<PAGE>
LOGO
FLAG INVESTORS
TOTAL RETURN U.S. TREASURY FUND SHARES
(Class A and Class B)
(Classes of Total Return U.S. Treasury Fund, Inc.)
Total Return U.S. Treasury Fund, Inc. (the "Fund") is designed to provide:
1) A high level of total return with relative stability of principal.
2) High current income, consistent with investment in securities issued by
the United States Treasury ("U.S. Treasury Securities").
The Fund will invest only in U.S. Treasury Securities and in repurchase
agreements fully collateralized by U.S. Treasury Securities.
Shares of the Flag Investors classes of the Fund are available through Alex.
Brown & Sons Incorporated, as well as Participating Dealers and Shareholder
Servicing Agents. This Prospectus relates to Flag Investors Class A Shares
("Class A Shares") and Flag Investors Class B Shares ("Class B Shares") of the
Fund. The separate classes provide investors with alternatives as to sales load
and Fund expenses. (See "How to Invest in the Fund.")
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 March 1, 1996, as amended through
May 25, 1996, has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated herein by reference. It is available upon
request and without charge by calling the Fund at (800) 767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is May 25, 1996
<PAGE>
FLAG INVESTORS
TOTAL RETURN U.S. TREASURY FUND SHARES
(Class A and Class B)
(Classes of Total Return U.S. Treasury Fund, Inc.)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
-----------------
Page
1. Fee Table ........................................ 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 6
4. Investment Restrictions .......................... 8
5. How to Invest in the Fund ........................ 9
6. How to Redeem Shares ............................. 16
7. Telephone Transactions ........................... 17
8. Dividends and Taxes .............................. 18
9. Management of the Fund ........................... 20
10. Investment Advisor ............................... 20
11. Administrator .................................... 22
12. Distributor ...................................... 22
13. Custodian, Transfer Agent, Accounting Services ... 23
14. Performance Information .......................... 24
15. General Information .............................. 26
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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or Alex.
Brown. This Prospectus does not constitute an offering by the Fund or Alex.
Brown in any jurisdiction in which such offering may not lawfully be made.
Shares may be offered only to residents of those states in which such
shares are eligible for purchase.
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1
<PAGE>
================================================================================
1. Fee Table
...............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ...................... 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) ............................................. 0.50%* 2.00%**
- ---------------------------------------------------------------------------------------------
Annual Fund Operating Expenses:
(as a percentage of average net assets)
- ---------------------------------------------------------------------------------------------
Management Fees ..................................... .27% .27%
12b-1 Fees .......................................... .25% .35%
Other Expenses (including a .25% shareholder
servicing fee for Class B Shares) ................. .28% .53%***
--- ----
Total Fund Operating Expenses ....................... .80% 1.15%
=== ====
- ---------------------------------------------------------------------------------------------
</TABLE>
*Purchases of $1 million or more of Class A Shares by persons not otherwise
eligible for sales load waivers are not subject to an initial sales
charge, however, a contingent deferred sales charge of .50% may be imposed
on such purchases. (See "How to Invest in the Fund -- Class A Shares.")
**A declining contingent deferred sales charge will be imposed on
redemptions of Class B Shares made within five years of purchase. Class B
Shares will automatically convert to Class A Shares five years after
purchase. (See "How to Invest in the Fund -- Class B Shares.")
***A portion of the shareholder servicing fee is allocated to member firms of
the National Association of Securities Dealers, Inc. and qualified banks
for continued personal service by such members to investors in Class B
Shares, such as responding to shareholder inquiries, quoting net asset
values, providing current marketing materials and attending to other
shareholder matters.
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares .................... $53 $70 $88 $144
Class B Shares .................... $32 $47 $65* $128*
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
You would pay the following expenses
on the same investment, assuming no
redemption:* 1 year 3 years 5 years 10 years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Shares .................... $12 $37 $65* $128*
- ------------------------------------------------------------------------------------
</TABLE>
* Expenses assume that Class B Shares are converted to Class A Shares at the
end of five years. Therefore, the expense figures assume five years of
Class B expenses and five years of Class A expenses.
2
<PAGE>
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 or indirectly. The
Management Fees paid by the Fund are based in part on the net assets of the Fund
and in part on gross income, which fees are reflected as a percentage of average
net assets. A person who purchases shares of either class through a financial
institution may be charged separate fees by the financial institution. (For more
complete descriptions of the various costs and expenses, see "How to Invest in
the Fund", "Investment Advisor", "Administrator" and "Distributor.") The
Expenses and Example for the Class A Shares appearing in the table above are
based on the Fund's expenses (.80%) for the fiscal year ended October 31, 1995
and are based on average daily net assets of approximately $365 million and a
gross income level of 6.74%. The Expenses and Example for the Class B Shares,
which have not been offered prior to the date of this Prospectus, are based on
those for the Class A Shares plus the incremental 12b-1 and service fee costs.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges. (See "How to Invest in the Fund -- Class A Shares.") Due to the
continuous nature of Rule 12b-1 fees, long-term shareholders may pay more
than the equivalent of the maximum front-end sales charges permitted by the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. The foregoing table has not been audited by Deloitte & Touche LLP, the
Fund's independent auditors.
================================================================================
2. Financial Highlights
The Fund was organized as a corporation under the laws of the State of
Maryland on June 3, 1988 and commenced operations on August 10, 1988. The
financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the fiscal year ended October 31, 1995 and the independent
auditors' report thereon of Deloitte & Touche LLP are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended October 31,
1995, which can be obtained at no charge by calling the Fund at (800)
767-FLAG. The Fund did not offer the Class B Shares prior to the date of this
Prospectus. Accordingly, no financial information is given.
3
<PAGE>
(For a Class A Share outstanding throughout each period)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 10,
1988
(comence-
ment of
operations)
For the Year Ended October 31, through
------------------------------------------------------------------------ October 31,
1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period $9.22 $11.35 $10.47 $10.41 $9.76 $10.55 $10.24 $10.00
--------- --------- ---------- ---------- --------- --------- --------- --------
Income from Investment Operations:
Net investment income 0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10
Net realized and unrealized
gain/(loss) on investments 1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21
--------- --------- ---------- ---------- --------- --------- --------- --------
Total from Investment Operations 1.61 (0.65) 1.74 0.81 1.49 0.13 1.15 0.31
Less Distributions:
Dividends from net investment income
and short-term gains (0.64) (1.20) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07)
Distributions from net realized
long-term gains -- (0.28) (0.07) (0.05) -- -- -- --
--------- --------- ---------- ---------- --------- --------- --------- --------
Total distributions (0.64) (1.48)(1) (0.86) (0.75) (0.84) (0.92) (0.84) (0.07)
--------- --------- ---------- ---------- --------- --------- --------- --------
Net asset value at end of period $10.19 $9.22 $11.35 $10.47 $10.41 $9.76 $10.55 $10.24
========= ========= ========== ========== ========= ========= ========= ========
Total Return** 18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10%
Ratios to Average Net Assets:
Expenses 0.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%*
Net investment income 5.94% 4.98% 5.21% 5.65% 6.88% 7.40% 7.51% 5.80%*
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares $164,206 $175,149 $224,790 $250,210 $237,688 $198,556 $135,523 $55,757
ISI Class Shares $206,615 $200,309 $232,103 $207,518 $168,128 $131,872 $89,943 $22,597
Portfolio turnover rate 194% 68% 249% 191% 141% 79% 184% 72%
</TABLE>
- ------
* Annualized.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Distributions to shareholders include $0.05 per share return of capital.
4-5
<PAGE>
===============================================================================
3. Investment Program
...............................................................................
INVESTMENT OBJECTIVE, POLICIES
AND RISK CONSIDERATIONS
The Fund's investment objective is to seek a high level of total return,
with relative stability of principal, and, secondarily, to seek a high level
of current income consistent with an investment in U.S. Treasury Securities.
The Fund will invest only in U.S. Treasury Securities and in repurchase
agreements fully collateralized by U.S. Treasury Securities. U.S. Treasury
Securities include Treasury bills, Treasury notes, Treasury bonds and
Separate Trading of Registered Interest and Principal of Securities
("STRIPS"). All such obligations are direct obligations of the United States
Government and are supported by the full faith and credit of the United
States. STRIPS are U.S. Treasury Securities which do not pay interest
currently, but which are purchased at a discount and are payable in full at
maturity. The value of STRIPS may be subject to greater market fluctuations
from changing interest rates prior to maturity than the value of other U.S.
Treasury Securities of comparable maturities that bear interest currently.
The Fund's investment objectives may be changed only by the affirmative vote
of a majority of the outstanding shares of all classes of the Fund. There can
be no assurance that the Fund's investment objective will be met.
The Fund may enter into forward commitments for the purchase of U.S.
Treasury Securities and, as noted, may enter into repurchase agreements
collateralized by U.S. Treasury Securities with commercial banks and
registered broker-dealers. These investment practices, which may involve
certain special risks, are described below.
...............................................................................
SELECTION OF INVESTMENTS
The Fund's investment advisor is International Strategy and Investment Inc.
("ISI" or the "Advisor" -- see "Investment Advisor"). ISI buys and sells
securities for the Fund's portfolio with a view toward, first, a high level of
total return with relative stability of principal and, second, high current
income. Therefore, in addition to yield, the potential for capital gains and
appreciation resulting from possible changes in interest rates will be a
consideration in selecting investments. ISI will be free to take full advantage
of the entire range of maturities offered by U.S. Treasury Securities and may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
6
<PAGE>
maturities and its expectations of future changes in interest rates. Thus, at
certain times the average maturity of the portfolio may be relatively short
(from under one year to five years, for example) and at other times may be
relatively long (over 10 years, for example). In determining which direction
interest rates are likely to move, the Advisor relies on the economic analysis
made by its chairman, Edward S. Hyman. There can be no assurance that such
economic analysis will accurately predict interest rate trends or that the
portfolio strategies based on Mr. Hyman's economic analysis will be effective.
...............................................................................
SPECIAL RISK CONSIDERATIONS
U.S. Treasury Securities are considered among the safest of fixed- income
investments. Because of this added safety, the yields available from these
securities are generally lower than the yields available from corporate debt
securities. As with other debt securities, the value of U.S. Treasury
Securities changes as interest rates fluctuate. Changes in the value of
portfolio securities will not affect interest income from those securities
but will be reflected in the Fund's net asset value. Thus, a decrease in
interest rates will generally result in an increase in the value of the
Fund's shares. Conversely, during periods of rising interest rates, the value
of the Fund's shares will generally decline. The magnitude of these
fluctuations will generally be greater at times when the Fund's average
maturity is longer.
...............................................................................
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. 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.
...............................................................................
PURCHASE OF WHEN-ISSUED SECURITIES
From time to time, in the ordinary course of business, the Fund may make
purchases of U.S. Treasury Securities, at the current market value of
7
<PAGE>
the securities, on a when-issued basis. When such transactions are
negotiated, the yield to maturity is fixed. The coupon interest rate on such
U.S. Treasury Securities is fixed at the next succeeding U.S. Treasury
auction date, thereby determining the price to be paid by the Fund. Delivery
and payment will take place after the date of the auction. A segregated
account of the Fund, consisting of cash, cash equivalents or U.S. Treasury
Securities equal at all times to the amount of the when-issued commitments
will be established and maintained by the Fund at the Fund's custodian.
Additional cash or U.S. Treasury Securities will be added to the account when
necessary. While the Fund will purchase securities on a when-issued basis
only with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The securities so purchased or sold are
subject to market fluctuation and no interest accrues to the purchaser during
this period. 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 U.S. Treasury Securities
purchased on a when-issued basis.
================================================================================
4.Investment Restrictions
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations.
1) As a matter of fundamental policy, the Fund will not borrow money except
as a temporary measure 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 equaling 5% or more of its total assets are
outstanding, the Fund will not purchase securities for investment. This
restriction may not be changed without the affirmative vote of a majority
of the outstanding shares of the Fund.
