<PAGE>
[GRAPHIC OMITTED]
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, 1998
- --------------------------------------------------------------------------------
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 Flag Investors classes of the Fund are available through your
securities dealer or the Fund's transfer agent. 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 you with
alternatives as to sales load and Fund expenses. (See "How to Invest in the
Fund.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A
Statement of Additional Information dated March 1, 1998 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.
TABLE OF CONTENTS
Fee Table ......................... 1
Financial Highlights .............. 2
Investment Program ................ 5
Investment Restrictions ........... 6
How to Invest in the Fund ......... 6
How to Redeem Shares .............. 9
Telephone Transactions ............ 10
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.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FEE TABLE
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<TABLE>
<CAPTION>
Class A Shares Class B Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
Shareholder Transaction Expenses: ---------------- ---------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) . 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends .......................... None None
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 ............................................................... 0.28% 0.28%
12b-1 Fees .................................................................... 0.25% 0.35%
Other Expenses (including a 0.25% shareholder servicing fee for Class B Shares) 0.30% 0.55%***
----------- ----------
Total Fund Operating Expenses ................................................. 0.83% 1.18%
=========== ==========
</TABLE>
- -----------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How
to Invest in the Fund -- Class A Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem Class B Shares within five years of purchase. The amount of the
charge declines in relation to the time you hold your shares. 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 your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you
with information about your investment.
<TABLE>
<CAPTION>
Example: 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:
Class A Shares ................................ $53 $70 $89 $ 143
Class B Shares ................................ $32 $47 $75 $ 120*
You would pay the following expenses on the same
investment, assuming no redemption:*
Class B Shares ................................ $12 $37 $65 $ 120*
- -----------
* 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.
</TABLE>
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and
expenses that you will bear directly or indirectly when you invest in the
Fund. 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. If you purchase shares of either class
through a financial institution, you may be charged separate fees by the
financial institution.
The rules of the SEC require that the maximum sales charge be reflected
in the above table. However, you may qualify for reduced sales charges or no
sales charge at all. (See "How to Invest in the Fund -- Class A Shares.") Due
to the continuous nature of Rule 12b-1 fees, you may pay more than the
equivalent of the maximum sales charges permitted by the Conduct
Rules of the National Association of Securities Dealers, Inc. if you hold your
shares for a long time. The above table has not been audited by Deloitte &
Touche LLP, the Fund's independent auditors.
1
<PAGE>
FINANCIAL HIGHLIGHTS
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The financial highlights included in these tables 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, 1997 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,
1997, which can be obtained at no charge by calling the Fund at (800)
767-FLAG.
(For a Class A Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................... $ 9.83 $ 10.19
--------- ---------
Income from Investment Operations:
Net investment income .................................... 0.55 0.56
Net realized and unrealized gain/(loss) on
investments ............................................ 0.30 (0.23)
--------- ----------
Total from Investment Operations ......................... 0.85 0.33
Less Distributions:
Distributions from net investment income and
short-term gains ....................................... (0.55) (0.65)
Tax return of capital distribution ....................... (0.08) --
Distributions in excess of net investment income ......... (0.01) (0.04)
Distributions from net realized long-term gains .......... -- --
---------- ----------
Total distributions ...................................... (0.64) (0.69)
---------- ----------
Net asset value at end of period ......................... $ 10.04 $ 9.83
========== ==========
Total Return(2)............................................ 9.00% 3.44%
Ratios to Average Daily Net Assets:
Expenses ................................................. 0.83% 0.81%
Net investment income .................................... 5.62% 5.69%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares .......................... $ 122,229 $ 143,791
ISI Class Shares ....................................... $ 171,074 $ 193,486
Flag Investors Class B Shares .......................... $ 838 $ 123
Portfolio turnover rate .................................. 92% 199%
</TABLE>
- -----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
2
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
August 10,
1988(1)
For the Year Ended October 31, through
- ------------------------------------------------------------------------------------------------------------- October 31,
1995 1994 1993 1992 1991 1990 1989 1988
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24 $ 10.00
--------- --------- --------- --------- --------- --------- --------- --------
0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10
1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21
---------- --------- --------- --------- --------- ---------- --------- --------
1.61 (0.65) 1.74 0.81 1.49 0.13 1.15 0.31
(0.64) (1.15) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07)
-- (0.05) -- -- -- -- -- --
-- -- -- -- -- -- -- --
-- (0.28) (0.07) (0.05) -- -- -- --
---------- --------- ---------- ---------- ---------- ---------- ---------- --------
(0.64) (1.48) (0.86) (0.75) (0.84) (0.92) (0.84) (0.07)
---------- --------- ---------- ---------- ---------- ---------- ---------- --------
$ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24
========== ========= ========== ========== ========== ========== ========== ========
18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10%
0.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%(3)
5.94% 4.98% 5.21% 5.65% 6.88% 7.40% 7.51% 5.80%(3)
$ 164,206 $ 175,149 $ 224,790 $ 250,210 $ 237,688 $ 198,556 $ 135,523 $ 55,757
