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P.O. Box 515 Semi-Annual Report
Baltimore, Maryland 21203 April 30, 1996
800-767-FLAG
Distributed by:
ALEX. BROWN & SONS
INCORPORATED
<PAGE>
Directors and Officers
Edward S. Hyman R. Alan Medaugh
Chairman President
Richard T. Hale Gary V. Fearnow
Vice Chairman Vice President
W. James Price Nancy Lazar
Vice Chairman Vice President
James J. Cunnane Edward J. Veilleux
Director Vice President
John F. Kroeger Brian C. Nelson
Director Vice President and Secretary
Louis E. Levy Carrie L. Butler
Director Vice President
Eugene J. McDonald Joseph A. Finelli
Director Treasurer
Harry Woolf Denice DeFlorio
Director Assistant Vice President
Laurie D. DePrine
Assistant Secretary
Investment Objective
A mutual fund designed to provide a high level of total return with relative
stability of principal as well as the secondary objective of high current income
consistent with an investment in securities issued by the United States
Treasury.
Investment Advisor
ISI Inc.
717 Fifth Avenue
New York, NY 10022
Custodian
PNC Bank, N.A.
Transfer Agent
Investment Company Capital Corp.
P.O. Box 515
Baltimore, MD 21203
(800) 553-8080
Legal Counsel
Morgan, Lewis & Bockius LLP
Independent Auditors
Deloitte & Touche LLP
Fund Highlights
Profile as of: April 30, 1996
Net Asset Value $ 9.61
Total Net Assets (Millions) $341.8
Average Maturity 13.1 years
AverageDuration 6.8 years
Sector Diversification (% of net assets)
U.S.Treasury Bonds 67.2%
U.S. Treasury Notes 22.6
Short-Term Investments 10.2
Average Annual Total Return*
(For the periods ended April 30, 1996)
One Year 8.1%
Five Years 8.2%
Since Inception (8/10/88) 8.5%
*These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
was 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. Past performance is not an
indicator of future results. Please review the Additional Performance
Information on page 5.
1
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the period ended
April 30, 1996. As of this date, the Fund recorded a 6-month total return of
- -2.2% and a 12-month total return of 8.1%. Since its inception on August 10,
1988, the Fund has produced a cumulative total return of 87.8%, which translates
into an average annual total return of 8.5%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
Overview
Overall, interest rates declined during the last 12 months. As stronger
economic news has surfaced recently, interest rates have moved back up. The
market's quick response to the appearance of fast growth has helped regulate the
economy and control inflation. The result has been a general decline in both
interest rates (see chart below) and inflation.
30-YEAR TREASURY YIELDS
[GRAPH GOES HERE]
DATE YIELD DATE YIELD DATE YIELD
4/96 6.907 6/95 6.618 6/94 7.609
5/95 6.650 5/94 7.429
3/96 6.668 4/95 7.337 4/94 7.308
2/96 6.470
1/96 6.029 3/95 7.432 3/94 7.093
2/95 7.444 2/94 6.662
12/95 5.949 1/95 7.699 1/94 6.239
11/95 6.131
10/95 6.329 12/94 7.882 12/93 6.349
11/94 8.000 11/93 6.302
9/95 6.502 10/94 7.970 10/93 5.971
8/95 6.648
7/95 6.847 9/94 7.818 9/93 6.026
8/94 7.452 8/93 6.093
7/94 7.397 7/93 6.565
6/93 6.673 6/92 7.781 6/91 8.406
5/93 6.981 5/92 7.838 5/91 8.266
4/93 6.933 4/92 8.037 4/91 8.183
3/93 6.927 3/92 7.959 3/91 8.247
2/93 6.898 2/92 7.790 2/91 8.204
1/93 7.198 1/92 7.759 1/91 8.196
12/92 7.397 12/91 7.401 12/90 8.249
11/92 7.598 11/91 7.943 11/90 8.487
10/92 7.627 10/91 7.915 10/90 8.760
9/92 7.382 9/91 7.810 9/90 8.950
8/92 7.410 8/91 8.061 8/90 8.985
7/92 7.459 7/91 8.342 7/90 8.412
6/90 8.401 6/89 8.038
5/90 8.579 5/89 8.596
4/90 8.995 4/89 8.929
3/90 8.627 3/89 9.093
2/90 8.543 2/89 9.115
1/90 8.453 1/89 8.821
12/89 7.979 12/88 8.992
11/89 7.891 11/88 9.069
10/89 7.907 10/88 8.741
9/89 8.237 9/88 9.052
8/89 8.205 8/88 9.299
7/89 7.921
Source: Bloomberg Financial Services
Portfolio
We actively manage the Fund's maturity structure by moving the Fund's
investments into short-term maturities as the economy appears to be growing
quickly and into longer-term maturities when growth and inflation appear to be
slowing. During the last 12 months, the Fund has increased its short-term
maturities (cash reserves), as shown in the chart below.
