ISI
Total Return
U.S. Treasury Fund Shares
- -------------------------------------------------------------------------------
Directors and Officers
Edward S. Hyman R. Alan Medaugh
Chairman President
Richard T. Hale Gary V. Fearnow
Vice Chairman Vice President
W. James Price Nancy Lazar
Vice Chairman Vice President
James J. Cunnane Edward J. Veilleux
Director Vice President
John F. Kroeger Scott J. Liotta
Director Vice President
Louis E. Levy Carrie L. Butler
Director Vice President
Eugene J. McDonald Joseph A. Finelli
Director Treasurer
Harry Woolf Edward J. Stoken
Director Secretary
Laurie D. Collidge
Assistant Secretary
Investment Objective
A mutual fund designed to provide a high level of total return with
relative stability of principal as well as the secondary objective of
high current income consistent with an investment in securities issued
by the United States Treasury.
INVESTMENT ADVISOR
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
SHAREHOLDER SERVICING AGENT
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
DISTRIBUTOR
Armata Financial Corp.
P.O. Box 515
Baltimore, MD 21203
ISI Mutual Funds
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
ISI
INTERNATIONAL STRATEGY AND INVESTMENT
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
TREASURIES
ANNUAL REPORT
October 31, 1996
<PAGE>
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the fiscal year
ended October 31, 1996. In this year of volatile interest rates, the Fund
recorded a total return of 3.4%. From its inception on August 10, 1988 through
October 31, 1996, the Fund posted a cumulative total return of 98.6%, which
translates into an average annual total return of 8.7%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
Review of Bond Market During
Fiscal Year 1996
Bond yields moved higher after hitting lows in December. The volatile
behavior of rates, especially in early 1996, is shown in the graph below.
30-Year Treasury Yields
[Graph appears here]
DATE YIELD DATE YIELD DATE YIELD
11/ 1 6.679 8/30 7.118 5/31 6.989
8/23 6.955 5/24 6.834
8/16 6.768 5/17 6.833
8/ 9 6.690 5/10 6.928
8/ 2 6.743 5/ 3 7.117
10/25 6.815 7/26 7.008 4/26 6.789
10/18 6.801 7/19 6.974 4/19 6.786
10/11 6.845 7/12 7.030 4/12 6.802
10/ 4 6.741 7/ 5 7.192 4/ 5 6.824
9/27 6.908 6/28 6.871 3/29 6.667
9/20 7.043 6/21 7.096 3/22 6.655
9/13 6.948 6/14 7.089 3/15 6.739
9/ 6 7.110 6/ 7 7.031 3/ 8 6.712
3/ 1 6.367
2/23 6.405 11/24 6.250
2/16 6.243 11/17 6.232
2/ 9 6.098 11/10 6.338
2/ 2 6.163 11/ 3 6.284
1/26 6.044 10/27 6.356
1/19 5.974
1/12 6.147
1/ 5 6.045
12/29 5.948
12/22 6.064
12/15 6.098
12/ 8 6.054
12/ 1 6.086
Source: Bloomberg Inc.
As the first calendar quarter unfolded, economic growth seemed to pick up
and a balanced budget deal appeared to wane. Both of these factors caused
interest rates to rise. As we saw this begin to unfold, we moved the Fund's cash
reserves from 21% to 32%. Long-term Treasury rates then remained in the 7% range
from May to September. During this time of sustained higher rates, we invested
the Fund's reserves, dropping them down to 2.7% of assets. We took this action
because we thought high rates would slow the economy and be good for bond
prices. Please see the table below for the review of maturity management.
Maturity Management for Fiscal Year 1996
Portfolio Breakdown: 10/31/95 3/31/96 10/31/96
- --------------------------------------------------------------------------------
2 years or less 21.1% 32.4% 2.7%
3-10 years 26.5% -- 25.7%
10-20 years -- 25.2% 24.2%
20+ years 52.4% 42.4% 47.4%
Average Maturity 13.5 yrs. 12.8 yrs. 14.3 yrs.
As the fiscal year ended, rates began to drop back toward 6.6%. Nervousness
about the elections passed with the return of balancing political power. Since
the election, long-term Treasury rates have declined slightly. The trend in
rates now seems to be dominated again by the upcoming pace of the economy. A
detailed review of our outlook follows this letter.
Performance Review
Treasury interest rates as a whole rose for the fiscal year, and the longer
the maturity, the poorer the total return (see table below).
Performance by Maturity
(October 31, 1995-October 31, 1996)
Treasury Maturity Capital Change Income Total Return
- --------------------------------------------------------------------------------
1-Year 0.0% 5.5% +5.5%
5-Year -0.6% 5.8% +5.2%
10-Year -2.2% 6.3% +4.1%
30-Year -4.8% 6.4% +1.6%
1
<PAGE>
With our active management, we moved roughly one-third of the Fund's assets
into reserves as we saw the economy gaining momentum. This helped the Fund cut
its capital exposure, allowing it to outperform long-term Treasuries, although
it did underperform shorter maturity Treasuries. For example, long-term
Treasuries had a total return of 1.6% for the fiscal year, while shorter
maturities like the 10-year Treasury had a total return of 4.1%, compared to the
Fund's 3.4% total return.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- ---------------------
R. Alan Medaugh
President
November 18, 1996
ECONOMIC OUTLOOK FOR 1997
Overview
We expect U.S. economic growth to slow to a 1% pace in the fourth quarter
and to remain slow into mid-1997. This would keep inflation low as capacity
utilization falls and the labor market cools. Slow growth would also be the
catalyst for declining rates and Federal Reserve easing. Near term, we expect
Christmas sales will be adequate but not strong, since early price cutting is
already evident. Please see our forecast table below.
96:1Q 96:2Q 96:3Q 96:4Q* 97:1Q* 97:2Q* 97:3Q*
- --------------------------------------------------------------------------------
Real GDP 2.0% 4.7% 2.2% 1.0% 1.0% 1.0% 3.5%
GDP Deflator** 2.2% 1.8% 1.6% 2.0% 1.5% 1.5% 2.0%
30-Year Bond
Yields*** 6.7% 6.9% 6.9% 6.3% 6.0% 5.7% 5.9%
Fed Funds
Rate*** 5.2% 5.2% 5.2% 5.2% 5.0% 4.8% 4.8%
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
Inflation
Inflation has subsided around the industrial world. This means that "real"
interest rates are high so there is room for "nominal" interest rates to fall
(see chart on page 3).
