<PAGE>
As Filed With the Securities and Exchange Commission on February 26, 1997
Registration No. 33-12179
811-5040
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 15 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 19 [x]
TOTAL RETURN U.S. TREASURY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 727-1700
Edward J. Veilleux
One South Street
Baltimore, Maryland 21202
(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esquire
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- -------------------------------------------------------------------------------
It is proposed that this filing will become effective (check
appropriate box)
___ immediately upon filing pursuant to paragraph (b)
_X_ on March 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on [Date] pursuant to paragraph (a)(2) of Rule 485.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ----------------------------------------------------------------------------------------------------------------------------
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Per Unit Aggregate Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of Common Stock 6,496,604 shares $9.86 $0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Registrant has calculated the maximum aggregate offering price pursuant
to Rule 24e-2 under the Investment Company Act of 1940 (the "1940 Act")
for its fiscal year ended October 31, 1996. Registrant had actual
aggregate redemptions of 6,496,604 shares for its fiscal year ended
October 31, 1996. Because of credits for prior net redemptions,
Registrant has used no available redemptions for reductions pursuant to
Rule 24f-2(c) under the 1940 Act and has previously used no available
redemptions for reductions pursuant to Rule 24e-2(a) of the 1940 Act
during the current year. Registrant elects to use redemptions in the
aggregate amount of 6,496,604 shares for reductions in its current
amendment.
- ------------------------------------------------------------------------------
Registrant has elected to maintain registration of an indefinite number of
shares of Common Stock pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Registrant's Rule 24f-2 Notice for the fiscal year ended October 31,
1996 was filed with the Commission on December 20, 1996.
- ------------------------------------------------------------------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
CLASS A AND CLASS B SHARES
February 26, 1997
Cross Reference Sheet
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Heading
- --------------------------- ------------
Part A - Information Required in a Prospectus
- ------
<S> <C> <C>
Item 1. Cover Page....................................................... Cover Page
Item 2. Synopsis......................................................... Fund Expenses
Item 3. Condensed Financial Information.................................. Financial Highlights
Item 4. General Description of Registrant................................ Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund........................................... Management of the Fund;
Investment Advisor;
Administrator; Distributor;
Custodian, Transfer Agent
and Accounting Services
Item 5A. Management's Discussion of Fund Performance...................... *
Item 6. Capital Stock and Other Securities............................... Cover Page; Dividends
and Taxes; General
Information
Item 7. Purchase of Securities Being Offered............................. How to Invest in the Fund;
Distributor
Item 8. Redemption or Repurchase......................................... How to Redeem Shares
Item 9. Pending Legal Proceedings........................................ **
</TABLE>
- ---------------
* Information required by Item 5A is contained in Registrant's
1996 Annual Report to Shareholders.
** Omitted since the answer is negative or the item is not
applicable.
<PAGE>
<TABLE>
<CAPTION>
Part B - Information Required in a Statement of Additional Information
- ------
<S> <C> <C>
Item 10. Cover Page....................................................... Cover Page
Item 11. Table of Contents................................................ Table of Contents
Item 12. General Information and History.................................. General Information and
History
Item 13. Investment Objectives and Policies............................... Investment Objectives and
Policies
Item 14. Management of the Fund........................................... Management of the Fund
Item 15. Control Persons and Principal Holders of Securities.............. Control Persons and
Principal Holders of
Securities
Item 16. Investment Advisory and Other Services........................... Investment Advisory and
Other Services;
Custodian, Transfer Agent
and Accounting Services;
Independent Auditors
Item 17. Brokerage Allocation............................................. Portfolio Transactions
Item 18. Capital Stock and Other Securities............................... Capital Shares; Semi-
Annual Reports
Item 19. Purchase, Redemption and Pricing of Securities Being
Offered.......................................................... Valuation of Shares and
Redemption
Item 20. Tax Status....................................................... Federal Tax Treatment of
Dividends and
Distributions
Item 21. Underwriters..................................................... Distribution of Fund
Shares
Item 22. Calculation of Performance Data.................................. Performance and Yield
Computations
Item 23. Financial Statements............................................. Financial Statements
</TABLE>
Part C - Other Information
Part C contains the information required by the items
contained therein under the items set forth in the form.
<PAGE>
Supplement dated March 1, 1997
to Prospectus dated March 1, 1997 of
Flag Investors Total Return U.S. Treasury Fund Shares
(Class A and Class B)
(Classes of Total Return U.S. Treasury Fund, Inc.)
The prospectus dated March 1, 1997 of Flag Investors Total Return U.S. Treasury
Fund Shares (Class A and Class B) (Classes of Total Return U.S. Treasury Fund,
Inc.) (the "Fund") is hereby amended and supplemented by the following:
The section entitled "Management of the Fund" is amended as follows:
A special meeting of shareholders, for the purpose of electing directors, has
been scheduled for March 7, 1997. Until such time, the Fund's directors are as
follows:
Edward S. Hyman
Richard T. Hale
James J. Cunnane
John F. Kroeger
Louis E. Levy
Eugene J. McDonald
Two directors and all of the officers of the Fund are officers or employees of
the Distributor, the Advisor or the Fund's administrator. The other directors
have no affiliation with the Distributor, the Advisor or the Fund's
administrator.
<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.)
Prospectus & Application -- March 1, 1997
===============================================================================
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 (the "Distributor"), 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, 1997 has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by calling the
Fund at (800) 767-FLAG.
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 the Distributor.
TABLE OF CONTENTS
Fee Table ............................................................ 1
Financial Highlights ................................................. 2
Investment Program ................................................... 4
Investment Restrictions .............................................. 5
How to Invest in the Fund ............................................. 5
How to Redeem Shares ................................................. 9
Telephone Transactions ............................................... 9
Dividends and Taxes .................................................. 10
Management of the Fund ............................................... 11
Investment Advisor ................................................... 11
Administrator ........................................................ 12
Distributor .......................................................... 12
Custodian, Transfer Agent and
Accounting Services ................................................. 13
Performance Information .............................................. 13
General Information .................................................. 14
Application .......................................................... A-1
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.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
===============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
FEE TABLE
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
Class A Shares Class B 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
(as a percentage of offering price) .......................................... None None
Maximum 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 daily net assets)
Management Fees ............................................................... .27% .27%
12b-1 Fees .................................................................... .25% .35%
Other Expenses (including a .25% shareholder
servicing fee for Class B Shares) ........................................... .29% .54%***
Total Fund Operating Expenses ................................................. .81% 1.16%
======= =======
</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
upon redemption. (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 services provided and expenses incurred in maintaining shareholder
accounts, responding to shareholder inquiries and providing information
on investments.
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 $141
__Class B Shares ............................. $32 $47 $74* $118*
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on the
same investment, assuming no redemption:* 1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------------------
Class B Shares ............................. $12 $37 $64* $118*
</TABLE>
<PAGE>
* 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.
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
daily 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 (.81%) for the fiscal year ended October 31, 1996
and are based on average daily net assets of approximately $153 million and a
gross income level of 6.5%. The Expenses and Example for the Class B Shares,
which have been offered only since June 20, 1996, 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 Conduct Rules of the National
Association of Securities Dealers, Inc. The foregoing table has not been audited
by Deloitte & Touche LLP, the Fund's independent auditors.
1
<PAGE>
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, 1996 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,
1996, which can be obtained at no charge by calling the Fund at (800)
767-FLAG.
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- -----------------------------------------------------------------------------
----------
1996
----
Per Share Operating Performance:
Net asset value at beginning of period ....... $ 10.19
---------
Income from Investment Operations:
Net investment income 0.56
Net realized and unrealized gain/(loss) on
investments ............................... (0.23)
---------
Total from Investment Operations ............. 0.33
---------
Less Distributions:
Dividends from net investment income and
short-term gains .......................... (0.65)
Distributions in excess of net investment
income .................................... (0.04)
Distributions from net realized long-term
gains ..................................... --
---------
Total distributions .......................... (0.69)
---------
Net asset value at end of period .............. $ 9.83
=========
Total Return(1) ................................ 3.44%
Ratios to Average Daily Net Assets:
Expenses ..................................... 0.81%
Net investment income ........................ 5.69%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares ............. $143,791
ISI Class Shares .......................... $193,486
Flag Investors Class B Shares ............. $ 123
Portfolio turnover rate ...................... 199%
------
* Commencement of operations.
(1) Total return excludes the effect of sales charge.
(2) Distributions to shareholders include $0.05 per share return of capital.
(3) Annualized.
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
- ----------------------------------------------------------------------------------------------------------- --------------
August 10, For the period
1988* June 20, 1996*
For the Year Ended October 31, through through
- ------------------------------------------------------------------------------------------ October 31, October 31,
1995 1994 1993 1992 1991 1990 1989 1988 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24 $ 10.00 $ 10.00
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ---------
0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10 0.22
1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21 (0.15)
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ---------
1.61 (0.65) 1.74 0.81 1.49 0.13 1.15 0.31 0.07
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ---------
(0.64) (1.20) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07) (0.22)
-- -- -- -- -- -- -- -- --
-- (0.28) (0.07) (0.05) -- -- -- -- --
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ---------
(0.64) (1.48)(2) (0.86) (0.75) (0.84) (0.92) (0.84) (0.07) (0.22)
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ---------
$10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24 $ 9.85
========== ========== ========= ========== ========== ========== ========== =========== =========
18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10% 6.37%
.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%(3) 1.40%(3)
5.94% 4.98% 5.21% 5.65% 6.88% 7.40% 7.51% 5.80%(3) 5.45%(3)
$164,206 $175,149 $224,790 $250,210 $237,688 $198,556 $135,523 $55,757 $143,791
$206,615 $200,309 $232,103 $207,518 $168,128 $131,872 $ 89,943 $22,597 193,486
-- -- -- -- -- -- -- -- $ 123
194% 68% 249% 191% 141% 79% 184% 72% 199%(3)
</TABLE>
3
<PAGE>
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 are direct obligations of the United States Government and are
supported by the full faith and credit of the United States. The Fund's
investment objective 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.
SELECTION OF INVESTMENTS
The Fund's investment advisor (the "Advisor" -- see "Investment Advisor")
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. The Advisor
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 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.
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. This is especially true for securities with
longer maturities and for STRIPS (securities that don't pay interest currently
but which are purchased at a discount and are payable in full at maturity).
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 creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Default by or bankruptcy proceedings with respect to 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.
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 the
securities, on a when-issued basis. A segregated account of the Fund,
consisting of cash or liquid 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. 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 value of
securities so purchased or sold is subject to market fluctuation and no
interest accrues to the purchaser during this period. 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
<PAGE>
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.
HOW TO INVEST IN THE FUND
- -------------------------------------------------------------------------------
Class A Shares and Class B Shares may be purchased from the Distributor,
through any securities dealer which has entered into a dealer agreement with
the Distributor ("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, 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. (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 the Distributor and the Advisor. Orders for purchases of
shares are accepted on any day on which the New York Stock Exchange is open
for business (a "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 the Distributor or a
Participating Dealer or Shareholder Servicing Agent must be in accordance
with such entity's payment procedures. The Distributor may, in its sole
discretion, refuse to accept any purchase order.
The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing its share of the Fund's assets, deducting all liabilities
attributable to that 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
5
<PAGE>
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.
Because of differences between the classes of shares in distribution/service
fees, the net asset value per share of the classes differs at times.
OFFERING PRICE
Shares may be purchased from the Distributor, 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.
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
Short-Intermediate Income Fund, Inc. (formerly 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 the Distributor, 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.
<PAGE>
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.
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.
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 the Distributor 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.
6
<PAGE>
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 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 the Distributor, the Advisor 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 the
Distributor 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
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. 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, 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.
<PAGE>
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
7
<PAGE>
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 the
Distributor 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 with the same sales load
structure 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 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 the Distributor 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 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 or
who wishes to obtain additional purchase information may do so by completing
the appropriate section of the Application Form attached to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
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. Unless the shareholder elects otherwise, all income dividends and
capital gains distributions will be reinvested in additional Fund shares of
the same class at net asset value, without a sales charge. Shareholders may
elect to terminate automatic reinvestment by giving written notice to the
Transfer Agent (see "Custodian, Transfer Agent and 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.
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 the Transfer Agent for additional
information.
8
<PAGE>
HOW TO REDEEM SHARES
- -------------------------------------------------------------------------------
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through the Distributor, a
Participating Dealer, a Shareholder Servicing Agent or by regular or express
mail to 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) or the
close of the New York Stock Exchange, whichever is earlier, will be effected
at the net asset value next determined on the following Business Day. Payment
for redeemed shares will be made by check and will ordinarily 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;
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 participate in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.
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 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 and Accounting Services."
Telephone transaction privileges are automatic. Shareholders may specifically
request that no telephone 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.
<PAGE>
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 trans-
9
<PAGE>
action 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. 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.")
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.
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 in one year,
but paid the following year, will be deemed for tax purposes to have been
received by the shareholders and paid by the Fund in the year in which the
dividends were declared.
The 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.
10
<PAGE>
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 executive officers, to its distributors, to the Advisor and to the Fund's
administrator. Four directors and all of the officers of the Fund are officers
or employees of the Distributor, the Advisor, or the Fund's administrator. The
other directors of the Fund have no affiliation with the Distributor, the
Advisor, 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
Charles W. Cole, Jr. Director Gary V. Fearnow Vice President
Truman T. Semans Director Nancy Lazar Vice President
James J. Cunnane Director Scott J. Liotta Vice President
John F. Kroeger Director Carrie L. Butler Vice President
Louis E. Levy Director Edward J. Stoken Secretary
Eugene J. McDonald Director Joseph A. Finelli Treasurer
Rebecca W. Rimel Director Laurie D. Collidge Assistant
Carl W. Vogt Director Secretary
INVESTMENT ADVISOR
- -------------------------------------------------------------------------------
International Strategy and Investment Inc. ("ISI" or the "Advisor"), 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 December 31, 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 $182 million in aggregate net assets as of December 31, 1996.
Pursuant to the terms of the Investment Advisory Agreement, as
compensation for its services for the fiscal year ended October 31, 1996, 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
seventeen 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
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
<PAGE>
ADMINISTRATOR
- -------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC"), One South 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, 1996, 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 is also the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")
DISTRIBUTOR
- -------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex Brown" or the "Distributor"), 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 (the "Plans") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. 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 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, 1996, Alex. Brown received a fee equal
to .25% of the Class A Shares' average daily net assets.
As compensation for providing distribution and shareholder servicing for
the Class B Shares for the period from June 20, 1996 (commencement of
operations) through October 31, 1996, Alex. Brown received a distribution fee
equal to .35% (annualized) of the Class B Shares' average daily net assets
and a shareholder servicing fee equal to .25% (annualized) of the Class B
Shares' average daily net assets. The distribution fee is used to compensate
Alex. Brown for its services and expenses in distributing the Class B Shares.
The shareholder servicing fee is 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
compen- sation (including merchandise or travel) to Participating Dealers.
The address of Alex. Brown is One South Street, Baltimore, Maryland 21202.
12
<PAGE>
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------
Investment Company Capital Corp., One South 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, 1996, ICC received a fee equal to .03% of the Fund's
average daily net assets. (See the Statement of Additional Information.)
PNC Bank, National Association, a national banking association with offices
at Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, acts as
custodian of the Fund's assets.
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 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, 1996, the Fund's portfolio turnover rate was 194% and 199%, 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. Early in the
1996 fiscal year, the Advisor moved the Fund into older high coupon issues
that had become relatively cheap as a result of the bond market rally. The
Fund's portfolio turnover rate for the fiscal years ended October 31, 1995
and October 31, 1996 increased as a result of these changes 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.")
