cost of shares repurchased (3,949,236) (5,036,544)
----------- -----------
Total increase in net assets derived
from capital share transactions 4,484,420 5,827,364
----------- -----------
Total increase in net assets 4,375,220 6,214,466
Net Assets:
Beginning of year 19,133,564 12,919,098
----------- -----------
End of year $23,508,784 $19,133,564
=========== ===========
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
For the Year Ended
March 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 9.84
------
Income from Investment Operations:
Net investment income 0.44
Net realized and unrealized gain/(loss)
on investments (0.05)
------
Total from Investment Operations 0.39
Less Distributions:
Dividends from net investment income (0.44)
Distributions in excess of income (0.01)
------
Total distributions (0.45)
------
Net asset value at end of period $ 9.78
======
Total Return(2) 4.05%
Ratios to Average Daily Net Assets:
Expenses(3) 0.70%
Net investment income(4) 4.29%
Supplemental Data:
Net assets at end of period (000) $11,538
Portfolio turnover rate 33.18%
- ------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of expenses to average net daily assets would have been 1.34%,
1.69%, 1.85% and 2.46% for the years ended March 31, 1997, 1996, 1995 and
the period ended March 31, 1994, respectively.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of net investment income to average daily net assets would have
been 3.66%, 3.13%, 3.29% and 1.68% for the years ended March 31, 1997,
1996, 1995 and the period ended March 31, 1994, respectively.
(5) Annualized.
16
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
October 1, 1993(1)
through
For the Year Ended March 31, March 31,
- ------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <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) --
------ ------ -------
Total distributions (0.45) (0.43) (0.11)
------ ------ -------
Net asset value at end of period $ 9.84 $ 9.52 $ 9.50
====== ====== =======
Total Return(2) 8.20% 5.12% (4.06)%
Ratios to Average Daily Net Assets:
Expenses(3) 0.70% 0.70% 0.29%(5)
Net investment income(4) 4.09% 4.44% 3.84%(5)
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>
See Notes to Financial Statements.
17
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout each period)
For the Period
For the Year Nov. 2, 1995(1)
Ended through
March 31, March 31,
- --------------------------------------------------------------------------------
1997 1996
Per Share Operating Performance:
Net asset value at beginning of period $ 9.93 $ 9.93
------ ------
Income from Investment Operations:
Net investment income 0.48 0.15
Net realized and unrealized loss
on investments (0.07) (0.03)
------ ------
Total from Investment Operations 0.41 0.12
Less Distributions:
Dividends from net investment income
and short-term gains (0.47) (0.12)
------ ------
Net asset value at end of period $ 9.87 $ 9.93
====== ======
Total Return 4.27% 2.83%(2)
Ratios to Average Daily Net Assets:
Expenses(3) 0.45% 0.45%(2)
Net investment income(4) 4.55% 4.45%(2)
Supplemental Data:
Net assets at end of period (000) $11,971 $7,068
Portfolio turnover rate 33.18% 8.79%(2)
- ------------
(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.08% and 1.30% for the year ended
March 31, 1997 and the period ended March 31, 1996, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 3.92% and 3.67% for the
year ended March 31, 1997 and the period ended March 31, 1996,
respectively.
See Notes to Financial Statements.
18
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Finaicial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc. (the
"Fund"), which was organized as a Maryland Corporation on July 23, 1993,
commenced operations October 1, 1993. The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end Management
Investment Company. It 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 invests primarily in municipal obligations issued by the State of Maryland
and its political subdivisions, agencies or instrumentalities. Since the Fund
has a specialized focus, it carries more risk than a fund that invests more
generally.
The Fund consists of two share classes: Class A Shares, which commenced
October 1, 1993, and Institutional Shares, which commenced November 2, 1995.
The Class A Shares have a 1.50% maximum front-end sales charge and a 0.25%
distribution fee. The Institutional Shares have neither a front-end sales charge
nor a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation--Municipal obligations are usually traded in the
over-the-counter market. When there is an available market quotation,
the Fund values a municipal obligation by using the most recent price
provided by an investment dealer. The Fund may also value a municipal
obligation by using a price from an independent pricing service that
the Investment Advisor has determined reflects the obligation's fair
market value. When a market quotation is unavailable, the Investment
Advisor determines a fair value using procedures that the Board of
Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost.
B. Repurchase Agreements--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
19
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Finaicial Statements (continued)
NOTE 1--concluded
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes--The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long
as it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net
realized capital gains, it will be exempt from most, if not all,
federal income and excise taxes. As a result, the Fund has made no
provisions for federal income taxes.
D. Security Transactions, Investment Income, Distributions and Other--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated
to each class based on its respective average net assets. Class
specific expenses are charged directly to each class. Dividend income
and distributions to shareholders are recorded on the ex-dividend
date. The Fund has deferred the costs incurred by its organization and
the initial public offering of shares. These costs are being amortized
on the straight-line method over a five-year period from the Fund's
commencement of operations.
20
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., is the Fund's investment advisor. As compensation for its
advisory services, the Fund pays ICC an annual fee. This fee is based on the
Fund's average daily net assets and is calculated daily and paid monthly at the
following annual rates: 0.35% of the first $1 billion, 0.30% of the next $500
billion and 0.25% of the amount over $1.5 billion.
