[LOGO]
FLAG INVESTORS
FLAG
INVESTORS
TOTAL
RETURN
U.S. TREASURY
FUND
SHARES
SEMI-ANNUAL REPORT
APRIL 30, 1997
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
(bullet) As our research began to indicate that economic growth was building,
we increased the portfolio's short-term investments from 2.8% to
22.3% of the portfolio from late October to early April.
(bullet) Evidence of slower second quarter growth continues to mount, and we
believe that another increase in short-term rates lies ahead.
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to report on the progress of your Fund for the period ended
April 30, 1997. As of this date, the Fund's Class A Shares recorded a 6-month
total return of 0.2% and a 12-month total return of 5.9%. Since its inception on
August 10, 1988, the Fund's Class A Shares have produced a cumulative total
return of 98.9%, which translates into an average annual total return of 8.2%.
These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge.
Overview
Over the past six months, economic growth has been strong, registering a
4.7% annualized rate. The bond market and Federal Reserve both reacted to the
fast growth by raising interest rates. Please see the graph below for the market
reaction. The Federal Reserve raised the Federal Funds rate by 25 basis points
(0.25%) and seems likely to move rates up again to ensure a slowdown in growth.
Recently, ISI's Company Surveys have detected a slowing in the economy. Please
see our Economic Outlook that follows this letter for more details.
U.S. Treasury Historical Yield Curves
[Graph appears here--see plot points below]
4/30/97 10/31/96
------- --------
3 MONTH 5.238 5.144
6 MONTH 5.522 5.264
1 YEAR 5.887 5.404
2 YEAR 6.274 5.732
3 YEAR 6.398 5.860
5 YEAR 6.565 6.070
10 YEAR 6.709 6.341
30 YEAR 6.954 6.641
Source: Bloomberg Inc.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
Portfolio
As our research began to indicate that economic growth was building,
we increased the portfolio's short-term investments. At the end of October,
short-term reserves were a low 2.8% of the portfolio, but by early April
they had increased to 22.3% of the portfolio. Since early April, ISI's
Company Surveys have indicated the economy is cooling off. As a result, we
have redeployed reserves in longer maturities. Please see the table below.
Short-Term Holdings
% of Portfolio
------------------------------------------------
Maturity October 31, 1996 April 9, 1997 May 8, 1997
- --------------------------------------------------------------------------------
Less than 1 year 2.8% 22.3% 13.2%
................................................................................
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- -------------------
R. Alan Medaugh
President
May 19, 1997
2
<PAGE>
ECONOMIC OUTLOOK
- --------------------------------------------------------------------------------
Overview
Evidence of slower second quarter growth continues to mount, highlighted
recently by declining auto sales, sluggish department store sales in April and
high initial unemployment claims. The March surge in wholesale inventories
suggests that rising first quarter nonfarm inventories will pull down growth in
the second half of 1997 as excess inventories decline. We lean toward the view
that another 25 basis point (0.25%) increase in short-term rates lies ahead. We
see it as an insurance policy against a tight labor market and high capacity
utilization sparking a return of inflation. Early in 1998 we expect the Fed will
be able to reverse the increase. Please see our forecast table below.
ISI Forecast
96:4Q 97:1Q 97:2Q* 97:3Q* 97:4Q* 98:1Q*
- --------------------------------------------------------------------------------
Real GDP 3.8% 5.6% 2.5% 2.0% 1.5% 1.5%
................................................................................
GDP Deflator** 1.5% 2.2% 1.5% 1.5% 1.5% 1.5%
................................................................................
30-Year Bond Yields*** 6.6% 7.1% 6.7% 6.5% 6.5% 6.2%
................................................................................
Fed Funds Rate*** 5.2% 5.5% 5.7% 5.7% 5.7% 5.5%
................................................................................
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
Inflation
The Greenspan Federal Reserve has presided over an economy producing strong
job formation but little inflation. The inflation performance has been a happy
surprise for bond investors. So far, strong growth has not produced price
increases; for example, among manufacturing companies, the strong growth has not
given them pricing power. Please see the chart on page 4 that shows ISI's
Manufacturing Company Pricing Power Index.