Short-Term Holdings
(Maturing in less than one year)
Percent of Portfolio
April 1995 7.6%
October 1995 20.5%
April 1996 23.1%
We believe that interest rates are moving close to a peak. As our economic
research indicates a slowing economy and lower inflation ahead, we will extend
the maturities of the short-term issues in the portfolio. Please see our
Interest Rate Outlook on the following page for more details.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
R. Alan Medaugh
President
May 24, 1996
2
<PAGE>
Interest Rate Outlook
The rate of growth in the economy is likely to slow as we move through 1996. The
recent interest rate rise, a stretched consumer and a long lag between Federal
Reserve easing and a pick-up in growth should produce a slow growth profile.
Overseas, we expect slow growth to continue, especially in Europe as these
economies struggle with the impact of declining government spending. Inflation,
after picking up in early 1996, should return to a subdued 1.5% pace. In the
U.S., credit demand is moderate, in part because of work aimed at reducing the
government deficit. Slow growth, low inflation and subdued credit demand should
produce lower interest rates in the second half of 1996. Please see our forecast
table below for more details.
ISI ECONOMIC FORECAST
95:4Q 96:1Q 96:2Q* 96:3Q* 96:4Q* 97:1Q* 97:2Q*
Real GDP 0.6% 2.0% 2.5% 1.0% 1.0% 1.0% 3.5%
GDP Deflator** 1.9% 1.5% 2.5% 2.0% 1.5% 1.5% 1.5%
30-Year Bond
Yields 6.0% 6.7% 6.6% 6.2% 6.0% 5.5% 5.7%
Fed Funds Rate 5.5% 5.2% 5.2% 5.0% 4.8% 4.5% 4.5%
* Estimated.
** A more accurate cost of living barometer than the CPI.
Source: ISI Inc.
Growth in the U.S.
We expect growth in the first half of 1996 to be above the level in late
1995. The credit markets are sensitive to fast growth because it reduces excess
capacity in the economy, providing an opportunity for price increases. We expect
growth in the first half of 1996 to be in the 2% to 2.5% range. The inflation
risk from this level of growth is low because new capacity is being added at a
4.0% annual rate (see chart, top right).
<TABLE>
<CAPTION>
CAPACITY GROWTH Y/Y %
Mar 3.8%
[GRAPH GOES HERE]
<S> <C>
68:1 68:2 68:3 68:4 68:5 68:6 68:7 68:8 68:9 68:10 68:11 68:12
Y/Y % 5.2 5.2 5.3 5.2 5.1 5.1 4.9 4.9 4.9 4.9 4.7 4.7
69:1 69:2 69:3 69:4 69:5 69:6 69:7 69:8 69:9 69:10 69:11 69:12
Y/Y % 4.8 4.7 4.6 4.6 4.6 4.4 4.6 4.4 4.4 4.4 4.4 4.3
70:1 70:2 70:3 70:4 70:5 70:6 70:7 70:8 70:9 70:10 70:11 70:12
Y/Y % 4.2 4.2 4.2 4.1 4.0 4.1 4.0 4.0 3.9 3.8 3.8 3.6
71:1 71:2 71:3 71:4 71:5 71:6 71:7 71:8 71:9 71:10 71:11 71:12
Y/Y % 3.7 3.7 3.5 3.4 3.4 3.3 3.3 3.3 3.1 3.1 3.1 3.1
72:1 72:2 72:3 72:4 72:5 72:6 72:7 72:8 72:9 72:10 72:11 72:12
Y/Y % 3.0 3.0 3.1 3.1 3.1 3.1 3.1 3.0 3.2 3.2 3.1 3.1
73:1 73:2 73:3 73:4 73:5 73:6 73:7 73:8 73:9 73:10 73:11 73:12