2) Additionally, the Fund will not invest more than 10% of the value of its
net assets in repurchase agreements with remaining maturities in excess of
seven days and other illiquid securities. This restriction may be changed
by a majority vote of the Board of Directors.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
8
<PAGE>
================================================================================
5. How to Invest in the Fund
Class A Shares and Class B Shares may be purchased from Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202 ("Alex.
Brown"), through any securities dealer which has entered into a dealer
agreement with Alex. Brown ("Participating Dealers") or through any financial
institution which has entered into a shareholder servicing agreement with the
Fund ("Shareholder Servicing Agents"). Shares of either class may also be
purchased by completing the Application Form attached to this Prospectus and
returning it, together with payment of the purchase price (including any
applicable front-end sales charge), to the address shown on the Application
Form. Participating Dealers or Shareholder Servicing Agents and their
investment representatives may receive different levels of compensation
depending on which class of shares they sell.
The Class A and Class B alternatives permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the combination of sales
charge and distribution fee on Class A Shares is more favorable than the
combination of distribution/service fees and contingent deferred sales charge
on Class B Shares. In almost all cases, investors planning to purchase
$250,000 or more of Fund shares will pay lower aggregate charges and expenses
by purchasing Class A Shares. Accordingly, the Fund will not accept purchases
for Class B Shares in excess of $250,000 per account. (See "Fee Table.")
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for
participants in the Fund's Automatic Investing Plan is $250. Each subsequent
investment must be at least $100 per class, except that the minimum
subsequent investment under the Fund's Automatic Investing Plan is $250 for
quarterly investments and $100 for monthly investments. (See "Purchases
Through Automatic Investing Plan" below.) There is no minimum investment
requirement for qualified retirement plans (i.e., 401(k) plans or pension and
profit sharing plans). IRA accounts are, however, subject to the $2,000
minimum initial investment requirement. There is no minimum investment
requirement for spousal IRA accounts.
The Fund reserves the right to suspend the sale of shares at any time at the
discretion of Alex. Brown and the Fund's Advisor. Orders for purchases of shares
9
<PAGE>
are accepted on any day on which the New York Stock Exchange is open for
business ("Business Day"). Purchase orders for shares will be executed at a per
share purchase price equal to the net asset value next determined after receipt
of the purchase order plus any applicable front-end sales charge (the "Offering
Price") on the date such net asset value is determined (the "Purchase Date").
Purchases made by mail must be accompanied by payment of the Offering Price.
Purchases made through Alex. Brown or a Participating Dealer or Shareholder
Servicing Agent must be in accordance with such entity's payment procedures.
Alex. Brown may, in its sole discretion, refuse to accept any purchase order.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. Securities 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 as determined in good faith by the
Advisor under procedures established from time to time and monitored by the
Fund's Board of Directors. Debt obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Directors.
...............................................................................
OFFERING PRICE
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge which is calculated as a percentage of the Offering
Price and for Class B Shares is net asset value.
...............................................................................
CLASS A SHARES
The sales charge on Class A Shares, which decreases as the amount of the
purchase increases, is shown below:
Sales Charge
as Percentage of Dealer
------------------------------ Retention
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- ------------------ ------------ -------------- -----------------
Less than $ 50,000 ..... 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999 ..... 3.50% 3.63% 3.00%
$ 100,000 - $249,999 .... 2.50% 2.56% 2.00%
$ 250,000 - $499,999 .... 2.00% 2.04% 1.50%
$ 500,000 - $999,999 .... 1.50% 1.52% 1.25%
$1,000,000 and over ...... None* None* None*
- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
10
<PAGE>
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of accumulation.
In addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Class A Shares and purchases of
shares of other Flag Investors funds with the same sales charge and purchases of
Class A shares of Flag Investors Intermediate-Term Income Fund, Inc. and Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc. (the "Intermediate
Funds"). The applicable sales charge will be determined based on the total of
(a) the shareholder's current purchase plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of all Class A Shares and
of all Flag Investors shares described above and any Flag Investors Class D
shares held by the shareholder. To obtain the reduced sales charge through a
right of accumulation, the shareholder must provide Alex. Brown, either directly
or through a Participating Dealer or Shareholder Servicing Agent, as applicable,
with sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.
The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing Class A Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the
Offering Price applicable at the time of such purchase to the full amount
indicated on the Letter of Intent. A Letter of Intent is not a binding
obligation upon the investor to purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Class A Shares purchased with the first 5% of the full amount will be held in
escrow (while remaining registered in the name of the investor) to secure
payment of the higher sales charge applicable to the Class A Shares actually
purchased if the full amount indicated is not invested. Such escrowed shares
will be involuntarily redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
shares will be released. An investor who wishes to enter into a Letter of
Intent in conjunction with an investment in Class A Shares may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.
11
<PAGE>
No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption within
24 months following the purchase, at the rate of .50% on the lesser of the
value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.
The Fund may sell Class A Shares at net asset value (without sales charge) to
the following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Class A Shares on
behalf of their fiduciary and advisory clients, provided such clients have paid
an account management fee for these services (investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent); (ii)
qualified retirement plans; (iii) participants in a Flag Investors fund payroll
savings plan program; (iv) investors who have redeemed Class A Shares, or shares
of any other mutual fund in the Flag Investors family of funds with the same
sales charges, or who have redeemed Class A shares of the Intermediate Funds
which they had held for at least 24 months prior to redemption, in an amount
that is not more than the total redemption proceeds, provided that the purchase
is within 90 days after the redemption; and (v) current or retired Directors of
the Fund, and directors and employees (and their immediate families) of Alex.
Brown, ISI and Participating Dealers and their respective affiliates.
Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
...............................................................................
CLASS B SHARES
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class B
Shares redeemed within five years of purchase. The charge is assessed on an
12
<PAGE>
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. Accordingly, the contingent
deferred sales charge will not be applied to dollar amounts representing an
increase in the net asset values above the initial purchase price of the shares
being redeemed. In addition, no charge is assessed on redemptions of Class B
Shares derived from reinvestment of dividends or capital gains distributions.
In determining whether the contingent deferred sales charge is applicable to
a redemption, the calculation is made in the manner that results in the lowest
possible rate. Therefore, it is assumed that the redemption is first of any
Class B Shares in the shareholder's account that represent invested dividends
and distributions and second of Class B Shares held the longest during the five
year period. The amount of the contingent deferred sales charge, if any, will
vary depending on the number of years from the time of payment for the purchase
of Class B Shares until the redemption of such shares (the "holding period").
For purposes of determining this holding period, all payments during a month are
aggregated and deemed to have been made on the first day of the month. The
following table sets forth the rates of the contingent deferred sales charge.
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
- -----------------------------------------------------------------
First ................ 2.0%
Second ............... 2.0%
Third ................ 1.0%
Fourth ............... 1.0%
Fifth ................ 1.0%
Thereafter ........... None*
- -----------------------------------------------------------------
*As described more fully below, Class B Shares automatically convert to
Class A Shares five years after the beginning of the calendar month in
which the purchase order is accepted.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
death or initial determination of disability (as defined in the Internal Revenue
Code of 1986, as amended) of a shareholder; or (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2. The waiver with respect to (i) above is only applicable in
cases where the shareholder account is registered (a) in the name of an
individual person, (b) as a joint tenancy with rights of survivorship, (c) as
community property or (d) in the name of a minor child under the Uniform Gifts
or Uniform Transfers to Minors Act. A shareholder, or his or her representative,
13
<PAGE>
must notify the Fund's transfer agent (the "Transfer Agent") prior to the time
of redemption if such circumstances exist and the shareholder is eligible for
this waiver. For information on the imposition and waiver of the contingent
deferred sales charge, contact the Transfer Agent at (800) 553-8080.
Automatic Conversion to Class A Shares. Five years after the beginning of
the calendar month in which the purchase order for Class B Shares is
accepted, such Class B Shares will automatically convert to Class A Shares
and will no longer be subject to the higher distribution and service fees.
Such conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other charge.
The conversion is not a taxable event to the shareholder.
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account
will be considered to be held in a separate sub-account. Each time any Class
B Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact Alex.
Brown or a Participating Dealer or Shareholder Servicing Agent.
================================================================================
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their Class A
shares of those funds for an equal dollar amount of Class A Shares. Shares
issued pursuant to this offer will not be subject to the sales charges described
above or any other charge. In addition, shareholders of Class A shares of the
Intermediate Funds may exchange into Class A Shares upon payment of the
difference in sales charges, as applicable, except that the exchange will be
made at net asset value if the shares of such funds have been held for more than
24 months. Shareholders of Flag Investors Cash Reserve Prime Class A Shares may
exchange into Class A Shares upon payment of the difference in sales charges, as
applicable, or into Class B Shares at net asset value, subject thereafter to any
applicable contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from another fund
in the Flag Investors family of funds, the Fund will combine the period for
which the original shares were held prior to the exchange with the holding
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<PAGE>
period of the shares acquired in the exchange for purposes of determining what,
if any, contingent deferred sales charge is applicable upon a redemption of any
such shares.
The net asset value of shares purchased and redeemed in an exchange request
received on a Business Day will be determined on the same day, provided that the
exchange request is received prior to 4:00 p.m. (Eastern Time) or the close of
the New York Stock Exchange, whichever is earlier. Exchange requests received
after 4:00 p.m. (Eastern Time) will be effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund who have paid
a sales charge may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to Alex. Brown or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the
payment of a sales charge and the source of such proceeds. Class A Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange. The Fund may
modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to shareholders.
...............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase either Class A Shares or Class B Shares
regularly by means of an Automatic Investing Plan with a pre-authorized check
drawn on their checking accounts. Under this plan, the shareholder may elect
to have a specified amount invested monthly or quarterly in either Class A
Shares or Class B Shares. The amount specified will be withdrawn from the
shareholder's checking account using the pre-authorized check and will be
invested in the class of shares selected by the shareholder at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan may
do so by completing the appropriate section of the Application Form attached
to this Prospectus.
15
<PAGE>
...............................................................................
PURCHASES THROUGH DIVIDEND REINVESTMENT PLAN
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. A shareholder who wishes to enroll in the Dividend Reinvestment
Plan should check the appropriate box on the Application Form or call (800)
553-8080 for additional information.
Alternately, shareholders may have their distributions invested in shares
of other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call (800) 553-8080 for additional
information.
Reinvestments of distributions will be effected without a sales charge.
================================================================================
6. How to Redeem Shares
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Fund's transfer agent (the "Transfer Agent"). Shareholders may also redeem
shares of either class by telephone (in amounts up to $50,000). (See
"Telephone Transactions" below.) A redemption order is effected at the net
asset value per share (reduced by any applicable contingent deferred sales
charge) next determined after receipt of the order (or, if stock certificates
have been issued for the shares to be redeemed, after the tender of the stock
certificates for redemption). Redemption orders received after 4:00 p.m.
(Eastern Time) will be effected at the net asset value next determined on the
following Business Day. Payment for redeemed shares will be made by check and
will be mailed within seven days after receipt of a duly authorized telephone
redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact
names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
16
<PAGE>
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of the redemption of shares will be paid
on the next dividend payable date. If all of the shares in a shareholder's
account have been redeemed on a dividend payable date, the dividend will be
remitted by check to the shareholder.
The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' notice.
...............................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed
monthly or quarterly under the Fund's Systematic Withdrawal Plan. Such
payments are drawn from income dividends, and to the extent necessary, from
share redemptions (which would be a return of principal and, if reflecting a
gain, would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of shares. In addition, Class B Shares may be subject to a
contingent deferred sales charge upon redemption. (See "How to Invest in the
Fund -- Class B Shares.") A shareholder who wishes to enroll in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.