2
<PAGE>
ECONOMIC OUTLOOK FOR 1997 (continued)
U.S. REAL GOVT. BOND YIELDS
SEP 4.02%
[Graph appears here]
REAL GOV BOND YIELDS
74:1 -2.12
74:2 -2.54
74:3 -2.41
74:4 -2.06
74:5 -2.57
74:6 -2.76
74:7 -3.28
74:8 -2.29
74:9 -3.35
74:10 -3.47
74:11 -4.21
74:12 -4.19
75:1 -3.87
75:2 -3.50
75:3 -2.47
75:4 -1.83
75:5 -1.04
75:6 -1.14
75:7 -1.36
75:8 -0.12
75:9 0.66
75:10 0.70
75:11 0.90
75:12 1.10
76:1 1.32
76:2 1.76
76:3 1.91
76:4 2.01
76:5 1.92
76:6 2.05
76:7 2.44
76:8 2.19
76:9 2.29
76:10 2.24
76:11 2.58
76:12 2.26
77:1 2.28
77:2 1.56
77:3 1.37
77:4 0.78
77:5 1.06
77:6 0.94
77:7 0.97
77:8 1.05
77:9 1.22
77:10 1.38
77:11 1.14
77:12 1.26
78:1 1.37
78:2 2.01
78:3 1.85
78:4 1.84
78:5 1.29
78:6 1.06
78:7 0.92
78:8 0.61
78:9 -0.01
78:10 -0.26
78:11 -0.12
78:12 -0.11
79:1 -0.31
79:2 -0.84
79:3 -1.22
79:4 -1.41
79:5 -1.51
79:6 -2.16
79:7 -2.52
79:8 -2.86
79:9 -2.71
79:10 -2.22
79:11 -2.29
79:12 -3.13
80:1 -3.27
80:2 -2.03
80:3 -2.25
80:4 -3.19
80:5 -4.07
80:6 -4.46
80:7 -2.91
80:8 -1.89
80:9 -1.43
80:10 -1.04
80:11 -0.26
80:12 0.05
81:1 0.35
81:2 1.41
81:3 2.08
81:4 3.06
81:5 3.81
81:6 3.26
81:7 2.81
81:8 3.35
81:9 3.70
81:10 4.41
81:11 3.77
81:12 4.54
82:1 5.96
82:2 6.61
82:3 6.65
82:4 6.75
82:5 6.33
82:6 6.74
82:7 6.99
82:8 6 81
82:9 7 13
82:10 6.14
82:11 6.06
82:12 6.71
83:1 6.92
83:2 7.40
83:3 7.04
83:4 6.48
83:5 7.09
83:6 8.46
83:7 9.04
83:8 9.36
83:9 8.87
83:10 8.83
83:11 8.59
83:12 8.09
84:1 7.46
84:2 7.26
84:3 7.49
84:4 8.09
84:5 9.09
84:6 9.11
84:7 8.90
84:8 8.24
84:9 8.01
84:10 7.71
84:11 7.41
84:12 7.48
85:1 7.92
85:2 7.86
85:3 8.02
85:4 7.89
85:5 7.48
85:6 6.79
85:7 7.04
85:8 7.21
85:9 7.36
85:10 7.26
85:11 6.55
85:12 5.75
86:1 5.43
86:2 5.73
86:3 5.81
86:4 5.80
86:5 5.84
86:6 5.80
86:7 5.60
86:8 5.75
86:9 5.86
86:10 6.13
86:11 6.24
86:12 6.18
87:1 5.93
87:2 5.54
87:3 4.62
87:4 4.48
87:5 5.02
87:6 4.73
87:7 4.62
87:8 4.59
87:9 5.23
87:10 5.16
87:11 4.33
87:12 4.70
88:1 4.70
88:2 4.59
88:3 4.80
88:4 5.05
88:5 5.25
88:6 5.04
88:7 5.01
88:8 5.30
88:9 4.88
88:10 4.63
88:11 4.78
88:12 4.60
89:1 4.45
89:2 4.28
89:3 4.28
89:4 3.91
89:5 3.56
89:6 3.19
89:7 3.02
89:8 3.41
89:9 3.72
89:10 3.42
89:11 3.33
89:12 3.26
90:1 3.07
90:2 3.24
90:3 3.41
90:4 4.05
90:5 4.37
90:6 3.71
90:7 3.69
90:8 3.16
90:9 2.86
90:10 2.49
90:11 2.27
90:12 1.99
91:1 2.63
91:2 2.72
91:3 3.39
91:4 3.40
91:5 3.24
91:6 3.78
91:7 4.09
91:8 4.34
91:9 4.56
91:10 5.08
91:11 4.86
91:12 4.72
92:1 4.91
92:2 5.11
92:3 4.78
92:4 4.78
92:5 4.87
92:6 4.75
92:7 4.44
92:8 4.32
92:9 4.35
92:10 4.25
92:11 4.49
92:12 4.48
93:1 4.16
93:2 3.77
93:3 3.73
93:4 3.70
93:5 3.70
93:6 3.89
93:7 3.79
93:8 3.48
93:9 3.24
93:10 3.19
93:11 3.54
93:12 3.51
94:1 3.77
94:2 4.05
94:3 4.40
94:4 4.91
94:5 5.12
94:6 4.84
94:7 4.81
94:8 4.59
94:9 4.75
94:10 5.33
94:11 5.41
94:12 5.20
95:1 4.98
95:2 4.75
95:3 4.59
95:4 4.31
95:5 3.83
95:6 3.53
95:7 3.96
95:8 4.24
95:9 4.01
95:10 3.56
95:11 3.66
95:12 3.46
96:1 3.33
96:2 3.52
96:3 3.76
96:4 3.89
96:5 3.97
96:6 4.31
96:7 4.08
96:8 3.96
96:9 4.03
96:10 3.82
96:11 NA
96:12 NA
Source: ISI Inc.
The major forces behind the decline of inflation are:
(bullet) Global Competition
(bullet) Technology
(bullet) Demographics
The opening up of world trade has meant new plants can be built in low-wage
areas and the products can be exported to high-wage home markets. As a result,
pressure on U.S. real wages and a drive for corporate efficiency have marked the
last 10 years. The declining cost of technology has also been a factor in
boosting capital spending and lowering the world inflation rate. Technology
represents a growing section of the overall economy, so the percentage of the
U.S. economy experiencing deflation has grown over the last 10 years. Finally,
baby boomers have reached the age when they are beginning to save for
retirement. This change from consumption to savings is an important shift in the
economy.
Reduced Government Spending
Growth in federal outlays has been declining since the mid-1980s. The past
five years have seen an unusually low growth rate of 3.3% (see chart below).