13
<PAGE>
GENERAL INFORMATION
- -------------------------------------------------------------------------------
CAPITAL SHARES
The Fund is an open-end diversified management investment company
organized 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.
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 the
Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
14
<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 the 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 for each class of shares 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. The Fund reserves the right not to accept
checks for more than $50,000 that are not certified or bank checks.
- ------------------------------------------------------------------------------
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
MAILING ADDRESS
______________________________________________________________________________
Street
______________________________________________________________________________
City State Zip
( )
______________________________________________________________________________
Daytime Phone
<PAGE>
==============================================================================
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
==============================================================================
RIGHT OF ACCUMULATION -- CLASS A SHARES ONLY (OPTIONAL)
List the Account numbers of other Flag Investors Funds (except Class B shares)
that you or your immediate family already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
==============================================================================
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.
A-1
<PAGE>
- -------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------
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 per class.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)
- ------------------------------------------------------------------------------
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 address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: _________________________ Bank Account No: ____________________
Address: _________________________ Bank Account Name: ____________________
<PAGE>
- ------------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
[The following information appears in a box.]
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as required
by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified
me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above,
I have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-553-8080.)
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:_______________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[end of box]
I have received a copy of the Fund's prospectus dated March 1, 1997. 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.
[The following information appears in a box.]
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
[end of box]
______________________________________________________________________________
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.: __________________________
A-2
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
ISI TOTAL RETURN U.S. TREASURY FUND SHARES
February 26, 1997
Cross Reference Sheet
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Heading
- --------------------------- ------------
Part A - Information Required in a Prospectus
- ------
<S> <C> <C>
Item 1. Cover Page....................................................... Cover Page
Item 2. Synopsis......................................................... Fund Expenses
Item 3. Condensed Financial Information.................................. Financial Highlights
Item 4. General Description of Registrant................................ Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund........................................... Management of the Fund;
Investment Advisor;
Administrator; Distributor;
Custodian, Transfer
Agent, and Accounting
Services
Item 5A. Management's Discussion of Fund Performance...................... *
Item 6. Capital Stock and Other Securities............................... Cover Page; Dividends
and Taxes; General
Information
Item 7. Purchase of Securities Being Offered............................. How to Invest in the Fund;
Distributor
Item 8. Redemption or Repurchase......................................... How to Redeem Shares
Item 9. Pending Legal Proceedings........................................ **
</TABLE>
- ---------------
* Information required by Item 5A is contained in Registrant's 1996
Annual Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<CAPTION>
Part B - Information Required in a Statement of Additional Information
- ------
<S> <C> <C>
Item 10. Cover Page....................................................... Cover Page
Item 11. Table of Contents................................................ Table of Contents
Item 12. General Information and History.................................. General Information and
History
Item 13. Investment Objectives and Policies............................... Investment Objectives and
Policies
Item 14. Management of the Fund........................................... Management of the Fund
Item 15. Control Persons and Principal Holders of Securities.............. Control Persons and
Principal Holders of
Securities
Item 16. Investment Advisory and Other Services........................... Investment Advisory and
Other Services;
Custodian, Transfer Agent
and Accounting Services;
Independent Auditors
Item 17. Brokerage Allocation............................................. Portfolio Transactions
Item 18. Capital Stock and Other Securities............................... Capital Shares; Semi-
Annual Reports
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered...................................... Valuation of Shares and
Redemption
Item 20. Tax Status....................................................... Federal Tax Treatment of
Dividends and
Distributions
Item 21. Underwriters..................................................... Distribution of Fund
Shares
Item 22. Calculation of Performance Data.................................. Performance and Yield
Computations
Item 23. Financial Statements............................................. Financial Statements
</TABLE>
Part C - Other Information
Part C contains the information required by the items
contained therein under the items set forth in the form.
<PAGE>
Supplement dated March 1, 1997
to Prospectus dated March 1, 1997 of
ISI Total Return U.S. Treasury Fund Shares
(A class of Total Return U.S. Treasury Fund, Inc.)
The prospectus dated March 1, 1997 of ISI Total Return U.S. Treasury Fund Shares
(a class of Total Return U.S. Treasury Fund, Inc.) (the "Fund") is hereby
amended and supplemented by the following:
The section entitled "Management of the Fund" is amended as follows:
A special meeting of shareholders, for the purpose of electing directors, has
been scheduled for March 7, 1997. Until such time, the Fund's directors are as
follows:
Edward S. Hyman
Richard T. Hale
James J. Cunnane
John F. Kroeger
Louis E. Levy
Eugene J. McDonald
Two directors and all of the officers of the Fund are officers or employees of
the Distributor, the Advisor or the Fund's administrator. The other directors
have no affiliation with the Distributor, the Advisor or the Fund's
administrator.
<PAGE>
ISI TOTAL RETURN U.S. TREASURY FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175
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 an 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 ISI class of the Fund ("Shares") are available through
Armata Financial Corp. (the "Distributor"), as well as Participating Dealers
and Shareholder Servicing Agents. (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, 1997, has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by contacting the Fund at the above address or telephone number.
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 NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is March 1, 1997
<PAGE>
1. Fee Table
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
(as a percentage of offering price)
Maximum Sales Charge Imposed on Purchases .............. 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Maximum Deferred Sales Charge .......................... None
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees ........................................ .27%
12b-1 Fees ............................................. .25%
Other Expenses ......................................... .29%
---------
Total Fund Operating Expenses .......................... .81%
=========
</TABLE>
Example:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
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: $52 $69 $87 $140
</TABLE>
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 daily
net assets. A person who purchases Shares 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
- -- Offering Price", "Investment Advisor", "Administrator" and "Distributor.")
The rules of the SEC require that the maximum sales charge (in the Shares' case,
4.45% of the offering price) be reflected in the above table. However, certain
investors may qualify for reduced sales charges. (See "How to Invest in the Fund
- -- Offering Price.") The Expenses and Example appearing in the table above are
based on the Fund's expenses (.81%) for the fiscal year ended October 31, 1996.
Due to the continuous nature of Rule 12b-1 fees, long-term shareholders of the
Fund may pay more than the equivalent of the maximum front-end sales charges
permitted by the Conduct Rules 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, 1996 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,
1996, which is available at no cost by calling the Fund at (800) 955-7175.
2
<PAGE>
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year Ended October 31, August 10, 1988+
--------------------------------------------------------------------------------------- through
1996 1995 1994 1993 1992 1991 1990 1989 October 31, 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24 $ 10.00
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from
Investment
Operations:
Net investment
income ......... 0.56 0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10
Net realized and
unrealized
gain/(loss) on
investments .... (0.23) 1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from
Investment
Operations ..... 0.33 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 .......... (0.65) (0.64) (1.20) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07)
Distributions in
excess of net
investment
income ......... (.04) -- -- -- -- -- -- -- --
Distributions from
net realized
long-term gains -- -- (0.28) (0.07) (0.05) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
Distributions .. (0.69) (0.64) (1.48)* (0.86) (0.75) (0.84) (0.92) (0.84) (0.07)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value at
end of period .. $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24
========== ========== ========== ========== ========== ========== ========== ========== ==========
Total Return** ...... 3.44% 18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10%
Ratios to Average
Daily Net Assets:
Expenses ........... 0.81% 0.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%***
Net investment
income ........... 5.69% 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):
ISI Class Shares .. $193,486 $206,615 $200,309 $232,103 $207,518 $168,128 $131,872 $ 89,943 $22,597
Flag Investors
Class A Shares . $143,791 $164,206 $175,149 $224,790 $250,210 $237,688 $198,556 $135,523 $55,757
Portfolio turnover
rate ............. 199% 194% 68% 249% 191% 141% 79% 184% 72%
</TABLE>
- ---
+ Commencement of operations.
* Distributions to shareholders include $0.05 per share return of capital.
** Total return excludes the effect of sales charge.
*** Annualized.
<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 are direct obligations of the United States Government and are
supported by the full faith and credit of the United States. The Fund's
investment objective 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.
SELECTION OF INVESTMENTS
The Fund's investment advisor (the "Advisor" -- see "Investment Advisor")
buys and sells securities for the Fund's portfolio with a view toward, first,
a high level of
3
<PAGE>
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. The Advisor 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 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.
RISK CONSIDERATIONS
U.S. Treasury Securities are considered among the safest of fixed-income
investments. Because of this added safety, the yields available from U.S.
Treasury 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. This is especially
true for securities with longer maturities and for STRIPS (securities that
don't pay interest currently but which are purchased at a discount and are
payable in full at maturity). 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 Shares. Conversely,
during periods of rising interest rates, the value of the 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 creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Default by, or bankruptcy proceedings with respect to, 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.
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 the
securities, on a when-issued basis. A segregated account of the Fund,
consisting of cash or liquid 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. 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 value of
securities so purchased or sold is subject to market fluctuation and no
interest accrues to the purchaser during this period. The Fund will 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 equalling 5% or more of the Fund's 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.
4
<PAGE>
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
5. How to Invest in the Fund
Shares may be purchased from the Distributor, through any securities dealer
which has entered into a dealer agreement with the Distributor
("Participating Dealers") or through any financial institution which has
entered into a shareholder servicing agreement with the Fund ("Shareholder
Servicing Agents"). Shares may also be purchased by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price, to the address shown on the Application Form.
As used herein, the "Fund" refers to Total Return U.S. Treasury Fund, Inc.,
whereas references to the "Shares" shall mean shares of the Fund's ISI Total
Return U.S. Treasury Fund Shares which is a class of shares of the Fund.
The minimum initial investment is $5,000, except that the minimum initial
investment for qualified retirement plans and IRA's is $1,000 and the minimum
initial investment for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent investment must be at least $250, except that the
minimum subsequent investment for participants in the Fund's Automatic
Investing Plan is $100 for monthly investments and $250 for quarterly
investments. (See "Purchases Through Automatic Investing Plan" below.) The
Fund reserves the right to suspend the sale of Shares at any time at the
discretion of the Distributor. Orders for purchases of Shares are accepted on
any day on which the New York Stock Exchange is open for business (a
"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 the Distributor or a Participating Dealer or
Shareholder Servicing Agent must be in accordance with such entity's payment
procedures. The Distributor may, in its sole discretion, refuse to accept any
purchase order.
The net asset value per Share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing
its share of the Fund's assets, deducting all liabilities attributable to
that 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 the Distributor, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and
decreases as the amount of purchase increases as shown below.
<TABLE>
<CAPTION>
Sales Sales
Charge as Charge as Dealer
Percentage Percentage Retention
of of Net as Percentage
Offering Amount of Offering
Amount of Purchase Price Invested Price*
-------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Less than $ 50,000 4.45% 4.66% 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 - $1,999,999 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 0.50% 0.50% 0.50%
$3,000,000 and over ...... None None None
</TABLE>
- ------
* The Distributor may from time to time reallow to Participating Dealers up
to 100% of the sales charge included in the Offering Price of Shares.
Dealers that receive a reallowance of 100% of the sales charge may be
considered underwriters for purposes of the federal securities laws.
<PAGE>
A shareholder who purchases additional 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 Shares and purchases of
shares of other mutual funds in the ISI family of funds. The applicable sales
charge will be determined based on the total of (a) the investor's current
purchase plus (b) an amount equal to the then current net asset value
5
<PAGE>
or cost, whichever is higher, of all Shares and of all shares of such other
mutual funds in the ISI family of funds held by the shareholder. To obtain
the reduced sales charge through a right of accumulation, the shareholder
must provide the Distributor, 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 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 Shares. Each purchase of
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. 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 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 Shares
may do so by completing the appropriate section of the Application Form
attached to this Prospectus.
The Fund may sell 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 Shares on behalf
of their fiduciary and advisory clients, provided such clients have paid an
account management fee for these services; (ii) investors who have redeemed
Shares, or shares of any other mutual fund in the ISI family of funds that
have similar sales charges, in an amount that is not more than the total
redemption proceeds, provided that the purchase is within six months after
the redemption and the amount of the purchase is at least $5,000; and (iii)
current or retired Directors of the Fund, directors and employees (and their
immediate families) of the Advisor, the Fund's administrator, and their
respective affiliates, and employees of Participating Dealers. In addition,
investors who have redeemed shares of funds in the ISI family of funds that
have lower sales charges may purchase Shares at net asset value in an amount
that is not more than the total redemption proceeds, provided that they held
the shares of such funds for more than 24 months prior to the redemption, the
purchase is within six months after the redemption and the amount of the
purchase is at least $5,000.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other mutual funds in the ISI family of funds that have
similar sales charges may exchange their shares of those funds for an equal
dollar amount of 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 funds in the ISI family of funds that have lower
sales charges may exchange into other funds in the family upon payment of the
difference in sales charges, except that the exchange will be made at net
asset value if the shares have been held for at least 24 months. 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.
Until February 28, 1998, shareholders of any other mutual fund who have paid
a sales charge on their shares of such fund, and shareholders of any
closed-end fund, may exchange shares of such funds for an equal dollar amount
of Shares by submitting to the Distributor or a Participating Dealer, the
proceeds of the redemption or sale of shares of such funds, together with
evidence of the payment of a sales charge (for mutual funds only) and the
source of such proceeds. Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
The Fund may modify or terminate these offers of exchange at any time and
will provide shareholders with 60
6
<PAGE>
days' written notice prior to any such modification or termination. The
exchange privilege with respect to other ISI funds may also be exercised by
telephone. (See "Telephone Transactions" below.)
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase 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 Shares. The minimum initial investment is $250. Each
subsequent investment must be at least $100 for monthly investments and $250
for quarterly investments. The amount specified by the shareholder will be
withdrawn from the shareholder's checking account using the pre-authorized
check. This amount will be invested in Shares at the applicable Offering
Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued by either
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 or
who wishes to obtain additional purchase information may do so by completing
the appropriate section of the Application Form attached to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Shares. Unless the
shareholder elects otherwise, all income dividends and capital gains
distributions will be reinvested in additional Shares at net asset value,
without a sales charge. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Fund's transfer agent (the
"Transfer Agent") (see "Custodian, Transfer Agent and 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.
Alternately, shareholders may have their distributions invested in shares of
other funds in the ISI family of funds. Shareholders who are interested in
this option should call the Transfer Agent for additional information.
6. How to Redeem Shares
Shareholders may redeem all or part of their investment on any Business Day
by transmitting a redemption order through the Distributor, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Transfer Agent. Shareholders may also redeem Shares by telephone (in amounts
up to $50,000). (See "Telephone Transactions" below.) A redemption order is
effected at the net asset value per Share 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) or the close of the
New York Stock Exchange, whichever is earlier, will be effected at the net
asset value next determined on the following Business Day. Payment for
redeemed Shares will be made by check and will ordinarily 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
the Distributor or 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;
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 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.
7
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold 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. A shareholder who
wishes to participate 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 ISI
funds, or redeem Shares, in amounts up to $50,000, by notifying the Transfer
Agent by telephone 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 and Accounting Services." Telephone transaction
privileges are automatic. Shareholders may specifically request that no
telephone 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 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 written instructions of such transaction requests. 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 (including net short-term capital gains) 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.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial, or administrative action. The Statement
of Additional Information sets forth further information concerning taxes.
The Fund 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 dividends will
be taxed as if they had been distributed on the reinvestment date.
8
<PAGE>
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 shareholder 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 consequences 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 one year, but paid the following year, will be
deemed for tax purposes to have been received by the shareholders and paid by
the Fund in the year in which the dividends were declared.
The sale, exchange or redemption of 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
executive officers, to the Distributor, to the Advisor and to the Fund's
administrator. Four directors and all of the officers of the Fund are officers
or employees of the Distributor, the Advisor or the Fund's administrator. The
other Directors of the Fund have no affiliation with the Distributor, the
Advisor or the Fund's administrator.