================================================================================
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent, Accounting Services." Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone
17
<PAGE>
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by regular or express
mail. Shares held in certificate form may not be exchanged or redeemed by
telephone. (See "How to Invest in the Fund -- Purchases by Exchange" and "How
to Redeem Shares.")
================================================================================
8. Dividends and Taxes
...............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of dividends that are declared
daily and paid monthly. The Fund may distribute to shareholders any net
capital gains on an annual basis or, alternatively, may elect to retain net
capital gains and pay tax thereon.
Unless the shareholder elects otherwise, all dividends and net capital
gains distributions, if any, will be reinvested in additional Fund shares of
the same class at net asset value. Shareholders may elect to have income
dividends or capital gains distributions paid in cash. Shareholders wishing
18
<PAGE>
to change their election must give written notice to the Transfer Agent (see
"Custodian, Transfer Agent, Accounting Services"), either directly or through
their Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.
...............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal 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 has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will generally pay federal income or
capital gains taxes on the amounts so distributed. Reinvested distributions
will be taxed as if they had been distributed on the reinvestment date.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, are
treated by the shareholder as long-term capital gains regardless of the
length of time the shareholder has held the shares. All other income
distributions are taxed to the shareholders as ordinary income. Fund
distributions generally will not be eligible for the corporate dividends
received deduction. Shareholders will be advised annually as to the federal
income tax status of distributions made during the year.
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.
19
<PAGE>
The sale, exchange or redemption of Fund shares is a taxable event for the
shareholder.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local taxes to investments in the Fund, which may
differ from the federal income tax consequences described above. For example,
under certain specified circumstances, state income tax laws may exempt from
taxation distributions of a regulated investment company to the extent that such
distributions are derived from interest on federal obligations. Shareholders are
urged to consult with their tax advisors regarding whether, and under what
conditions such exemption is available.
================================================================================
9. Management of the Fund
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributors, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's officers, to Alex. Brown, as distributor of the Flag
Investors classes, to the Advisor and to the Fund's administrator. Three
directors and all of the officers of the Fund are officers or employees of
Alex. Brown, ISI, or the Fund's administrator. The other directors of the
Fund have no affiliation with Alex. Brown, ISI, or the Fund's administrator.
The Fund's Directors and officers are as follows:
*Edward S. Hyman Chairman R. Alan Medaugh President
*Richard T. Hale Vice Chairman Edward J. Veilleux Vice President
*W. James Price Vice Chairman Gary V. Fearnow Vice President
James J. Cunnane Director Nancy Lazar Vice President
John F. Kroeger Director Brian C. Nelson Vice President and
Louis E. Levy Director Secretary
Eugene J. McDonald Director Carrie L. Butler Vice President
Harry Woolf Director Joseph A. Finelli Treasurer
Denice De Florio Assistant Vice
President
Laurie D. DePrine Assistant Secretary
- ------
*Messrs. Hyman, Hale and Price are "interested persons" of the Fund within
the meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").
20
<PAGE>
================================================================================
10. Investment Advisor
ISI, a registered investment advisor, serves as investment advisor to the
Fund pursuant to an investment advisory agreement dated as of April 1, 1991
(the "Investment Advisory Agreement"). ISI employs Messrs. Edward S. Hyman
and R. Alan Medaugh. Due to their stock ownership, Messrs. Hyman and Medaugh
may be deemed to be controlling persons of ISI. As of February 29, 1996, the
Advisor had approximately $1 billion under management. The Advisor also acts
as investment advisor to Managed Municipal Fund, Inc. and North American
Government Bond Fund, Inc., open-end management investment companies with
approximately $195 million in aggregate net assets as of February 29, 1996.
Pursuant to the terms of the Investment Advisory Agreement, as
compensation for its services for the fiscal year ended October 31, 1995, the
Advisor received an annual fee equal to .27% of the Fund's average daily net
assets. The Advisor's fee is based in part upon a varying percentage of the
Fund's average daily net assets and in part upon a percentage (1.5%) of the
Fund's gross income.
The address of the Advisor is 717 Fifth Avenue, New York, New York 10022.
...............................................................................
PORTFOLIO MANAGERS
Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh,
President of the Fund and ISI, have shared direct portfolio management
responsibility for the Fund since its inception. Mr. Hyman is responsible for
developing the economic analysis upon which the Fund's selection of
investments is based. (See "Investment Program.") Before joining ISI, Mr.
Hyman was a vice chairman and member of the Board of C.J. Lawrence Inc. and
prior thereto, an economic consultant at Data Resources. He writes a variety
of international and domestic economic research reports which follow trends
that may determine the direction of interest rates. These international and
domestic reports are sent to ISI's private institutional clients in the
United States and overseas. The periodical Institutional Investor, which
rates analysts and economists on an annual basis, has rated Mr. Hyman as its
"first team" economist, which is its highest rating, in each of the last
sixteen years.
Mr. Medaugh is responsible for day to day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
21
<PAGE>
Management and prior thereto Senior Vice President and bond portfolio manager at
Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam Management
Company and Fidelity Management and Research.
================================================================================
11. Administrator
Investment Company Capital Corp. ("ICC"), 135 East Baltimore Street,
Baltimore, Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated,
provides administration services to the Fund. ICC supervises the day-to-day
operations of the Fund, including the preparation of registration statements,
proxy materials, shareholder reports, compliance with all requirements of
securities laws in the states in which the Fund's shares are distributed and
oversight of the relationship between the Fund and its other service providers.
As compensation for these services for the fiscal year ended October 31, 1995,
ICC received a fee equal to .12% of the Fund's average daily net assets. ICC's
fee is based in part upon a varying percentage of the Fund's average daily net
assets and in part upon a percentage (.50%) of the Fund's gross income.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
================================================================================
12. Distributor
Alex. Brown acts as distributor of the Class A Shares and the Class B
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.
The Fund has adopted two separate Distribution Agreements and related Plans
of Distribution, one with respect to the Class A Shares and one with respect to
the Class B Shares pursuant to Rule 12b-1 under the 1940 Act (the "Plans''). In
addition, the Fund may enter into Shareholder Servicing Agreements with certain
22
<PAGE>
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. Such
financial institutions may impose separate fees in connection with these
services and investors should review this Prospectus in conjunction with any
such institution's fee schedule. In addition, financial institutions may be
required to register as dealers pursuant to state securities laws. Amounts
allocated to Participating Dealers and Shareholder Servicing Agents may not
exceed amounts payable to Alex. Brown under the Plans with respect to shares
held by or on behalf of customers of such entities.
As compensation for providing distribution services for the Class A Shares
for the fiscal year ended October 31, 1995, Alex. Brown received a fee equal
to .25% of the Class A Shares' average daily net assets.
Under the Class B Plan, Alex. Brown will receive an annual distribution
fee, paid monthly, equal to .35% of the Class B Shares' average daily net
assets. In addition, Alex. Brown will receive an annual shareholder servicing
fee, paid monthly, equal to .25% of the Class B Shares' average daily net
assets. The distribution fee will be used to compensate Alex. Brown for its
services and expenses in distributing the Class B Shares. The shareholder
servicing fee will be used to compensate Alex. Brown, Participating Dealers
and Shareholder Servicing Agents for services provided and expenses incurred
in maintaining shareholder accounts, responding to shareholder inquiries and
providing information on their investments.
Payments under the Plans 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 Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares or
in connection with the sale of the Class B Shares is less than .35% of the
average daily net assets invested in Class B Shares for any period, the
unexpended portion of the distribution fee may be retained by Alex. Brown.
Alex. Brown will from time to time and from its own resources pay or allow
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise or travel) to Participating Dealers.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
23
<PAGE>
================================================================================
13. Custodian, Transfer Agent,
Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services to the Fund for the fiscal year ended October
31, 1995, ICC received a fee equal to .03% of the Fund's average daily net
assets. (See the Statement of Additional Information.) ICC also serves as the
Fund's administrator.
================================================================================
14. Performance Information
From time to time, the Fund may quote total return and yield data in
advertisements or in reports to shareholders. Both total return and yield
data will be computed according to the standardized calculations required by
the SEC to provide consistency and comparability in investment company
advertising.
The 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.
Advertisements or reports citing performance data will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares redeemed at the end of the specific period covered by the total return
figure, 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 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, net of all sales loads and other fees, according to
the required standardized calculation. The Fund's total return for a given
period is based upon changes in the Fund's net asset value and the Fund's yield
for the period. If the Fund compares its performance to other funds or to
relevant indices, its 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. For these purposes, the performance of the Fund, as well as the
24
<PAGE>
performance of such investment companies or indices, may not reflect sales
charges, which, if reflected, would reduce performance results.
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
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index (or any of its sub-indices), the Consumer Price Index,
Ryan U.S. Treasury Index, the return on 90 day U.S. Treasury bills, the Standard
& Poor's 500 Stock Index and the Dow Jones Industrial Average. The Fund may also
use total return performance data as reported in the following national
financial and industry publications that monitor the performance of mutual
funds: Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, shareholders
should realize that the Fund's current yield will fluctuate from time to time
and is not necessarily representative of the Fund's future performance. Yield
and performance data should also be considered in light of the risks associated
with the Fund's investment objective and policies. Any fees charged by banks
with respect to customer accounts through which shares may be purchased,
although not included in calculations of performance, will reduce performance
results.
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 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 October 31, 1995 and October 31,
1994, the Fund's portfolio turnover rate was 194% and 68%, respectively. In late
1994 the Advisor decided, in light of then current market conditions, that the
maturity of the Fund's portfolio should be lengthened to take advantage of an
ISI forecasted declining interest rate trend. The Fund's portfolio turnover rate
for the fiscal year ended October 31, 1995 increased as a result of this change
in investment strategy. 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. (See "Dividends and Taxes.")
25
<PAGE>
================================================================================
15. General Information
...............................................................................
CAPITAL SHARES
The Fund was incorporated under the laws of the State of Maryland on June
3, 1988, and is authorized to issue 100 million shares of capital stock with
a par value of $.001 per share. Shares of the Fund have equal rights with
respect to voting. Voting rights are not cumulative, so the holders of more
than 50% of the outstanding shares of capital stock voting together for
election of Directors may elect all the members of the Board of Directors of
the Fund. In the event of liquidation or dissolution of the Fund, each share
is entitled to its portion of the Fund's assets after all debts and expenses
have been paid. The fiscal year end of the Fund is October 31.
The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The shares offered by this Prospectus have been designated "Flag
Investors Total Return U.S. Treasury Fund Class A Shares" and "Flag Investors
Total Return U.S. Treasury Fund Class B Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have another class of shares in addition to the shares offered hereby, "ISI
Total Return U.S. Treasury Fund Shares." Shares of that class are sold
through broker-dealers and have similar 12b-1 fees and front-end sales
charges as the Class A Shares. 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 Class A or Class B Shares. All classes of
the Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different sales load structures,
distribution/service fees or other expenses and, accordingly, the net asset
value per share of classes may differ at times.
...............................................................................
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders but
special meetings of shareholders will be held under certain circumstances.
Shareholders of the Fund reserve the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.
26
<PAGE>
...............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors, Deloitte
& Touche LLP.
...............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
...............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact Alex.
Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
27
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
NEW ACCOUNT APPLICATION
- ----------------------------------------------------------------------------
Make check payable to "Flag Investors Total Return U.S. Treasury Fund Shares"
and mail with this application to:
Alex Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Total Return U.S. Treasury Fund Shares
For assistance in completing this application please call:
1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 for an IRA information kit.
I wish to purchase the following class of shares of the Fund, in the amount
indicated below. (Please check the applicable box and indicate amount of
purchase.)