Y/Y % 3.1 3.1 3.1 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.2 3.3
74:1 74:2 74:3 74:4 74:5 74:6 74:7 74:8 74:9 74:10 74:11 74:12
Y/Y % 3.3 3.3 3.4 3.3 3.4 3.4 3.5 3.3 3.4 3.4 3.6 3.4
75:1 75:2 75:3 75:4 75:5 75:6 75:7 75:8 75:9 75:10 75:11 75:12
Y/Y % 3.4 3.4 3.3 3.3 3.1 3.1 3.0 2.9 2.8 2.8 2.6 2.6
76:1 76:2 76:3 76:4 76:5 76:6 76:7 76:8 76:9 76:10 76:11 76:12
Y/Y % 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7 2.7 2.7 2.7
77:1 77:2 77:3 77:4 77:5 77:6 77:7 77:8 77:9 77:10 77:11 77:12
Y/Y % 2.7 2.7 2.8 2.8 2.7 2.7 2.8 2.8 2.8 2.8 2.8 2.9
78:1 78:2 78:3 78:4 78:5 78:6 78:7 78:8 78:9 78:10 78:11 78:12
Y/Y % 2.9 2.9 2.9 2.9 3.0 3.0 3.0 3.0 3.1 3.1 3.1 3.0
79:1 79:2 79:3 79:4 79:5 79:6 79:7 79:8 79:9 79:10 79:11 79:12
Y/Y % 3.0 3.0 3.0 3.0 2.9 3.0 2.9 2.9 2.8 2.9 2.9 2.8
80:1 80:2 80:3 80:4 80:5 80:6 80:7 80:8 80:9 80:10 80:11 80:12
Y/Y % 2.9 2.9 2.8 2.9 3.0 3.0 3.1 3.1 3.2 3.2 3.3 3.3
81:1 81:2 81:3 81:4 81:5 81:6 81:7 81:8 81:9 81:10 81:11 81:12
Y/Y % 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.5
82:1 82:2 82:3 82:4 82:5 82:6 82:7 82:8 82:9 82:10 82:11 82:12
Y/Y % 3.4 3.3 3.2 3.2 3.1 3.0 3.0 2.9 2.9 2.8 2.7 2.7
83:1 83:2 83:3 83:4 83:5 83:6 83:7 83:8 83:9 83:10 83:11 83:12
Y/Y % 2.7 2.6 2.6 2.5 2.6 2.6 2.5 2.5 2.4 2.4 2.4 2.4
84:1 84:2 84:3 84:4 84:5 84:6 84:7 84:8 84:9 84:10 84:11 84:12
Y/Y % 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.4 2.4 2.3
85:1 85:2 85:3 85:4 85:5 85:6 85:7 85:8 85:9 85:10 85:11 85:12
Y/Y % 2.4 2.4 2.5 2.5 2.5 2.5 2.6 2.7 2.8 2.7 2.8 2.9
86:1 86:2 86:3 86:4 86:5 86:6 86:7 86:8 86:9 86:10 86:11 86:12
Y/Y % 2.8 2.8 2.7 2.6 2.5 2.5 2.4 2.3 2.2 2.2 2.1 2.0
87:1 87:2 87:3 87:4 87:5 87:6 87:7 87:8 87:9 87:10 87:11 87:12
Y/Y % 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
88:1 88:2 88:3 88:4 88:5 88:6 88:7 88:8 88:9 88:10 88:11 88:12
Y/Y % 1.9 1.8 1.8 1.8 1.7 1.7 1.6 1.6 1.6 1.5 1.5 1.4
89:1 89:2 89:3 89:4 89:5 89:6 89:7 89:8 89:9 89:10 89:11 89:12
Y/Y % 1.4 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.8 1.8 1.8 1.9
90:1 90:2 90:3 90:4 90:5 90:6 90:7 90:8 90:9 90:10 90:11 90:12
Y/Y % 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
91:1 91:2 91:3 91:4 91:5 91:6 91:7 91:8 91:9 91:10 91:11 91:12
Y/Y % 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.9
92:1 92:2 92:3 92:4 92:5 92:6 92:7 92:8 92:9 92:10 92:11 92:12
Y/Y % 1.9 1.9 1.9 1.9 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1
93:1 93:2 93:3 93:4 93:5 93:6 93:7 93:8 93:9 93:10 93:11 93:12
Y/Y % 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
94:1 94:2 94:3 94:4 94:5 94:6 94:7 94:8 94:9 94:10 94:11 94:12
Y/Y % 2.2 2.3 2.4 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2
95:1 95:2 95:3 95:4 95:5 95:6 95:7 95:8 95:9 95:10 95:11 95:12
Y/Y % 3.2 3.2 3.3 3.3 3.4 3.5 3.5 3.5 3.6 3.6 3.7 3.8
96:1 96:2 96:3 96:4 96:5 96:6
Y/Y % 3.8 3.8 3.8 3.9 N/A N/A
</TABLE>
Source: ISI Inc.