ICC has agreed to waive its fees when necessary so that expenses are no
more than 0.70% of the Class A Shares' average daily net assets and 0.45% of the
Institutional Shares' average daily net assets. For the year ended March 31,
1997, ICC waived fees of $79,698 and reimbursed expenses of $64,880.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $25,202 for accounting services for the year ended
March 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $11,297 for
transfer agent services for the year ended March 31, 1997.
As compensation for providing distribution services, the Fund pays Alex.
Brown & Sons Incorporated ("Alex. Brown") an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the Class
A Shares' average daily net assets. For the year ended March 31, 1997,
distribution fees aggregated $29,887. The Fund did not pay Alex. Brown any
commissions for the year ended March 31, 1997.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period April
1, 1996 through March 31, 1997 was approximately $950, and the accrued liability
was approximately $2,200.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 40 million shares of $.001 par value
capital stock (25 million Class A, 2 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory & Trust and 3 million undesignated).
Transactions in shares of the Fund are listed on the following page.
21
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Finaicial Statements (concluded)
NOTE 3--continued
Class A Shares
-----------------------------------
For the For the
Year Ended Year Ended
March 31, 1997 March 31, 1996
-------------- --------------
Shares sold 77,427 318,331
Shares issued to shareholders on
reinvestment of dividends 33,825 39,023
Shares redeemed (157,261) (488,564)
----------- -----------
Net decrease in shares outstanding (46,009) (131,210)
=========== ===========
Proceeds from sale of shares $ 750,704 $ 3,133,248
Value of reinvested dividends 331,270 382,490
Cost of shares redeemed (1,538,466) (4,810,545)
----------- -----------
Net decrease from capital share transactions $ (456,492) $(1,294,807)
=========== ===========
Institutional Shares
-----------------------------------
For the Period
For the Nov. 2, 1995*
Year Ended through
March 31, 1997 March 31, 1996
-------------- --------------
Shares sold 731,797 731,839
Shares issued to shareholders on
reinvestment of dividends 12,570 2,037
Shares redeemed (243,131) (22,388)
----------- ----------
Net increase in shares outstanding 501,236 711,488
=========== ==========
Proceeds from sale of shares $ 7,227,557 $7,327,770
Value of reinvested dividends 124,125 20,400
Cost of shares redeemed (2,410,770) (225,999)
----------- ----------
Net increase from capital share transactions $ 4,940,912 $7,122,171
=========== ==========
- ----------
*Commencement of operations.
22
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $12,702,143 and sales of investment securities aggregated $7,177,895
for the year ended March 31, 1997.
On March 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $138,678 and
aggregate gross unrealized depreciation of all securities in which there is an
excess of tax cost over value was $125,411.
NOTE 5--Net Assets
On March 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares ............................................. $11,637,968
Institutional Shares ....................................... 12,063,083
Accumulated net realized loss from securities transactions .... (205,533)
Unrealized appreciation of investments ........................ 13,266
-----------
$23,508,784
===========
NOTE 6--Distributions
Of the net investment income distributions paid monthly by the Fund during
the taxable year ended March 31, 1997, 96.91% qualify as tax-exempt interest
dividends for federal tax purposes. The Fund did not distribute any capital
gains during the year.
NOTE 7--Capital Loss Carryforward
At March 31, 1997, there was a tax capital loss carryforward of $164,603 of
which $36,982 expires in 2003, $83,039 expires in 2004 and $44,582 expires in
2005. This carryforward will be used to offset any future net capital gains.
NOTE 8--Merger Agreement
On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they had signed a definitive agreement to merge. The
merger, which is expected to be completed by the fourth quarter of 1997, is
subject to customary closing conditions, including certain regulatory and
shareholder approvals.
23
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc.:
We have audited the accompanying statement of net assets of the Flag
Investors Maryland Intermediate Tax-Free Income Fund, Inc. as of March 31, 1997,
and 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, and the
financial highlights for each of the respective periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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, 1997 by correspondence with the custodian. 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, 1997, 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 25, 1997
24
<PAGE>
FLAG INVESTORS MARYLAND INTERMEDIATE TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Directors and Officers
RICHARD T. HALE
Chairman
JAMES J. CUNNANE PAUL D. CORBIN
Director Executive Vice President
JOHN F. KROEGER GARY V. FEARNOW
Director Vice President
LOUIS E. LEVY MONICA M. HAUSNER
Director Vice President
EUGENE J. MCDONALD EDWARD J. VEILLEUX
Director Vice President
REBECCA W. RIMEL SCOTT J. LIOTTA
Director Vice President and Secretary
TRUMAN T. SEMANS JOSEPH A. FINELLI
Director Treasurer
M. ELLIOTT RANDOLPH, JR. LAURIE D. COLLIDGE
President Assistant Secretary
Investment Objective
A open-end mutual fund designed to provide current income exempt from federal
income taxes and Maryland state and local income taxes consistent with
preservation of principal within an intermediate-term maturity structure.
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
- --------------------------------------------------------------------------------
25
<PAGE>
[FLAG INVESTORS LOGO]
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ALEX. BROWN & SONS
INCORPORATED