3
<PAGE>
ECONOMIC OUTLOOK (CONTINUED)
- --------------------------------------------------------------------------------
ISI MANUFACTURING COMPANIES PRICING POWER SURVEY
0=WEAK 100=STRONG MAY 9: 24.7
[Graph appears here--see plot points below]
1/7/94 20.8
1/14/94 20.8
1/21/94 20.8
1/28/94 21.4
2/4/94 21.4
2/11/94 16.7
2/18/94 16.7
2/25/94 16.7
3/4/94 25.0
3/11/94 25.0
3/18/94 24.1
3/25/94 24.1
4/1/94 24.1
4/8/94 20.8
4/15/94 20.8
4/22/94 20.8
4/29/94 23.6
5/6/94 23.6
5/13/94 23.6
5/20/94 27.8
5/27/94 27.8
6/3/94 32.5
6/10/94 32.5
6/17/94 33.9
6/24/94 33.9
7/1/94 33.9
7/8/94 35.3
7/15/94 35.3
7/22/94 35.3
7/29/94 35.3
8/5/94 33.9
8/12/94 33.9
8/19/94 33.9
8/26/94 43.6
9/2/94 43.6
9/9/94 45.8
9/16/94 45.8
9/23/94 52.8
9/30/94 52.8
10/7/94 52.8
10/14/94 52.8
10/21/94 54.4
10/28/94 54.4
11/4/94 56.9
11/11/94 56.9
11/18/94 57.5
11/25/94 57.5
12/2/94 57.8
12/9/94 57.8
12/16/94 58.9
12/23/94 58.9
12/30/94 60.6
1/6/95 60.6
1/13/95 60.8
1/20/95 60.8
1/27/95 61.4
2/3/95 61.4
2/10/95 56.9
2/17/95 56.9
2/24/95 56.9
3/3/95 58.9
3/10/95 58.9
3/17/95 57.8
3/24/95 57.8
3/31/95 54.4
4/7/95 54.4
4/14/95 57.2
4/21/95 57.2
4/28/95 56.7
5/5/95 56.7
5/12/95 57.2
5/19/95 57.2
5/26/95 52.5
6/2/95 52.5
6/9/95 48.3
6/16/95 48.3
6/23/95 43.1
6/30/95 43.1
7/7/95 41.8
7/14/95 41.8
7/21/95 41.8
7/28/95 41.8
8/4/95 45.7
8/11/95 45.7
8/18/95 45.7
8/25/95 45.7
9/1/95 45.4
9/8/95 45.4
9/15/95 42.5
9/22/95 42.5
9/29/95 42.1
10/6/95 42.1
10/13/95 40.4
10/20/95 40.4
10/27/95 39.9
11/3/95 39.9
11/10/95 37.8
11/17/95 37.8
11/24/95 37.8
12/1/95 37.8
12/8/95 36.7
12/15/95 36.7
12/22/95 34.2
12/29/95 34.2
1/5/96 34.2
1/12/96 34.2
1/19/96 29.4
1/26/96 29.4
2/2/96 28.9
2/9/96 28.9
2/16/96 28.6
2/23/96 28.6
3/1/96 28.1
3/8/96 28.1
3/15/96 28.5
3/22/96 28.5
3/29/96 29.0
4/5/96 29.0
4/12/96 29.0
4/19/96 29.0
4/26/96 29.3
5/3/96 29.3
5/10/96 31.0
5/17/96 31.0
5/24/96 31.5
5/31/96 31.5
6/7/96 34.4
6/14/96 34.4
6/21/96 34.4
6/28/96 34.4
7/5/96 32.5
7/12/96 32.5
7/19/96 32.8
7/26/96 32.8
8/2/96 32.2
8/9/96 32.2
8/16/96 32.2
8/23/96 32.2
8/30/96 32.2
9/6/96 32.2
9/13/96 31.9
9/20/96 31.9
9/27/96 31.1
10/4/96 31.1
10/11/96 30.6
10/18/96 30.6
10/25/96 30.8
11/1/96 30.8
11/8/96 30.3
11/15/96 30.3
11/22/96 30.0
11/29/96 30.0
12/6/96 28.8
12/13/96 28.8
12/20/96 27.2
12/27/96 27.2
1/3/97 27.2
1/10/97 27.2
1/17/97 26.9
1/24/97 26.9
1/31/97 28.1
2/7/97 28.1
2/14/97 28.9
2/21/97 28.9
2/28/97 26.4
3/7/97 26.4
3/14/97 26.4
3/21/97 26.4
3/28/97 25.6
4/4/97 25.6
4/11/97 25.0
4/18/97 25.0
4/25/97 25.0
5/2/97 25.0
5/9/97 24.7
5/16/97 24.7
Source: ISI Inc.
