<TABLE>
<S> <C>
========================================
ISI
Total Return ISI
U.S. Treasury Fund Shares INTERNATIONAL STRATEGY & INVESTMENT
- --------------------------------------------------========================================
Directors and Officers
Edward S. Hyman Carl W. Vogt, Esq.
Chairman Director
Richard T. Hale R. Alan Medaugh
Vice Chairman President
Charles W. Cole, Jr. Gary V. Fearnow
Director Vice President ISI
James J. Cunnane Nancy Lazar TOTAL RETURN
Director Vice President
U.S. TREASURY
John F. Kroeger Edward J. Veilleux
Director Vice President FUND SHARES
Louis E. Levy Scott J. Liotta (A Class of Total Return
Director Vice President and Secretary U.S. Treasury Fund, Inc.)
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
Investment Objective
A mutual fund designed to provide a
high level of total return with
relative stability of principal as TREASURIES
well as the secondary objective of ----------
high current income consistent with
an investment in securities issued
by the United States Treasury.
==================================================
Investment Advisor
==================================================
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
==================================================
Shareholder Servicing Agent
==================================================
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
==================================================
Distributor --------------------------
================================================== SEMI-ANNUAL REPORT
ISI Group Inc.
717 Fifth Avenue April 30, 1997
New York, NY10022 --------------------------
(800) 955-7175
</TABLE>
<PAGE>
================================================================================
Investment Advisor's Report
================================================================================
We are pleased to report on the progress of your Fund for the period ended
April 30, 1997. As of this date, the Fund 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 has 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.
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
1
<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 following chart on ISI's Manufacturing
Company Pricing Power Index.
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
2
<PAGE>
================================================================================
Economic Outlook (concluded)
================================================================================
half. Second, the slowdown pattern under 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.
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.
3
<PAGE>
================================================================================
Additional Performance Information
================================================================================
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management.The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include the Fund's total return, according to a standardized formula, for
various time periods through the end of the most recent calendar quarter. The
SEC total return figures differ from those we reported because the time periods
may be different and because the SEC calculation includes the impact of the
Fund's currently effective 4.45% maximum sales charge.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
% Return with
Periods ended 3/31/97: Sales Charge
- --------------------------------------------------------------------------------
One Year -1.51%
- --------------------------------------------------------------------------------
Five Years 6.18%
- --------------------------------------------------------------------------------
Since Inception (8/10/88) 7.53%
- --------------------------------------------------------------------------------
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results.
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Statement of Net Assets
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Maturity Par Value
Interest Rate Date (000) (Note A)
- ---------------------------------------------------------------------------------------------------
<S> <C>
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
============
</TABLE>
5
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Statement of Net Assets (concluded)
April 30, 1997
(Unaudited)
Value
(Note A)
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
ISI Class Share
($173,892,163 / 18,243,236 shares outstanding) $9.53
=====
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
=====
Maximum Offering Price Per:
ISI Class Share
($9.53 / .9555) $9.97
=====
Flag Investors Class A Share
($9.53 / .955) $9.98
=====
Flag Investors Class B Share $9.52
=====
- --------------------------------------------------------------------------------
* Yield as of April 30, 1997.
**Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
Total Return U.S. Treasury Fund, Inc.
6
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Statement of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):
Interest $ 10,326,187
------------
EXPENSES
Investment advisory fee (Note B) 435,973
Distribution fee (Note B) 394,073
Administration fee (Note B) 191,988
Transfer agent fee (Note B) 102,701
Accounting fee (Note B) 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
============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
April 30, 1997 Ended
(Unaudited) October 31, 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:
ISI Class Shares (5,235,223) (11,276,368)
Flag Investors Class A Shares (3,789,774) (8,687,010)
Flag Investors Class B Shares (4,735) (664)
Distributions in excess of net investment income:
ISI Class Shares (787,340) (723,712)
Flag Investors Class A Shares (570,272) (561,610)
Flag Investors Class B Shares (932) (8)
Net realized short-term gains:
ISI Class Shares -- (1,869,945)
Flag Investors Class A Shares -- (1,451,089)
Flag Investors Class B Shares -- (21)
------------ ------------
Total distributions (10,388,276) (24,570,427)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
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>
See Notes to Financial Statements.