The Fund's Directors and officers are as follows:
Edward S. Hyman Chairman
Richard T. Hale Vice Chairman
Charles W. Cole, Jr. Director
Truman T. Semans Director
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Rebecca W. Rimel Director
Carl W. Vogt Director
R. Alan Medaugh President
Edward J. Veilleux Vice President
Gary V. Fearnow Vice President
Nancy Lazar Vice President
Scott J. Liotta Vice President
Carrie L. Butler Vice President
Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
Laurie D. Collidge Assistant Secretary
10. Investment Advisor
International Strategy and Investment Inc. ("ISI" or the "Advisor"), 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 December 31, 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 investment companies with approximately
$182 million in net assets as of December 31, 1996.
Pursuant to the terms of the Investment Advisory Agreement, as compensation
for its services for the fiscal year ended October 31, 1996, 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 percent-
9
<PAGE>
age 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,
telephone (800) 955-7175.
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 seventeen 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
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"), One South Street, Baltimore,
Maryland 21202, provides administration services to the Fund. ICC is an
indirect subsidiary of Alex. Brown Incorporated and an affiliate of the
Distributor.
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 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, 1996, 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 is also the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")
12. Distributor
Armata Financial Corp. ("Armata" or the "Distributor"), P.O. Box 515, Baltimore,
Maryland 21203, acts as distributor of the Shares pursuant to a Distribution
Agreement and related Plan of Distribution (the "Plan") adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended. Armata is a
broker-dealer that was formed in 1983 and is an affiliate of ICC. As
compensation for its service for the fiscal year ended October 31, 1996, Armata
received a fee equal to .25% of the Shares' average daily net assets. Armata
expects to allocate on a proportional basis most of its annual distribution fee
to its investment representatives or up to all of its fee to Participating
Dealers as compensation for their ongoing shareholder services, including
processing purchase and redemption requests and responding to shareholder
inquiries.
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 Armata may 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. Amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Armata under the Plan.
Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay
Armata's overhead expenses. If the cost of providing distribution services to
the Fund in connection with the sale of the Shares is less than .25% of the
average daily net assets invested in Shares for any period, Armata may retain
the unexpended portion of the distribution fee. Armata or its associated
persons will from time to time and from its own resources pay or allow
10
<PAGE>
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise or travel) to Participating Dealers.
13. Custodian, Transfer Agent and Accounting Services
Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
(telephone: (800) 882-8585), 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, 1996, ICC received a fee equal to .03% of the Fund's average daily net
assets. (See the Statement of Additional Information.)
PNC Bank, National Association, a national banking association with offices at
Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, acts as
custodian of the Fund's assets.
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 sales charge, 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 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, 1996, the Fund's portfolio turnover rate was 194% and 199%, 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. Early in the
1996 fiscal year, the Advisor moved the Fund into older high coupon issues
that had become relatively cheap as a result of the bond
11
<PAGE>
market rally. The Fund's portfolio turnover rate for the fiscal years ended
October 31, 1995 and October 31, 1996 increased as a result of these changes
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.")
15. General Information
CAPITAL SHARES
The Fund is an open-end diversified management investment company organized
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 "ISI
Total Return U.S. Treasury Fund Shares." The Board has no present intention
of establishing any additional series of the Fund but the Fund does have two
other classes of shares in addition to the shares offered hereby, "Flag
Investors Total Return U.S. Treasury Fund Class A Shares" and "Flag Investors
Total Return U.S. Treasury Fund Class B Shares." Shares of those classes are
sold through broker-dealers. 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 Shares. All classes of the Fund share a
common investment objective, portfolio and advisory fee, but the classes may
have different distribution expenses and sales charges and, accordingly,
performance may differ.
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.
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 the Transfer
Agent at (800) 882-8585, the Fund at (800) 955-7175, the Advisor, a
Participating Dealer or Shareholder Servicing Agent, as appropriate.
12
<PAGE>
ISI TOTAL RETURN U.S. TREASURY FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "ISI Total Return U.S. Treasury Fund Shares" and mail
with this Application to:
Armata Financial Corp./ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
To open an IRA account, call ISI at (800) 955-7175 to request an application.
The minimum initial purchase is $5,000, except that the minimum initial
purchase for qualified retirement plans or IRA's is $1,000 and the minimum
initial purchase for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent purchase requires a $250 minimum, except that the
minimum subsequent purchase under the Fund's Automatic Investing Plan is $100
for monthly purchases and $250 for quarterly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.
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
- -----------------------------------------------------------------------------
Social Security Number
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
Name of Corporation, Trust or Partnership
- -----------------------------------------------------------------------------
Tax ID Number
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
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
MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
STATEMENT OF INTENTION (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares
of ISI Total Return U.S. Treasury Fund Shares in an aggregate amount at least
equal to:
____$50,000 ____$100,000 ____$250,000 ____$500,000 ____$1,000,000
____$2,000,000 ____$3,000,000
<PAGE>
RIGHT OF ACCUMULATION (OPTIONAL)
List the Account numbers of other ISI Funds that you or your immediate family
already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
----------- ----------- ------------ ------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTION OPTIONS
Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options is selected, all distributions will be
reinvested.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
<PAGE>
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ 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
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- ----------------------------------------
Bank Name
- ----------------------------------------
Existing ISI Total Return U.S. Treasury
Fund Account No., if any
Please attach a voided check.
- ----------------------------------------
Depositor's Signature Date
- ----------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
- --------------------------------------------------------------------------------
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 $_________, from 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)
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 ISI 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 address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:________________________________ Bank Account No.:________________________
Address:_____________________________ Bank Account Name:_______________________
_____________________________
<PAGE>
SIGNATURE AND TAXPAYER CERTIFICATION
[The following information appears in a box]
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this application, I hereby certify under penalties of perjury
that the information on this application is complete and correct and that
as required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the
correct Social Security Number or Tax ID Number and (2) I am not
subject to any backup withholding either because (a) I am exempt
from backup withholding, or (b) I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided
above, I have applied, or intend to apply, to the IRS or the Social
Security Administration for a Tax ID Number or a Social Security
Number, and I understand that if I do not provide either number to
the Transfer Agent within 60 days of the date of this Application
or if I fail to furnish my correct Social Security Number or Tax ID
Number, I may be subject to a penalty and a 31% backup withholding
on distributions and redemption proceeds. (Please provide either
number on IRS Form W-9. You may request such form by calling the
Transfer Agent at 800-882-8585.)
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:__________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[end of box]
I have received a copy of the Fund's prospectus dated March 1, 1997. 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.
[The following information appears in a box]
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
[end of box]
_________________________________________
Signature Date
_________________________________________________________
Signature (if a joint account, both must sign) Date
- --------------------------------------------------------------------------------
FOR DEALER USE ONLY
Dealer's Name: _____________________________________
Dealer's Address:_____________________________________
_____________________________________
Representative _____________________________________
Dealer Code: _____________________________________
Branch Code: _____________________________________
Rep. No.: _____________________________________
<PAGE>
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
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 the Distributor.
TABLE OF CONTENTS
PAGE
----
1. Fee Table ...................... 2
2. Financial Highlights ........... 2
3. Investment Program ............. 3
4. Investment Restrictions ........ 4
5. How to Invest in the Fund ...... 5
6. How to Redeem Shares ........... 7
7. Telephone Transactions ......... 8
8. Dividends and Taxes ............ 8
9. Management of the Fund ......... 9
10. Investment Advisor ............. 9
11. Administrator .................. 10
12. Distributor .................... 10
13. Custodian, Transfer Agent and
Accounting Services ............. 11
14. Performance Information ........ 11
15. General Information ............ 12
<PAGE>
LOGO
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
An open-end mutual fund seeking a high level of total return, with relative
stability of principal and, secondarily, high current income consistent with an
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.
MARCH 1, 1997
LOGO
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------
TOTAL RETURN U.S. TREASURY FUND, INC.
One South 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, ONE SOUTH STREET, 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, 1997
Relating to the Prospectuses of ^
ISI Total Return U.S. Treasury Fund Shares Dated: March 1, 1997
and
Flag Investors Total Return U.S. Treasury Fund Class A and Class B Shares
Dated: March 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
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................ 14
7. Administration........................................ 15
8. Distribution of Fund Shares........................... 16
9. Portfolio Transactions................................ 19
10. Capital Shares........................................ 19
11. Semi-Annual 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.................... 22
16. Financial Statements ................................. 24
<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
"Flag Investors Class A Shares"), Flag Investors Total Return U.S. Treasury Fund
Class B Shares (the "Flag Investors 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,
One South Street, Baltimore, Maryland 21202, (800) 767-FLAG (for a prospectus
for the Flag Investors Shares) or from Armata Financial Corp., P.O. Box 515,
Baltimore, Maryland 21203 (for a prospectus for the ISI Shares) (collectively,
the "Distributors"), 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. The Fund has
offered the Flag Investors Class B Shares since June 20, 1996.
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.
-1-
<PAGE>
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.
Except as specifically identified under "Investment Restrictions"
in the Prospectus and in this Statement of Additional Information, the
investment policies described in these documents 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 (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
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 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 the Fund makes the commitment to purchase or sell
securities on a when-issued basis, it will record the transaction and
-2-
<PAGE>
thereafter reflect the value of such security purchased or, if a sale, the
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;
-3-
<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 investment restriction 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.
3. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined daily as of the close
of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time)
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 its share of
the Fund's assets, deducting all liabilities attributable to that class, 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 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
-4-
<PAGE>
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 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
-5-
<PAGE>
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 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
-6-
<PAGE>
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). 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 this excise tax.
However, the Fund may, in certain circumstances, be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability. 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.
-7-
<PAGE>
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 executive officers, to the Advisor, the Distributors and to the Fund's
administrator. Four directors and all of the officers of the Fund are directors,
officers or employees of the Advisor, the Distributors or the Fund's
administrators. The other directors of the Fund have no affiliation with the
Advisor, the Distributors or the Fund's administrators.
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 One South 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. (registered investment advisor), Chairman, ISI Inc.
(investments) and Chairman and President, ISI Group Inc. (registered
investment advisory and registered broker-dealer), 1991-Present.
* RICHARD T. HALE, Vice Chairman and Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); Chartered Financial Analyst.
* CHARLES W. COLE, JR., Director+ (11/11/35)
Vice Chairman, Alex. Brown Capital Advisory & Trust Company
(registered investment advisor); Chairman, Investment Company
Capital Corp. (registered investment advisor); Director, Provident
Bankshares Corporation and Provident Bank of Maryland; Formerly,
President and Chief Executive Officer, Chief Administrative Officer
and Director, First Maryland Bancorp, The First National Bank of
Maryland and First Omni Bank; Director, York Bank and Trust Company.
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated and Director,
Investment Company Capital Corp. (registered investment advisor);
Formerly, Vice Chairman, Alex. Brown Incorporated.
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).
-8-
<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); Director, Central Bank & Trust
(banking), Key Funds (registered investment companies) and AMBAC
Treasurers Trust (registered investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103-7017; President and Chief
Executive Officer, The Pew Charitable Trusts; Director and Executive
Vice President, The Glenmede Trust Company; Formerly, Executive
Director, The Pew Charitable Trusts.
CARL W. VOGT, Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004- 2604. Senior Partner, Fulbright & Jaworski
L.L.P. (law); Director, Yellow Corporation (trucking); Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak) and Member,
Aviation System Capacity Advisory Committee (Federal Aviation
Administration).
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., 1991-Present.
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Vice President, Armata
Financial Corp. (registered broker-dealer); Executive Vice
President, Investment Company Capital Corp. (registered investment
advisor).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated; 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.
-9-
<PAGE>
SCOTT J. LIOTTA, Vice President (3/18/65)+
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist,
Putnam Investments Inc. (registered investment companies), April
1994-July 1996; and Supervisor, Brown Brothers Harriman & Co.
(domestic and global custody), August 1991-April 1994.
CARRIE L. BUTLER, Vice President (5/1/67)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Assistant Vice President, International
Strategy and Investment Inc., 1991-Present.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice President
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present; Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company, Inc. (investments),
1980-August 1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April
1995-Present; Formerly, Legal Advisor, Federated Investors
(registered investment advisor), 1991-1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present.
- -------------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
+ Mr. Liotta is Mr. Cole's son-in-law.
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 the Advisor or the Distributor 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 Chairman of three funds in the Fund Complex. Mr. Hale serves
as Chairman of three funds, 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. Cole serves as Chairman of one fund and as a Director of seven
other funds in the Fund Complex. Mr. Semans serves as Chairman of five funds and
as a Director of five other funds in the Fund Complex. Messrs. Cunnane, Kroeger,
Levy and McDonald serve as Directors of each fund in the Fund Complex. Ms. Rimel
serves as a director of ten funds in the Fund Complex. Mr. Vogt serves as a
Director of nine funds in the Fund Complex. Ms. Lazar and Ms. Butler serve as
Vice Presidents 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. Liotta serves as Vice President, Mr. Finelli
serves as Treasurer, Mr. Stoken serves as Secretary and Ms. Collidge serves as
Assistant Secretary, respectively, for each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had
normal brokerage transactions with, the Distributor in the ordinary course
of business. All such
-10-
<PAGE>
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, 1996, Non-Interested
Directors' fees attributable to the assets of the Fund totalled $16,709. The
following table shows aggregate compensation payable to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
October 31, 1996.
-11-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Pension or Total Compensation From
Aggregate Compensation Retirement the Fund and Fund Complex
From the Fund for the Benefits Accrued Payable to Directors
Name of Person, Fiscal Year Ended as Part of Fund for the Fiscal Year Ended
Position October 31, 1996 Expenses October 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Edward S. Hyman $0 $0 $0
Chairman
*Richard T. Hale $0 $0 $0
Vice Chairman
*W. James Price, $0 $0 $0
Vice Chairman***
*Charles W. Cole, Jr. $0 $0 $0
Director(2)
*Truman T. Semans $0 $0 $0
Director(2)
James J. Cunnane $2,592(1) + $39,000 for service on 12
Director Boards in the Fund Complex
N. Bruce Hannay** $958(1) + $13,071 for service on 12
Director Boards in the Fund Complex
John F. Kroeger $3,257(1) + $49,000 for service on 12
Director Boards in the Fund Complex
Louis E. Levy $2,592(1) + $39,000 for service on 12
Director Boards in the Fund Complex
Eugene J. McDonald $2,592(1) + $39,000 for service on 12
Director Boards in the Fund Complex
Rebecca W. Rimel N/A(2) + $39,000 for service on 6
Director(2) Boards in the Fund Complex
Carl W. Vogt N/A(2) + $29,250 for service on 5
Director(2) Boards in the Fund Complex
Harry Woolf*** $2,592(1) + $39,000 for service on 12
Director Boards in the Fund Complex
</TABLE>
- ------------
* Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
** Retired effective January 31, 1996 and is now deceased.
*** Retired, effective December 31, 1996.
+ The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
Fund for the period from January 1, 1996 through October 31, 1996 was
approximately $12,337.
(1) Of the amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy,
McDonald and Woolf, $2,592, $741, $0, $0, $2,592 and $2,592 was
deferred pursuant to a deferred compensation plan.
(2) Not a Director of the Fund in the fiscal year ended October 31, 1996.