We expect growth in the second half of 1996 to slow to the 1.0% level. The
recent interest rate rise, a high consumer debt burden and the multi-year delay
between Federal Reserve easing and an upturn in economic growth are the
catalysts for the slowdown. A slowdown of this magnitude would reduce the fear
of a return to inflation and help reduce interest rates.
Growth Outside the U.S.
In 1994, the specter of a synchronized global expansion caused a sharp rise
in interest rates. In 1996, European growth prospects are slight. Germany's
growth, for example, is forecast by the German government to be only 0.5% this
year. Japanese growth is likely to pick up, but slow money growth and a fragile
financial system should hold it to 2.0% or less for 1996. We survey 28 countries
to gauge world growth. Currently, these surveys show world growth as slow at
best. Please see our survey results on the top of p. 4.
3
<PAGE>
Interest Rate Outlook (continued)
[GRAPH GOES HERE]
<TABLE>
<CAPTION>
FOREIGN (STRENGTH-WEAKNESS)--Plot points for Foreign (Strength-Weakness)
<S> <C>
9/5/94 9/12/94 9/19/94 9/26/94 10/3/94 10/10/94 10/17/94
13 Wk. Avg. NA NA NA 3.1 3.8 4.1 4.8
10/24/94 10/31/94 11/7/94 11/14/94 11/21/94 11/28/94 12/5/94
13 Wk. Avg. 6.0 5.6 4.6 5.2 5.4 5.8 6.5
12/12/94 12/19/94 12/26/94 1/2/95 1/9/95 1/16/95 1/23/95
13 Wk. Avg. 7.1 6.5 6.5 8.4 7.8 7.2 6.0
1/30/95 2/6/95 2/13/95 2/20/95 2/27/95 3/6/95 3/13/95 3/20/95
13 Wk. Avg. 5.8 6.4 5.3 5.8 6.7 7.2 6.7 7.4
3/27/95 4/3/95 4/10/95 4/17/95 4/24/95 5/1/95 5/8/95 5/15/95
13 Wk. Avg. 7.3 6.4 7.4 6.9 6.2 6.2 5.3 5.6
5/22/95 5/29/95 6/5/95 6/12/95 6/19/95 6/26/95 7/3/95 7/10/95
13 Wk. Avg. 5.6 4.1 2.1 1.3 0.5 1.1 0.5 0.3
7/17/95 7/24/95 7/31/95 8/7/95 8/14/95 8/21/95 8/28/95 9/4/95
13 Wk. Avg. 0.9 0.4 -0.6 -1.2 -1.0 -2.8 -2.7 -3.1
9/11/95 9/18/95 9/25/95 10/2/95 10/9/95 10/16/95 10/23/95
13 Wk. Avg. -2.5 -2.5 -3.6 -3.8 -4.8 -5.2 -5.2
10/30/95 11/6/95 11/13/95 11/20/95 11/27/95 12/4/95 12/11/95
13 Wk. Avg. -5.4 -3.9 -4.8 -4.9 -4.8 -4.5 -4.4
12/18/95 12/25/95 1/1/96 1/8/96 1/15/96 1/22/96 1/29/96
13 Wk. Avg. -4.5 -5.0 -4.8 -4.3 -5.0 -5.8 -5.2
2/5/96 2/12/96 2/19/96 2/26/96 3/4/96 3/11/96 3/18/96 3/25/96
13 Wk. Avg. -5.4 -5.9 -4.5 -3.7 -3.5 -4.3 -5.4 -4.7
4/1/96 4/8/96 4/15/96 4/22/96 4/29/96 5/6/96 5/13/96 5/20/96
13 Wk. Avg. -5.7 -6.4 -5.8 -5.3 -5.6 -5.7 -5.9 -7.3
5/27/96 6/3/96 6/10/96 6/17/96
13 Wk. Avg. -6.2 -6.2 -5.7 NA
</TABLE>
Source: ISI Inc.
Outlook for Inflation
The prices of many commodities have increased this year. As a result, there
is likely to be some pressure on consumer prices. Price increases become large
and widespread if money growth has been high. Central banks around the world
have been in an inflation-fighting posture, and money growth, although up
recently, is quite low compared to periods such as 1974, 1979 and 1990 when
commodity prices surged (see chart below).