FEDERAL OUTLAYS Y/Y %
5 Yr. Avg. 1996 3.3%
[Graph appears here]
68:1 14.6
69:1 14.6
70:1 15.8
71:1 13.8
72:1 11.7
73:1 7.3
74:1 8.1
75:1 11.4
76:1 11.7
77:1 11.7
78:1 12.2
79:1 12.4
80:1 11.1
81:1 12.4
82:1 12.6
83:1 12.0
84:1 11.3
85:1 10.2
86:1 8.4
87:1 6.6
88:1 5.8
89:1 6.2
90:1 6.0
91:1 6.0
92:1 6.5
93:1 6.0
94:1 5.0
95:1 4.0
96:1 3.3
Source: ISI Inc.
The risk of a Presidential landslide vote that would have put Democrats
back in control of Congress has passed, and the prospects of spending controls
on entitlements without large tax cuts are back in place. The 3% level on
outlays would bring the budget into balance by 2000 if we don't have a
recession. The pressure on the capital markets from a large and rising
government deficit has passed, so the growth in overall credit demand has moved
down to a modest 5% pace. Because government spending is over 25% of the GDP,
slow growth here holds down overall growth. Similar constraints on government
spending in Europe places a "fiscal drag" there as well.
3
<PAGE>
ECONOMIC OUTLOOK FOR 1997 (concluded)
High Federal Funds Policy
The Federal Reserve moved its key short-term rate up from 3% to 6% in 1993
and 1994. In 1995, the Fed trimmed this rate a bit to 5.25%. Inflation, as
measured by the Consumption Price Deflator, has recently dipped below 2% but the
Fed has maintained a 5.25% Fed Funds rate. This high rate policy has caused
growth in two key areas of the economy to stall. Real construction spending and
vehicle sales have both seen little growth since 1994. The policy emphasis on
fighting inflation has encouraged long-term rates to fall recently. The
flattening of the yield curve implies weak economic growth because of no
monetary stimulus. In part, the modest 125 basis point (1.25%) yield gap between
the Fed Funds rate and long-term Treasury bonds indicates only 1% real economic
growth lies ahead. It has also caused investors to build up their short maturity
investments, with individual investors currently building a $1.5 trillion money
mountain. If slow economic growth allowed the Fed to cut money market rates
there might well be a great deal of investment activity in longer maturity notes
and bonds (see the Money Mountain #2 graph below).
SMALL CDS + MONEY MARKET FUNDS
Oct 28 $1457.8
[Graph appears here]
MONEY MOUNTAIN
07 JAN 85 1,060.8
14 JAN 85 1,061.3
21 JAN 85 1,061.2
28 JAN 85 1,060.5
04 FEB 85 1,059.2
11 FEB 85 1,058.7
18 FEB 85 1,059.2
25 FEB 85 1,058.2
04 MAR 85 1,057.9
11 MAR 85 1,058.1
18 MAR 85 1,058.4
25 MAR 85 1,060.0
01 APR 85 1,061.9
08 APR 85 1,060.9
15 APR 85 1,059.7
22 APR 85 1,062.2
29 APR 85 1,062.3
06 MAY 85 1,062.4
13 MAY 85 1,063.0
20 MAY 85 1,064.0
27 MAY 85 1,064.2
03 JUN 85 1,065.3
10 JUN 85 1,066.1
17 JUN 85 1,067.1
24 JUN 85 1,069.4
01 JUL 85 1,069.8
08 JUL 85 1,067.6
15 JUL 85 1,066.8
22 JUL 85 1,065.2
29 JUL 85 1,064.1
05 AUG 85 1,063.5
12 AUG 85 1,063.8
19 AUG 85 1,063.0
26 AUG 85 1,061.9
02 SEP 85 1,062.2
09 SEP 85 1,061.2
16 SEP 85 1,061.1
23 SEP 85 1,061.2
30 SEP 85 1,062.6
07 OCT 85 1,062.3
14 OCT 85 1,061.7
21 OCT 85 1,061.0
28 OCT 85 1,060.1
04 NOV 85 1,059.6
11 NOV 85 1,059.9
18 NOV 85 1,059.7
25 NOV 85 1,060.5
02 DEC 85 1,061.7
09 DEC 85 1,062.8
16 DEC 85 1,063.0
23 DEC 85 1,064.4
30 DEC 85 1,064.7
06 JAN 86 1,066.9
13 JAN 86 1,068.0
20 JAN 86 1,069.1
27 JAN 86 1,071.4
03 FEB 86 1,071.8
10 FEB 86 1,072.3
17 FEB 86 1,073.3
24 FEB 86 1,073.1
03 MAR 86 1,074.9
10 MAR 86 1,077.4
17 MAR 86 1,079.8
24 MAR 86 1,081.9
31 MAR 86 1,086.0
07 APR 86 1,085.8
14 APR 86 1,087.7
21 APR 86 1,087.8
28 APR 86 1,088.0
05 MAY 86 1,087.7
12 MAY 86 1,088.8
19 MAY 86 1,088.5
26 MAY 86 1,088.3
02 JUN 86 1,087.3
09 JUN 86 1,086.4
16 JUN 86 1,086.9
23 JUN 86 1,088.4
30 JUN 86 1,087.7
07 JUL 86 1,087.9
14 JUL 86 1,087.5
21 JUL 86 1,087.9
28 JUL 86 1,087.6
04 AUG 86 1,087.5
11 AUG 86 1,087.7
18 AUG 86 1,085.2
25 AUG 86 1,083.7
01 SEP 86 1,083.1
08 SEP 86 1,082.6