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 the Participant in
his or
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<PAGE>
her last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he or she served after completion of
the first five years, up to a maximum annual benefit of 50% of the fee earned by
the Participant in his or her last year of service. The fee will be paid
quarterly, for life, by each Fund for which he or she serves. The Retirement
Plan is unfunded and unvested. Mr. Kroeger has qualified but has not received
benefits. The Fund has two Participants, a Director who retired effective
December 31, 1994 and a Director who retired effective December 31, 1996, each
of whom has qualified for the Retirement Plan by serving thirteen and fourteen
years, respectively, and who will be paid a quarterly fee of $4,875 by the Fund
Complex for the rest of his life. Another participant, who retired on January
31, 1996 and died on June 2, 1996, was paid fees of $8,090 by the Fund Complex
under the Retirement Plan in the fiscal year ended October 31, 1996. Such fees
are allocated to each fund in the Fund Complex based upon the relative net
assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger,
14 years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1
year and for Mr. Vogt, 1 year.
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon
Retirement
Chairman of Audit Committee Other Participants
--------------------------- ------------------
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald and
Vogt and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors may select various Flag Investors 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 ten
years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Code of
Ethics applies to the personal investing activities of the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisor and the Distributors. As described below, the Code of Ethics
imposes additional restrictions on the Advisor's investment personnel, including
the portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that covered employees of the
Advisor, certain directors or officers of the Distributors, and all Fund
Directors who are "interested persons", preclear any personal securities
investments (with certain exceptions, such as non-volitional purchases or
purchases which are part of an automatic dividend reinvestment plan). The
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<PAGE>
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Officers, directors and employees of the Advisor and the
Distributors may comply with codes instituted by those entities so long as they
contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
International Strategy and Investment Inc. ("ISI" or the
"Advisor") 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.
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 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 will 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 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 securities
transactions will be to obtain
-14-
<PAGE>
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 October 1,
1996. 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, 1996, October 31, 1995 and October 31, 1994, the Fund paid
fees to ISI of $953,088, $999,452 and $1,056,633, respectively.
7. ADMINISTRATION
Investment Company Capital Corp., One South 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,
1996, October 31, 1995 and for the period from January 1, 1994 through October
31, 1994, ICC received administration fees of $419,655, $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, Alex. Brown received
an administration fee from the Fund of $82,018.
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 Financial Corp.
-15-
<PAGE>
8. DISTRIBUTION OF FUND SHARES
The Distribution Agreements provide that Alex. Brown & Sons
Incorporated ("Alex. Brown") (in the case of the Flag Investors Shares) or
Armata Financial Corp. ("Armata") (in the case of the ISI Shares) has
(collectively, the "Distributors") 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 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 Flag Investors 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. For the fiscal years ended October 31, 1996, October 31, 1995 and October
31, 1994, Alex. Brown (for services performed as distributor for the Flag
Investors Class A Shares) received from the Fund aggregate 12b-1 fees in the
amount of $382,235, $411,117 and $485,928, respectively. For the fiscal years
ended October 31, 1996, October 31, 1995 and October 31, 1994, Armata (for
services performed as distributor for the ISI Shares) received from the Fund
aggregate 12b-1 fees of $495,975, $501,139 and $544,678, respectively.
As compensation for providing distribution and related
administrative services for the Flag Investors Class B Shares, as described
above, the Fund will pay Alex. Brown, on a monthly basis, an annual fee equal to
.35% of the Flag Investors 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. For the period from June 20, 1996 (commencement of operations of Flag
Investors Class B Shares) through October 31, 1996, such fees totalled $73.
In addition, with respect to the Flag Investors 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 Flag Investors Class B
Shares. (See the Prospectus.) Alex. Brown expects to allocate most
-16-
<PAGE>
of its shareholder servicing fee to its investment representatives or to
Participating Dealers. For the period from June 20, 1996 through October 31,
1996, such fees totalled $30.
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 period from November 1, 1993 through October
20, 1994, Alex. Brown received from the Fund aggregate 12b-1 fees of $9,735.
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
Flag Investors 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 on October 1, 1996. The Class B Distribution Agreement, including the
Flag Investors Class B Plan and Form of Sub-Distribution Agreement, was approved
by the Fund's Board of Directors, including a majority of the Non-Interested
Directors, on March 18, 1996. The Flag Investors Class B Plan was most recently
approved by the Board of Directors on October 1, 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
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,
-17-
<PAGE>
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.
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
Flag Investors 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 Flag Investors Class B Shares is less than .35% of the Flag Investors
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. In return for payments received
pursuant to the Plans in the fiscal years ended October 31, 1996, October 31,
1995 and October 31, 1994, respectively, Alex. Brown and Armata, as appropriate,
paid the distribution-related expenses of the Fund including one or more of the
following:
advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges.
For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, Alex. Brown received sales commissions on the Flag
Investors Class A Shares of $113,136, $209,203 and $310,376 and from such
amounts retained $83,059, $177,202 and $281,454 in each such year, respectively.
For the period from June 20, 1996 through October 31, 1996, Alex. Brown received
contingent deferred sales loads on the Flag Investors Class B Shares of $1,420
and retained [all of such amount]. For the fiscal years ended October 31, 1996,
October 31, 1995 and October 31, 1994, Armata received sales commissions on the
ISI Class Shares of $360,356, $635,954 and $426,023 and from such amounts
retained $53,175, $53,363 and $57,564 in each such year, respectively.
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
-18-
<PAGE>
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 (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, 1996, October 31, 1995
and October 31, 1994, 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, 1996, the Fund held a 5.45% repurchase agreement issued by Goldman
Sachs & Co. valued at $3,955,000. Goldman Sachs & Co. is one of the Fund's
"regular brokers or dealers."
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.
-19-
<PAGE>
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 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.
11. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors.
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., One South 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
-20-
<PAGE>
services, ICC receives up to $10.62 per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended October 31, 1996, such fees totalled $230,210.
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, 1996, ICC received fees of $92,694.
ICC also serves as the Fund's administrator.
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
To Fund management's knowledge, no one owned beneficially 5%
or more of the Fund's outstanding Shares, as of January 31, 1997.
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.
-21-
<PAGE>
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
the Fund (or a series) commenced operations (provided such date is subsequent to
the date the registration statement became effective). In calculating the ending
redeemable value for the Flag Investors Class A Shares and the ISI Shares, the
maximum sales load (4.50% and 4.45%, respectively) 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. In calculating performance for the Flag
Investors Class B Shares, the applicable contingent deferred sales charge (2.0%
for the one year period, 1.0% for the five-year period and no sales charge
thereafter) is deducted from the ending redeemable value 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. The Fund will, however,
disclose the maximum sales charges
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<PAGE>
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, 1996, the ending redeemable value of a hypothetical $1,000
payment for each of the Flag Investors Class A Shares and the ISI Shares was
$979 and $979, respectively, resulting in a total return for such Shares equal
to (2.10)% and (2.05)%, respectively. For the five year period ended September
30, 1996, the ending redeemable value of a hypothetical $1,000 payment for each
of the Flag Investors Class A Shares and the ISI Shares was $1,364 and $1,365,
respectively, resulting in a total return for such Shares equal to 6.40% and
6.41%, 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, 1996, the ending redeemable value of a hypothetical $1,000 payment
for each of the Flag Investors Class A Shares and the ISI Shares was $1,840 and
$1,841, respectively, resulting in an average annual total return for such
Shares equal to 7.78% and 7.79%, respectively.
Calculated according to SEC rules for the period from June 20,
1996 (commencement of operations of Flag Investors Class B Shares) through the
end of the Fund's most recent calendar quarter on September 30, 1996, the ending
redeemable value of a hypothetical $1,000 payment for Flag Investors Class B
Shares was $992, resulting in an aggregate total return for such Shares equal to
(0.78)%.
Calculated according to the alternative computation which
assumes no sales charges and reinvestment of all distributions, for the one year
period ended October 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in the Flag Investors Class A Shares or ISI Shares was
$10,344, resulting in a total return for such Shares equal to 3.44%. For the
five year period ended October 31, 1996, the ending redeemable value of a
hypothetical $10,000 investment in Flag Investors Class A Shares or ISI Shares
was $14,647, resulting in a total return for such Shares equal to 7.93%. For the
period from August 10, 1988 (commencement of operations) through the end of the
Fund's most recent fiscal year on October 31, 1996, the ending redeemable value
of a hypothetical $10,000 investment in the Flag Investors Class A Shares or ISI
Shares was $19,989 resulting in an average annual total return for such Shares
equal to 8.70%.
Calculated according to the alternative computation which
assumes no sales charges and reinvestment of all distributions, for the period
from June 20, 1996 (commencement of operations of Flag Investors Class B Shares)
through the end of the Fund's fiscal year on October 31, 1996, the ending
redeemable value of a hypothetical $10,000 investment in the Flag Investors
Class B Shares was $10,637, resulting in an aggregate total return for such
Shares equal to 6.37%.
Yield Calculations
The yield based on the 30 day period ended October 31, 1996
was 5.20% for the Flag Investors Class A Shares, 5.20% for the ISI Shares and
5.09% for the Flag Investors Class B Shares, computed in the manner discussed
below. The yield of the Fund is calculated
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<PAGE>
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 Flag Investors Class A Shares and 4.45%
for the ISI Shares and a maximum contingent deferred sales charge of 2.0% for
the Flag Investors 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.
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<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
Par Value
Interest Rate Maturity Date (000) (Note 1)
- --------------------------------------------------------------------------------
<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>
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<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Value
(Note 1)
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
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
======
ISI Class Share
($193,486,009 / 19,676,205 shares outstanding) $ 9.83
======
Maximum Offering Price Per:
Flag Investors Class A Share
($9.83 / .955) $10.29
======
Flag Investors Class B Share $ 9.85
======
ISI Class Share
($9.83 / .9555) $10.29
======
- -----------------
*Yield as of October 31, 1996.
**Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
-26-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
October 31,
1996
Investment Income (Note 1):
Interest $22,809,288
Expenses:
Investment advisory fee (Note 2) 953,088
Distribution fee (Note 2) 878,283
Administration fee (Note 2) 419,655
Transfer agent fee (Note 2) 230,210
Accounting fee (Note 2) 92,694
Printing and postage 69,069
Legal 41,257
Custodian fee 37,605
Registration fees 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
===========
See Notes to Financial Statements.
-27-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
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:
Flag Investors Class A Shares (8,687,010) (9,785,285)
Flag Investors Class B Shares (664) --
ISI Class Shares (11,276,368) (11,897,210)
Distributions in excess of net investment
income:
Flag Investors Class A Shares (561,610) --
Flag Investors Class B Shares (8) --
ISI Class Shares (723,712) --
Net realized short-term gains:
Flag Investors Class A Shares (1,451,089) (1,162,209)
Flag Investors Class B Shares (21) --
ISI Class Shares (1,869,945) (1,385,249)
------------ ------------
Total distributions (24,570,427) (24,229,953)
------------ ------------
Capital Share Transactions (Note 3):
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.
-28-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Financial Highlights--Flag Investors Class A and ISI Class Shares (For a share
outstanding throughout each year)
For the Year Ended
October 31,
1996
Per Share Operating Performance:
Net asset value at beginning of year $ 10.19
-------
Income from Investment Operations:
Net investment income 0.56
Net realized and unrealized gain/(loss) on investments (0.23)
-------
Total from Investment Operations 0.33
=======
Less Distributions:
Dividends from net investment income
and short-term gains (0.65)
Distributions in excess of net investment income (0.04)
Distributions from net realized long-term gains --
-------
Total distributions (0.69)
-------
Net asset value at end of year $ 9.83
=======
Total Return(1) 3.44%
Ratios to Average Daily Net Assets:
Expenses 0.81%
Net investment income 5.69%
Supplemental Data:
Net assets at end of year (000):
Flag Investors Class A Shares $143,791
ISI Class Shares $193,486
Portfolio turnover rate 199%
- -------------
(1) Total return excludes the effect of sales charge.
(2) Distributions to shareholders include $.05 per share return of capital.
-29-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
For the Year Ended October 31,
- --------------------------------------------------------------------------------
1995 1994 1993 1992
$ 9.22 $ 11.35 $ 10.47 $ 10.41
-------- -------- -------- --------
0.57 0.51 0.62 0.76
1.04 (1.16) 1.12 0.05
-------- -------- -------- --------
1.61 (0.65) 1.74 0.81
======== ======== ======== ========
(0.64) (1.20) (0.79) (0.70)
-- -- -- --
-- (0.28) (0.07) (0.05)
-------- -------- -------- --------
(0.64) (1.48)(2) (0.86) (0.75)
-------- -------- -------- --------
$ 10.19 $ 9.22 $ 11.35 $ 10.47
======== ======== ======== ========
18.09% (6.22)% 17.33% 8.96%
0.80% 0.77% 0.77% 0.77%
5.94% 4.98% 5.21% 5.65%
$164,206 $175,149 $224,790 $250,210
$206,615 $200,309 $232,103 $207,518
194% 68% 249% 191%
See Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
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.
-31-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--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 ("ISI Class") 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:
A. 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.
B. 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.
-32-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
C. 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.
D. 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.
E. 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.
NOTE 2--Investment Advisory Fee, Transactions with Affiliates and Other Fees
International Strategy & Investment Inc. ("ISI") serves as the Fund's
investment advisor and Investment Company Capital Corp. ("ICC"), a subsidiary of
Alex. Brown Financial Corp., serves as the Fund's administrator. As compensation
for its advisory services, ISI receives an annual fee from the Fund, calculated
daily and paid monthly, at the following annual rates based upon the Fund's
average daily net assets: .20% of the first $100 million, .18% of the next $100
million, .16% of the next $100 million, .14% of the next $200 million and .12%
of that portion in excess of $500 million. In addition, the Fund pays the
investment advisor 1.5% of the Fund's gross income.
As compensation for its administrative services, ICC receives an annual fee
from the Fund, calculated daily and paid monthly, at the following annual rates
based upon the Fund's average daily 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.
-33-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
NOTE 2--concluded
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. ICC received $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.
NOTE 3--Capital Share Transactions
At October 31, 1996, there were 100 million shares of $.001 par value
common stock authorized (44 million Flag Investors Class A, 44 million ISI
Class, 5 million Flag Investors Class B, 500,000 Flag Investors Class D and 6.5
million undesignated). Transactions in shares of the Fund are listed on the
following pages.
-34-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3--continued
<TABLE>
<CAPTION>
Flag Investors Class A Shares
--------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
<S> <C>
Shares sold 914,108 726,425
Shares issued to shareholders on
reinvestment 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 shareholders on
reinvestment 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
========
</TABLE>
- -----------
*Commencement of operations.
-35-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
NOTE 3--concluded
<TABLE>
<CAPTION>
ISI Class Shares
---------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
<S> <C>
Shares sold 2,043,599 2,579,624
Shares issued to shareholders on
reinvestment 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)
============ ============
</TABLE>
NOTE 4--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.
NOTE 5--Net Assets
At October 31, 1996, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $146,851,212
Flag Investors Class B Shares 121,486
ISI Class Shares 201,762,510
Distributions in excess of net investment income (1,285,330)
Unrealized depreciation of investments (10,049,571)
------------
$337,400,307
============
-36-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 6--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.
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.
Quarter Ended Percentage of Federal 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.
-37-
<PAGE>
FLAG INVESTORS 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 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
-38-
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
LIST ALL FINANCIAL STATEMENTS AND EXHIBITS FILED AS PART OF THE
REGISTRATION STATEMENT.
(a) Financial statements:
(1) Included in Part A of the Registration Statement:
- Financial Highlights for the fiscal years ended
October 31, 1996, October 31, 1995, October 31,
1994, October 31, 1993, October 31, 1992, October
31, 1991, October 31, 1990 and October 31, 1989
and for the period from August 10, 1988
(commencement of operations) through October 31,
1988
(2) Included in Part B of the Registration Statement:
- Statement of Net Assets as of October 31, 1996
- Statement of Operations for the fiscal year ended
October 31, 1996
- Statements of Changes in Net Assets for the fiscal
years ended October 31, 1996 and October 31, 1995
- Financial Highlights for the fiscal years ended
October 31, 1996, October 31, 1995, October 31,
1994, October 31, 1993 and October 31, 1992
- Notes to Financial Statements
(3) All required financial statements are included in
parts A and B hereof. All other financial statements
and schedules are inapplicable.