G7 MONEY Y/Y % U.S., J, G, F, U.K., C Eq. Wts
Mar 5.4%
[GRAPH GOES HERE]
<TABLE>
<CAPTION>
G7 MONEY U.S.,J,G,F,U.K.,C Eq.Wts= Plot points for G7 Money Y/Y Chart
<S> <C>
72:1 72:2 72:3 72:4 72:5 72:6 72:7 72:8 72:9 72:10 72:11 72:12
Y/Y % 12.8 11.2 12.2 12.8 13.3 13.6 13.6 13.7 14.3 15.2 15.7 16.8
73:1 73:2 73:3 73:4 73:5 73:6 73:7 73:8 73:9 73:10 73:11 73:12
Y/Y % 16.3 16.5 16.2 16.2 16.3 15.2 14.9 14.8 13.9 13.0 13.1 13.0
74:1 74:2 74:3 74:4 74:5 74:6 74:7 74:8 74:9 74:10 74:11 74:12
Y/Y % 13.8 13.0 13.5 13.1 12.5 12.7 12.7 12.7 13.2 13.3 13.6 13.1
75:1 75:2 75:3 75:4 75:5 75:6 75:7 75:8 75:9 75:10 75:11 75:12
Y/Y % 12.6 13.3 13.1 13.0 13.1 13.8 13.8 13.8 14.0 14.1 13.7 14.3
76:1 76:2 76:3 76:4 76:5 76:6 76:7 76:8 76:9 76:10 76:11 76:12
Y/Y % 14.4 14.5 14.2 14.4 14.7 14.7 14.7 15.0 14.2 14.7 14.2 13.3
77:1 77:2 77:3 77:4 77:5 77:6 77:7 77:8 77:9 77:10 77:11 77:12
Y/Y % 13.9 13.2 12.9 12.9 12.6 12.3 12.2 11.8 12.2 11.6 12.3 13.1
78:1 78:2 78:3 78:4 78:5 78:6 78:7 78:8 78:9 78:10 78:11 78:12
Y/Y % 12.6 12.9 12.7 13.0 12.8 13.0 13.7 13.5 13.5 13.4 13.8 12.5
79:1 79:2 79:3 79:4 79:5 79:6 79:7 79:8 79:9 79:10 79:11 79:12
Y/Y % 12.6 12.6 12.6 12.4 12.8 12.5 11.9 12.3 12.2 12.1 11.3 11.7
80:1 80:2 80:3 80:4 80:5 80:6 80:7 80:8 80:9 80:10 80:11 80:12
Y/Y % 11.4 11.3 11.2 10.3 10.0 9.9 9.8 10.1 9.7 9.5 10.0 9.3
81:1 81:2 81:3 81:4 81:5 81:6 81:7 81:8 81:9 81:10 81:11 81:12
Y/Y % 8.8 9.3 9.7 11.1 10.7 10.3 10.5 9.7 9.6 9.3 8.0 9.2
82:1 82:2 82:3 82:4 82:5 82:6 82:7 82:8 82:9 82:10 82:11 82:12
Y/Y % 10.3 9.3 8.7 7.6 7.8 8.1 7.5 7.7 8.1 8.8 8.9 8.9
83:1 83:2 83:3 83:4 83:5 83:6 83:7 83:8 83:9 83:10 83:11 83:12
Y/Y % 8.9 9.1 9.4 9.6 9.2 9.0 9.1 9.0 8.9 8.8 8.9 9.1
84:1 84:2 84:3 84:4 84:5 84:6 84:7 84:8 84:9 84:10 84:11 84:12
Y/Y % 8.4 7.1 6.9 6.9 6.7 6.8 6.3 6.2 6.7 6.3 6.8 7.5
85:1 85:2 85:3 85:4 85:5 85:6 85:7 85:8 85:9 85:10 85:11 85:12
Y/Y % 8.1 8.4 8.7 8.5 8.4 8.7 8.9 9.1 9.0 9.2 9.1 9.2
86:1 86:2 86:3 86:4 86:5 86:6 86:7 86:8 86:9 86:10 86:11 86:12
Y/Y % 8.8 8.6 9.0 8.9 9.7 9.4 9.7 10.2 10.1 10.2 10.6 10.0
87:1 87:2 87:3 87:4 87:5 87:6 87:7 87:8 87:9 87:10 87:11 87:12
Y/Y % 10.8 10.9 10.3 10.7 10.2 9.8 9.5 9.1 9.0 9.2 8.1 7.8
88:1 88:2 88:3 88:4 88:5 88:6 88:7 88:8 88:9 88:10 88:11 88:12
Y/Y % 7.7 7.4 7.4 7.3 7.4 7.5 7.9 8.0 8.0 8.0 8.6 8.7
89:1 89:2 89:3 89:4 89:5 89:6 89:7 89:8 89:9 89:10 89:11 89:12
Y/Y % 8.4 8.5 8.5 8.2 7.9 8.1 8.3 8.3 8.7 8.9 8.9 9.7
90:1 90:2 90:3 90:4 90:5 90:6 90:7 90:8 90:9 90:10 90:11 90:12
Y/Y % 9.8 10.0 9.7 9.9 9.7 11.9 11.1 10.9 11.0 10.3 9.7 9.5
91:1 91:2 91:3 91:4 91:5 91:6 91:7 91:8 91:9 91:10 91:11 91:12
Y/Y % 8.7 8.2 8.6 8.4 8.5 5.9 5.9 5.7 5.2 4.8 5.2 4.2
92:1 92:2 92:3 92:4 92:5 92:6 92:7 92:8 92:9 92:10 92:11 92:12
Y/Y % 4.8 5.1 5.0 5.1 5.4 4.9 5.2 5.3 5.3 5.6 5.3 4.8