8
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Financial Highlights--ISI Class and Flag Investors Class A Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended October 31,
April 30, 1997 -------------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning
of period $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
-------- -------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income 0.27 0.56 0.57 0.51 0.62 0.76
Net realized and unrealized
gain/(loss) on investments (0.25) (0.23) 1.04 (1.16) 1.12 0.05
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.02 0.33 1.61 (0.65) 1.74 0.81
Less Distributions:
Distributions from net investment
income and short-term gains (0.27) (0.65) (0.64) (1.20) (0.79) (0.70)
Distributions in excess of net
investment income (0.05) (0.04) -- -- -- --
Distributions from net realized
long-term gains -- -- -- (0.28) (0.07) (0.05)
-------- -------- -------- -------- -------- --------
Total distributions (0.32) (0.69) (0.64) (1.48)(1) (0.86) (0.75)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 9.53 $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47
======== ======== ======== ======== ======== ========
Total Return(2) 0.17% 3.44% 18.09% (6.22)% 17.33% 8.96%
Ratios to Average Daily Net Assets:
Expenses 0.82%(3) 0.81% 0.80% 0.77% 0.77% 0.77%
Net investment income 5.73%(3) 5.69% 5.94% 4.98% 5.21% 5.65%
Supplemental Data:
Net assets at end of period (000):
ISI Class Shares $173,892 $193,486 $206,615 $200,309 $232,103 $207,518
Flag Investors Class A Shares $124,417 $143,791 $164,206 $175,149 $224,790 $250,210
Portfolio turnover rate 44%(3) 199% 194% 68% 249% 191%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions to shareholders include $.05 per share return of capital.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Total Return U.S. Treasury Fund, Inc.
================================================================================
Financial Highlights--Flag Investors Class B Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six
Months Ended For the Period
April 30, 1997 June 20, 1996(1) through
(Unaudited) October 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C>
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(2) (0.16)% 6.37%
Ratios to Average Daily Net Assets:
Expenses 1.17%(3) 1.40%(3)
Net investment income 5.42%(3) 5.45%(3)
Supplemental Data:
Net assets at end of period (000) $ 233 $ 123
Portfolio turnover rate 44%(3) 199%(3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
A. 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:
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.
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.
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
11
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
taxes. As a result, the Fund has made no provisions for federal income
taxes.
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.
B. 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.
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.
12
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
C. Capital Share Transactions -- The Fund is authorized to issue up to 100
million shares of $.001 par value capital stock (44 million ISI Class,
44 million Flag Investors Class A, 5 million Flag Investors Class B,
500,000 Flag Investors Class D and 6.5 million undesignated).
Transactions in shares of the Fund were as follows:
ISI Class Shares
-------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1997 October 31,
(Unaudited) 1996
-------------- -------------
Shares sold 697,516 2,043,599
Shares issued to share-
holders on reinvest-
ment 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)
============ ============
Flag Investors Class A Shares
-------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1997 October 31,
(Unaudited) 1996
-------------- -------------
Shares sold 387,763 914,108
Shares issued to share-
holders on reinvest-
ment 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)
============ ============
Flag Investors Class B Shares
-------------------------------
For the Period
For the Six June 20, 1996*
Months Ended through
April 30, 1997 October 31,
(Unaudited) 1996
-------------- ---------------
Shares sold 27,008 12,460
Shares issued to share-
holders on reinvest-
ment 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
========= ========
- ---------
*Commencement of operations.
13
<PAGE>
================================================================================
Notes to Financial Statements (concluded)
================================================================================
D. 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.
E. Net Assets -- On April 30, 1997, net assets consisted of:
Paid-in capital:
ISI Class Shares $187,859,612
Flag Investors
Class A Shares 131,585,218
Flag Investors
Class B Shares 235,865
Distributions in excess
of net investment income (6,055,014)
Unrealized depreciation of
investments (15,084,015)
------------
$298,541,666
============
F. 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.
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.
Percentage of
Quarter Ended 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.
G. 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.
H. 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.
14
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