(b) Exhibits:
(1) (a)(4) Registrant's Articles of Incorporation.
(b)(4) Registrant's Articles Supplementary to
Registrant's Articles of Incorporation
dated December 18, 1991.
(c)(4) Registrant's Articles Supplementary to
Registrant's Articles of Incorporation
dated December 15, 1993.
(d)(4) Registrant's Articles Supplementary to
Registrant's Articles of Incorporation
dated December 31, 1994.
(2)1 By-Laws, as amended through December 18, 1996.
(3) None.
(4) (a)(2) Specimen Certificate of Common Stock,
$.001 par value with respect to
Registrant's Flag Investors Total Return
U.S. Treasury Fund Class A Shares.
(b)(3) Specimen Certificate of Common Stock, $.001
par value with respect to Registrant's ISI
Total Return U.S. Treasury Fund Shares.
(c)(3) Specimen Certificate of Common Stock, $.001
par value with respect to Registrant's Flag
Investors Total Return U.S. Treasury Fund
Class B Shares (later renamed Class D
Shares).
C-1
<PAGE>
(5)(4) Investment Advisory Agreement dated April 1, 1991
between Registrant and International Strategy and
Investment Inc.
(6) (a)(4) Distribution Agreement between Registrant
and Alex. Brown & Sons Incorporated with
respect to Flag Investors Total Return U.S.
Treasury Fund Class A Shares.
(b)(4) Registrant's Participating Dealer Agreement
between Alex. Brown & Sons Incorporated and
Participating Dealers with respect to Flag
Investors Total Return U.S. Treasury Fund
Shares.
(c)(4) Form of Registrant's Shareholder Servicing
Agreement between Registrant and
Shareholder Servicing Agents.
(d)(4) Distribution Agreement dated November 30,
1990 between Registrant and Armata
Financial Corp. with respect to ISI Total
Return U.S. Treasury Fund Shares.
(e)(4) Participating Dealer Agreement between
Armata Financial Corp. and Participating
Dealers with respect to ISI Total Return
U.S. Treasury Fund Shares.
(f)(5) Distribution Agreement between Registrant
and Alex. Brown & Sons Incorporated with
respect to Flag Investors Total Return U.S.
Treasury Fund Class B Shares.
(g)(1) Form of Sub-Distribution Agreement between
Alex. Brown & Sons Incorporated and
Participating Dealers.
(7) None.
(8)(4) Custodian Agreement between Registrant and
Provident National Bank of Philadelphia (now known
as PNC Bank).
(9) (a)(4) Master Services Agreement between
Registrant and Investment Company Capital
Corp., with Appendices for the provision of
Administration, Accounting and Transfer
Agency Services.
(b)(4) License Agreement between Registrant and
Alex. Brown Incorporated.
(10)(4) Opinion of Counsel.
(11)(1) Consent of Deloitte & Touche LLP.
(12) None.
(13)(4) Subscription Agreements.
(14) None.
(15) (a)(4) Registrant's Distribution Plan for its
Flag Investors Total Return U.S.
Treasury Fund Class A Shares.
(b)(4) Registrant's Distribution Plan for its ISI
Total Return U.S. Treasury Fund Shares.
(c)(5) Registrant's Distribution Plan for its Flag
Investors Total Return U.S. Treasury Fund
Class B Shares.
(16)(4) Schedule of Computation of Performance Quotations
(unaudited).
C-2
<PAGE>
(18) (a)(5) Rule 18f-3 Plan.
(b)(1) Rule 18f-3 Plan.
(24)(1) Powers of Attorney.
(27)(1) Financial Data Schedule.
- -----------------------
(1) Filed herewith.
(2) Incorporated by reference to Pre-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-12179), filed with the Securities and Exchange Commission on
August 4, 1988.
(3) Incorporated by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-12179), filed with the Securities and Exchange Commission on
February 23, 1994.
(4) Incorporated by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-12179), filed with the Securities and Exchange Commission via
EDGAR on February 26, 1996.
(5) Incorporated by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-12179), filed with the Securities and Exchange Commission via
EDGAR on March 26, 1996.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
FURNISH A LIST OR DIAGRAM OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT AND AS TO EACH SUCH
PERSON INDICATE (1) IF A COMPANY, THE STATE OR OTHER SOVEREIGN POWER UNDER THE
LAWS OF WHICH IT IS ORGANIZED, AND (2) THE PERCENTAGE OF VOTING SECURITIES OWNED
OR OTHER BASIS OF CONTROL BY THE PERSON, IF ANY, IMMEDIATELY CONTROLLING IT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES
STATE IN SUBSTANTIALLY THE TABULAR FORM INDICATED, AS OF A
SPECIFIED DATE WITHIN 90 DAYS PRIOR TO THE DATE OF FILING, THE NUMBER OF RECORD
HOLDERS OF EACH CLASS OF SECURITIES OF THE REGISTRANT.
The following information is given as of January 31, 1997.
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Capital Stock
Flag Investors Total Return U.S.
Treasury Fund Shares - Class A 2,794
-----
Flag Investors Total Return U.S.
Treasury Fund Shares - Class B 12
-----
ISI Total Return U.S. Treasury Fund Shares 4,977
-----
Item 27. INDEMNIFICATION
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE
UNDER WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE
REGISTRANT IS INSURED OR INDEMNIFIED IN ANY MANNER AGAINST ANY LIABILITY WHICH
MAY BE INCURRED IN SUCH CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR,
OFFICER, AFFILIATED PERSON OR UNDERWRITER FOR THEIR OWN PROTECTION.
C-3
<PAGE>
Under the terms of the Fund's Articles of Incorporation, the
Registrant may indemnify each of its Directors and officers (including persons
who serve at the Registrant's request as directors, officers or trustees of
another organization in which the corporation has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any such indemnified
person in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, before any court or administrative
or legislative body except with respect to any matter as to which such person
shall have been finally adjudicated in any such action, suit or other proceeding
where (a) the act or omission of the director was material to the cause of
action adjudicated; the act or omission was committed in bad faith or was the
result of active and deliberate dishonesty; the director actually received an
improper personal benefit in money, property, or services or in the case of any
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful, or (b) to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such person's
office. Termination of any proceeding by conviction or a plea of nolo contendere
or its equivalent, or an entry of an order of probation prior to judgment
creates a rebuttable presumption that the director did not meet the standard of
conduct. No such presumption results from the termination of any proceeding by
judgment, order or settlement. Expenses, including counsel fees so incurred by
any such person (but excluding amounts paid in satisfaction of judgment, in
compromise or as fines or penalties), shall be paid from time to time by the
Registrant in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay amounts so paid to the Fund if it is ultimately determined that
indemnification of such expenses is not authorized under the Articles of
Incorporation, provided, however, that such person shall have affirmed that he
in good faith believes that he has met the standard of conduct necessary for
indemnification and shall have provided a written undertaking to repay the
amount if it is ultimately determined that the standard of conduct has not been
met and either a majority of the Directors acting on the matter who are not
parties to such action (provided that at least two of such Directors then in
office act on the matter), or independent legal counsel in a written opinion,
shall have determined, based upon a review of readily available facts that there
is reason to believe that such person will be found entitled to indemnification
under the Articles of Incorporation.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event of a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person in connection with the securities being registered) the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue. In the absence of a
determination by a court of competent jurisdiction, the determinations that
indemnification against such liabilities is proper, and advances can be made,
are made by a majority of a quorum of the disinterested, non-party directors of
the Fund, or an independent legal counsel in a written opinion, based on review
of readily available facts.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF
A SUBSTANTIAL NATURE IN WHICH THE INVESTMENT ADVISOR OF THE REGISTRANT, AND EACH
DIRECTOR, OFFICER OR PARTNER OF ANY SUCH INVESTMENT ADVISOR, IS OR HAS BEEN, AT
ANY TIME DURING THE PAST TWO FISCAL YEARS, ENGAGED FOR HIS OWN ACCOUNT OR IN THE
CAPACITY OF DIRECTOR, OFFICER, EMPLOYEE, PARTNER OR TRUSTEE.
C-4
<PAGE>
During the past two fiscal years: Edward S. Hyman, Jr., Chairman
of the Investment Advisor, served as Chairman and a Member of the Board of
Directors of the Registrant; R. Alan Medaugh, President of the Investment
Advisor, served as President of the Registrant; Nancy Lazar, Executive Vice
President and Secretary of the Investment Advisor, served as a Vice President of
the Registrant; and Carrie L. Butler, Assistant Vice President of the Investment
Advisor, served as Vice President (since March 1996) and as an Assistant Vice
President (from 1991 - 1996) of the Registrant.
Item 29. PRINCIPAL UNDERWRITERS
ALEX. BROWN
(a) Alex. Brown & Sons Incorporated acts as distributor for
Alex. Brown Cash Reserve Fund, Inc., Flag Investors
Telephone Income Fund, Inc., Flag Investors International
Fund, Inc., Flag Investors Emerging Growth Fund, Inc., the
Flag Investors Shares Class of Managed Municipal Fund,
Inc., Flag Investors Short-Intermediate Income Fund, Inc.
(formerly known as Flag Investors Intermediate-Term Income
Fund, Inc.), Flag Investors Value Builder Fund, Inc., Flag
Investors Maryland Intermediate Tax-Free Income Fund, Inc.,
Flag Investors Real Estate Securities Fund, Inc. and Flag
Investors Equity Partners Fund, Inc., all registered
open-end management investment companies.
(b)
<TABLE>
<CAPTION>
Position and
Names and Principal Position with Offices Offices with
Business Address(1) and Principal Underwriter Registrant
- ------------------- ------------------------- -------------
<S> <C> <C>
Alvin B. Krongard Chairman, Chief Executive Officer, None
Director
Benjamin Howell Griswold, IV Director None
Mayo A. Shattuck III President, Director None
Beverly L. Wright Chief Financial Officer and Treasurer None
Robert F. Price Secretary and General Counsel None
</TABLE>
(c) Not applicable.
- --------
(1) One South Street, Baltimore, Maryland 21202
C-5
<PAGE>
ARMATA FINANCIAL CORP.
(a) Armata Financial Corp. also acts as distributor for the ISI
Managed Municipal Fund Shares, a class of Managed Municipal
Fund, Inc., and North American Government Bond Fund, Inc.,
registered open-end investment companies.
(b)
<TABLE>
<CAPTION>
Names and Principal Position and Offices Position and Offices
Business Address* with Principal Underwriter with Registrant
- -------------------- -------------------------- ---------------
<S> <C> <C>
Jack S. Griswold Chairman and Director None
F. Barton Harvey, Jr. Director None
John M. Prugh President and Director None
E. Robert Kent, Jr. Director None
Peter E. Bancroft Secretary None
Timothy M. Gisriel Treasurer None
</TABLE>
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
WITH RESPECT TO EACH ACCOUNT, BOOK OR OTHER DOCUMENT REQUIRED TO BE
MAINTAINED BY SECTION 31(A) OF THE 1940 ACT [15 U.S.C. 80A-30(A)] AND THE RULES
[17 CFR 270.31A-1 TO 31A-3] PROMULGATED THEREUNDER, FURNISH THE NAME AND ADDRESS
OF EACH PERSON MAINTAINING PHYSICAL POSSESSION OF EACH SUCH ACCOUNT, BOOK OR
OTHER DOCUMENT.
Investment Company Capital Corp., One South Street, Baltimore,
Maryland 21202, Registrant's administrator and transfer and dividend
disbursing agent, maintains physical possession of each such account,
book or other document of the Fund, except for those maintained by the
Registrant's investment advisor, International Strategy and Investment
Inc., 717 Fifth Avenue, New York, New York 10022 or by the Registrant's
custodian, PNC Bank, Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113.
Item 31. MANAGEMENT SERVICES
FURNISH A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY MANAGEMENT
RELATED SERVICE CONTRACT NOT DISCUSSED IN PART A OR PART B OF THIS FORM (BECAUSE
THE CONTRACT WAS NOT BELIEVED TO BE OF INTEREST TO A PURCHASER OF SECURITIES OF
THE REGISTRANT) UNDER WHICH SERVICES ARE PROVIDED TO THE REGISTRANT, INDICATING
THE PARTIES TO THE CONTRACT, THE TOTAL DOLLARS PAID AND BY WHOM, FOR THE LAST
THREE FISCAL YEARS.
See Exhibit 8.
C-6
<PAGE>
Item 32. UNDERTAKINGS
FURNISH THE FOLLOWING UNDERTAKINGS IN SUBSTANTIALLY THE FOLLOWING FORM
IN ALL INITIAL REGISTRATION STATEMENTS FILED UNDER THE 1933 ACT:
(a) Not applicable.
(b) Not applicable.
(c) A copy of the Registrant's latest annual report to
shareholders is available upon request, without charge by
contacting the Registrant at (800) 767-3524 (for Flag
Investors Shares) or (800) 955-7175 (for ISI Shares).
C-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940 the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized in the City of Baltimore,
in the State of Maryland, on the 26th day of February, 1997.
TOTAL RETURN U.S. TREASURY
FUND, INC.
By: /s/ R. Alan Medaugh
-------------------------
R. Alan Medaugh,
President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities on the date(s) indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
* February 26, 1997
- --------------------------- Director ----------------------------
Edward S. Hyman, Jr. Date
* February 26, 1997
- --------------------------- Director ----------------------------
James J. Cunnane Date
* February 26, 1997
- --------------------------- Director ----------------------------
Richard T. Hale Date
* February 26, 1997
- --------------------------- Director ----------------------------
John F. Kroeger Date
* February 26, 1997
- --------------------------- Director ----------------------------
Louis E. Levy Date
* February 26, 1997
- --------------------------- Director ----------------------------
Eugene J. McDonald Date
/s/ R. Alan Medaugh February 26, 1997
- --------------------------- President ----------------------------
R. Alan Medaugh Date
/s/ Joseph A. Finelli February 26, 1997
- --------------------------- Chief Financial ----------------------------
Joseph A. Finelli and Accounting Date
Officer
*By: /s/ Edward J. Veilleux
-----------------------
Edward J. Veilleux
Attorney-In-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit
Number Description
- ------- -----------
<S> <C> <C>
(1) (a)(4) Registrant's Articles of Incorporation.
(1) (b)(4) Registrant's Articles Supplementary to Registrant's
Articles of Incorporation dated December 18, 1991.
(1) (c)(4) Registrant's Articles Supplementary to Registrant's
Articles of Incorporation dated December 15, 1993.
(1) (d)(4) Registrant's Articles Supplementary to Registrant's
Articles of Incorporation dated December 31, 1994.
(2)(1) Registrant's By-Laws, as amended through December 18, 1996.
(3) None.
(4) (a)(2) Specimen Certificate of Common Stock, $.001 par value
with respect to Registrant's Flag Investors Total Return
U.S. Treasury Fund Class A Shares.
(4) (b)(3) Specimen Certificate of Common Stock, $.001
par value with respect to Registrant's ISI Total
Return U.S.
Treasury Fund Shares.
(4) (c)(3) Specimen Certificate of Common Stock, $.001 par value
with respect to Registrant's Flag Investors Total Return
U.S. Treasury Fund Class B Shares (later renamed
Class D Shares).
(5)(4) Investment Advisory Agreement dated April 1, 1991 between
Registrant and International Strategy and Investment Inc.