[ ] Class A Shares (4.5% maximum initial sales charge) in the amount of
$______
[ ] Class B Shares (2.0% maximum contingent deferred sales charge) in
the amount of $______
The minimum initial purchase is $2,000, except that the minimum initial
purchase for shareholders of any other Flag Investors Fund or class is $500
and the minimum initial purchase for participants in the Fund's Automatic
Investing Plan is $250 per class. Each subsequent purchase requires a $100
minimum per class, except that the minimum subsequent purchase under the
Fund's Automatic Investing Plan is $250 for quarterly purchases and $100 for
monthly purchases. The maximum investment in Class B Shares is $250,000 per
account. The Fund reserves the right not to accept checks for more than
$50,000 that are not certified or bank checks.
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YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: _____________________________________________
INDIVIDUAL OR JOINT TENANT
_____________________________________________________________________________
First Name Initial Last Name
_____________________________________________________________________________
Social Security Number
_____________________________________________________________________________
Joint Tenant Initial Last Name
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
_____________________________________________________________________________
Name of Corporation, Trust or Partnership
______________________________________________________________________________
Tax ID Number Date of Trust
______________________________________________________________________________
Name of Trustees (If to be included in the Registration)
______________________________________________________________________________
For the Benefit of
GIFTS TO MINORS
______________________________________________________________________________
Custodian's Name (only one allowed by law)
______________________________________________________________________________
Minor's Name (only one)
______________________________________________________________________________
Social Security Number of Minor
under the ___________________Uniform Gifts to Minors Act
State of Residence
<PAGE>
MAILING ADDRESS
______________________________________________________________________________
Street
______________________________________________________________________________
City State Zip
(____)________________________________________________________________________
Daytime Phone
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LETTER OF INTENT -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Flag Investors Total Return U.S. Treasury
Fund Class A Shares, as shown below, in an aggregate amount at least equal
to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
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RIGHT OF ACCUMULATION -- CLASS A SHARES ONLY (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
<PAGE>
DISTRIBUTION OPTIONS
Please check the appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional shares of the same class of
the Fund at no sales charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
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AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ in Class A Shares or $______ in Class B Shares
for me, on a monthly or quarterly basis, on or about the 20th of each month
or if quarterly, the 20th of January, April, July and October, and to draw a
bank draft in payment of the investment against my checking account. (Bank
drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250 per class
Subsequent Investments (check one):
[ ] Monthly ($100 minimum per class)
[ ] Quarterly ($250 minimum per class)
____________________________________________________________________________
Bank Name
____________________________________________________________________________
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
____________________________________________________________________________
Depositor's Signature Date
____________________________________________________________________________
Depositor's Signature Date (if joint acct., both must sign)
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SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of ____________, 19__ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $______, from Class A Shares and/or $______, from Class B Shares
that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)
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TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/we do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the addess of record. If
you would prefer redemptions mailed to a pre- designated bank account, please
provide the following information:
Bank: ____________________________________________________________
Address: ____________________________________________________________
____________________________________________________________
Bank Account No:____________________________________________________________
Bank Account Name: _________________________________________________________
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<PAGE>
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated May 25, 1996. Unless the
box below is checked, I certify under penalties of perjury, (1) that the number
shown on this form is my correct taxpayer identification number and (2) that I
am not subject to backup withholding as a result of a failure to report all
interest or dividends, or the Internal Revenue Service has notified me that I am
no longer subject to backup withholding. [ ] Check here if you are subject to
backup withholding. If a non-resident alien, please indicate country of
residence:__________________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
_______________________________________________________________________________
Signature Date
_______________________________________________________________________________
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name: ___________________ Dealer Code: ________________________
Dealer's Address:___________________ Branch Code: ________________________
_________________________________________
Representative: ___________________ Rep. No. ____________________________
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------
TOTAL RETURN U.S. TREASURY FUND, INC.
135 East Baltimore Street
Baltimore, Maryland 21202
----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS FOR THE APPLICABLE CLASS, WHICH MAY BE OBTAINED
FROM YOUR PARTICIPATING DEALER OR BY WRITING OR CALLING
EITHER ALEX. BROWN & SONS INCORPORATED, 135 EAST BALTIMORE
ST., BALTIMORE, MARYLAND 21202, (800) 767-FLAG (FOR THE FLAG
INVESTORS SHARES CLASS) OR ARMATA FINANCIAL CORP., P.O. BOX
515, BALTIMORE, MARYLAND 21203, (410) 727-1700 (FOR THE ISI
SHARES CLASS).
Statement of Additional Information Dated: March 1, 1996, as amended
through May 24, 1996
Relating to the Prospectuses of
ISI Total Return U.S. Treasury Fund Shares Dated: March 1, 1996
and
Flag Investors Total Return U.S. Treasury Fund Class A
and Class B Shares Dated: May 24, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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1. General Information and History......................................................... 1
2. Investment Objectives and Policies...................................................... 2
3. Valuation of Shares and Redemption...................................................... 4
4. Federal Tax Treatment of Dividends and
Distributions......................................................................... 5
5. Management of the Fund.................................................................. 8
6. Investment Advisory and Other Services.................................................. 12
7. Administration.......................................................................... 14
8. Distribution of Fund Shares............................................................. 15
9. Portfolio Transactions.................................................................. 18
10. Capital Shares.......................................................................... 19
11. Reports.. .............................................................................. 20
12. Custodian, Transfer Agent and
Accounting Services................................................................... 20
13. Independent Auditors.................................................................... 21
14. Control Persons and Principal Holders of
Securities............................................................................ 21
15. Performance and Yield Computations...................................................... 21
16. Financial Statements ................................................................... 23
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Total Return U.S. Treasury 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 Total Return U.S. Treasury Fund Class A
Shares, (the "Class A Shares"), Flag Investors Total Return U.S. Treasury Fund
Class B Shares (the "Class B Shares") (collectively, the "Flag Investors
Shares") and ISI Total Return U.S. Treasury Fund Shares (the "ISI Shares").
There are two separate prospectuses for the Fund's shares: one for the Flag
Investors Shares and one for the ISI Shares. Each prospectus contains important
information concerning the classes of shares offered thereby and the Fund, and
may be obtained without charge from Alex. Brown & Sons Incorporated ("Alex.
Brown"), 135 East Baltimore Street, Baltimore, Maryland 21202, (800) 767-FLAG
(for a prospectus for the Flag Investors Shares) or from Armata Financial Corp.
("Armata"), P.O. Box 515, Baltimore, Maryland 21203 (for a prospectus for the
ISI Shares), or from Participating Dealers that offer shares of the respective
classes of the Fund (the "Shares") to prospective investors. Prospectuses 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 Total Return
U.S. Treasury 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 respecting 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 June 3, 1988. The Fund filed a registration statement with the SEC
registering itself as an open-end 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
"Securities Act"), and commenced operations on August 10, 1988.
For the period from November 9, 1992 through February 27,
1994, the Fund offered another class of shares: Flag Investors Total Return U.S.
Treasury Fund Class D Shares (which were known at the time as Flag Investors
Total Return U.S. Treasury Fund Class B Shares). Such shares are no longer being
offered.
Under a license agreement dated August 10, 1988 between the
Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the
Fund the "Flag Investors" name and logo, but retains rights to that name and
logo, including the right to permit other investment companies to use them.
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2. INVESTMENT OBJECTIVES AND POLICIES
Investment Objective and Policies of the Fund
The Fund's investment objective and its general investment
policies are described in the Prospectus. Additional investment restrictions
are set forth below. This Statement of Additional Information also describes
other investment practices in which the Fund may engage. These include
entering into repurchase agreements and purchasing securities for future
delivery.
Except as described below under "Investment Restrictions of
the Fund", the investment policies described in the Prospectus and in this
Statement of Additional Information are not fundamental, and the Directors may
change such policies without an affirmative vote of a majority of the Fund's
outstanding Shares (as defined under "Capital Shares" below). The Fund's
investment objective is fundamental, however, and may not be changed without
such a vote.
Repurchase Agreements
The Fund may agree to purchase securities issued by the
United States Treasury ("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. Such
repurchase agreements will be fully collateralized. The Fund's procedures
regarding repurchase agreements are discussed in greater detail in the Fund's
Prospectuses. The collateral for these repurchase agreements will be held by
the Fund's custodian or by a duly appointed sub-custodian. 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. The list of approved banks and
broker-dealers will be monitored regularly by the Fund's investment advisor,
International Strategy and Investment Inc. ("ISI" or the "Advisor") and
reviewed at least quarterly by the Fund's Board of Directors. The seller under
a repurchase agreement may be required to maintain the value of the securities
subject to the repurchase agreement at not less than the repurchase price.
Default by the seller would, 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.
When-Issued Securities
From time to time, in the ordinary course of business, the
Fund may make purchases of U.S. Treasury Securities, at the current market
value of the securities, on a when-issued basis. When such transactions are
negotiated, the yield to maturity is fixed. The coupon interest rate on such
U.S. Treasury Securities is fixed at the time of the U.S. Treasury auction
date therefore determining the price to be paid by the Fund, but delivery and
payment will take place after the date of the commitment. A segregated account
of the Fund, consisting of cash, cash equivalents or U.S. Treasury Securities
equal at all times to the amount of the when-issued commitments will be
established and maintained by the Fund at the Fund's custodian. Additional
cash or U.S. Treasury Securities will be added to the account when necessary.
While the Fund will purchase securities on a forward commitment basis only
with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The securities so purchased or sold are
subject to market fluctuation and no interest accrues to the purchaser during
this period. At the time the Fund makes the commitment to purchase or sell
securities on a forward commitment basis, it will record the transaction and
thereafter reflect the value of such security purchased or, if a sale, the
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<PAGE>
proceeds to be received, in determining its net asset value. At the time of
delivery of the securities, their value may be more or less than the purchase
or sale price.
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. The percentage limitations
contained in these restrictions apply at the time of purchase of securities.
Accordingly, the Fund will not:
1. Invest 25% or more of the value of its total assets in
any one industry (U.S. Treasury Securities are not considered to
represent an industry);
2. Invest more than 5% of its total assets in the securities
of any single issuer (the U.S. Government is not considered an issuer
for this purpose);
3. Invest in the securities of any single issuer if, as a
result, the Fund would hold more than 10% of the voting securities of
such issuer;
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts or
futures contracts;
6. Act as an underwriter of securities within the meaning of
the Federal securities laws;
7. Issue senior securities;
8. Make loans, except that the Fund may purchase or hold
debt instruments and may enter into repurchase agreements in
accordance with its investment objectives and policies;
9. Effect short sales of securities;
10. Purchase securities on margin (but the Fund may obtain
such short-term credits as may be necessary for the clearance of
transactions);
11. Purchase participations or other interests in oil, gas
or other mineral exploration or development programs;
12. Purchase any securities of unseasoned issuers which have
been in operation directly or through predecessors for less than
three years;
13. Invest in shares of any other investment company
registered under the Investment Company Act;
14. Purchase or retain the securities of any issuer, if to
the knowledge of the Fund, any officer or Director of the Fund or its
Advisor owns beneficially more than .5% of the outstanding securities
of such issuer and together they own beneficially more than 5% of the
securities of such issuer;
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<PAGE>
15. Invest in companies for the purpose of exercising
management or control;
16. Invest in puts or calls or any combination thereof;
17. Purchase warrants, if by reason of such purchase more
than 5% of its net assets (taken at market value) will be invested in
warrants, valued at the lower of cost or market. Included within this
amount, but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities will be deemed to be without value and therefore not
included within the preceding limitations.