Other leading indicators of inflation have also registered little inflation
in the pipeline today. The closely watched Employment Cost Index for the first
quarter of 1997 showed overall labor costs growing at only 2.9% year over year.
The Journal of Commerce Commodity Index, which tracks raw industrial commodity
prices, hit a two-year low in early May. The Federal Reserve "Beige Book" is a
survey-based analysis approach that covers all 12 Federal Reserve Districts. The
May release also found limited inflation for both prices and wages. If growth
slows in the upcoming quarter, the low inflation picture would prove a good
investing background for bonds.
Economic Growth
Three areas are pointing to slower growth ahead. First, interest rates for
long-term Treasuries are about 7% while 30-year mortgage rates are about 8%. The
relatively higher interest rates when contrasted to inflation have already cut
the pace of mortgage refinancing in half. Second, the slowdown pattern under
4
<PAGE>
- --------------------------------------------------------------------------------
way now in consumer installment debt growth has typically led to a significant
drop in retail sales. As a gauge of the extent consumers are using credit,
credit card chargeoffs just hit a seven-year high. Third, foreign economies
are struggling to retain modest growth. ISI tracks economic activity in 28
foreign economies. We construct a Foreign (Strength - Weakness) diffusion index.
After a runup in late 1996, foreign activity has returned to a negative reading
(please see chart below).
FOREIGN [STRENGTH - WEAKNESS]
13 Wk. Avg. May 12: -0.1
[Graph appears here--see plot points below]
26 SEP 94 3.1
3 OCT 94 3.8
10 OCT 94 4.1
17 OCT 94 4.8
24 OCT 94 6.0
31 OCT 94 5.6
7 NOV 94 4.6
14 NOV 94 5.2
21 NOV 94 5.4
28 NOV 94 5.8
5 DEC 94 6.5
12 DEC 94 7.1
19 DEC 94 6.5
26 DEC 94 6.5
2 JAN 95 8.4
9 JAN 95 7.8
16 JAN 95 7.2
23 JAN 95 6.0
30 JAN 95 5.8
6 FEB 95 6.4
13 FEB 95 5.3
20 FEB 95 5.8
27 FEB 95 6.7
6 MAR 95 7.2
13 MAR 95 6.7
20 MAR 95 7.4
27 MAR 95 7.3
3 APR 95 6.4
10 APR 95 7.4
17 APR 95 6.9
24 APR 95 6.2
1 MAY 95 6.2
8 MAY 95 5.3
15 MAY 95 5.6
22 MAY 95 5.6
29 MAY 95 4.1
5 JUN 95 2.1
12 JUN 95 1.3
19 JUN 95 0.5
26 JUN 95 1.1
3 JUL 95 0.5
10 JUL 95 0.3
17 JUL 95 0.9
24 JUL 95 0.4
31 JUL 95 -0.6
7 AUG 95 -1.2
14 AUG 95 -1.0
21 AUG 95 -2.8
28 AUG 95 -2.7
4 SEP 95 -3.1
11 SEP 95 -2.5
18 SEP 95 -2.5
25 SEP 95 -3.6
2 OCT 95 -3.8
9 OCT 95 -4.8
16 OCT 95 -5.2
23 OCT 95 -5.2
30 OCT 95 -5.4
6 NOV 95 -3.9
13 NOV 95 -4.8
20 NOV 95 -4.9
27 NOV 95 -4.8
4 DEC 95 -4.5
11 DEC 95 -4.4
18 DEC 95 -4.5
25 DEC 95 -5.0
1 JAN 96 -4.8
8 JAN 96 -4.5
15 JAN 96 -5.0
22 JAN 96 -5.8
29 JAN 96 -5.2
5 FEB 96 -5.4
12 FEB 96 -5.9
19 FEB 96 -4.5
26 FEB 96 -4.0
4 MAR 96 -3.6
11 MAR 96 -4.5
18 MAR 96 -5.4
25 MAR 96 -4.7
1 APR 96 -5.7
8 APR 96 -6.4
15 APR 96 -5.8
22 APR 96 -5.3
29 APR 96 -5.6
6 MAY 96 -5.7
13 MAY 96 -5.9
20 MAY 96 -7.2
27 MAY 96 -6.2
3 JUN 96 -6.2
10 JUN 96 -5.7
17 JUN 96 -5.5
24 JUN 96 -5.2
1 JUL 96 -5.0
8 JUL 96 -4.7
15 JUL 96 -4.0
22 JUL 96 -4.4
29 JUL 96 -5.2
5 AUG 96 -6.2
12 AUG 96 -5.7
19 AUG 96 -5.2
26 AUG 96 -5.1
2 SEP 96 -4.6
9 SEP 96 -2.8
16 SEP 96 -2.7
23 SEP 96 -2.4
30 SEP 96 -1.7
7 OCT 96 -0.5
14 OCT 96 -1.3
21 OCT 96 -0.5
28 OCT 96 0.7
4 NOV 96 2.4
11 NOV 96 2.5
18 NOV 96 3.8
25 NOV 96 5.2
2 DEC 96 6.3
9 DEC 96 5.4
16 DEC 96 6.2
23 DEC 96 5.3
30 DEC 96 5.8
6 JAN 97 5.1
13 JAN 97 4.6
20 JAN 97 4.5
27 JAN 97 4.5
3 FEB 97 4.0
10 FEB 97 4.8
17 FEB 97 4.1
24 FEB 97 1.8
3 MAR 97 1.8
10 MAR 97 1.0
17 MAR 97 2.0
24 MAR 97 3.3
31 MAR 97 2.7
7 APR 97 2.7