(6) (a)(4) Distribution Agreement between Registrant and Alex.
Brown & Sons Incorporated with respect to Flag
Investors Total Return U.S. Treasury Fund Class A
Shares.
(6) (b)(4) Registrant's Participating Dealer Agreement between
Alex. Brown & Sons Incorporated and Participating
Dealers with respect to Flag Investors Total Return U.S.
Treasury Fund Shares.
(6) (c)(4) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents.
(6) (d)(4) Distribution Agreement dated November 30, 1990
between Registrant and Armata Financial Corp. with
respect to ISI Total Return U.S. Treasury Fund Shares.
</TABLE>
<PAGE>
(6) (e)(4) Participating Dealer Agreement between Armata
Financial Corp. and Participating Dealers with
respect to ISI Total Return U.S. Treasury Fund
Shares.
(6) (f)(5) Distribution Agreement between Registrant and Alex.
Brown & Sons Incorporated with respect to Flag
Investors Total Return U.S. Treasury Fund Class B
Shares.
EX-99.B (6) (g)(1) Form of Sub-Distribution Agreement between Alex.
Brown & Sons Incorporated and Participating
Dealers.
(7) None.
(8)(4) Custodian Agreement between Registrant and Provident
National Bank of Philadelphia (now known as PNC Bank).
(9) (a)(4) Master Services Agreement between
Registrant and Investment Company Capital Corp.,
with Appendices for the provision of
Administration, Accounting and Transfer Agency
Services.
(b)(4) License Agreement between Registrant and Alex.
Brown Incorporated.
(10)(4) Opinion of Counsel.
EX-99.B (11)1 Consent of Deloitte & Touche LLP.
(12) None.
(13)(4) Subscription Agreements between Registrant and Investors.
(14) None.
(15) (a)(4) Registrant's Distribution Plan for its Flag
Investors Total Return U.S. Treasury Fund Class A
Shares.
(15) (b)(4) Registrant's Distribution Plan for its ISI Class
of Shares.
(15) (c)(5) Registrant's Distribution Plan for its Flag
Investors Total Return U.S. Treasury Fund Class B
Shares.
(16)(4) Schedule of Computation of Performance Quotations
(unaudited).
(18) (a)(5) Rule 18f-3 Plan.
EX-99.B (b)(1) Rule 18f-3 Plan.
EX-99.B (24)(1) Powers of Attorney.
EX-27(1) Financial Data Schedule.
<PAGE>
- ---------------------
(1) Filed herewith.
(2) Incorporated by reference to Pre-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-
12179), filed with the Securities and Exchange Commission on August 4,
1988.
(3) Incorporated by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-
12179), filed with the Securities and Exchange Commission on February
23, 1994.
(4) Incorporated by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-
12179), filed with the Securities and Exchange Commission via EDGAR
on February 26, 1996.
(5) Incorporated by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-
12179), filed with the Securities and Exchange Commission via EDGAR
on March 26, 1996.
<PAGE>
EX-99.B(2)
As amended through
December 18, 1996.
BY-LAWS
OF
TOTAL RETURN U.S. TREASURY FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive
office of the Corporation shall be in the City of Baltimore, State of Maryland.
Section 3. Other Offices. The Corporation may have such other
offices in such places as the Board of Directors may from time to time
determine.
ARTICLE II
Meetings of Stockholders
Section 1. Stockholder Meetings. The Corporation may, but
shall not be required to, hold a regular meeting of stockholders in any year in
which the Corporation is not required, under the Investment Company Act of 1940,
as amended, (the "1940 Act") to submit for stockholder approval (i) the election
of director(s), (ii) any contract with an investment adviser or principal
underwriter (as such terms are defined in the 1940 Act) that the Corporation
enters into or any renewal or amendment thereof, or (iii) the selection of the
Corporation's independent public accountants. If stockholder approval is
required for any of the purposes in (i) through (iii) above, the regular meeting
shall be held, at which stockholders shall vote on the proposal necessitating
such meeting and shall transact any other business as may properly be brought
before the meeting. Regular meetings of stockholders, if any, shall be held on
such day during the month of June and at such time as shall be designated by the
Board of Directors and stated in the notice of the meeting.
<PAGE>
Section 2. Special Meetings. Special meetings of the
stockholders, unless otherwise provided by law or by the Charter may be called
for any purpose or purposes by a majority of the Board of Directors or the
President, and shall be called by the President or Secretary on the written
request of the stockholders as provided by the Maryland General Corporation Law.
Such request shall state the purpose or purposes of the proposed meeting and the
matters proposed to be acted on at it; provided, however, that unless requested
by stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting, a special meeting need not be called to consider any matter
which is substantially the same as a matter voted on at any special meeting of
the stockholders held during the preceding twelve (12) months.
Section 3. Place of Meetings. The regular meeting, if any, and
any special meeting of the stockholders shall be held at such place within the
United States as the Board of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice; Shareholder
List. (a) Notice of the place, date and time of the holding of each regular and
special meeting of the stockholders and the purpose or purposes of the meeting
shall be given personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder at his address as it appears on the
records of the Corporation, with postage thereon prepaid. The notice of every
meeting of stockholders may be accompanied by a form of proxy approved by the
Board of Directors in favor of such actions or persons as the Board of Directors
may select.
(b) Notice of any meeting of stockholders shall
be deemed waived by any stockholder who shall attend such meeting in person or
by proxy, or who shall, either before or after the meeting, submit a signed
waiver of notice which is filed with the records of the meeting. A meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice to a date not more than 120 days after the
original record date.
(c) At least five (5) days prior to each meeting
of stockholders, the officer or agent having charge of the share transfer books
of the Corporation shall make a complete list of stockholders entitled to vote
at such meeting, in alphabetical order with the address of and the number of
shares held by each stockholder.
-2-
<PAGE>
Section 5. Organization. At each meeting of the stockholders,
the Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, or in the
absence or the inability to act of the Chairman of the Board, the President and
all the Vice Presidents, a chairman chosen by the stockholders shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
Section 6. Voting. (a) Except as otherwise provided by statute
or the Charter, each holder of record of shares of stock of the Corporation
having voting power shall be entitled at each meeting of the stockholders to one
vote for every share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 8 of Article VII hereof or if such record date shall not have been so
fixed, then at the later of (i) the close of business on the day on which notice
of the meeting is mailed or (ii) the thirtieth (30) day before the meeting. In
all elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
(b) Each stockholder entitled to vote at any
meeting of stockholders may authorize another person or persons to act for him
by a proxy signed by such stockholder or his attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof, unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the stockholder executing it, except in those cases where such proxy states
that it is irrevocable and where an irrevocable proxy is permitted by law.
Except as otherwise provided by statute, the Charter or these By-Laws, any
corporate action to be taken by vote of the stockholders shall be authorized by
a majority of the total votes cast at a meeting of stockholders at which a
quorum is present by the holders of shares present in person or represented by
proxy and entitled to vote on such action, except that a plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
director.
(c) If a vote shall be taken on any question
other than the election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the chairman of
the meeting to be advisable, any such vote need not be by ballot. On a vote by
ballot, each ballot shall be signed by the stockholder voting, or by his proxy,
if there be such proxy, and shall state the number of shares voted.
-3-
<PAGE>
Section 7. Inspectors. The Board may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If the inspectors shall not be so appointed or if
any of them shall fail to appear or act, the chairman of the meeting may, and on
the request of any stockholder entitled to vote at the meeting shall, appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote at it, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders.
Section 8. Consent of Stockholders in Lieu of Meeting. Except
as otherwise provided by statute any action required to be taken at any regular
or special meeting of stockholders, or any action which may be taken at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders' meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote at it.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in the
Charter, the business and affairs of the Corporation shall be managed under the
direction of the Board of Directors. All powers of the Corporation may be
exercised by or under authority of the Board of Directors except as conferred on
or reserved to the stockholders by law or by the Charter or these By-Laws.
-4-
<PAGE>
Section 2. Number of Directors. The number of directors shall
be fixed from time to time by resolution of the Board of Directors adopted by a
majority of the Directors then in office; provided, however, that the number of
directors shall in no event be less than three (except for any period during
which shares of the corporation are held by fewer than three shareholders) nor
more than fifteen. Any vacancy created by an increase in directors may be filled
in accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his term unless such director is specifically removed pursuant
to Section 5 of this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors shall be
elected by plurality vote of a quorum cast by written ballot at the regular
meeting of stockholders, if any, or at a special meeting held for that purpose.
The term of office of each director shall be from the time of his election and
qualification and until his successor shall have been elected and shall have
qualified, or until his death, or until he shall have resigned, or have been
removed as hereinafter provided in these By-Laws, or as otherwise provided by
statute or the Charter.
Section 4. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to the Board or
the Chairman of the Board or the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the
Corporation may be removed by the stockholders by a vote of a majority of the
votes entitled to be cast for the election of directors.
Section 6. Vacancies. The stockholders may elect a successor
to fill a vacancy on the Board of Directors which results from the removal of a
director. A majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the Board of Directors which results
from any cause except an increase in the number of directors, and a majority of
the entire Board of Directors may fill a vacancy which results from an increase
in the number of directors; provided however, that no vacancies shall be filled
by action of the remaining directors, if after the filling of said vacancy or
vacancies, fewer than two-thirds of the directors then holding office shall have
been elected by the stockholders of the Corporation. In the event that at any
-5-
<PAGE>
time there is a vacancy in any office of a director which vacancy may not be
filled by the remaining directors, a special meeting of the stockholders shall
be held as promptly as possible and in any event within sixty days, for the
purpose of filling said vacancy or vacancies. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of stockholders
and until his successor is elected and qualifies. A director elected by the
stockholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director.
Section 7. Regular Meetings. Regular meetings of the
Board may be held with notice at such times and places as may be
determined by the Board of Directors.
Section 8. Special Meetings. Special meetings of the Board may
be called by the Chairman of the Board, the President, or by a majority of the
directors either in writing or by vote at a meeting, and may be held at any
place in or out of the State of Maryland as the Board may from time to time
determine.
Section 9. Notice of Special Meetings. Notice of each special
meeting of the Board shall be given by the Secretary as hereinafter provided, in
which notice shall be stated the time and place of the meeting. Notice of each
such meeting shall be delivered to each director, either personally or by
telephone, telegraph, cable or wireless, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, or by commercial delivery services addressed to him at his residence or
usual place of business, at least three days before the day on which such
meeting is to be held.
Section 10. Waiver of Notice of Special Meetings. Notice of
any special meeting need not be given to any director who shall, either before
or after the meeting, sign a written Waiver of notice which is filed with the
records of the meeting or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 11. Quorum and Voting. One-third, but not fewer than
three members, of the members of the entire Board shall be present in person at
any meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting, and except as otherwise expressly required by statute,
the Charter, these By-Laws, the 1940 Act or other applicable statute, the act of
a majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board; provided, however, that the approval of any
contract with an investment adviser or principal underwriter, as such terms are
-6-
<PAGE>
defined in the 1940 Act, which the Corporation enters into or any renewal or
amendment thereof, the approval of the fidelity bond required by the 1940 Act,
and the selection of the Corporation's independent public accountants shall each
require the affirmative vote of a majority of the directors who are not
interested persons, as defined in the 1940 Act, of the Corporation. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present thereat may adjourn the meeting from time to time, but not for a period
greater than thirty (30) days at any one time, to another time and place until a
quorum shall attend. Notice of the time and place of any adjourned meeting shall
be given to the directors who were not present at the time of the adjournment
and, unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 12. Chairman. The Board of Directors may at any time
appoint one of its members as Chairman of the Board who shall serve at the
pleasure of the Board and who shall perform and execute such duties and powers
as may be conferred upon or assigned to him by the Board or these By-Laws, but
who shall not by reason of performing and executing these duties and powers be
deemed an officer or employee of the Corporation.
Section 13. Organization. At every meeting of the Board of
Directors, the Chairman of the Board, if one has been selected and is present,
shall preside. In the absence or inability of the Chairman of the Board to
preside at a meeting, the President, or, in his absence or inability to act,
another director chosen by a majority of the directors present, shall act as
chairman of the meeting and preside at it. The Secretary (or, in his absence or
inability to act, any person appointed by the Chairman) shall act as secretary
of the meeting and keep the minutes thereof.
Section 14. Written Consent of Directors in Lieu of a Meeting.
Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
Section 15. Meeting by Conference Telephone. Members of the
Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time.
-7-
<PAGE>
Section 16. Compensation. Any director, whether or not he is a
salaried officer, employee or agent of the Corporation, may be compensated for
his services as director or as a member of a committee, or as Chairman of the
Board or chairman of a committee, and in addition may be reimbursed for
transportation and other expenses, all in such manner and amounts as the
directors may from time to time determine.
Section 17. Investment Policies. It shall be the duty of the
Board of Directors to ensure that the purchase, sale, retention and disposal of
portfolio securities and the other investment practices of the Corporation are
at all times consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corporation, as recited
in the current Prospectus of the Corporation filed from time to time with the
Securities and Exchange Commission and as required by the 1940 Act. The Board,
however, may delegate the duty of management of the assets and the
administration of its day-to-day operations to an individual or corporate
management company or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors or the stockholders of
the Corporation in accordance with the provisions of the 1940 Act.
ARTICLE IV
Committees
Section 1. Committees of the Board. The Board may, by
resolution adopted by a majority of the entire Board, designate an Executive
Committee, Compensation Committee, Audit Committee and Nomination Committee,
each of which shall consist of two or more of the directors of the Corporation,
which committee shall have and may exercise all the powers and authority of the
Board with respect to all matters other than as set forth in Section 3 of this
Article.
Section 2. Other Committees of the Board. The Board of
Directors may from time to time, by resolution adopted by a majority of the
whole Board, designate one or more other committees of the Board, each such
committee to consist of two or more directors and to have such powers and duties
as the Board of Directors may, by resolution, prescribe.
Section 3. Limitation of Committee Powers. No
committee of the Board shall have power or authority to:
-8-
<PAGE>
(a) recommend to stockholders any action
requiring authorization of stockholders pursuant to statute or
the Charter;
(b) approve or terminate any contract with an
investment adviser or principal underwriter, as such terms are defined in the
1940 Act, or take any other action required to be taken by the Board of
Directors by the 1940 Act;
(c) amend or repeal these By-Laws or adopt new
By-Laws;
(d) declare dividends or other distributions or
issue capital stock of the Corporation; and
(e) approve any merger or share exchange which
does not require stockholder approval.
Section 4. General. One-third, but not less than two members,
of the members of any committee shall be present in person at any meeting of
such committee in order to constitute a quorum for the transaction of business
at such meeting, and the act of a majority present shall be the act of such
committee. The Board may designate a chairman of any committee and such chairman
or any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence of disqualification of
any member or any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. The Board
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members, to replace any absent or
disqualified member, or to dissolve any such committee.
All committees shall keep written minutes of their proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect
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or appoint one or more Vice Presidents and may also appoint such other officers,
agents and employees as it may deem necessary or proper. Any two or more offices
may be held by the same person, except the offices of President and Vice
President, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity. The Board may from time to time elect or appoint, or
delegate to the President the power to appoint, such other officers (including
one or more Assistant Vice Presidents, one or more Assistant Treasurers and one
or more Assistant Secretaries) and such agents, as may be necessary or desirable
for the business of the Corporation. Such other officers and agents shall have
such duties and shall hold their offices for such terms as may be prescribed by
the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may
resign at any time by giving written notice of his resignation to the Board, the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer,
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate such power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer, agent or
employee of the Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising
from death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any committee or to any officer in respect of other officers under
his control. No officer shall be precluded from receiving such compensation by
reason of the fact that he is also a director of the Corporation.