93:1 93:2 93:3 93:4 93:5 93:6 93:7 93:8 93:9 93:10 93:11 93:12
Y/Y % 4.7 4.4 4.3 4.2 4.3 4.6 4.2 3.9 3.8 3.9 3.7 4.3
94:1 94:2 94:3 94:4 94:5 94:6 94:7 94:8 94:9 94:10 94:11 94:12
Y/Y % 4.6 4.4 4.2 4.5 3.5 3.3 3.7 3.4 3.5 3.3 3.0 2.7
95:1 95:2 95:3 95:4 95:5 95:6 95:7 95:8 95:9 95:10 95:11 95:12
Y/Y % 2.3 2.3 2.2 1.9 2.4 2.8 2.8 3.1 3.4 3.0 3.5 4.5
96:1 96:2 96:3 96:4 96:5 96:6
Y/Y % 4.5 4.9 5.7 5.3 N/A N/A
</TABLE>
Source: ISI Inc.
It is likely that individual commodity prices will show gains in 1996 due
to specific supply/ demand situations, but we expect that the entire basket of
commodities will show only a modest increase. After a first half rise that
carried the Consumption Price Deflator (an indicator of price changes and shifts
in the GDP) into the 2.5% range, we expect inflation to return to a low 1.5%
rate later in 1996.
Interest Rates
The bond market has reacted to reports of stronger growth in early 1996 by
moving interest rates up 1%. The hike in rates is to prevent a return of
inflation. The interest rate sensitive areas of the economy, such as housing,
have already felt the effect of higher rates, and the refinancing of mortgages
has fallen sharply as rates have climbed. With the Prime Rate already at a high
8.25%, loans to small and mid-sized businesses seem likely to be affected by
cost pressure. The recent jump in rates is another force lowering second half
growth. As the economy slows, interest rates have room to fall from today's 7%
on long-term Treasuries to 6% by year-end.
4
<PAGE>
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include 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
Fund's currently effective 4.50% maximum sales charge.
AVERAGE ANNUAL TOTAL RETURN
% Return With
Periods ended 3/31/96: Sales Charge
-----------------------------------------------------------------
One Year 5.87%
Five Years 7.69%
Since Inception (8/10/88) 8.12%
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.
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.
5
<PAGE>
Statement of Net Assets April 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Par Value
Interest Rate Maturity Date (000) (Note A)
<S> <C>
U.S. TREASURY BONDS - 67.2%
10.000% 5/15/10 $ 5,000 $ 6,048,440
12.000 8/15/13 20,500 28,949,854
11.750 11/15/14 36,000 50,940,000
7.500 11/15/16 37,000 38,682,353
9.000 11/15/18 69,750 84,571,875
8.875 2/15/19 10,000 11,990,630
8.750 8/15/20 7,000 8,324,533
Total U.S. Treasury Bonds
(Cost $247,957,681) 229,507,685
U.S. TREASURY NOTES - 22.6%
7.000 9/30/96 47,000 47,323,125
6.375 3/31/01 30,000 29,934,390
Total U.S. Treasury Notes
(Cost $77,425,530) 77,257,515
REPURCHASE AGREEMENTS - 8.7%
Goldman Sachs & Co., 5.20%
Dated 4/30/96, to be repurchased on 5/1/96, collateralized
by U.S. Treasury Bonds with a market value of $30,407,342.