14 APR 97 2.6
21 APR 97 2.2
28 APR 97 1.5
5 MAY 97 0.5
12 MAY 97 -0.1
19 MAY 97 -0.7
Source: ISI Inc.
With foreign economies struggling to hold on to modest growth, U.S. exports
seem unlikely to stimulate near-term economic growth. There are factors working
to improve the U.S. economy, such as high equity prices and high consumer
confidence, but we expect the forces cited earlier will rule, producing slower
growth over the balance of 1997.
5
<PAGE>
ECONOMIC OUTLOOK (CONCLUDED)
- --------------------------------------------------------------------------------
The Impact of Smaller Budget Deficits
A decline in the federal government deficit is a powerful influence on
economic growth and inflation but it also influences the capital markets.
Smaller deficits free up capital for alternative investments. The change in
the annual net financing requirement has been very dramatic (please see table
below).
Federal Government Deficit
12-month Sum in Billions
----------------------------------
August 1992 September 1997*
- --------------------------------------------------------------------------------
Treasury Interest Paid $200 $250
................................................................................
Treasury Issuance $324 $ 70
.................................................----.................----......
Net Financing Requirement +$124 -$180
................................................................................
*Estimated.
We see low inflation and dwindling Treasury issuance as strong secular
forces able to create a declining interest rate environment. They will be active
near-term market influences when the economy is seen slowing.
6
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include the Fund's total return, according to a standardized formula, for
various time periods through the end of the most recent calendar quarter. The
SEC total return figures differ from those we reported because the time periods
may be different and because the SEC calculation includes the impact of the
currently effective 4.50% maximum sales charge for the Fund's Class A Shares and
2.00% maximum contingent deferred sales charge for the Fund's Class B Shares.
Average Annual Total Return
Periods Ended 3/31/97 1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Class A Shares -1.56% 6.16% 7.52%
................................................................................
Class B Shares -- -- 0.53%
................................................................................
*Inception dates: Class A 8/10/88, Class B 6/20/96.
The Fund's total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed. Past performance is not an indicator of future results.
7
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Statement of Net Assets April 30, 1997
(Unaudited)
Par Value
Interest Rate Maturity Date (000) (Note 1)
- -------------------------------------------------------------------------------
U.S. TREASURY BONDS - 69.1%
12.000% 8/15/13 $20,500 $ 28,568,677
11.750% 11/15/14 36,000 50,355,000
7.250% 5/15/16 14,000 14,306,250
7.500% 11/15/16 37,000 38,740,147
9.000% 11/15/18 44,750 54,259,375
8.875% 2/15/19 10,000 11,995,310
8.750% 8/15/20 7,000 8,331,092
------------
Total U.S. Treasury Bonds
(Cost $221,257,217) 206,555,851
------------
U.S. TREASURY NOTES - 5.0%
6.375% 9/30/01 15,000 14,901,570
------------
Total U.S. Treasury Notes
(Cost $15,132,382) 14,901,570
------------
ZERO COUPON U.S. TREASURY BONDS (S.T.R.I.P.S.) - 9.3%
6.057%* 11/15/98 30,000 27,768,180
------------
Total U.S. Treasury S.T.R.I.P.S.