The following are investment restrictions that may be
changed by a vote of the majority of the Fund's Board of Directors. The Fund
will not:
1. Invest more than 10% of the value of its net assets in
illiquid securities (as defined under federal and state securities
laws);
2. Invest in real estate limited partnerships;
3. Invest in oil, gas or mineral leases.
3. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined once daily as of
4:00 p.m. (Eastern Time) each day on which the New York Stock Exchange is open
for business ("Business Day"). The New York Stock Exchange is open for
business on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the price at which Shares are
redeemed, the net asset value per Share is calculated by valuing all
securities held by the Fund, deducting the Fund's actual and accrued
liabilities (including liability for dividends declared), and dividing the
resulting amount by the number of then outstanding Shares. To determine the
net asset value per Share of any class, the net asset value calculated as
described above will be further adjusted to reflect the pro rata portion of
income and expenses attributable to that class. For this purpose, securities
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 as determined in good faith
by the Advisor under procedures established and monitored by the Board of
Directors. Debt obligations with maturities of 60 days or less will be valued
at amortized cost, which constitutes fair value as determined by the
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
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<PAGE>
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 Shares by
check as described in the Prospectus. However, if the Board of Directors
determines that it would be in the best interests of the remaining
shareholders of the Fund to make payment of the redemption price in whole or
in part by a distribution in kind of readily marketable 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, however, 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
federal 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 general discussion of federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
Qualification as Regulated Investment Company
The Fund has been and expects to continue to be taxed as a
regulated investment company ("RIC") under Subchapter M of the Code. As a RIC,
the Fund is exempt from federal income tax on its net investment income and
capital gains which it distributes to shareholders, provided 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 losses) for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code that are described below.
Distributions of investment company taxable income made during the taxable
year or, under certain specified circumstances, within 12 months after the
close of the taxable year, will satisfy the Distribution Requirement. The
Distribution Requirement for any year may be waived if a RIC 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).
The Fund may make investments in securities (such as STRIPS)
that bear "original issue discount" or "acquisition discount" (collectively,
"OID Securities"). The holder of such securities is deemed to have received
interest income even though no cash payments have been received. Accordingly,
OID Securities may not produce sufficient current cash receipts to match the
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<PAGE>
amount of distributable net investment income the Fund must distribute to
satisfy the Distribution Requirement. In some cases, the Fund may have to
borrow money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement,
in order to qualify as a RIC the Fund must, generally, (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 or
securities, or from other income derived with respect to its business of
investing in stock or securities, and (2) derive less than 30% of its gross
income from, among other things, gains on the sale or other disposition of
stock or securities (as defined in section 2(a)(36) of the Investment Company
Act) held for less than three months (the "Short-Short Gain Test").
Finally, at the close of each quarter of its taxable year,
at least 50% of the value of the Fund's 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 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"). The Fund will not lose its
status as a RIC 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. The Fund may curtail its investment in certain securities where the
application thereto of the Asset Diversification Test is uncertain.
Fund Distributions
The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income, regardless
of whether such distributions are paid in cash or are reinvested in Shares.
The Fund may either retain or distribute to shareholders the
excess, if any, of net long-term capital gains over net short-term capital
losses ("net capital gains") for each taxable year. If such gains are
distributed as a capital gains distribution, they are treated by shareholders
as long-term capital gains, regardless of the length of time the shareholder
has held Shares, whether or not such gains were recognized by the Fund prior
to the date on which a shareholder acquired Shares and whether or not the
distribution was paid in cash or reinvested in Shares. The aggregate amount of
distributions designated by the Fund as capital gains distributions may not
exceed the net capital gains of the Fund for any taxable year, determined by
excluding any net capital losses and net long-term capital losses attributable
to transactions occurring after October 31 of such year and by treating any
such net capital losses or net long-term capital losses as if they arose on
the first day of the following taxable year. Conversely, if the Fund elects to
retain its net capital gains, it will be taxed thereon (except to the extent
of any available capital loss carryovers) at the applicable corporate tax
rate. In such event, it is expected that the Fund also will elect to have
shareholders treated as having received a distribution of such gains, with the
result that they will be required to report such gains on their returns as
long-term capital gains, will receive a refundable tax credit for their
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allocable share of capital gains tax paid by the Fund on the gains, and will
increase the tax basis for their Shares by an amount equal to 65 percent of
the deemed distribution.
Investors should be careful to consider the tax implications
of buying Shares of the Fund just prior to the ex-dividend date of an ordinary
income dividend or capital gains distribution. The price of Shares purchased
at that time may reflect the amount of the forthcoming ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend or distribution received even though the
dividend or capital gains distribution was earned by the Fund before the
shareholder purchased the Shares.
Generally, gain or loss on the sale of Shares will be
capital gain or loss, which will be long-term capital gain or loss if the
Shares have been held for more than one year and otherwise will be short-term
capital gain or loss. However, investors should be aware that any loss
realized upon the sale, exchange or redemption of Shares held for six months
or less will be treated as a long-term capital loss to the extent any capital
gains distributions have been paid with respect to such Shares (or any
undistributed net capital gains of the Fund with respect to such Shares have
been included in determining the shareholder's long-term capital gains). In
addition, any loss realized on a sale or other disposition of Shares will be
disallowed to the extent an investor repurchases (or enters into a contract or
option to repurchase) Shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the Shares). Investors
should particularly note that this loss disallowance rule will apply to Shares
received through the reinvestment of dividends during the 61-day period.
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 be taxable to shareholders as
ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. Such distributions will be eligible for the dividends
received deduction in the case of corporate shareholders.
The Fund will be required in certain cases to withhold and
remit to the United States Treasury 31% of distributions paid to any
shareholder (1) who has provided 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 report the receipt of interest or dividend
income properly, or (3) who has failed to certify to the Fund that he is not
subject to backup withholding.
Excise Tax; Miscellaneous Considerations
The Code imposes a non-deductible 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 gain net income for the one-year period ending on October 31 of such
calendar year. The excise tax is imposed on the undistributed part of this
required distribution. In addition, the balance of such income must be
distributed during the next calendar year to avoid liability for the excise
tax in that year. For the foregoing purposes, a 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. For purposes of the excise tax, a regulated
investment company must reduce its capital gain net income by the amount of
any net ordinary loss for the calendar year (but only to the extent the
capital gain net income for the one-year period ending on October 31 exceeds
the net capital gains for such period). Because the Fund intends to distribute
all of its income currently (or to retain, at most, its "net capital gains"
and pay tax thereon), the Fund does not anticipate incurring any liability for
-7-
<PAGE>
this excise tax. However, investors should note that the Fund may, in certain
circumstances, be required to liquidate portfolio investments in order to make
sufficient distributions to avoid excise tax liability, and, in addition, that
the liquidation of investments in such circumstances may affect the ability of
the Fund to satisfy the Short-Short Gain Test.
Rules of state and local taxation of dividend and capital
gains distributions from regulated investment companies often differ from the
rules for Federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of federal, state and local
tax rules affecting an investment in the Fund.
5. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are the
responsibility of the 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,
distributors, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's officers, to Investment Company Capital Corp.
("ICC"), acting as the Fund's administrator, to Alex. Brown and Armata acting
as the Fund's distributors, and to ISI, as the Fund's Advisor. Three directors
and all of the officers of the Fund are directors, officers or employees of
ICC, Alex. Brown, Armata or ISI. The other directors of the Fund have no
affiliation with ICC, Alex. Brown, Armata or ISI.
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 135 East Baltimore Street, Baltimore,
Maryland 21202.
*EDWARD S. HYMAN, Chairman and Director (4/8/45)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Chairman, International Strategy and
Investment Inc., 1991-Present; Formerly, Vice Chairman and Member
of the Board of Directors, C.J. Lawrence Inc. (money manager),
1972-1991.
*RICHARD T. HALE, Vice Chairman and Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered
Financial Analyst.
*W. JAMES PRICE, Vice Chairman and Director (10/6/24)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3342. Director, Boca Research, Inc. (computer peripherals).
Managing Director Emeritus, Alex. Brown & Sons Incorporated;
Formerly, Director, CSX Corporation (transportation), and PHH
Corporation (business services).
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).
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<PAGE>
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); 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 (finance and banking); 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; 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).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New
Jersey 08540. Professor-at-Large Emeritus, Institute for Advanced
Study; Director, ATL and Spacelabs Medical Corp. (medical
equipment) and Family Health International (non-profit research
and education); Trustee, Reed College (education); Director,
Research America (non-profit medical research); Formerly, Trustee,
Rockefeller Foundation; and Director, Merrill Lynch Cluster C
Funds (registered investment companies).
R. ALAN MEDAUGH, President (8/20/43)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. President, International Strategy and
Investment Inc.; Formerly Managing Director, C.J. Lawrence Fixed
Income Management (money manager).
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); Vice
President, Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated; Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
NANCY LAZAR, Vice President (8/1/57)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Executive Vice President and Secretary,
International Strategy and Investment Inc., 1991-Present;
Formerly, Vice President, C.J. Lawrence Inc. (money manager),
1981-1991.
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<PAGE>
BRIAN C. NELSON, Vice President and Secretary (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment
Company Capital Corp. (registered investment advisor) and Armata
Financial Corp. (registered broker-dealer).
CARRIE L. BUTLER, Vice President (5/1/67)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Vice President, International Strategy and
Investment Inc.; Formerly, Mutual Fund Sales Assistant, C.J.
Lawrence Fixed Income Management (money manager), 1989-1991.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September
1995-Present; Formerly, Vice President and Treasurer, The Delaware
Group of Funds (registered investment companies) and Vice President,
Delaware Management Company, Inc., 1980-August 1995.
DENICE DE FLORIO, Assistant Vice President (4/23/69)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Assistant Vice President, International
Strategy and Investment Inc., March 1995-Present; Formerly,
Assistant Portfolio Manager, Smith Barney's Municipal Money Market
Funds and Taxable Money Market Funds, February 1993-February 1995
and Portfolio Administrator, Offitbank, September 1991-February
1995.
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student, 1989-1991.
- -------------------------
* A Director who is an "interested person" 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, Armata or ISI or by any of their
respective 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. Hyman serves as a Director of three funds in the Fund Complex. Mr. Hale
serves as President and Director of one fund and as a Director of each of the
other funds in the Fund Complex. Mr. Medaugh serves as a Director and President
of one fund and as President of two other funds in the Fund Complex. Mr. Price
serves as a Director of seven funds in the Fund Complex. Messrs. Cunnane,
Kroeger, Levy, McDonald and Woolf serve as Directors of each fund in the Fund
Complex. Ms. Lazar and Ms. Butler serve as Vice Presidents and Ms. De Florio
serves as an Assistant Vice President of three funds in the Fund Complex. Mr.
Veilleux serves as Executive Vice President of one fund and as Vice President of
each of the other funds in the Fund Complex. Mr. Nelson serves as Vice President
and Secretary, Mr. Finelli serves as Treasurer and Ms. DePrine serves as
Assistant Secretary, respectively, for each of the funds in the Fund Complex.
-10-
<PAGE>
Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, Alex. Brown or Armata 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 ICC, Alex. Brown, Armata or ISI may be considered to have
received remuneration indirectly. As compensation for his 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 attendance at Board and committee
meetings) from all Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund,
Inc. for which he 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 is allocated among all such funds described
above in direct proportion to their relative net assets. For the fiscal year
ended October 31, 1995, Non-Interested Directors' fees attributable to the
assets of the Fund totalled $24,011. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Compensation From Total Compensation From the Fund
Name of Person, the Fund for the Fiscal Year and Fund Complex Paid to Directors for
Position Ended October 31, 1995 the Fiscal Year Ended October 31, 1995
- -------- ---------------------- --------------------------------------
<S> <C> <C>
*Edward S. Hyman, Chairman $0 $0
*Richard T. Hale, Vice Chairman $0 $0
*W. James Price, Vice Chairman $0 $0
James J. Cunnane, Director $2,529(1) $29,250 for service on 13
boards in the Fund Complex(2)
N. Bruce Hannay, Director ** $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)
John F. Kroeger, Director $3,822(1) $42,900 for service on 13
boards in the Fund Complex(2)
Louis E. Levy, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)
Eugene J. McDonald, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)
Harry Woolf, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)
</TABLE>
- -------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired, effective January 31, 1996.
(1) Of the amounts paid to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $2,529, $2,564, $0, $0, $3,475 and $3,475, respectively, was
deferred pursuant to a deferred compensation plan.
(2) One of these funds ceased operations on May 17, 1995.