Section 6. Bonds or other Security. If required by the Board,
any officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
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Section 7. President. The President shall be the chief
executive officer of the Corporation. In the absence of the Chairman of the
Board (or if there be none), he shall preside at all meetings of the
stockholders and of the Board of Directors. He shall have, subject to the
control of the Board of Directors, general charge of the business and affairs of
the Corporation. He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he may delegate
these powers.
Section 8. The Vice Presidents. In the absence or disability
of the President, or when so directed by the President, any Vice President
designated by the Board of Directors may perform any or all of the duties of the
President, and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the President; provided, however, that no Vice
President shall act as a member of or as chairman of any committee of which the
President is a member or chairman by designation of ex officio, except when
designated by the Board. Each Vice President shall perform such other duties as
from time to time may be conferred upon or assigned to him by the Board or the
President.
Section 9. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be
responsible for, all the funds and securities of the Corporation, except those
which the Corporation has placed in the custody of a bank or trust company or
member of a national securities exchange (as that term is defined in the
Securities Exchange Act of 1934) pursuant to a written agreement designating
such bank or trust company or member of a national securities exchange as
custodian of the property of the Corporation;
(b) keep full and accurate accounts of receipts
and disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due
and payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and
supervise the investment of its funds as ordered or authorized by
the Board, taking proper vouchers therefor; and
(f) in general, perform all the duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to him by the Board or the President.
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<PAGE>
Section 10. Assistant Treasurers. In the absence or disability
of the Treasurer, or when so directed by the Treasurer, any Assistant Treasurer
may perform any or all of the duties of the Treasurer, and, when so acting,
shall have all the powers of, and be subject to all the restrictions upon, the
Treasurer. Each Assistant Treasurer shall perform all such other duties as from
time to time may be conferred upon or assigned to him by the Board of Directors,
the President or the Treasurer.
Section 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more
books provided for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;
(b) see that all notices are duly given in
accordance with the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of
the Corporation and affix and attest the seal to all stock certificates of the
Corporation (unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all other
documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements,
certificates and other documents and records required by law to
be kept and filed are properly kept and filed; and
(e) in general, perform all the duties incident
to the office of Secretary and such other duties as from time to time may be
assigned to him by the Board or the President.
Section 12. Assistant Secretaries. In the absence or
disability of the Secretary, or when so directed by the Secretary, any Assistant
Secretary may perform any or all of the duties of the Secretary, and, when so
acting, shall have all the powers of, and be subject to all restrictions upon,
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be conferred upon or assigned to him by the Board of Directors,
the President or the Secretary.
Section 13. Delegation of Duties. In case of the absence of
any officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or any
of them, of such officer upon any other officer or upon any director.
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<PAGE>
ARTICLE VI
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing the
number of shares of stock of the Corporation owned by him, provided, however,
that certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by the President, a
Vice President, or the Chairman of the Board, and countersigned by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed
with the seal of the Corporation. Any or all of the signatures or the seal on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 2. Rights of Inspection. There shall be kept at the
principal executive office, which shall be available for inspection during usual
business hours in accordance with the General Laws of the State of Maryland, the
following corporate documents: (a) By-Laws, (b) minutes of proceedings of the
stockholders, (c) annual statements of affairs, and (d) voting trust agreements,
if any. One or more persons who together are and for at least six months have
been stockholders of record of at least five percent of the outstanding stock of
any class may inspect and copy during usual business hours the Corporation's
books of account and stock ledger in accordance with the General Laws of the
State of Maryland.
Section 3. Transfer of Shares. Transfers of shares of stock of
the Corporation shall be made on the stock records of the Corporation at the
direction of the person named on the Corporation's books or named in the
certificate or certificates for such shares (if issued) only by the registered
holder thereof, or by his attorney authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates, if issued, for such shares
properly endorsed or accompanied by a duly executed stock transfer power and the
payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such owner,
and the Corporation shall not be bound to recognize any equitable or legal claim
to or interest in any such share or shares on the part of any other person.
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<PAGE>
Section 4. Transfer Agents and Registrars. The Corporation may
have one or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent, if
the Corporation shall have a Transfer Agent or until registered by a Registrar,
if the Corporation shall have a Registrar. The duties of Transfer Agent and
Registrar may be combined.
Section 5. Record Date and Closing of Transfer Books. The
Board of Directors may set a record date for the purpose of making any proper
determination with respect to stockholders, including which stockholders are
entitled to notice of a meeting, vote at a meeting (or any adjournment thereof),
receive a dividend, or be allotted or exercise other rights. The record date may
not be more than ninety (90) days before the date on which the action requiring
the determination will be taken; and, in the case of a meeting of stockholders,
the record date shall be at least ten (10) days before the date of the meeting.
The Board of Directors shall not close the books of the Corporation against
transfers of shares during the whole or any part of such period.
Section 6. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
Section 7. Lost Stolen, Destroyed or Mutilated Certificates.
The holder of any certificate representing shares of stock of the Corporation
shall immediately notify the Corporation of any loss, theft, destruction or
mutilation of such certificate, and the Corporation may issue a new certificate
of stock in the place of any certificate theretofore issued by it which the
owner thereof shall allege to have been lost, stolen or destroyed or which shall
have been mutilated, and the Board may, in its discretion, require such owner or
his legal representatives to give to the Corporation a bond in such sum, limited
or unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 8. Stock Ledgers. The Corporation shall not be
required to keep original or duplicate stock ledgers at its principal office in
the City of Baltimore, Maryland, but stock ledgers shall be kept at the
respective offices of the Transfer Agents of the Corporation's capital stock.
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<PAGE>
ARTICLE VII
Seal
The Board of Directors shall provide a suitable seal, bearing
the name of the Corporation, which shall be in the charge of the secretary. The
Board of Directors may authorize one or more duplicate seals and provide for the
custody thereof. If the corporation is required to place its corporate seal on a
document, it is sufficient to meet any requirement of any law, rule, or
regulation relating to a corporate seal to place the word "Seal" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
ARTICLE VIII
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of
the Corporation shall end on the last day of December in each year.
ARTICLE IX
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation
shall be deposited with such banks or other depositories as the Board of
Directors of the Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments
shall be deposited in the safekeeping of such banks or other companies as the
Board of Directors of the Corporation may from time to time determine. Every
arrangement entered into with any bank or other company for the safekeeping of
the securities and investments of the Corporation shall contain provisions
complying with the 1940 Act, and the general rules and regulations thereunder.
ARTICLE X
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc:. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Money market
instruments, bonds or other securities at any time owned by the Corporation may
be held on behalf of the Corporation or sold, transferred or otherwise disposed
of subject to any limits imposed by these By-Laws, and pursuant to authorization
by the Board and, when so authorized to be held on behalf of the Corporation or
sold, transferred or otherwise disposed of, may be transferred from the name of
the Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
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<PAGE>
ARTICLE XI
Independent Public Accountants
The firm of independent public accountants which shall sign or
certify the financial statements of the Corporation which are filed with the
Securities and Exchange Commission shall be selected annually by the Board of
Directors and ratified by the Board of Directors or the stockholders in
accordance with the provisions of the 1940 Act.
ARTICLE XII
Annual Statements
The books of account of the Corporation shall be examined by
an independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed to
each stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be placed on file
at the Corporation's principal office in the State of Maryland. Each such report
shall show the assets and liabilities of the Corporation as of the close of the
annual or semi-annual period covered by the report and the securities in which
the funds of the Corporation were then invested. Such report shall also show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or semi-annual
period covered by the report and any other information required by the 1940 Act,
and shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIII
Amendments
These By-Laws or any of them may be amended, altered or
repealed at any annual meeting of the stockholders or at any special meeting of
the stockholders at which a quorum is present or represented, provided that
notice of the proposed amendment, alteration or repeal be contained in the
notice of such special meeting. These By-Laws may also be amended, altered or
repealed by the affirmative vote of a majority of the Board of Directors at any
regular or special meeting of the Board of Directors.
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<PAGE>
EX-99.B(6)(g)
FLAG INVESTORS FAMILY OF FUNDS
One South Street
Baltimore, Maryland 21202
FORM OF
SUB-DISTRIBUTION AGREEMENT
_____________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a Maryland
corporation, serves as distributor (the "Distributor") of the Flag Investors
Funds (collectively, the "Funds", individually a "Fund"). The Funds are open-end
investment companies registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Funds offer their shares ("Shares")
to the public in accordance with the terms and conditions contained in the
Prospectus of each Fund. The term "Prospectus" used herein refers to the
prospectus on file with the Securities and Exchange Commission which is part of
the registration statement of each Fund under the Securities Act of 1933 (the
"Securities Act"). In connection with the foregoing you may serve as a
participating dealer (and, therefore, accept orders for the purchase or
redemption of Shares, respond to shareholder inquiries and perform other related
functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a Participating
Dealer and as such are authorized (i) to accept orders for the purchase of
Shares and to transmit to the Funds such orders and the payment made therefore,
(ii) to accept orders for the redemption of Shares and to transmit to the Funds
such orders and all additional material, including any certificates for Shares,
as may be required to complete the redemption and (iii) to assist shareholders
with the foregoing and other matters relating to their investments in each Fund,
in each case subject to the terms and conditions set forth in the Prospectus of
each Fund. You are to review each Share purchase or redemption order submitted
through you or with your assistance for completeness and accuracy. You further
agree to undertake from time to time certain shareholder servicing activities
for customers of yours who have purchased Shares and who use your facilities to
communicate with the Funds or to effect redemptions or additional purchases of
Shares.
<PAGE>
2. Limitation of Authority. No person is authorized to make any
representations concerning the Funds or the Shares except those contained in the
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you will look
solely to the Distributor, and you acknowledge that the Funds shall have no
direct responsibility for any compensation. In addition to any sales charge
payable to you by your customer pursuant to a Prospectus, the Distributor will
pay you no less often than annually a shareholder processing and service fee (as
we may determine from time to time in writing) computed as a percentage of the
average daily net assets maintained with each Fund during the preceding period
by shareholders who purchase their shares through you or with your assistance,
provided that said assets are at least $250,000 for each Fund for which you are
to be compensated, and provided that in all cases your name is transmitted with
each shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the provisions
contained in the Securities Act governing the distribution of prospectuses to
persons to whom you offer Shares. You further agree to deliver, upon our
request, copies of any amended Prospectus of the relevant Fund to purchasers
whose Shares you are holding as record owner and to deliver to such persons
copies of the annual and interim reports and proxy solicitation materials of the
Funds. We agree to furnish to you as many copies of each Prospectus, annual and
interim reports and proxy solicitation materials as you may reasonably request.
5. Qualification to Act. You represent that you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD").
Your expulsion or suspension from the NASD will automatically terminate this
Agreement on the effective date of such expulsion or suspension. You agree that
you will not offer Shares to persons in any jurisdiction in which you may not
lawfully make such offer due to the fact that you have not registered under, or
are not exempt from, the applicable registration or licensing requirements of
such jurisdiction. You agree that in performing the services under this
Agreement, you at all times will comply with the NASD's Conduct Rules,
including, without limitation, the provisions of Rule 2830. You agree that you
will not combine customer orders to reach breakpoints in commissions for any
purposes whatsoever unless authorized by the then current Prospectus in respect
of Shares of a particular class or by us in writing. You also agree that you
will place orders immediately upon their receipt and will not withhold any order
so as to profit therefrom. In determining the amount payable to you hereunder,
we reserve the right to exclude any sales which we reasonably determine are not
made in accordance with the terms of the Prospectus and provisions of the
Agreement.
6. Blue Sky. The Funds have registered an indefinite number of
Shares under the Securities Act. The Funds intend to register or qualify in
certain states where
<PAGE>
registration or qualification is required. We will inform you as to the states
or other jurisdictions in which we believe the Shares have been qualified for
sale under, or are exempt from the requirements of, the respective securities
laws of such states. You agree that you will offer Shares to your customers only
in those states where such Shares have been registered, qualified, or an
exemption is available. We assume no responsibility or obligation as to your
right to sell Shares in any jurisdiction. We will file with the Department of
State in New York a State Notice and a Further State Notice with respect to the
Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full authority to
take such action as it deems advisable in respect of all matters pertaining to
the offering of its Shares, including the right not to accept any order for the
purchase of Shares.
8. Record Keeping. You will (i) maintain all records required by law to
be kept by you relating to transactions in Shares and, upon request by any Fund,
promptly make such of these records available to the Fund as the Fund may
reasonably request in connection with its operations and (ii) promptly notify
the Fund if you experience any difficulty in maintaining the records described
in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability to you except
for lack of good faith and for obligations expressly assumed by it hereunder. In
carrying out your obligations, you agree to act in good faith and without
negligence. Nothing contained in this Agreement is intended to operate as a
waiver by the Distributor or you of compliance with any provision of the
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by either party,
without penalty, upon ten days' notice to the other party and shall
automatically terminate in the event of its assignment (as defined in the
Investment Company Act). This Agreement may also be terminated at any time for
any particular Fund without penalty by the vote of a majority of the members of
the Board of Directors or Trustees of such Fund who are not "interested persons"
(as defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Distribution Agreement between such
Fund and the Distributor or by the vote of a majority of the outstanding voting
securities of the Fund.
11. Communications. All communications to us should be sent to the
above address. Any notice to you shall be duly given if mailed or telegraphed to
you at the address specified by you below.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
------------------------------------------
(Authorized Signature)
Confirmed and accepted:
Firm Name: ________________________
By: _______________________________
Address: __________________________
Date:______________________________
<PAGE>
EX-99.B(11)
INDEPENDENT AUDITORS' CONSENT
Total Return U.S. Treasury Fund, Inc.
We consent to the use in Post-Effective Amendment No. 15 to the Registration
Statement No. 33-12179 of Total Return U.S. Treasury Fund, Inc. of our report
dated November 22, 1996, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the reference to our firm
under the caption "Financial Highlights" appearing in the Prospectuses, which
also are a part of such Registration Statement.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Parsippany, NJ
February 24, 1997
<PAGE>
EX-99.B(18)(b)
Total Return U.S. Treasury Fund, Inc.
Rule 18f-3 Multiple Class Plan
for
Flag Investors Class A, Flag Investors Class B and ISI Class
Adopted December 13, 1995
I. Introduction.
A. Authority. This Rule 18f-3 Multiple Class Plan (the "Plan") has been
adopted by the Board of Directors (the "Board") of Total Return U.S. Treasury
Fund, Inc. (the "Fund"), including a majority of the Directors of the Fund who
are not "interested persons" of the Fund (the "Independent Directors") pursuant
to Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940
Act"),
B. History. The Fund is entitled to rely on an exemptive order dated
December 30, 1994, which amended and supplemented prior multi-class exemptive
orders dated August 27, 1985 and February 27, 1987, respectively, (Inv. Co. Act
Releases Nos. IC-20813, IC-14695 and IC-15592, respectively) (collectively, the
"Order"). On December 13, 1995, the Fund elected to rely on Rule 18f-3 rather
than the Order, as permitted by Rule 18f-3 subject to certain conditions, and
created a multiple class distribution arrangement for three classes of shares of
the common stock of the Fund's one existing series (the "Series"). The multiple
class distribution arrangement will be effective on the date of effectiveness of
the post-effective amendment to the Fund's registration statement that
incorporates the arrangement. The multi-class distribution arrangement will
apply to all existing (Flag Investors Class A Shares, Flag Investors Class B
Shares and ISI Shares) and future classes of Fund shares. The Flag Investors
Class A Shares and the ISI Shares have been offered since the Fund's inception
on August 10, 1988. The Flag Investors Class B Shares have not yet been offered.