(Cost $27,920,017) 27,768,180
------------
REPURCHASE AGREEMENTS - 20.1%
Goldman Sachs & Co., 5.25%
Dated 4/30/97, to repurchased on 5/1/97, collateralized
by U.S. Treasury Bonds with a market value of $61,101,094.
Total Repurchase Agreements
(Cost $59,903,000) 59,903 59,903,000
------------
Total Investments in Securities - 103.5%
(Cost $324,212,616)** 309,128,601
Liabilities in Excess of Other Assets, Net - (3.5)% (10,586,935)
------------
Net Assets - 100.0% $298,541,666
============
8
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Value
(Note 1)
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($124,416,951 / 13,058,799 shares outstanding) $9.53
=====
Flag Investors Class B Share
($232,552 / 24,438 shares outstanding) $9.52
=====
ISI Class Share
($173,892,163 / 18,243,236 shares outstanding) $9.53
=====
Maximum Offering Price Per:
Flag Investors Class A Share
($9.53 / .955) $9.98
=====
Flag Investors Class B Share $9.52
=====
ISI Class Share
($9.53 / .9555) $9.97
=====
- --------
** Yield as of April 30, 1997.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
9
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Statement of Operations
For the Six
Months Ended
April 30,
- --------------------------------------------------------------------------------
1997(1)
Investment Income (Note 1):
Interest $10,326,187
-----------
Expenses:
Investment advisory fee (Note 2) 435,973
Distribution fee (Note 2) 394,073
Administration fee (Note 2) 191,988
Transfer agent fee (Note 2) 102,701
Accounting fee (Note 2) 43,462
Printing and postage 31,733
Legal 24,106
Custodian fee 20,705
Directors' fees 13,112
Audit 11,901
Miscellaneous 10,587
Registration fees 10,297
Insurance 5,817
-----------
Total expenses 1,296,455
-----------
Net investment income 9,029,732
-----------
Realized and unrealized gain/(loss) on investments:
Net realized loss from security transactions (3,411,140)
Change in unrealized appreciation or depreciation
of investments (5,034,444)
-----------
Net loss on investments (8,445,584)
-----------
Net increase in net assets resulting from operations $ 584,148
===========
- --------------
(1) Unaudited.
See Notes to Financial Statements.
10
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
April 30, October 31,
- -----------------------------------------------------------------------------------
1997(1) 1996
<S> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 9,029,732 $ 19,964,042
Net gain/(loss) from security transactions (3,411,140) 3,072,425
Change in unrealized appreciation or depreciation
on investments (5,034,444) (11,517,095)
------------ ------------
Net increase in net assets
resulting from operations 584,148 11,519,372
------------ ------------
Dividends to Shareholders from:
Net investment income:
Flag Investors Class A Shares (3,789,774) (8,687,010)
Flag Investors Class B Shares (4,735) (664)
ISI Class Shares (5,235,223) (11,276,368)
Distributions in excess of net investment income:
Flag Investors Class A Shares (570,272) (561,610)
Flag Investors Class B Shares (932) (8)
ISI Class Shares (787,340) (723,712)
Net realized short-term gains:
Flag Investors Class A Shares -- (1,451,089)
Flag Investors Class B Shares -- (21)
ISI Class Shares -- (1,869,945)
------------ ------------
Total distributions (10,388,276) (24,570,427)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 10,781,941 29,511,549
Value of shares issued in
reinvestment of dividends 6,577,518 14,241,221
Cost of shares repurchased (46,413,972) (64,122,099)
------------ ------------
Decrease in net assets derived
from capital share transactions (29,054,513) (20,369,329)
------------ ------------
Total decrease in net assets (38,858,641) (33,420,384)
Net Assets:
Beginning of period 337,400,307 370,820,691
------------ ------------
End of period $298,541,666 $337,400,307
============ ============
</TABLE>
- -------------
(1) Unaudited.