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<PAGE>
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 him in
his last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by
him in his last year of service. The fee will be paid quarterly, for life, by
each Fund for which he serves. The Retirement Plan is unfunded and unvested.
Messrs. Kroeger and Woolf have qualified but have not yet received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994 and a Director who retired effective January 31, 1996, each of whom has
qualified for the Retirement Plan and will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each
fund in the Fund Complex based upon the relative net assets of such fund to
the Fund Complex.
Beginning in December, 1994, any Director who receives fees
from the Fund is permitted to defer a minimum of 50%, or up to all, of his
annual compensation pursuant to a Deferred Compensation Plan. Messrs. Cunnane,
Kroeger, Levy, McDonald and Woolf have each executed a Deferred Compensation
Agreement. Currently, the deferring Directors may select various Flag and Alex.
Brown 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 five
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 significantly restricts the personal investing activities of all
employees of the Advisor and the directors and officers of the Fund's
distributors. As described below, the Code of Ethics imposes additional, more
onerous, restrictions on the Fund's investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of the Advisor,
any director or officer of the Fund's distributors, and all Directors, preclear
any personal securities investments (with exceptions, such as non-volitional
purchases or purchases which are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and preclearance
of the acquisition of securities in private placements. Furthermore, the Code of
Ethics provides for trading "blackout periods" that prohibit trading by
investment personnel and certain other employees within periods of trading by
the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
ISI serves as the Fund's investment advisor pursuant to an
investment advisory agreement dated as of April 1, 1991 (the "Advisory
Agreement"). ISI is a registered investment advisor that was formed in
January, 1991. ISI employs Messrs. Edward S. Hyman, the Fund's Chairman, and
R. Alan Medaugh, the Fund's President. ISI is also investment advisor to
Managed Municipal Fund, Inc. and North American Government Bond Fund, Inc.
As described in the Fund's Prospectus, the Advisor (a)
formulates and implements continuing programs for the purchases and sales of
securities, (b) determines what securities (and in what proportion) shall be
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<PAGE>
represented in the Fund's portfolio, (c) provides the Fund's Board of
Directors with regular financial reports and analyses with respect to the
Fund's portfolio investments and operations, and the operations of comparable
investment companies, (d) obtains and evaluates pertinent information about
economic, statistical and financial information pertinent to the Fund, (e)
takes, on behalf of the Fund, all actions which appear to the Advisor
necessary to carry into effect its purchase and sale programs. Any investment
program undertaken by the Advisor will at all times be subject to policies and
control of the Fund's Board of Directors. The Advisor shall not be liable to
the Fund or its shareholders for any act or omission by the Advisor 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.
Pursuant to the terms of the Advisory Agreement, as
compensation for its services, the Advisor receives an annual fee, paid
monthly, of a percentage of the average daily net assets of the Fund which
varies as follows:
Incremental
Advisory Fee
(as a percentage of
Average Daily Net Assets Average Daily Net Assets)
------------------------ -------------------------
Less than $100,000,000 .20%
$100,000,000 - $200,000,000 .18%
$200,000,001 - $300,000,000 .16%
$300,000,001 - $500,000,000 .14%
$500,000,001 and over .12%
In addition, the Fund pays the Advisor 1.5% of the Fund's
gross income.
The Advisor has agreed to reduce its aggregate fees
attributable to the Fund on a monthly basis for any fiscal year, to the extent
required, so that the amount of the ordinary expenses of the Fund (excluding
brokerage commissions, interest, taxes and extraordinary expenses such as
legal claims, liabilities, litigation costs and indemnification related
thereto) paid or incurred by the Fund for such fiscal year does not exceed the
expense limitations applicable to the Fund imposed by the securities laws or
regulations of the states in which the Shares are registered or qualified for
sale as such limitations may be raised or lowered from time to time.
Currently, the most restrictive of such expense limitations requires the
Advisor to reduce its fees to the extent required so that ordinary expenses of
the Fund (excluding brokerage commissions, interest, taxes and extraordinary
expenses such as legal claims, liabilities, litigation costs and
indemnification related thereto) do not exceed 2.5% of the first $30 million
of the Fund's average daily net assets, 2.0% of the next $70 million of the
Fund's average daily net assets and 1.5% of the Fund's average daily net
assets in excess of $100 million. In addition, if required to do so by any
applicable state securities laws or regulations, the Advisor will reimburse
the Fund to the extent required to prevent the expense limitations of any
state law or regulation from being exceeded. Expenses incurred pursuant to the
Plans (see "Distribution of Fund Shares" below) would not come within state
expense limitation requirements.
The Advisor is responsible 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. Because purchases and sales of securities by the Fund will
usually be principal transactions, the Fund will incur little, if any,
brokerage commission expense. The Advisor's primary consideration in effecting
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<PAGE>
securities transactions will be to obtain best price and execution. To the
extent that the execution and prices of more than one dealer are comparable,
the Advisor may, in its discretion, effect transactions with dealers that
furnish statistical research or other information or services that may benefit
the Fund's investment program.
The Investment Advisory Agreement will continue in effect
from year to year after its initial two year term if such continuance is
specifically approved (a) at least annually by the Fund's Board of Directors
or by a vote of a majority of the outstanding Shares and (b) 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 Investment Advisory
Agreement was most recently approved by the Fund's Board of Directors in the
foregoing manner on September 25, 1995. The Fund or the Advisor 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. For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, the Fund paid fees to ISI of $999,452, $1,056,633
and $1,162,324, respectively.
7. ADMINISTRATION
Investment Company Capital Corp., 135 East Baltimore Street,
Baltimore, Maryland 21202, provides administration services to the Fund. Such
services include: monitoring the Fund's regulatory compliance, supervising all
aspects of the Fund's service providers, arranging, but not paying for, the
printing and mailing of prospectuses, proxy materials and shareholder reports,
preparing and filing all documents required by the securities laws of any
state in which the Shares are sold, establishing the Fund's budgets,
monitoring the Fund's distribution plans, preparing the Fund's financial
information and shareholder reports, calculating dividend and distribution
payments and arranging for the preparation of state and federal tax returns.
The Fund compensates ICC by paying it a percentage of the
Fund's average daily net assets which varies as follows:
Incremental
Administration Fee
(as a percentage of
Average Daily Net Assets Average Daily Net Assets)
------------------------ -------------------------
Less than $100,000,000 .10%
$100,000,000 - $200,000,000 .09%
$200,000,001 - $300,000,000 .08%
$300,000,001 - $500,000,000 .07%
$500,000,001 and over .06%
In addition, the Fund pays ICC .50% of the Fund's annual
gross income.
The services of ICC to the Fund are not exclusive and ICC is
free to render similar services to others. For the fiscal year ended October
31, 1995 and for the period from January 1, 1994 through October 31, 1994, ICC
received administration fees of $438,267 and $386,768. Prior to January 1,
1994, Alex. Brown served as the Fund's administrator. For the period from
November 1, 1993 through December 31, 1993 and for the fiscal year ended
October 31, 1993, Alex. Brown received an administration fee from the Fund of
$82,018 and $513,355, respectively.
-14-
<PAGE>
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".) ICC is a wholly-owned
subsidiary of Alex. Brown Financial Corporation, an indirect subsidiary of
Alex. Brown Incorporated, and an affiliate of Armata.
8. DISTRIBUTION OF FUND SHARES
The Distribution Agreements provide that Alex. Brown (in the
case of the Flag Investors Shares) or Armata (in the case of the ISI Shares) has
the exclusive right to distribute the related class of Shares either directly or
through other broker-dealers. Armata, a Maryland corporation, is a broker-dealer
that was formed in 1983 and is an affiliate of ICC and Alex. Brown. (The Flag
Investors Total Return U.S. Treasury Fund Class A Shares Distribution Agreement
(the "Class A Distribution Agreement"), the Flag Investors Total Return U.S.
Treasury Fund Class B Shares Distribution Agreement (the "Class B Distribution
Agreement") and the ISI Total Return U.S. Treasury Fund Shares Distribution
Agreement (the "ISI Distribution Agreement") are herein collectively called the
"Distribution Agreements.")
The Distribution Agreements further provide that Alex. Brown
or Armata on behalf of the relevant class, will: solicit and receive orders
for the purchase of Shares; 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;
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;
provide the Fund's Board of Directors for their review with quarterly reports
required by Rule 12b-1; 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
Shares. Alex. Brown and Armata have not undertaken to sell any specific number
of Shares. The Distribution Agreements further provide that, in connection
with the distribution of Shares, Alex. Brown or Armata will be responsible for
all of their respective promotional expenses. The services by Alex. Brown and
Armata to the Fund are not exclusive, and Alex. Brown and Armata shall not be
liable to the Fund or its shareholders for any act or omission by Alex. Brown
or Armata 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 providing distribution and related
administrative services as described above, the Fund will pay Alex. Brown for
the Class A Shares and Armata for the ISI Shares, on a monthly basis, an annual
fee, equal to .25% of the average daily net assets of the respective class of
Shares. Alex. Brown and Armata expect to allocate on a proportional basis a
substantial portion of their respective annual fees to their investment
representatives or up to all of their fees to broker-dealers who enter into
Sub-Distribution Agreements with Alex. Brown or Armata ("Participating Dealers")
under which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning the
status of their accounts and the operations of the Fund.
As compensation for providing distribution and related
administrative services for the Class B Shares, as described above, the Fund
will pay Alex. Brown, on a monthly basis, an annual fee equal to .35% of the
Class B Shares' average daily net assets. Alex. Brown expects to retain the
entire amount of the distribution fee as reimbursement for front-end payments to
its investment representatives and to Participating Dealers.
In addition, with respect to the Class B Shares, the Fund will
pay Alex. Brown a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) Alex.
Brown expects to allocate most of its shareholder servicing fee to its
investment representatives or to Participating Dealers.
For the fiscal years ended October 31, 1995, October 31, 1994
and October 31, 1993, Alex. Brown (for services performed as distributor for the
Class A Shares) received from the Fund aggregate 12b-1 fees in the amount of
$411,117, $485,928 and $582,520, respectively and paid from such fees
approximately $362,959, $410,280 and $383,983, respectively to its investment
representatives as compensation and $44,701, $40,041, and $49,530, respectively
to Participating Dealers as compensation. In addition, for the fiscal year ended
October 31, 1995, Alex. Brown incurred expenses of $0 for advertising and
-15-
<PAGE>
$12,195 for printing and mailing of prospectuses to prospective investors. For
the fiscal years ended October 31, 1995, October 31, 1994 and October 31, 1993,
Armata (for services performed as distributor for the ISI Shares) received from
the Fund aggregate 12b-1 fees of $501,139, $544,678 and $549,662, respectively
and paid from such fees $483,565, $517,078 and $546,159, respectively, to
Participating Dealers as compensation. From amounts received from the Fund
during such periods, Armata paid no fees to its investment representatives. In
addition, for the fiscal year ended October 31, 1995, Armata incurred expenses
of $7,020 for advertising and $6,253 for printing and mailing prospectuses to
prospective investors. For the period from November 9, 1992 through February 27,
1994, Alex. Brown was also distributor for the Flag Investors Class D Shares
pursuant to the Plan of Distribution in effect for such class. For distribution
services for such shares for the periods from November 1, 1993 through October
20, 1994 and from November 9, 1992 through October 31, 1993, Alex. Brown
received from the Fund aggregate 12b-1 fees of $9,735 and $6,282, respectively.
From amounts received from the Fund during such periods, Alex. Brown paid no
fees to its investment representatives or to Participating Dealers.
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 each of its classes of Shares (the
"Plans"). Under the Plans, the Fund pays a fee to Alex. Brown or Armata for
distribution and other shareholder servicing assistance as set forth in the
related Distribution Agreement, and Alex. Brown and Armata are authorized to
make payments out of their fees to their investment representatives and to
Participating Dealers.