(A fourth class of the Fund's shares (the Flag Investors Class D Shares) are no
longer being offered.)
C. Adoption of Plan; Amendment of Plan; and Periodic Review. Pursuant
to Rule 18f-3, the Fund is required to create a written plan specifying all of
the differences among the Fund's classes, including shareholder services,
distribution arrangements, expense allocations, and any related conversion
features or exchange options. The Board has created the Plan to meet this
requirement. The Board, including a majority of the Independent Directors, must
periodically review the Plan for its continued appropriateness, and must approve
any material amendment of the Plan as it relates to any class of any Series
covered by the Plan. This Plan must be amended to properly describe (through
additional exhibits hereto or otherwise) each additional class of shares
approved by the Fund's Board of Directors after the date hereof. Before any
material amendment of the Plan, the Fund is required to obtain a finding by a
majority of the Board, and a majority of
<PAGE>
the Independent Directors, that the Plan as proposed to be amended, including
the expense allocations, is in the best interests of each class individually and
the Fund as a whole.
II. Attributes of Share Classes
A. The rights of each existing class of the Fund are not being changed
hereby, and the rights, obligations and features of each of the classes of the
Fund shall be as set forth in the Fund's Articles of Incorporation and Bylaws,
as each such document is amended or restated to date, the resolutions that are
adopted with respect to the classes of the Fund and that are adopted pursuant to
the Plan to date, and related materials of the Board, as set forth in Exhibit A
hereto.
B. With respect to any class of shares of a Series, the following
requirements shall apply. Each share of a particular Series shall represent an
equal pro rata interest in the Series and shall have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that (i) each
class shall have a different class designation (e.g., Class A, Class B, Class C,
etc.); (ii) each class of shares shall separately bear any distribution expenses
in connection with the plan adopted pursuant to Rule 12b-1 under the 1940 Act (a
"Rule 12b-1 Plan"), if any, for such class (and any other costs relating to
obtaining shareholder approval of the Rule 12b-1 Plan for such class, or an
amendment of such plan) and shall separately bear any expenses associated with
any non-Rule 12b-1 Plan service payments ("service fees") that are made under
any servicing agreement, if any, entered into with respect to that class; (iii)
holders of the shares of the class shall have exclusive voting rights regarding
the Rule 12b-1 Plan relating to such class (e.g., the adoption, amendment or
termination of a Rule 12b-1 Plan), regarding the servicing agreements relating
to such class and regarding any matter submitted to shareholders in which the
interests of that class differ from the interests of any other class; (iv) each
new class of shares may bear, to the extent consistent with rulings and other
published statements of position by the Internal Revenue Service, the expenses
of the Fund's operation that are directly attributable to such class ("Class
Expenses")(1); and (v) each class may have conversion features unique to such
class, permitting conversion of shares of such class to shares of another class,
subject to the requirements set forth in Rule 18f-3.
- --------
(1) Class Expenses are limited to any or all of the following: (i) transfer
agent fees identified as being attributable to a specific class of shares, (ii)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class, (iii) Blue Sky
registration fees incurred by a class of shares, (iv) SEC registration fees
incurred by a class of shares, (v) expenses of administrative personnel and
services as required to support the shareholders of a specific class, (vi)
directors' fees or expenses incurred as a result of issues relating solely to a
class of shares, (vii) account expenses relating solely to a class of shares,
(viii) auditors' fees, litigation expenses, and legal fees and expenses relating
solely to a class of shares, and (ix) expenses incurred in connection with
shareholder meetings as a result of issues relating solely to a class of shares.
<PAGE>
III. Expense Allocations
Expenses of each class created after the date hereof must be
allocated as follows: (i) distribution and shareholder servicing payments
associated with any Rule 12b-1 Plan or servicing agreement, if any, relating to
each respective class of shares (including any costs relating to implementing
such plans or any amendment thereto) will be borne exclusively by that class;
(ii) any incremental transfer agency fees relating to a particular class will be
borne exclusively by that class; and (iii) Class Expenses relating to a
particular class will be borne exclusively by that class.
The methodology and procedures for calculating the net asset
value and dividends and distributions of the various classes of shares of the
Fund and the proper allocation of income and expenses among the various classes
of shares of the Fund are required to comply with the Fund's internal control
structure pursuant to applicable auditing standards, including Statement on
Auditing Standards No. 55, and to be reviewed as part of the independent
accountants' review of such internal control structure. The independent
accountants' report on the Fund's system of internal controls required by Form
N-SAR, Item 77B, is not required to refer expressly to the procedures for
calculating the classes' net asset values.
<PAGE>
Approved: June 1988
Resolutions of Board Creating
Flag Investors Class of Shares and
ISI Class of Shares (formerly known as C.J. Lawrence Class of Shares)
RESOLVED, that the Fund establish the Flag Investors Class of its
shares and that the shares of such class represent undivided interests in the
net assets of the Fund.
FURTHER RESOLVED, that the Fund establish the C. J. Lawrence Class of
its shares and that the shares of such class represent undivided interests in
the net assets of the Fund.
RESOLVED, that the proposed Distribution Agreement, in substantially
the form presented to this meeting, between the Fund and Alex. Brown & Sons
Incorporated for distribution of the Fund's Flag Investors Class of Shares be,
and the same hereby is, approved, and that the appropriate officers of the Fund
be, and they hereby are, authorized and directed to enter into and execute the
Flag Investors Class Distribution Agreement with such modifications as the
officers executing the Flag Investors Class Distribution Agreement shall deem
appropriate or as may be required to conform with the requirements of any
applicable statute, regulation or regulatory body;
FURTHER RESOLVED, that the proposed Distribution Agreement, in
substantially the form presented to this meeting, among the Fund, Alex. Brown &
Sons Incorporated and C. J. Lawrence, Morgan Grenfell Inc. for distribution of
the Fund's C. J. Lawrence Class of Shares be, and the same hereby is, approved,
and that the appropriate officers be, and they hereby are, authorized and
directed to enter into and execute the C. J. Lawrence Distribution Agreement
with such modifications as the officers executing the C. J. Lawrence Class
Distribution Agreement shall deem appropriate or as may be required to conform
with requirements of any applicable statute, regulation or regulatory body;
FURTHER RESOLVED, that the proposed Plans of Distribution (the "Plans")
are determined to be reasonably likely to benefit the Fund and its shareholders;
FURTHER RESOLVED, that the Plans be, and the same hereby are, approved.
Approved: November 4, 1992
Resolutions of Board Renaming Flag Investors Class of Shares
WHEREAS, the Board of Directors of Total Return U.S. Treasury Fund,
Inc. has previously designated two classes of the Fund's shares: Flag Investors
Total Return U.S. Treasury Fund Shares and ISI Total Return U.S. Treasury Fund
Shares;
NOW THEREFORE BE IT RESOLVED, that Flag Investors Total Return U.S.
Treasury Fund Shares be, and they hereby are, further classified and designated
as "Flag Investors Class A Shares";
Approved: September 22, 1994
Resolutions of Board Creating Flag Investors Class B Shares
<PAGE>
FURTHER RESOLVED, that an additional class of shares of Total Return
U.S. Treasury Fund, Inc. (the "Fund") be, and hereby is, classified and
designated as the "Flag Investors Class B Shares" (the "Class B Shares") and
that unissued shares of common stock, par value $.001 per share of the Fund be,
and the same hereby are, reclassified as follows:
<TABLE>
<CAPTION>
==========================================================================================================================
Total # Shares Class A Class B Class D ISI Unclassified
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100,000,000 44,000,000 5,000,000 500,000 44,000,000 6,500,000
==========================================================================================================================
</TABLE>
FURTHER RESOLVED, that the proper officers of each of the foregoing
Funds be, and each of them hereby is, authorized and directed to file articles
supplementary to the relevant Fund's Articles of Incorporation and to take such
other action as may be necessary to designate and reclassify shares in the
foregoing manner.
RESOLVED, that the Distribution Agreement between the Fund Inc. and
Alex. Brown & Sons Incorporated for the Class B Shares be, and the same hereby
is, approved;
FURTHER RESOLVED, that at such time as the Fund offers the Class B
Shares, the Plan of Distribution presented at this meeting shall govern the
payment of 12b-1 fees by that class;
FURTHER RESOLVED, that the Plan of Distribution for the Class B Shares
of the Fund is determined to be reasonably likely to benefit the Fund and its
shareholders; and that based on information reasonably available to the
Directors, expenditures contemplated by such Plan are comparable to expenditures
for similar plans;
FURTHER RESOLVED, that said Plan be, and the same hereby is, approved.
<PAGE>
Approved: September 22, 1992
Resolution of Board Approving
New Distribution Agreement
With Armata Financial Corp.
RESOLVED, that the proposed Distribution Agreement, in substantially
the form presented to this meeting, between the Fund and Armata Financial Corp.,
for distribution of the Fund's C.J. Lawrence Class of Shares be, and the same
hereby is, approved and that the appropriate officers be, and they hereby are,
authorized and directed to enter into and execute the C.J. Lawrence Class
Distribution Agreement with such modifications as the officers executing the
C.J. Lawrence Class Distribution Agreement shall deem appropriate or as may be
required to conform with the requirements of any applicable statute, regulation
or regulatory body.
<PAGE>
Total Return U.S. Treasury Fund, Inc.
18f-3 Plan Exhibits
1. Registrant's Articles of Incorporation filed as Exhibit (1)(a) to
Post-Effective Amendment 13 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-12179), filed with the Securities and Exchange Commission
via EDGAR (Accession No.0000950116-96-000097) on February 26, 1996 is herein
incorporated by reference..
2. Registrant's Articles Supplementary to Articles of Incorporation filed as
Exhibit (1)(b) to Post-Effective Amendment 13 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-12179), filed with the Securities
and Exchange Commission via EDGAR (Accession No.0000950116-96-000097) on
February 26, 1996 is herein incorporated by reference.
3. Registrant's By-Laws are filed as Exhibit (2) to this Registration Statement
on Form N-1A (Registration No. 33-12179) and are herein incorporated by
reference.
4. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors Total Return U.S. Treasury Fund
Class A Shares filed as Exhibit (6)(a) to Post-Effective Amendment 13 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-12179),
filed with the Securities and Exchange Commission via EDGAR (Accession
No.0000950116-96-000097) on February 26, 1996 is herein incorporated by
reference.
5. Registrant's Distribution Plan with respect to Flag Investors Total Return
U.S. Treasury Fund Class A Shares filed as Exhibit (15)(a) to Post-Effective
Amendment 13 to Registrant's Registration Statement on Form N-1A (Registration
No. 33-12179), filed with the Securities and Exchange Commission via EDGAR
(Accession No.0000950116-96-000097) on February 26, 1996 is herein incorporated
by reference.
6. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Flag Investors Total Return U.S. Treasury Fund
Class B Shares filed as Exhibit (6)(f) to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-12179),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000163) on March 26, 1996 is herein incorporated by reference.
7. Registrant's Distribution Plan with respect to Flag Investors Total Return
U.S. Treasury Fund Class B Shares filed as Exhibit (15)(c) to Post-Effective
Amendment No. 14 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-12179), filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-96-000163) on March 26, 1996 is herein
incorporated by reference.
8. Registrant's Distribution Agreement between Registrant and Armata Financial
Corp. with respect to ISI Total Return U.S. Treasury Fund Shares filed as
Exhibit (6)(d) to Post-Effective Amendment 13 to Registrant's Registration
Statement on Form N-1A
<PAGE>
(Registration No. 33-12179), filed with the Securities and Exchange Commission
via EDGAR (Accession No.0000950116-96-000097) on February 26, 1996 is herein
incorporated by reference.
9. Registrant's Distribution Plan with respect to ISI Total Return U.S. Treasury
Fund Shares filed as Exhibit (15)(b) to Post-Effective Amendment 13 to
Registrant's Registration Statement on Form N-1A (Registration No. 33-12179),
filed with the Securities and Exchange Commission via EDGAR (Accession
No.0000950116-96-000097) on February 26, 1996 is herein incorporated by
reference.
10. Registrant's Form of Sub-Distribution Agreement between Alex. Brown & Sons
Incorporated and Participating Dealers is filed as Exhibit (6)(g) to this
Registration Statement on Form N-1A (Registration No.33-12179) and is herein
incorporated by reference.
11. Registrant's Prospectus with respect to Flag Investors Total Return U.S.
Treasury Fund Class A and Class B Shares is filed as part of this Registration
Statement on Form N-1A (Registration No. 33-12179) and, as amended from time to
time, is herein incorporated by reference.
12. Registrant's Prospectus with respect to ISI Total Return U.S. Treasury Fund
Shares is filed as part of this Registration Statement on Form N-1A
(Registration No. 33-12179) and, as amended from time to time, is herein
incorporated by reference.
<PAGE>
EX-99.B(24)
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, James J. Cunnane, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ James J. Cunnane
------------------------
James J. Cunnane
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Joseph A. Finelli, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as Chief Financial and
Accounting Officer of the Fund such Registration Statement and any and all such
pre- and post-effective amendments filed with the Securities and Exchange
Commission under the 1933 Act and the 1940 Act, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorney-in-fact and agent, or either of them or their substitute
or substitutes, shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Joseph A. Finelli
--------------------------
Joseph A. Finelli
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Richard T. Hale, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Richard T. Hale
--------------------------
Richard T. Hale
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Edward S. Hyman, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as Chairman and a director of
the Fund such Registration Statement and any and all such pre- and
post-effective amendments filed with the Securities and Exchange Commission
under the 1933 Act and the 1940 Act, and any other instruments or documents
related thereto, and the undersigned does hereby ratify and confirm all that
said attorney-in-fact and agent, or either of them or their substitute or
substitutes, shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Edward S. Hyman
-------------------------
Edward S. Hyman
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, John F. Kroeger, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ John F. Kroeger
--------------------------
John F. Kroeger
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Louis E. Levy, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Louis E. Levy
-------------------------
Louis E. Levy
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Eugene J. McDonald, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Eugene J. McDonald
--------------------------
Eugene J. McDonald
Date: December 18, 1996
-------------------
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, R. Alan Medaugh, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Total Return U.S. Treasury Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as President of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ R. Alan Medaugh
-------------------------
R. Alan Medaugh
Date: December 18, 1996
-------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811160
<NAME> TRUST FLAG A CLASS
<SERIES>
<NUMBER> 01
<NAME> TRUST FLAG A CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 342,245,566
<INVESTMENTS-AT-VALUE> 332,195,995
<RECEIVABLES> 8,081,178
<ASSETS-OTHER> 543,521
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 340,820,694
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,420,387
<TOTAL-LIABILITIES> 3,420,387
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 146,851,212
<SHARES-COMMON-STOCK> 14,628,079
<SHARES-COMMON-PRIOR> 16,119,600
<ACCUMULATED-NII-CURRENT> (5,949,791)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,664,461
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10,049,571)
<NET-ASSETS> 337,400,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,809,288
<OTHER-INCOME> 0
<EXPENSES-NET> 2,845,246
<NET-INVESTMENT-INCOME> 19,964,042
<REALIZED-GAINS-CURRENT> 3,072,425
<APPREC-INCREASE-CURRENT> (11,517,095)
<NET-CHANGE-FROM-OPS> 11,519,372
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 24,570,427
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,996,345
<NUMBER-OF-SHARES-REDEEMED> 29,396,253
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811160
<NAME> TRUST FLAG B CLASS
<SERIES>
<NUMBER> 02
<NAME> TRUST FLAG B CLASS
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<PAGE>
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<CIK> 0000811160
<NAME> TRUST ISI CLASS
<SERIES>
<NUMBER> 03
<NAME> TRUST ISI CLASS
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