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Financial Highlights--Flag Investors Class A and ISI Class Shares
(For a share outstanding throughout each period)
For the Six
Months Ended
April 30,
- --------------------------------------------------------------------------------
1997(1)
Per Share Operating Performance:
Net asset value at beginning of period $ 9.83
--------
Income from Investment Operations:
Net investment income 0.27
Net realized and unrealized gain/(loss) on investments (0.25)
--------
Total from Investment Operations 0.02
Less Distributions:
Distributions from net investment income
and short-term gains (0.27)
Distributions in excess of net investment income (0.05)
Distributions from net realized long-term gains --
--------
Total distributions (0.32)
--------
Net asset value at end of period $ 9.53
========
Total Return(3) 0.17%
Ratios to Average Daily Net Assets:
Expenses 0.82%(4)
Net investment income 5.73%(4)
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares $124,417
ISI Class Shares $173,892
Portfolio turnover rate 44%(4)
- ------------
(1) Unaudited.
(2) Distributions to shareholders include $.05 per share return of capital.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
See Notes to Financial Statements.
12
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.56 0.57 0.51 0.62 0.76
Net realized and unrealized gain/(loss) on investments (0.23) 1.04 (1.16) 1.12 0.05
-------- -------- -------- -------- --------
Total from Investment Operations 0.33 1.61 (0.65) 1.74 0.81
Less Distributions:
Distributions from net investment income
and short-term gains (0.65) (0.64) (1.20) (0.79) (0.70)
Distributions in excess of net investment income (0.04) -- -- -- --
Distributions from net realized long-term gains -- -- (0.28) (0.07) (0.05)
-------- -------- -------- -------- --------
Total distributions (0.69) (0.64) (1.48)(2) (0.86) (0.75)
-------- -------- -------- -------- --------
Net asset value at end of period $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47
======== ======== ======== ======== ========
Total Return(3) 3.44% 18.09% (6.22)% 17.33% 8.96%
Ratios to Average Daily Net Assets:
Expenses 0.81% 0.80% 0.77% 0.77% 0.77%
Net investment income 5.69% 5.94% 4.98% 5.21% 5.65%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares $143,791 $164,206 $175,149 $224,790 $250,210
ISI Class Shares $193,486 $206,615 $200,309 $232,103 $207,518
Portfolio turnover rate 199% 194% 68% 249% 191%
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Financial Highlights--Flag Investors Class B Shares
(For a share outstanding throughout each period)
For the Six For the Period
Months Ended June 20, 1996(2)
April 30, through October 31,
- --------------------------------------------------------------------------------
1997(1) 1996
Per Share Operating Performance:
Net asset value at beginning of period $ 9.85 $10.00
------ ------
Income from Investment Operations:
Net investment income 0.24 0.22
Net realized and unrealized loss
on investments (0.26) (0.15)
------ ------
Total from Investment Operations (0.02) 0.07
Less Distributions:
Distributions from net investment income
and short-term gains (0.24) (0.22)
Distributions in excess of net investment
income (0.07) --
------ ------
Total distributions (0.31) (0.22)
------ ------
Net asset value at end of period $ 9.52 $ 9.85
====== ======
Total Return(3) (0.16)% 6.37%
Ratios to Average Daily Net Assets:
Expenses 1.17%(4) 1.40%(4)
Net investment income 5.42%(4) 5.45%(4)
Supplemental Data:
Net assets at end of period (000) $ 233 $ 123
Portfolio turnover rate 44%(4) 199%(4)
- ------------
(1) Unaudited.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Total Return U.S. Treasury Fund, Inc. (the "Fund"), which was organized as
a Maryland Corporation on June 3, 1988, commenced operations August 10, 1988.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end Investment Management Company. It is designed to provide a
high level of total return with relative stability of principal as well as the
secondary objective of high current income consistent with an investment in
securities issued by the United States Treasury.
The Fund consists of three share classes: 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"), which both commenced August 10, 1988,
and Flag Investors Total Return U.S. Treasury Fund Class B Shares ("Flag
Investors Class B"), which commenced June 20, 1996.