15 SEP 86 1,082.7
22 SEP 86 1,084.9
29 SEP 86 1,086.1
06 OCT 86 1,085.0
13 OCT 86 1,083.0
20 OCT 86 1,080.6
27 OCT 86 1,079.0
03 NOV 86 1,076.9
10 NOV 86 1,073.4
17 NOV 86 1,072.3
24 NOV 86 1,071.8
01 DEC 86 1,070.0
08 DEC 86 1,068.6
15 DEC 86 1,069.0
22 DEC 86 1,070.2
29 DEC 86 1,069.9
05 JAN 87 1,071.8
12 JAN 87 1,070.7
19 JAN 87 1,067.7
26 JAN 87 1,066.4
02 FEB 87 1,064.8
09 FEB 87 1,064.7
16 FEB 87 1,065.2
23 FEB 87 1,063.3
02 MAR 87 1,062.6
09 MAR 87 1,062.4
16 MAR 87 1,061.9
23 MAR 87 1,060.7
30 MAR 87 1,060.8
06 APR 87 1,059.0
13 APR 87 1,058.1
20 APR 87 1,058.7
27 APR 87 1,058.4
04 MAY 87 1,058.9
11 MAY 87 1,058.4
18 MAY 87 1,058.3
25 MAY 87 1,060.7
01 JUN 87 1,063.5
08 JUN 87 1,067.2
15 JUN 87 1,067.4
22 JUN 87 1,068.6
29 JUN 87 1,070.1
06 JUL 87 1,073.9
13 JUL 87 1,075.8
20 JUL 87 1,076.9
27 JUL 87 1,079.3
03 AUG 87 1,082.3
10 AUG 87 1,085.5
17 AUG 87 1,087.5
24 AUG 87 1,089.2
31 AUG 87 1,090.7
07 SEP 87 1,094.4
14 SEP 87 1,097.7
21 SEP 87 1,099.9
28 SEP 87 1,100.9
05 OCT 87 1,103.8
12 OCT 87 1,107.2
19 OCT 87 1,110.6
26 OCT 87 1,119.3
02 NOV 87 1,123.2
09 NOV 87 1,128.0
16 NOV 87 1,132.2
23 NOV 87 1,135.3
30 NOV 87 1,137.1
07 DEC 87 1,141.4
14 DEC 87 1,145.4
21 DEC 87 1,149.2
28 DEC 87 1,150.6
04 JAN 88 1,152.7
11 JAN 88 1,157.0
18 JAN 88 1,162.6
25 JAN 88 1,167.4
01 FEB 88 1,174.1
08 FEB 88 1,177.7
15 FEB 88 1,182.6
22 FEB 88 1,185.8
29 FEB 88 1,188.5
07 MAR 88 1,191.6
14 MAR 88 1,194.1
21 MAR 88 1,197.4
28 MAR 88 1,199.6
04 APR 88 1,202.0
11 APR 88 1,204.9
18 APR 88 1,206.1
25 APR 88 1,207.9
02 MAY 88 1,209.1
09 MAY 88 1,210.6
16 MAY 88 1,212.5
23 MAY 88 1,214.4
30 MAY 88 1,215.4
06 JUN 88 1,214.5
13 JUN 88 1,214.0
20 JUN 88 1,215.0
27 JUN 88 1,217.6
04 JUL 88 1,218.6
11 JUL 88 1,221.0
18 JUL 88 1,222.9
25 JUL 88 1,224.2
01 AUG 88 1,226.3
08 AUG 88 1,227.2
15 AUG 88 1,229.8
22 AUG 88 1,233.5
29 AUG 88 1,235.3
05 SEP 88 1,238.1
12 SEP 88 1,240.9
19 SEP 88 1,244.3
26 SEP 88 1,247.2
03 OCT 88 1,252.0
10 OCT 88 1,254.7
17 OCT 88 1,257.6
24 OCT 88 1,260.6
31 OCT 88 1,262.8
07 NOV 88 1,267.2
14 NOV 88 1,270.8
21 NOV 88 1,275.0
28 NOV 88 1,277.5
05 DEC 88 1,279.0
12 DEC 88 1,281.7
19 DEC 88 1,284.5
26 DEC 88 1,286.9
02 JAN 89 1,291.1
09 JAN 89 1,293.7
16 JAN 89 1,298.0
23 JAN 89 1,301.2
30 JAN 89 1,304.9
06 FEB 89 1,307.5
13 FEB 89 1,310.8
20 FEB 89 1,315.8
27 FEB 89 1,318.2
06 MAR 89 1,324.2
13 MAR 89 1,328.0
20 MAR 89 1,332.4
27 MAR 89 1,337.4
03 APR 89 1,343.3
10 APR 89 1,349.1
17 APR 89 1,354.4
24 APR 89 1,360.0
01 MAY 89 1,365.2
08 MAY 89 1,371.0
15 MAY 89 1,378.0
22 MAY 89 1,384.9
29 MAY 89 1,388.0
05 JUN 89 1,392.8
12 JUN 89 1,398.1
19 JUN 89 1,403.0
26 JUN 89 1,407.3
03 JUL 89 1,411.5
10 JUL 89 1,417.2
17 JUL 89 1,419.9
24 JUL 89 1,422.8
31 JUL 89 1,426.0
07 AUG 89 1,431.2
14 AUG 89 1,434.7
21 AUG 89 1,438.4
28 AUG 89 1,441.1
04 SEP 89 1,443.6
11 SEP 89 1,445.4
18 SEP 89 1,448.3
25 SEP 89 1,451.2
02 OCT 89 1,454.5
09 OCT 89 1,455.7
16 OCT 89 1,456.7
23 OCT 89 1,461.2
30 OCT 89 1,462.9
06 NOV 89 1,465.7
13 NOV 89 1,468.6
20 NOV 89 1,468.6
27 NOV 89 1,470.2
04 DEC 89 1,472.9
11 DEC 89 1,474.2
18 DEC 89 1,475.3
25 DEC 89 1,478.1
01 JAN 90 1,479.3
08 JAN 90 1,480.7
15 JAN 90 1,479.8
22 JAN 90 1,478.8
29 JAN 90 1,480.8
05 FEB 90 1,483.3
12 FEB 90 1,484.6
19 FEB 90 1,485.0
26 FEB 90 1,487.0
05 MAR 90 1,485.9
12 MAR 90 1,488.1
19 MAR 90 1,489.0
26 MAR 90 1,491.1
02 APR 90 1,493.1
09 APR 90 1,493.6
16 APR 90 1,492.6
23 APR 90 1,494.6
30 APR 90 1,496.4
07 MAY 90 1,496.4
14 MAY 90 1,496.2
21 MAY 90 1,492.8
28 MAY 90 1,493.1
04 JUN 90 1,496.1
11 JUN 90 1,496.4
18 JUN 90 1,501.5
25 JUN 90 1,501.7
02 JUL 90 1,503.9
09 JUL 90 1,504.0
16 JUL 90 1,505.2
23 JUL 90 1,506.2
30 JUL 90 1,509.0
06 AUG 90 1,510.3
13 AUG 90 1,514.6
20 AUG 90 1,514.3
27 AUG 90 1,518.0
03 SEP 90 1,520.0
10 SEP 90 1,520.4
17 SEP 90 1,520.8
24 SEP 90 1,521.8
01 OCT 90 1,524.7
08 OCT 90 1,526.4
15 OCT 90 1,526.1
22 OCT 90 1,526.9
29 OCT 90 1,527.0