(Cost $29,811,000) 29,811 29,811,000
</TABLE>
6
<PAGE>
Statement of Net Assets (concluded) April 30, 1996
(Unaudited)
Value
(Note A)
Total Investments in Securities - 98.5%
(Cost $355,194,211)* $336,576,200
Other Assets in Excess of Liabilities, Net - 1.5% 5,254,429
Net Assets - 100.0% $341,830,629
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($148,809,988 / 15,488,576 shares outstanding) $ 9.61
ISI Class Share
($193,020,641 / 20,083,409 shares outstanding) $ 9.61
Maximum Offering Price Per:
Flag Investors Class A Share
($9.61 / .955) $10.06
ISI Class Share
($9.61 / .9555) $10.06
*Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
7
<PAGE>
Statement of Operations For the Six Months Ended April 30, 1996
(Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest $ 11,680,187
EXPENSES:
Investment advisory fee (Note B) 488,740
Distribution fee (Note B) 453,202
Administration fee (Note B) 215,147
Transfer agent fee (Note B) 96,171
Accounting fee (Note B) 47,083
Printing and postage 30,816
Legal 13,650
Audit 11,967
Miscellaneous 9,473
Insurance 5,849
Custodian fee 5,460
Registration fees 4,894
Directors' fees 4,550
Total expenses 1,387,002
Net investment income 10,293,185
Realized and Unrealized gain/(loss) on investments:
Net realized gain from security transactions 2,385,791
Change in unrealized appreciation/(depreciation) of investments (20,085,536)
Net loss on investments (17,699,745)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (7,406,560)
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
April 30, 1996 Ended
(Unaudited) October 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 10,293,185 $ 21,682,495
Net gain from security transactions 2,385,791 2,796,088
Change in unrealized appreciation/(depreciation)
on investments (20,085,536) 36,191,069
Net increase/(decrease) in net assets resulting from operations (7,406,560) 60,669,652
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares (5,860,239) (9,785,285)
ISI Class Shares (7,493,203) (11,897,210)
Net realized short-term gains:
Flag Investors Class A Shares -- (1,162,209)
ISI Class Shares -- (1,385,249)
Total distributions (13,353,442) (24,229,953)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 18,782,838 31,613,586
Value of shares issued in reinvestment of dividends 7,151,777 15,133,836
Cost of shares repurchased (34,164,675) (87,824,419)
Decrease in net assets derived from capital share
transactions (8,230,060) (41,076,997)
Total decrease in net assets (28,990,062) (4,637,298)
NET ASSETS:
Beginning of period 370,820,691 375,457,989
End of period $341,830,629 $370,820,691
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE>
Financial Highlights -- Flag Investors Class A Shares and ISI Class Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six
Months Ended
April 30, 1996 For the Year Ended October 31,
(Unaudited) 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
Income from Investment Operations:
Net investment income 0.28 0.57 0.51 0.62 0.76
Net realized and unrealized gain/(loss)
on investments (0.49) 1.04 (1.16) 1.12 0.05
Total from Investment Operations (0.21) 1.61 (0.65) 1.74 0.81
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains (0.37) (0.64) (1.20) (0.79) (0.70)
Distributions from net realized
long-term gains -- -- (0.28) (0.07) (0.05)
Total distributions (0.37) (0.64) (1.48) (0.86) (0.75)
Net asset value at end of period $ 9.61 $ 10.19 $ 9.22 $ 11.35 $ 10.47
Total Return* (2.16)% 18.09% (6.22)% 17.33% 8.96%
Ratios to Average Daily Net Assets:
Expenses(1) 0.76% 0.80% 0.77% 0.77% 0.77%
Net investment income(1) 5.66% 5.94% 4.98% 5.21% 5.65%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares $148,810 $164,206 $175,149 $224,790 $250,210
ISI Class Shares $193,021 $206,615 $200,309 $232,103 $207,518
Portfolio turnover rate 128% 194% 68% 249% 191%
</TABLE>
*Total return excludes the effect of sales charge.
(1)Annualized.
See accompanying Notes to Financial Statements.
10
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies -- Total Return U.S. Treasury Fund, Inc. (the
"Fund") was organized as a Maryland Corporation on June 3, 1988 and commenced
operations on August 10, 1988. The Fund is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company. At
April 30, 1996, the Fund consisted of two classes of shares: ISI Total Return
U.S. Treasury Fund ("ISI Class") and Flag Investors Total Return U.S. Treasury
Fund Class A Shares ("Flag Investors Class A"). The Flag Investors Class A and
the ISI Class Shares each have a different sales charge.
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. Significant accounting
policies are as follows:
Security Valuation -- Portfolio securities that are listed on a national
securities exchange are valued on the basis of their last sale price or, in the
absence of recorded sales, at the average of readily available closing bid and
asked prices. Securities or other assets for which market quotations are
not readily available are valued at their fair value so determined in good faith
by the Investment Advisor under procedures established and monitored by the
Board of Directors. Short-term obligations with maturities of 60 days or less
are valued at amortized cost which approximates market.