Each of the Distribution Agreements has an initial term of two
years. The Distribution Agreements and the Plans will remain in effect from year
to year as specifically approved (a) at least annually by the Fund's Board of
Directors and (b) 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
Class A and ISI Distribution Agreements, forms of Sub-Distribution Agreements
and the related Plans were most recently approved 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 Plans or Distribution Agreements
or any Sub-Distribution Agreement) on September 25, 1995. The Class B
Distribution Agreement, including the Plan and Form of Sub-Distribution
Agreement, were approved by the Fund's Board of Directors, including a majority
of the Non-Interested Directors, on March 18, 1996 and by the sole shareholder
of the class on May 24, 1996.
In approving the Plans, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable
likelihood that the Plans would benefit the Fund and its shareholders. The
Plans will be renewed only if the Directors make a similar determination in
each subsequent year. The Plans may not be amended to increase materially the
fee to be paid pursuant to the Distribution Agreements without the approval of
the shareholders of the respective classes of the Fund. The Plans may be
terminated at any time, and the Distribution Agreements may be terminated at
any time upon 60 days' notice, without penalty, by a vote of a majority of the
Fund's Non-Interested Directors or by a vote of a majority of the outstanding
Shares. Any Sub-Distribution Agreement may be terminated in the same manner at
any time. The Distribution Agreements and any Sub-Distribution Agreement shall
automatically terminate in the event of assignment.
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plans to Alex. Brown or Armata
pursuant to the Distribution Agreements, to Participating Dealers pursuant to
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<PAGE>
Sub-Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors
shall be committed to the discretion of the Non-Interested Directors then in
office.
In addition, 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 and Armata will
allocate a portion of their respective distribution fees 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 from
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 applicable 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 Plans, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
or Armata, as appropriate, with respect to shares held by or on behalf of
customers of such entities. Payments under the Plans are made as described above
regardless of the distributor's actual cost of providing distribution services
and may be used to pay such distributor's overhead expenses. If the cost of
providing distribution services to the Fund in connection with the sale of the
Class A Shares or the ISI Shares is less than .25% of such Shares' average daily
net assets for any period or in connection with the sale of the Class B Shares
is less than .35% of the Class B Shares' average daily net assets for any
period, the unexpended portion of the distribution fee may be retained by the
distributor. The Plans do not provide for any charges to the Fund for excess
amounts expended by the distributor and, if a Plan is terminated in accordance
with its terms, the obligation of the Fund to make payments to the distributor
pursuant to the Plan will cease and the Fund will not be required to make any
payments past the date the related Distribution Agreement terminates.
For the fiscal years ended October 31, 1995, October 31, 1994
and October 31, 1993, Alex. Brown received sales commissions on the Flag
Investors Class A Shares of $971,034, $310,376 and $538,275 and from such
amounts retained $177,202, $281,454 and $387,481 in each such year,
respectively. For the fiscal years ended October 31, 1995, October 31, 1994 and
October 31, 1993, Armata received sales commissions on the ISI Class Shares of
$635,954, $426,023 and $1,067,706 and from such amounts retained $53,363,
$57,564 and $189,792 in each such year, respectively. The Fund did not offer the
Class B Shares prior to the date of this Statement of Additional Information.
Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory, administration 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, if any, 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 corporate 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 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
of the Fund and supplements thereto to the 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
Non-Interested Directors and Non-Interested 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 or independent auditors, in connection with any matter relating
to the Fund; membership dues of industry associations; interest payable on
Fund borrowings; postage; insurance premiums on property or personnel
-17-
<PAGE>
(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, ICC or Armata.
9. PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell
securities for the Fund, selection of broker-dealers and negotiation of
commission rates. Since purchases and sales of portfolio securities by the
Fund are usually principal transactions, the Fund incurs little or no
brokerage commissions. Portfolio securities are normally purchased directly
from the issuer or from a market maker for the securities. The purchase price
paid to broker-dealers serving as market makers usually includes 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.
The Advisor's primary consideration in effecting security
transactions is to obtain, on an overall basis, the best net price and the
most favorable execution of orders. To the extent that the execution and
prices offered by more than one broker-dealer are comparable, the Advisor may,
in its discretion, effect transactions with dealers that furnish statistical,
research or other information or services which the Advisor deems to be
beneficial to the Fund's investment program. Such research services supplement
the Advisor's own research. Research services may include the following:
statistical and background information on the U.S. economy, industry groups
and individual companies; forecasts and interpretations with respect to the
U.S. money markets; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indices and investment accounts; information concerning prices of
securities; the providing of equipment used to communicate research
information; and the providing of access to consultants who supply research
information. Certain research services furnished by broker-dealers may be
useful to the Advisor with clients other than the Fund. Similarly, any
research services received by the Advisor through placement of portfolio
transactions of other clients may be of value to the Advisor in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to the Advisor by a broker-dealer.
The Advisor 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 the Advisor's research and analysis. Therefore,
it may tend to benefit the Fund by improving the quality of the Advisor's
investment advice.
For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, no brokerage commissions were paid by the Fund.
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 October 31, 1995, the Fund held a 5.75% repurchase agreement issued by
Goldman Sachs & Co. valued at $25,240,000. Goldman Sachs & Co. is one of the
Fund's "regular brokers or dealers."
-18-
<PAGE>
10. CAPITAL SHARES
Under the Fund's Articles of Incorporation, the Fund may
issue up to 100 million Shares of its capital stock with a par value of $.001
per Share.
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 Total Return
U.S. Treasury Fund Class A Shares (formerly known as the Flag Investors Total
Return U.S. Treasury Fund Shares), Flag Investors Total Return U.S. Treasury
Fund Class B Shares, Flag Investors Total Return U.S. Treasury Fund Class D
Shares and ISI Total Return U.S. Treasury Fund Shares. The Flag Investors Total
Return U.S. Treasury Fund Class B Shares have not been offered prior to the date
of this Statement of Additional Information. The Flag Investors Total Return
U.S. Treasury Fund Class D Shares are no longer being offered. All Shares of the
Fund regardless of class 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 will vote separately. Any such
series will be a separately managed portfolio and shareholders of each series
will have an undivided interest in the net assets of that series. For tax
purposes, the series will be treated as separate entities. Generally, each class
of Shares issued by a particular series will be identical to every other class
and expenses of the Fund (other than 12b-1 fees and any applicable service fees)
are 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.
The Fund's By-laws provide that any director of the Fund may
be removed by the shareholders by a vote of a majority of the votes entitled
to be cast for the election of Directors. A meeting to consider the removal of
any Director or Directors of the Fund will be called by the Secretary of the
Fund upon the written request of the holders of at least one-tenth of the
outstanding Shares of the Fund entitled to vote at such meeting.
There are no preemptive, conversion or exchange rights
applicable to any of the Shares. The Fund's 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.
-19-
<PAGE>
11. REPORTS
The Fund furnishes shareholders with semi-annual and 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.
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport Business
Park, 200 Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of PNC Bank
Corp., has been retained to act as custodian of the Fund's investments. PNC Bank
receives such compensation from the Fund for its services as custodian as may be
agreed to from time to time by PNC Bank and the Fund. Investment Company Capital
Corp., 135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800)
553-8080 for the Flag Investors Shares and (800) 882-8585 for the ISI Shares)
has been retained to act as the Fund's transfer and dividend disbursing agent.
As compensation for these services, ICC receives up to $15.17 per account per
year plus reimbursement for out-of-pocket expenses incurred in connection
therewith. For the fiscal year ended October 31, 1995, such fees totalled
$204,806.
ICC also provides accounting services to the Fund. As
compensation for these services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly, as shown below.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $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 ICC's provision of
accounting services: express delivery service, independent pricing and
storage. As compensation for providing accounting services for the fiscal year
ended October 31, 1995, ICC received fees of $94,737.
ICC also serves as the Fund's administrator.
-20-
<PAGE>
13. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by
the Fund's independent auditors, Deloitte & Touche LLP. Deloitte & Touche LLP
has offices at 2 Hilton Court, P.O. Box 319, Parsippany, New Jersey 07054.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 19, 1996, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
outstanding Shares.
Class A Shares
Alex. Brown & Sons Incorporated 61.41%*
135 East Baltimore Street
Baltimore, MD 21202
- ------------
* As of such date, to Fund management's knowledge, Alex. Brown owned
beneficially less than 1% of such shares.
As of such date, to Fund management's knowledge, Directors
and officers as a group owned less than 1% of the Fund's total outstanding
Shares of either class.
15. PERFORMANCE AND YIELD COMPUTATIONS
For purposes of quoting and comparing the performance of the
Fund to that of other open-end diversified management investment companies and
to stock or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will 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 Calculation
The total return quotations, under the rules of the SEC,
must be calculated according to the following formula:
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1,
5 or 10 year periods (or fractional portion thereof)of a
hypothetical $1,000 payment made at the beginning of the 1,
5 or 10 year periods.
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover one, five and ten year periods or a shorter period
dating from the effectiveness of the Fund's registration statement or the date
-21-
<PAGE>
the Fund (or a series) commenced operations (provided such date is subsequent to
the date the registration statement became effective). During its first year of
operation 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 (for the Class A Shares 4.50%, for the
ISI Shares 4.45% and for the Class B Shares 2.00% for the one year period, 1.00%
for the five year period and no sales charge thereafter) 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 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 in order 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., 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 September 30, 1995, the ending redeemable value of a hypothetical $1,000
payment for each of the Class A Shares and the ISI Shares was $1,103 and $1,104,
respectively, resulting in a total return for such Shares equal to 10.34% and
10.40%, respectively. For the five year period ended September 30, 1995, the
ending redeemable value of a hypothetical $1,000 payment for each of the Class A
Shares and the ISI Shares was $1,566 and $1,567, respectively, resulting in a
total return for such Shares equal to 9.39% and 9.40%, respectively. For the
period from August 10, 1988 (commencement of operations) through the end of the
Fund's most recent calendar quarter on September 30, 1995, the ending redeemable
value of a hypothetical $1,000 payment for each of the Class A Shares and the
ISI Shares was $1,795 and $1,796, respectively, resulting in an average annual
total return for such Shares equal to 8.54% and 8.56%, respectively.
Calculated according to the alternative computation which
assumes no sales charges and reinvestment of all distributions, for the one
year period ended October 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in the Class A Shares or ISI Shares was
$11,810 resulting in a total return for such Shares equal to 18.11%. For the
five year period ended October 31, 1995, the ending redeemable value of a
-22-
<PAGE>
hypothetical $10,000 investment in Class A Shares or ISI Shares was $16,410,
resulting in a total return for such Shares equal to 10.4%. For the period
from August 10, 1988 (commencement of operations) through the end of the
Fund's most recent fiscal year on October 31, 1995, the ending redeemable
value of a hypothetical $10,000 investment in the Class A Shares or ISI Shares
was $19,198 resulting in an average annual total return for such Shares equal
to 9.4%.
The Class B Shares were not offered prior to the date of this
Statement of Additional Information.
Yield Calculations
The yield based on the 30 day period ended October 31, 1995
was 5.33% for the Class A Shares and 5.34% for the ISI Shares, computed in the
manner discussed below. The Class B Shares were not offered prior to the date of
this Statement of Additional Information. 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 analyzing 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 4.50% for the Class A Shares, 4.45% for the ISI Shares and 2.0%
for the Class B 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.
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.
16. FINANCIAL STATEMENTS.
See next page.