05 NOV 90 1,526.4
12 NOV 90 1,527.6
19 NOV 90 1,526.7
26 NOV 90 1,528.3
03 DEC 90 1,530.2
10 DEC 90 1,530.8
17 DEC 90 1,531.2
24 DEC 90 1,533.5
31 DEC 90 1,536.3
07 JAN 91 1,538.1
14 JAN 91 1,541.1
21 JAN 91 1,543.6
28 JAN 91 1,545.4
04 FEB 91 1,546.0
11 FEB 91 1,546.7
18 FEB 91 1,545.1
25 FEB 91 1,548.0
04 MAR 91 1,548.0
11 MAR 91 1,546.6
18 MAR 91 1,546.6
25 MAR 91 1,546.8
01 APR 91 1,544.5
08 APR 91 1,544.1
15 APR 91 1,541.3
22 APR 91 1,540.1
29 APR 91 1,536.8
06 MAY 91 1,534.6
13 MAY 91 1,533.3
20 MAY 91 1,530.2
27 MAY 91 1,527.4
03 JUN 91 1,524.8
10 JUN 91 1,521.5
17 JUN 91 1,520.1
24 JUN 91 1,518.4
01 JUL 91 1,517.4
08 JUL 91 1,514.5
15 JUL 91 1,511.5
22 JUL 91 1,508.8
29 JUL 91 1,504.1
05 AUG 91 1,499.7
12 AUG 91 1,498.4
19 AUG 91 1,495.4
26 AUG 91 1,494.5
02 SEP 91 1,491.5
09 SEP 91 1,489.0
16 SEP 91 1,487.0
23 SEP 91 1,483.9
30 SEP 91 1,479.4
07 OCT 91 1,475.7
14 OCT 91 1,473.7
21 OCT 91 1,470.9
28 OCT 91 1,466.3
04 NOV 91 1,460.7
11 NOV 91 1,460.3
18 NOV 91 1,456.1
25 NOV 91 1,454.1
02 DEC 91 1,450.1
09 DEC 91 1,446.8
16 DEC 91 1,446.5
23 DEC 91 1,438.9
30 DEC 91 1,433.5
06 JAN 92 1,426.8
13 JAN 92 1,419.8
20 JAN 92 1,415.4
27 JAN 92 1,413.1
03 FEB 92 1,408.4
10 FEB 92 1,402.8
17 FEB 92 1,398.3
24 FEB 92 1,395.1
02 MAR 92 1,391.3
09 MAR 92 1,383.2
16 MAR 92 1,376.8
23 MAR 92 1,372.0
30 MAR 92 1,365.8
06 APR 92 1,359.6
13 APR 92 1,356.0
20 APR 92 1,351.4
27 APR 92 1,346.3
04 MAY 92 1,342.7
11 MAY 92 1,338.3
18 MAY 92 1,332.8
25 MAY 92 1,329.1
01 JUN 92 1,327.3
08 JUN 92 1,324.2
15 JUN 92 1,320.3
22 JUN 92 1,317.5
29 JUN 92 1,313.5
06 JUL 92 1,308.7
13 JUL 92 1,305.8
20 JUL 92 1,300.8
27 JUL 92 1,297.1
03 AUG 92 1,293.7
10 AUG 92 1,288.5
17 AUG 92 1,286.6
24 AUG 92 1,284.2
31 AUG 92 1,283.5
07 SEP 92 1,277.6
14 SEP 92 1,274.1
21 SEP 92 1,268.1
28 SEP 92 1,265.1
05 OCT 92 1,258.9
12 OCT 92 1,261.3
19 OCT 92 1,258.8
26 OCT 92 1,254.9
02 NOV 92 1,252.2
09 NOV 92 1,245.5
16 NOV 92 1,240.4
23 NOV 92 1,236.9
30 NOV 92 1,236.3
07 DEC 92 1,233.2
14 DEC 92 1,228.5
21 DEC 92 1,226.5
28 DEC 92 1,223.0
04 JAN 93 1,222.0
11 JAN 93 1,220.8
18 JAN 93 1,217.9
25 JAN 93 1,214.3
01 FEB 93 1,210.9
08 FEB 93 1,208.4
15 FEB 93 1,206.2
22 FEB 93 1,206.8
01 MAR 93 1,205.1
08 MAR 93 1,204.1
15 MAR 93 1,201.5
22 MAR 93 1,199.5
29 MAR 93 1,197.4
05 APR 93 1,192.8
12 APR 93 1,193.2
19 APR 93 1,190.9
26 APR 93 1,189.4
03 MAY 93 1,189.2
10 MAY 93 1,187.8
17 MAY 93 1,185.0
24 MAY 93 1,186.0
31 MAY 93 1,184.4
07 JUN 93 1,182.8
14 JUN 93 1,180.7
21 JUN 93 1,177.5
28 JUN 93 1,173.1
05 JUL 93 1,170.0
12 JUL 93 1,168.8
19 JUL 93 1,168.4
26 JUL 93 1,165.8
02 AUG 93 1,165.0
09 AUG 93 1,161.4
16 AUG 93 1,159.6
23 AUG 93 1,160.0
30 AUG 93 1,157.0
06 SEP 93 1,155.5
13 SEP 93 1,157.3
20 SEP 93 1,154.8
27 SEP 93 1,155.1
04 OCT 93 1,153.0
11 OCT 93 1,152.3
18 OCT 93 1,149.5
25 OCT 93 1,149.2
01 NOV 93 1,150.0
08 NOV 93 1,148.4
15 NOV 93 1,148.4
22 NOV 93 1,151.5
29 NOV 93 1,148.8
06 DEC 93 1,147.9
13 DEC 93 1,148.4
20 DEC 93 1,146.5
27 DEC 93 1,144.9
03 JAN 94 1,144.8
10 JAN 94 1,145.2
17 JAN 94 1,144.2
24 JAN 94 1,141.4
31 JAN 94 1,139.1
07 FEB 94 1,138.0
14 FEB 94 1,137.8
21 FEB 94 1,136.6
28 FEB 94 1,136.2
07 MAR 94 1,136.6
14 MAR 94 1,137.4
21 MAR 94 1,137.5
28 MAR 94 1,135.1
04 APR 94 1,135.0
11 APR 94 1,142.4
18 APR 94 1,142.7
25 APR 94 1,144.5
02 MAY 94 1,145.1
09 MAY 94 1,145.2
16 MAY 94 1,145.9
23 MAY 94 1,147.0
30 MAY 94 1,142.7
06 JUN 94 1,142.0
13 JUN 94 1,142.8
20 JUN 94 1,141.1
27 JUN 94 1,142.6
04 JUL 94 1,144.9
11 JUL 94 1,148.8
18 JUL 94 1,150.8
25 JUL 94 1,151.9
01 AUG 94 1,153.5
08 AUG 94 1,155.5
15 AUG 94 1,157.1
22 AUG 94 1,159.2
29 AUG 94 1,156.3
05 SEP 94 1,157.5
12 SEP 94 1,163.3
19 SEP 94 1,166.1
26 SEP 94 1,168.0
03 OCT 94 1,170.8
10 OCT 94 1,175.7
17 OCT 94 1,178.5
24 OCT 94 1,180.9
31 OCT 94 1,184.6
07 NOV 94 1,188.1
14 NOV 94 1,192.9
21 NOV 94 1,197.2
28 NOV 94 1,199.3
05 DEC 94 1,204.1
12 DEC 94 1,209.4
19 DEC 94 1,211.8
26 DEC 94 1,215.0