The ISI Class Shares have a 4.45% maximum front-end sales charge, the Flag
Investors Class A Shares have a 4.50% maximum front-end sales charge and the
Flag Investors Class B Shares have a 2.00% maximum contingent deferred sales
charge. The classes each have different distribution fees.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation -- The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price
reported for the day by an independent pricing source. If there are no
sales or the security is not traded on a listed exchange, the Fund
values the security at the average of the last bid and asked prices in
the over-the-counter market. When a market quotation is unavailable,
the Investment Advisor determines a fair value using procedures that
the Board of Directors establishes and monitors. The Fund values
short-term obligations with maturities of 60 days or less at amortized
cost.
15
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
B. Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes -- The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. Security Transactions, Investment Income, Distributions and Other -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Interest
income is recorded on an accrual basis and includes the pro rata
scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated to
each class based on its respective average net assets. Class specific
expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
16
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC") is the Fund's
administrator. As compensation for its advisory services, the Fund pays ISI an
annual fee based on the Fund's average daily net assets. This fee is calculated
daily and paid monthly at the following annual rates: 0.20% of the first $100
million, 0.18% of the next $100 million, 0.16% of the next $100 million, 0.14%
of the next $200 million and 0.12% of the amount over $500 million. In addition,
the Fund pays ISI 1.5% of the Fund's gross income.
As compensation for its administrative services, the Fund pays ICC an
annual fee based on the Fund's average daily net assets. This fee is calculated
daily and paid monthly at the following annual rates: 0.10% of the first $100
million, 0.09% of the next $100 million, 0.08% of the next $100 million, 0.07%
of the next $200 million and 0.06% of the amount over $500 million. In addition,
the Fund pays ICC 0.50% of the Fund's gross income.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $43,462 for accounting services for the six months
ended April 30, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $102,701 for
transfer agent services for the six months ended April 30, 1997.
As compensation for providing distribution services for the ISI Class, the
Fund paid Armata Financial Corp., an affiliate of Alex. Brown & Sons
Incorporated ("Alex. Brown"), an annual fee that was calculated daily and paid
monthly. This fee was paid at an annual rate equal to 0.25% of the ISI Class'
average daily net assets. Beginning April 1, 1997, ISI Group Inc. assumed the
role of distributor of the ISI Class. As compensation for providing distribution
services for the Flag Investors classes, the Fund pays Alex. Brown an annual fee
that is calculated daily and paid monthly. This fee is paid at an annual rate
equal to 0.25% of the Flag Investors Class A Shares' average daily net assets
and 0.60% (including a 0.25% shareholder servicing fee) of the Flag Investors
Class B Shares' average daily net assets. For the six months ended April 30,
1997, distribution fees aggregated $394,073, of which $228,237 was attributable
to the ISI Class Shares, $165,313 was attributable to the Flag Investors Class A
Shares and $523 was attributable to the Flag Investors Class B Shares.
17
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
November 1, 1996 through April 30, 1997 was $5,629, and the accrued liability
was $51,989.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 100 million shares of $.001 par value
capital stock (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 were as follows:
<TABLE>
<CAPTION>
Flag Investors Class A Shares
----------------------------------
For the Six
Months Ended For the
April 30, 1997 Year Ended
(Unaudited) October 31, 1996
-------------- ----------------
<S> <C>
Shares sold 387,763 914,108
Shares issued to shareholders on
reinvestment of dividends 264,112 580,880
Shares redeemed (2,221,155) (2,986,509)
------------ ------------
Net decrease in shares outstanding (1,569,280) (1,491,521)
============ ============
Proceeds from sale of shares $ 3,738,575 $ 8,996,345
Value of reinvested dividends 2,574,006 5,722,783
Cost of shares redeemed (21,578,575) (29,396,253)
------------ ------------
Net decrease from capital share transactions $(15,265,994) $(14,677,125)
============ ============
</TABLE>
18
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 3 -- concluded
<TABLE>
<CAPTION>
Flag Investors Class B Shares
----------------------------------
For the Six For the Period
Months Ended June 20, 1996*
April 30, 1997 through
(Unaudited) October 31, 1996
-------------- ----------------
<S> <C>
Shares sold 27,008 12,460
Shares issued to shareholders on
reinvestment of dividends 281 34
Shares redeemed (15,345) --
-------- --------
Net increase in shares outstanding 11,944 12,494
======== ========
Proceeds from sale of shares $262,497 $121,164
Value of reinvested dividends 2,721 322
Cost of shares redeemed (150,839) --
-------- --------
Net increase from capital share transactions $114,379 $121,486
======== ========
</TABLE>
- ---------
*Commencement of operations.