Repurchase Agreements -- The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be required
on a daily basis to maintain the value of the securities subject to the
agreement at not less than the repurchase price. The agreement is conditioned
upon the collateral being deposited under the Federal Reserve book-entry system.
Federal Income Taxes -- No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to 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
taxable net investment income and net realized capital gains.
Other -- Security transactions are accounted for on the trade date and the cost
of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when applicable,
the pro rata amortization of premiums and accretion of discounts.
B. Investment Advisory Fee, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") serves as the Fund's investment
advisor and Investment Company Capital Corp. ("ICC"), a subsidiary of Alex.
Brown Financial Corp., serves as the Fund's administrator. As compensation for
its advisory services, ISI receives an annual fee from the Fund, calculated
daily and paid monthly, at the following annual rates based upon the Fund's
average daily net assets: .20% of the first $100 million, .18% of the next $100
million, .16% of the next $100 million, .14% of the next $200 million and .12%
of that portion in excess of $500 million. In addition, the Fund pays the
investment advisor 1.5% of the Fund's gross income.
As compensation for its administrative services, ICC receives an annual fee
from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's average daily
11
<PAGE>
Notes to Financial Statements (continued)
net assets: .10% of the first $100 million, .09% of the next $100 million,
.08% of the next $100 million, .07% of the next $200 million and .06% of
that portion in excess of $500 million. In addition, the Fund pays the
administrator .50% of the Fund's gross income.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $47,083 for accounting services for the six
months ended April 30, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $96,171 for
transfer agent services for the six months ended April 30, 1996.
As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of Alex. Brown &Sons Incorporated ("Alex. Brown"), receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to .25% of the average daily net assets of the ISI Class Shares.
Alex. Brown receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .25% of the average daily net assets of the
Flag Investors Class A Shares. For the six months ended April 30, 1996,
distribution fees aggregated $453,202, of which $254,335 and $198,867 were
allocated to the ISI Class and Flag Investors Class A Shares, respectively.
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 six months ended April 30, 1996 was $3,640.
C. Capital Share Transactions -- At April 30, 1996, there were 100 million
shares of $.001 par value common stock authorized (44 million Flag Investors
Class A, 44 million ISI Class, 5 million Flag Investors Class B, 500,000 Flag
Investors Class D and 6.5 million undesignated). Transactions of the Fund were
as follows:
Flag Investors Class A Shares
For the Six
Months Ended For the
April 30, 1996 Year Ended
(Unaudited) Oct. 31, 1995
Shares sold 501,743 726,425
Shares issued to share-
holders on reinvest-
ment of dividends 282,897 653,526
Shares redeemed (1,415,664) (4,262,626)
Net decrease in shares
outstanding (631,024) (2,882,675)
Proceeds from sale
of shares $ 5,059,997 $ 7,023,050
Reinvested dividends 2,873,859 6,240,023
Net asset value of
shares redeemed (14,299,960) (40,514,349)
Net decrease from
capital share
transactions $ (6,366,104) $(27,251,276)
12
<PAGE>
Notes to Financial Statements (concluded)
ISI Class Shares
For the Six
Months Ended For the
April 30, 1996 Year Ended
(Unaudited) Oct. 31, 1995
Shares sold 1,346,511 2,579,624
Shares issued to share-
holders on reinvest-
ment of dividends 421,617 929,740
Shares redeemed (1,962,282) (4,961,123)
Net decrease in shares
outstanding (194,154) (1,451,759)
Proceeds from sale
of shares $ 13,722,841 $ 24,590,536
Reinvested dividends 4,277,918 8,893,813
Net asset value of
shares redeemed (19,864,715) (47,310,070)
Net decrease from
capital share
transactions $ (1,863,956) $(13,825,721)
D. Investment Transactions -- Purchases and sales of investment securities,
other than short-term obligations, aggregated $428,684,660 and $443,583,447,
respectively, for the six months ended April 30, 1996.
At April 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,318, and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $18,620,329.
E. Net Assets -- At April 30, 1996, net assets consisted of:
Paid-in capital:
Flag Investors
Class A Shares $155,162,231
ISI Class Shares 205,712,244
Undistributed net realized
gain from security
transactions 3,977,827
Overdistribution of
net investment income (4,403,662)
Unrealized depreciation of
investments (18,618,011)
$341,830,629
13