02 JAN 95 1,218.2
09 JAN 95 1,223.5
16 JAN 95 1,230.0
23 JAN 95 1,235.1
30 JAN 95 1,239.5
06 FEB 95 1,242.8
13 FEB 95 1,248.7
20 FEB 95 1,252.4
27 FEB 95 1,260.1
06 MAR 95 1,262.0
13 MAR 95 1,271.7
20 MAR 95 1,274.9
27 MAR 95 1,279.7
03 APR 95 1,283.5
10 APR 95 1,290.6
17 APR 95 1,294.1
24 APR 95 1,298.6
01 MAY 95 1,301.7
08 MAY 95 1,307.5
15 MAY 95 1,311.8
22 MAY 95 1,320.4
29 MAY 95 1,323.7
05 JUN 95 1,330.4
12 JUN 95 1,338.7
19 JUN 95 1,342.4
26 JUN 95 1,345.0
03 JUL 95 1,350.1
10 JUL 95 1,354.4
17 JUL 95 1,358.4
24 JUL 95 1,364.3
31 JUL 95 1,366.3
07 AUG 95 1,371.3
14 AUG 95 1,373.8
21 AUG 95 1,377.5
28 AUG 95 1,379.0
04 SEP 95 1,384.0
11 SEP 95 1,385.5
18 SEP 95 1,386.7
25 SEP 95 1,386.3
02 OCT 95 1,389.0
09 OCT 95 1,392.1
16 OCT 95 1,393.2
23 OCT 95 1,395.3
30 OCT 95 1,397.1
06 NOV 95 1,399.5
13 NOV 95 1,403.1
20 NOV 95 1,403.9
27 NOV 95 1,406.5
04 DEC 95 1,407.3
11 DEC 95 1,409.2
18 DEC 95 1,411.6
25 DEC 95 1,412.9
01 JAN 96 1,412.3
08 JAN 96 1,401.4
15 JAN 96 1,408.6
22 JAN 96 1,404.0
29 JAN 96 1,403.4
05 FEB 96 1,400.6
12 FEB 96 1,405.2
19 FEB 96 1,407.8
26 FEB 96 1,415.9
04 MAR 96 1,414.6
11 MAR 96 1,414.2
18 MAR 96 1,416.4
25 MAR 96 1,414.6
01 APR 96 1,414.3
08 APR 96 1,414.3
15 APR 96 1,416.8
22 APR 96 1,417.9
29 APR 96 1,413.1
06 MAY 96 1,413.6
13 MAY 96 1,420.1
20 MAY 96 1,415.0
27 MAY 96 1,412.9
03 JUN 96 1,419.8
10 JUN 96 1,423.0
17 JUN 96 1,426.4
24 JUN 96 1,425.6
01 JUL 96 1,424.4
08 JUL 96 1,429.7
15 JUL 96 1,429.4
22 JUL 96 1,434.1
29 JUL 96 1,434.2
05 AUG 96 1,424.4
12 AUG 96 1,428.2
19 AUG 96 1,431.9
26 AUG 96 1,433.8
02 SEP 96 1,435.5
09 SEP 96 1,440.2
16 SEP 96 1,443.8
23 SEP 96 1,441.6
30 SEP 96 1,441.8
07 OCT 96 1,445.2
14 OCT 96 1,450.2
21 OCT 96 1,452.7
28 OCT 96 1,457.7
04 NOV 96 1,458.7
Source: ISI Inc.
4
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on August
10, 1988 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses and its currently effective 4.45% maximum sales
charge.
While the following chart is required by SEC rules, such comparisons are of
limited utility since the indices shown are not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total returns, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate,
an investor's shares may be worth more or less than their original cost when
redeemed.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 9/30/96: Sales Charge**
- --------------------------------------------------------------------------------
One Year -2.05%
Five Years 6.41%
Since Inception (8/10/88) 7.79%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
August 10, 1988-October 31, 1996
[Graph appears here]
Lehman Brothers Lehman Brothers
ISI Total Return Intermediate Lehman Brothers Long-Term
U.S. Treasury Fund Treasury Index Treasury Index Treasury Index
8/86 9,555 10,000 10,000 10,000
10/88 9,852 10,313 10,407 10,685
10/89 11,021 11,388 11,676 12,493
10/90 11,178 12,266 12,345 12,592
10/91 12,954 13,889 14,140 14,876
10/92 14,116 15,268 15,608 16,593
10/93 16,564 16,685 17,659 20,526
10/94 15,534 16,400 16,871 18,143
10/95 18,344 18,329 19,464 23,016
10/96 18,975 19,359 20,449 23,810
* These figures assume the reinvestment of dividends and capital gains
distributions. The Lehman Brothers indices listed above are unmanaged. The
Intermediate Index and the Long-Term Index reflect the performance of U.S.
Treasury securities in their respective sectors. The Treasury Index is more of a
general index in that it reflects the performance of all public obligations and
does not focus on any one particular segment. Management is not aware of any
single index that is truly representative of the Fund since its active maturity
management policy allows the manager to adjust the weighted average maturity
throughout each U.S. Treasury sector. Currently, the Fund's weighted average
maturity is approximately 14.3 years. Past performance is not an indicator of
future results.