<TABLE>
<CAPTION>
ISI Class Shares
----------------------------------
For the Six
Months Ended For the
April 30, 1997 Year Ended
(Unaudited) October 31, 1996
-------------- ----------------
<S> <C>
Shares sold 697,516 2,043,599
Shares issued to shareholders on
reinvestment of dividends 410,713 865,140
Shares redeemed (2,541,198) (3,510,096)
------------ ------------
Net decrease in shares outstanding (1,432,969) (601,357)
============ ============
Proceeds from sale of shares $ 6,780,869 $ 20,394,040
Value of reinvested dividends 4,000,791 8,518,116
Cost of shares redeemed (24,684,558) (34,725,846)
------------ ------------
Net decrease from capital share transactions $(13,902,898) $ (5,813,690)
============ ============
</TABLE>
19
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $64,536,922 and sales of investment securities aggregated
$135,315,820 for the six months ended April 30, 1997.
On April 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $35,000 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $15,119,015.
NOTE 5--Net Assets
On April 30, 1997, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $131,585,218
Flag Investors Class B Shares 235,865
ISI Class Shares 187,859,612
Distributions in excess of net investment income (6,055,014)
Unrealized depreciation of investments (15,084,015)
------------
$298,541,666
============
NOTE 6--Tax Information
None of the ordinary income distributions paid monthly by the Fund during
the six months ended April 30, 1997, qualify for the dividends received
deduction for corporations.
The law varies in each state as to whether dividend income attributable to
federal obligations, and which percentage, is exempt from state income tax. We
recommend that you consult with your tax advisor to determine if any portion of
the dividends you received is exempt from state income tax.
20
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 6--concluded
Listed below are the percentages of the Fund's total assets invested in
federal obligations as of the end of each quarter for the past six months.
Quarter Ended Percentage of Federal Obligations*
- ------------- ----------------------------------
January 31, 1997 97.40%
April 30, 1997 78.89%
- ---------
*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 Loan Banks and the
Student Loan Marketing Association. Repurchase agreements are not included in
this calculation.
Of the Fund's ordinary income dividends paid during the six months ended
April 30, 1997, 92.97% was attributable to federal obligations. In calculating
this percentage, Fund expenses have been allocated on a pro rata basis.
NOTE 7--Shareholder Meeting
On March 7, 1997, the Total Return U.S. Treasury Fund held a special
meeting of its shareholders. During the meeting, shareholders elected the
following Directors: Charles W. Cole, Jr., James J. Cunnane, Richard T. Hale,
Edward S. Hyman, John F. Kroeger, Louis E. Levy, Eugene J. McDonald, Rebecca W.
Rimel, Truman T. Semans and Carl W. Vogt.
NOTE 8--Merger Agreement
On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they had signed a definitive agreement to merge. The
merger, which is expected to be completed by the fourth quarter of 1997, is
subject to customary closing conditions, including certain regulatory and
shareholder approvals.
21
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Directors and Officers
EDWARD S. HYMAN
Chairman
RICHARD T. HALE R. ALAN MEDAUGH
Vice Chairman President
CHARLES W. COLE, JR. GARY V. FEARNOW
Director Vice President
JAMES J. CUNNANE NANCY LAZAR
Director Vice President
JOHN F. KROEGER EDWARD J. VEILLEUX
Director Vice President
LOUIS E. LEVY SCOTT J. LIOTTA
Director Vice President and Secretary
EUGENE J. MCDONALD CARRIE L. BUTLER
Director Vice President
REBECCA W. RIMEL JOSEPH A. FINELLI
Director Treasurer
TRUMAN T. SEMANS LAURIE D. COLLIDGE
Director Assistant Secretary
CARL W. VOGT, ESQ.
Director
Investment Objective
A mutual fund designed to provide a high level of total return with relative
stability of principal as well as the secondary objective of high current income
consistent with an investment in securities issued by the United States
Treasury.
22
<PAGE>
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<PAGE>
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<PAGE>
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
<PAGE>
[LOGO]
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ALEX. BROWN & SONS
INCORPORATED