-23-
<PAGE>
[LOGO]
TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1995
<TABLE>
<CAPTION>
PAR VALUE
INTEREST RATE MATURITY DATE (000) (NOTE A)
<S> <C> <C> <C>
- -------------------------------------------------------------------------
U.S. TREASURY BONDS - 55.4%
10.375% 11/15/09 $ 12,500 $ 16,099,612
9.250 2/15/16 65,000 85,840,625
7.250 5/15/16 30,000 32,868,750
8.875 2/15/19 45,000 58,099,230
8.500 2/15/20 10,000 12,495,310
-------------
TOTAL U.S. TREASURY BONDS
(Cost $203,503,896)................................... 205,403,527
-------------
U.S. TREASURY NOTES - 35.1%
7.875 7/31/96 46,700 47,458,875
5.750 8/15/03 83,700 82,509,870
-------------
TOTAL U.S. TREASURY NOTES
(Cost $130,668,720)................................... 129,968,745
-------------
ZERO COUPON U.S. TREASURY BONDS (S.T.R.I.P.S.) - 1.3%
S.T.R.I.P.S. (Principal Only)
6.572%* 8/15/17 20,500 4,939,209
-------------
TOTAL U.S. TREASURY STRIPS
(Cost $4,671,341)..................................... 4,939,209
-------------
REPURCHASE AGREEMENTS - 6.8%
GOLDMAN SACHS & CO., 5.75%
Dated 10/31/95, to be repurchased on 11/1/95,
collateralized by U.S. Treasury Bonds with a
market value of $25,745,920
(Cost $25,240,000)........................... 25,240 25,240,000
-------------
</TABLE>
[LOGO]
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<PAGE>
[LOGO]
TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (CONCLUDED) October 31, 1995
<TABLE>
<CAPTION>
VALUE
(NOTE A)
<S> <C> <C>
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 98.6%
(Cost $364,083,957)**...................................................... $ 365,551,481
OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 1.4%............................ 5,269,210
-------------
NET ASSETS - 100.0%.......................................................... $ 370,820,691
-------------
-------------
NET ASSET VALUE AND REDEMPTION PRICE PER:
FLAG INVESTORS CLASS A SHARE
($164,205,925 DIVIDED BY 16,119,600 shares outstanding)................. $10.19
ISI CLASS SHARE
($206,614,766 DIVIDED BY 20,277,563 shares outstanding)................. $10.19
MAXIMUM OFFERING PRICE PER:
FLAG INVESTORS CLASS A SHARE
($10.19 DIVIDED BY .955)................................................ $10.67
ISI CLASS SHARE
($10.19 DIVIDED BY .9555)............................................... $10.66
- --------------------------------------------------------------------------------------------
</TABLE>
*Yield as of October 31, 1995.
**Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
[LOGO]
-25-
<PAGE>
[LOGO]
TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):
Interest................................................................................... $ 24,592,183
------------
EXPENSES:
Investment advisory fee (Note B)........................................................... 999,452
Distribution fee (Note B).................................................................. 912,256
Administration fees (Note B)............................................................... 438,267
Transfer agent fees (Note B)............................................................... 204,806
Accounting fee (Note B).................................................................... 94,737
Printing and postage....................................................................... 61,802
Custodian fees............................................................................. 58,167
Legal...................................................................................... 47,433
Directors' fees............................................................................ 24,011
Audit...................................................................................... 23,976
Miscellaneous.............................................................................. 19,007
Insurance.................................................................................. 15,959
Registration fees.......................................................................... 9,815
------------
Total expenses........................................................................... 2,909,688
------------
Net investment income...................................................................... 21,682,495
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions............................................... 2,796,088
Change in unrealized appreciation/(depreciation) of investments............................ 36,191,069
------------
Net gain on investments.................................................................... 38,987,157
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................................... $ 60,669,652
------------
------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
[LOGO]
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<PAGE>
[LOGO]
TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------
<S> <C> <C>
1995 1994
- -----------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................. $ 21,682,495 $ 20,608,620
Net gain from security transactions............................... 2,796,088 2,694,502
Change in unrealized appreciation/(depreciation) of investments... 36,191,069 (50,587,386)
--------------- ------------------
Net increase/(decrease) in net assets resulting from operations... 60,669,652 (27,284,264)
--------------- ------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares................................... (9,785,285) (9,667,725)
Flag Investors Class B Shares................................... -- (69,473)
ISI Class Shares................................................ (11,897,210) (10,871,422)
Net realized short-term gains:
Flag Investors Class A Shares................................... (1,162,209) (3,322,794)
Flag Investors Class B Shares................................... -- (48,182)
ISI Class Shares................................................ (1,385,249) (3,643,272)
Net realized long-term gains:
Flag Investors Class A Shares................................... -- (16,299,585)
Flag Investors Class B Shares................................... -- (138,210)
ISI Class Shares................................................ -- (16,877,555)
--------------- ------------------
Total distributions............................................... (24,229,953) (60,938,218)
--------------- ------------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares...................................... 31,613,586 53,031,045
Value of shares issued in reinvestment of dividends............... 15,133,836 39,758,572
Cost of shares repurchased........................................ (87,824,419) (87,607,047)
--------------- ------------------
Increase/(decrease) in net assets derived from
capital share transactions...................................... (41,076,997) 5,182,570
--------------- ------------------
Total decrease in net assets...................................... (4,637,298) (83,039,912)
NET ASSETS:
Beginning of period............................................... 375,457,989 458,497,901
--------------- ------------------
End of period..................................................... $ 370,820,691 $ 375,457,989
--------------- ------------------
--------------- ------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
[LOGO]
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<PAGE>
[LOGO]
TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A and ISI Class Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year................. $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................ 0.57 0.51 0.62 0.76 0.70
Net realized and unrealized gain/(loss)
on investments..................................... 1.04 (1.16) 1.12 0.05 0.79
----------- ----------- ----------- ----------- -----------
Total from Investment Operations..................... 1.61 (0.65) 1.74 0.81 1.49
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains............................... (0.64) (1.20) (0.79) (0.70) (0.84)
Distributions from net realized
long-term gains.................................... -- (0.28) (0.07) (0.05) --
----------- ----------- ----------- ----------- -----------
Total distributions.................................. (0.64) (1.48)* (0.86) (0.75) (0.84)
----------- ----------- ----------- ----------- -----------
Net asset value at end of year....................... $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN........................................... 18.09% (6.22)% 17.33% 8.96% 15.89%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. 0.80% 0.77% 0.77% 0.77% 0.87%
Net investment income................................ 5.94% 4.98% 5.21% 5.65% 6.88%
SUPPLEMENTAL DATA:
Net assets at end of year (000):
Flag Investors Class A Shares...................... $164,206 $175,149 $224,790 $250,210 $237,688
ISI Class Shares................................... $206,615 $200,309 $232,103 $207,518 $168,128
Portfolio turnover rate.............................. 194% 68% 249% 191% 141%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Distributions to shareholders include $.05 per share return of capital.
See accompanying Notes to Financial Statements.
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TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
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 October 31, 1995, 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 different sales loads. As of March 1, 1994, the previously
offered Flag Investors Total Return U.S. Treasury Fund Class B Shares ("Flag
Investors Class B") were no longer offered. All Class B Shares not exchanged
into Class A Shares or previously redeemed were redeemed as of October 20,
1994. 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 & Sons Incorporated ("Alex. Brown"),
serves as the Fund's administrator. As compensation for its advisory
services, ISI receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .20% of the first $100 million of the Fund's
average daily net assets; .18% of the Fund's average daily net assets in
excess of $100 million but not exceeding $200 million; .16% of the Fund's
average daily net assets in excess of $200 million but not exceeding $300
million; .14% of the Fund's average daily net assets in excess of $300
million but not exceeding $500 million; and .12% of the Fund's average daily
net assets in excess of $500 million. In addition, the Fund pays the
investment advisor 1.5% of the Fund's gross income.
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TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
As compensation for its administrative services, ICC receives from the Fund
an annual fee, calculated daily and paid monthly, at the annual rate of .10%
of the first $100 million of the Fund's average daily net assets; .09% of the
Fund's average daily net assets in excess of $100 million but not exceeding
$200 million; .08% of the Fund's average daily net assets in excess of $200
million but not exceeding $300 million; .07% of the Fund's average daily net
assets in excess of $300 million but not exceeding $500 million; and .06% of
the Fund's average daily net assets 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 $94,737 for accounting services for the year
ended October 31, 1995.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $204,806 for
transfer agent services for the year ended October 31, 1995.
As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of 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
year ended October 31, 1995, distribution fees aggregated $912,256, of which
$501,139 and $411,117 were allocated to the ISI Class and Flag Investors
Class A Shares, respectively.
C. CAPITAL SHARE TRANSACTIONS -- At October 31,
1995, there were 100 million shares of $.001 par value common stock
authorized. Transactions of the Fund were as follows:
<TABLE>
<CAPTION>
Flag Investors Class A Shares
------------------------------
<S> <C> <C>
For the Year Ended October 31,
------------------------------
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Shares sold............... 726,425 1,644,765
Shares issued to
shareholders on
reinvestment of
dividends............... 653,526 1,794,890
Shares redeemed........... (4,262,626) (4,249,405)
-------------- --------------
Net decrease in shares
outstanding............. (2,882,675) (809,750)
-------------- --------------
-------------- --------------
Proceeds from sale of
shares.................. $ 7,023,050 $ 16,544,622
Reinvested dividends...... 6,240,023 18,068,172
Net asset value of shares
redeemed................ (40,514,349) (41,772,070)
-------------- --------------
Net decrease from capital
share transactions...... $ (27,251,276) $ (7,159,276)
-------------- --------------
-------------- --------------
</TABLE>
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TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONCLUDED)
<TABLE>
<CAPTION>
ISI Class Shares
------------------------------
<S> <C> <C>
For the Year Ended October 31,
------------------------------
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Shares sold................. 2,579,624 3,572,802
Shares issued to
shareholders on
reinvestment of
dividends................. 929,740 2,141,783
Shares redeemed............. (4,961,123) (4,441,121)
-------------- --------------
Net increase/(decrease) in
shares outstanding........ (1,451,759) 1,273,464
-------------- --------------
-------------- --------------
Proceeds from sale of
shares.................... $ 24,590,536 $ 35,603,196
Reinvested dividends........ 8,893,813 21,518,947
Net asset value of shares
redeemed.................. (47,310,070) (43,262,704)
-------------- --------------
Net increase/(decrease) from
capital share
transactions.............. $ (13,825,721) $ 13,859,439
-------------- --------------
-------------- --------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Flag Investors Class B
Shares
---------------------------
<S> <C>
For the Period Nov. 1, 1993
to Oct. 20, 1994*
---------------------------
Shares sold.................... 83,459
Shares issued to shareholders
on reinvestment of
dividends.................... 16,938
Shares redeemed................ (242,301)
-------------
Net decrease in shares
outstanding.................. (141,904)
-------------
-------------
Proceeds from sale of shares... $ 883,227
Reinvested dividends........... 171,453
Net asset value of shares
redeemed..................... (2,572,273)
-------------
Net decrease from capital share
transactions................. $ (1,517,593)
-------------
-------------
- ------------------------------------------------------------
* Final redemption date.
</TABLE>
D. INVESTMENT TRANSACTIONS -- Purchases and sales
of investment securities, other than short-term obligations, aggregated
$658,047,217 and $650,979,192, respectively, for the year ended October 31,
1995.
At October 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,786,291 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $1,318,767.
E. NET ASSETS -- At October 31, 1995, net assets
consisted of:
<TABLE>
<S> <C>
Paid-in Capital:
Flag Investors
Class A Shares.......... $ 161,528,337
ISI Class Shares.......... 207,576,200
Accumulated net realized
gain from security
transactions.............. 248,630
Unrealized appreciation of
investments............... 1,467,524
-------------
$ 370,820,691
-------------
-------------
</TABLE>
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TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders,
Total Return U.S. Treasury Fund, Inc.:
We have audited the accompanying statement of net assets of Total Return
U.S. Treasury Fund, Inc. as of October 31, 1995, 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 years in the five-year period then ended. 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 October
31, 1995 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 represent
fairly, in all material respects, the financial position of Total Return U.S.
Treasury Fund, Inc. as of October 31, 1995, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
December 6, 1995
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