** Assumes maximum sales charge of 4.45%.
5
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
Maturity Par Value
Interest Rate Date (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY BONDS - 76.7%
10.000% 5/15/10 $14,000 $ 17,250,632
12.000 8/15/13 20,500 29,548,823
11.750 11/15/14 36,000 52,166,268
7.500 11/15/16 47,000 51,002,332
9.000 11/15/18 69,750 87,765,099
8.875 2/15/19 10,000 12,448,440
8.750 8/15/20 7,000 8,648,283
------------
Total U.S. Treasury Bonds
(Cost $268,955,232) 258,829,877
------------
U.S. TREASURY NOTES - 6.0%
6.375 9/30/01 20,000 20,243,760
------------
Total U.S. Treasury Notes
(Cost $20,193,564) 20,243,760
------------
ZERO COUPON U.S. TREASURY BONDS (S.T.R.I.P.S.) - 14.6%
5.770* 11/15/98 55,200 49,167,358
------------
Total U.S. Treasury S.T.R.I.P.S.
(Cost $49,141,770) 49,167,358
------------
REPURCHASE AGREEMENTS - 1.2%
Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased on 11/1/96,
collateralized by U.S. Treasury Bonds with a
market value of $4,035,255.
(Cost $3,955,000) 3,955 3,955,000
------------
Total Investments in Securities - 98.5%
(Cost $342,245,566)** 332,195,995
Other Assets in Excess of Liabilities, Net - 1.5% 5,204,312
------------
Net Assets - 100.0% $337,400,307
============
</TABLE>
6
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Statement of Net Assets (concluded) October 31, 1996
Value
(Note A)
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
ISI Class Share
($193,486,009 / 19,676,205 shares outstanding) $ 9.83
======
Flag Investors Class A Share
($143,791,212 / 14,628,079 shares outstanding) $ 9.83
======
Flag Investors Class B Share
($123,086 / 12,494 shares outstanding) $ 9.85
======
Maximum Offering Price Per:
ISI Class Share
($9.83 / .9555) $10.29
======
Flag Investors Class A Share
($9.83 / .955) $10.29
======
Flag Investors Class B Share $ 9.85
======
- --------------------------------------------------------------------------------
* Yield as of October 31, 1996.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
7
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Statement of Operations For the Year Ended October 31, 1996
<TABLE>
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest $ 22,809,288
------------
EXPENSES:
Investment advisory fee (Note B) 953,088
Distribution fee (Note B) 878,283
Administration fee (Note B) 419,655
Transfer agent fee (Note B) 230,210
Accounting fee (Note B) 92,694
Printing andpostage 69,069
Legal 41,257
Custodian fee 37,605
Registration fee 35,190
Audit 27,065
Miscellaneous 25,790
Directors' fees 23,577
Insurance 11,763
------------
Total expenses 2,845,246
------------
Net investment income 19,964,042
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 3,072,425
Change in unrealized appreciation or depreciation of investments (11,517,095)
------------
Net loss on investments (8,444,670)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,519,372
============
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
-----------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 19,964,042 $ 21,682,495
Net gain from security transactions 3,072,425 2,796,088
Change in unrealized appreciation or depreciation
on investments (11,517,095) 36,191,069
Net increase in net assets
resulting from operations 11,519,372 60,669,652
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
ISI Class Shares (11,276,368) (11,897,210)
Flag Investors Class A Shares (8,687,010) (9,785,285)
Flag Investors Class B Shares (664) --
Distributions in excess of net investment income:
ISI Class Shares (723,712) --
Flag Investors Class A Shares (561,610) --
Flag Investors Class B Shares (8) --
Net realized short-term gains:
ISI Class Shares (1,869,945) (1,385,249)
Flag Investors Class A Shares (1,451,089) (1,162,209)
Flag Investors Class B Shares (21) --
Total distributions (24,570,427) (24,229,953)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 29,511,549 31,613,586
Value of shares issued in reinvestment of dividends 14,241,221 15,133,836
Cost of shares repurchased (64,122,099) (87,824,419)
Decrease in net assets derived
from capital share transactions (20,369,329) (41,076,997)
Total decrease in net assets (33,420,384) (4,637,298)
NET ASSETS:
Beginning of year 370,820,691 375,457,989
End of year $337,400,307 $370,820,691
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Financial Highlights--ISI Class and Flag Investors Class A Shares
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
Income from Investment Operations:
Net investment income 0.56 0.57 0.51 0.62 0.76
Net realized and unrealized gain/(loss)
on investments (0.23) 1.04 (1.16) 1.12 0.05
Total from Investment Operations 0.33 1.61 (0.65) 1.74 0.81
Less Distributions:
Dividends from net investment income
and short-term gains (0.65) (0.64) (1.20) (0.79) (0.70)
Distributions in excess of net
investment income (0.04) -- -- -- --
Distributions from net realized
long-term gains -- -- (0.28) (0.07) (0.05)
Total distributions (0.69) (0.64) (1.48)(2) (0.86) (0.75)
Net asset value at end of year $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47
Total Return(1) 3.44% 18.09% (6.22)% 17.33% 8.96%
Ratios to Average Daily Net Assets:
Expenses 0.81% 0.80% 0.77% 0.77% 0.77%
Net investment income 5.69% 5.94% 4.98% 5.21% 5.65%
Supplemental Data:
Net assets at end of year (000):
ISI Class Shares $193,486 $206,615 $200,309 $232,103 $207,518
Flag Investors Class A Shares 143,791 164,206 175,149 224,790 250,210
Portfolio turnover rate 199% 194% 68% 249% 191%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return excludes the effect of sales charge.
(2) Distributions to shareholders include $.05 per share return of capital.
See Notes to Financial Statements.
10
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
Financial Highlights--Flag Investors Class B Shares
(For a share outstanding throughout the period)
For the Period
June 20, 1996(1) through
October 31, 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $10.00
Income from Investment Operations:
Net investment income 0.22
Net realized and unrealized loss on investments (0.15)
Total from Investment Operations 0.07
Less Distributions:
Dividends from net investment income and short-term gains (0.22)
Net asset value at end of period $ 9.85
Total Return(2) 6.37%
Ratios to Average Daily Net Assets:
Expenses 1.40%(3)
Net investment income 5.45%(3)
Supplemental Data:
Net assets at end of period (000) $ 123
Portfolio turnover rate 199%(3)
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Significant Accounting Policies -- Total Return U.S. Treasury Fund, Inc.
(the "Fund") was organized as a Maryland Corporation on June 3, 1988 and
commenced operations on August 10, 1988, consisting of ISI Total Return U.S.
Treasury Fund Shares ("ISIClass") and Flag Investors Total Return U.S.
Treasury Fund Class A Shares ("Flag Investors Class A"). The Fund is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. The Flag Investors Class A and
the ISI Class Shares each have a different sales charge. On June 20, 1996,
the Fund began offering Flag Investors Total Return U.S. Treasury Fund
Class B Shares ("Flag Investors Class B"), which are not subject to a
front-end sales charge but have a contingent deferred sales charge.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Security Valuation -- Portfolio securities that are listed on a national
securities exchange are valued on the basis of their last sale price as
provided by an independent pricing source 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 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.
Dividends and Distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates. Distributions in excess of net investment income
are due to differing tax treatments of dividends declared.
B. Investment Advisory Fee, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") serves as the Fund's
investment advisor and Investment Company Capital Corp. ("ICC"), a
subsidiary of Alex. Brown Financial Corp., serves as the Fund's
administrator. As compensation for its advisory services, ISI receives
an annual fee from the Fund, calculated daily and
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
paid monthly, at the following annual rates based upon the Fund's average
daily net assets: .20% of the first $100 million, .18% of the next $100
million, .16% of the next $100 million, .14% of the next $200 million and
.12% of that portion in excess of $500 million. In addition, the Fund
pays the investment advisor 1.5% of the Fund's gross income.
As compensation for its administrative services, ICC receives an annual fee
from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's average daily net assets: .10% of the first $100
million, .09% of the next $100 million, .08% of the next $100 million, .07%
of the next $200 million and .06% of that portion in excess of $500 million.
In addition, the Fund pays the administrator .50% of the Fund's gross
income.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $92,694 for accounting services for the year
ended October 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICCreceived $230,210 for
transfer agent services for the year ended October 31, 1996.
As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of Alex. Brown & Sons Incorporated ("Alex. Brown"), receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to .25% of the average daily net assets of the ISI Class Shares.
Alex. Brown receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .25% of the average daily net assets of the
Flag Investors Class A Shares and .35% of the average daily net assets of
the Flag Investors Class B Shares plus an additional .25% shareholder
servicing fee. For the year ended October 31, 1996, distribution fees
aggregated $878,283, of which $495,975, $382,235 and $73 were allocated to
the ISI Class, Flag Investors Class A Shares and Flag Investors Class B
Shares, respectively.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $12,337, and the accrued liability was approximately $49,608.
C. Capital Share Transactions -- At October 31, 1996, there were 100 million
shares of $.001 par value common stock authorized (44 million ISI Class,
44 million Flag Investors Class A, 5 million Flag Investors Class B,
500,000 Flag Investors Class D and 6.5 million undesignated). Transactions
in shares of the Fund were as follows:
ISI Class Shares
----------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
Shares sold 2,043,599 2,579,624
Shares issued to share-
holders on reinvest-
ment of dividends 865,140 929,740
Shares redeemed (3,510,096) (4,961,123)
Net decrease in shares
outstanding (601,357) (1,451,759)
Proceeds from sale
of shares $ 20,394,040 $ 24,590,536
Value of reinvested
dividends 8,518,116 8,893,813
Cost of shares
redeemed (34,725,846) (47,310,070)
Net decrease from
capital share
transactions $ (5,813,690) $(13,825,721)
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Flag Investors Class A Shares
---------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
Shares sold 914,108 726,425
Shares issued to share-
holders on reinvest-
ment of dividends 580,880 653,526
Shares redeemed (2,986,509) (4,262,626)
Net decrease in shares
outstanding (1,491,521) (2,882,675)
Proceeds from sale
of shares $ 8,996,345 $ 7,023,050
Value of reinvested
dividends 5,722,783 6,240,023
Cost of shares
redeemed (29,396,253) (40,514,349)
Net decrease from
capital share
transactions $(14,677,125) $(27,251,276)
Flag Investors Class B Shares
-----------------------------
For the Period
June 20, 1996* through
October 31, 1996
-----------------------------
Shares sold 12,460
Shares issued to share-
holders on reinvest-
ment of dividends 34
Shares redeemed --
Net increase in shares
outstanding 12,494
Proceeds from sale
of shares $121,164
Value of reinvested
dividends 322
Cost of shares
redeemed --
Net increase from
capital share
transactions $121,486
- --------------
*Commencement of operations.
D. Investment Transactions -- Purchases and sales of investment securities,
other than short-term obligations, aggregated $648,212,760 and
$650,041,643, respectively, for the year ended October 31, 1996.
At October 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$75,783 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $10,125,354.
E. Net Assets -- At October 31, 1996, net assets consisted of:
Paid-in capital:
ISI Class Shares $201,762,510
Flag Investors Class A
Shares 146,851,212
Flag Investors Class B
Shares 121,486
Distributions in excess
of net investment income (1,285,330)
Unrealized depreciation of
investments (10,049,571)
------------
$337,400,307
============
F. Tax Information (Unaudited) -- None of the ordinary income distributions
paid monthly by the Fund during the fiscal year ended October 31, 1996,
qualify for the dividends received deduction for corporations. Additionally,
the Fund paid a long-term capital gains distribution of $.022787 per share
October 4, 1996, to shareholders of record September 30, 1996.
The law varies in each state as to whether dividend income attributable to
federal obligations, and what percentage, is exempt from state income tax.
We recommend that you consult your tax advisor to determine if any portion
of the dividends you received is exempt from state income tax.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(concluded)
Listed below are the percentages of the Fund's total assets invested in
federal obligations as of the end of each quarter for the fiscal year.
Percentage of Federal
Quarter Ended Obligations*
----------------- ---------------------
January 31, 1996 95.18%
April 30, 1996 89.05%
July 31, 1996 92.94%
October 31, 1996 96.31%
- ----------------
*For purposes of this calculation, federal obligations include U.S. Treasury
Notes, U.S. Treasury Bills and U.S. Treasury Bonds. Also included are
obligations issued by the following agencies: Banks for Cooperatives,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Home
LoanBanks and the Student Loan Marketing Association. Repurchase agreements
are not included in this calculation.
Of the Fund's ordinary income dividends paid during the fiscal year ended
October 31, 1996, 86.14% was attributable to federal obligations. In
calculating this percentage, Fund expenses have been allocated on a pro rata
basis.
This report is prepared for the general information of shareholders. It
is authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative
or directly from the Fund at 1-800-955-7175. Read it carefully before you
invest.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Total Return U.S. Treasury Fund, Inc.:
We have audited the statement of net assets of the Total Return U.S.
Treasury Fund, Inc. as of October 31, 1996, and the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the 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 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, 1996 by correspondence with the custodian and broker. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Total Return U.S.
Treasury Fund, Inc. as of October 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 22, 1996
15