$ 206,615 $ 200,309 $ 232,103 $ 207,518 $ 168,128 $ 131,872 $ 89,943 $ 22,597
-- -- -- -- -- -- -- --
194% 68% 249% 191% 141% 79% 184% 72%
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
(For a Class B Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Year Ended June 20, 1996(1)
October 31, 1997 through October 31, 1996
------------------ -------------------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................... $ 9.85 $ 10.00
------- -------
Income from Investment Operations:
Net investment income .................................... 0.56 0.22
Net realized and unrealized gain/(loss) on
investments ............................................ 0.23 (0.15)
------- -------
Total from Investment Operations ......................... 0.79 0.07
Less Distributions:
Distributions from net investment income and
short-term gains ....................................... (0.56) (0.22)
Tax return of capital distribution ....................... (0.04) --
Distributions in excess of net investment income ......... (0.01) --
-------- -------
Total distributions ...................................... (0.61) (0.22)
-------- -------
Net asset value at end of period ......................... $ 10.03 $ 9.85
======== =======
Total Return(2)............................................ 8.49% 6.37%
Ratios to Average Daily Net Assets:
Expenses ................................................. 1.18% 1.40%(3)
Net investment income .................................... 5.24% 5.45%(3)
Supplemental Data:
Net assets at end of period (000) ........................ $ 838 $ 123
Portfolio turnover rate .................................. 92% 199%(3)
</TABLE>
- -----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
4
<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 high 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. 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.
Investments in 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 to limit the effects of adverse
market action. The value of when-issued securities 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
when-issued securities.
5
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities including repurchase agreements with remaining maturities
in excess of seven days. 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
- --------------------------------------------------------------------------------
You may purchase Class A Shares and Class B Shares through your
securities dealer or through any financial institution that is authorized to
service shareholder accounts ("Shareholder Servicing Agents"). You may also
purchase shares of either class 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.
The Class A and Class B alternatives permit you to choose the method of
purchasing shares that is best for you given the amount of your purchase, the
length of time you expect to hold your shares, and other circumstances. You
should consider whether, during the anticipated life of your 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, if
you plan to purchase $250,000 or more of Fund shares you will pay lower
aggregate charges and expenses by purchasing Class A Shares. (See "Fee
Table.") Your securities dealer or Shareholder Servicing Agent and their
investment representatives may receive different levels of compensation
depending on which class of shares you buy.
Your initial investment in either class must be at least $2,000.
Subsequent investments must be at least $100. The following are exceptions to
these minimums:
o If you are investing in an IRA account, your initial investment may
be as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your
initial investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan,
your initial investment may be as low as $250. Subsequent
investments may be as low as $100 if made monthly, but must be $250
if done quarterly. (See "Purchases Through Automatic Investing Plan"
below.)
o There is no minimum investment requirement for qualified retirement
plans (i.e., 401(k) plans or pension and profit sharing plans).
You may purchase shares on any day on which the New York Stock Exchange
is open for business (a "Business Day"). Your purchase order will be executed
at a per share purchase price equal to the net asset value next determined
after it is received plus any applicable front-end sales charge (the "Offering
Price"). If your purchase is made by mail, it must be accompanied by payment
of the Offering Price. Purchases made through your securities dealer or
Shareholder Servicing Agent must be in accordance with their payment
procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
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. For this purpose, portfolio securities will be given
their market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board
of Directors. Because the classes of shares have different distribution/
service fees, the net asset value per share of the classes differs at times.
Offering Price
Your share purchase is made 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 in the following table:
6
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------- Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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*
</TABLE>
- --------------------------------------------------------------------------------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be subject to a contingent
deferred sales charge when you redeem your shares. (See below.) The Fund's
distributor may make payments to your securities dealer or Shareholder
Servicing Agent in an amount up to 0.50% of the Offering Price.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Class A Shares
of this Fund and Class A or Class D shares of any other Flag Investors fund.
The applicable sales charge will be determined based on the total value of
your current purchases plus the value of your existing investments. (For this
purpose existing investments will be valued at the higher of cost or current
value.) You may combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation,
you must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent that states your 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 does not require that you purchase the full amount indicated.
The minimum initial investment under a Letter of Intent is 5% of the full
amount. Class A Shares purchased with the first 5% of the full amount will be
held in escrow (while remaining registered in your name) to secure payment of
the higher sales charge applicable to the Class A Shares actually purchased if
you do not purchase the full amount. Such escrowed shares will be redeemed to
pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the escrowed shares will be released. If you wish to enter
into a Letter of Intent in conjunction with an investment in Class A Shares, you
may do so by completing the appropriate section of the Application Form attached
to this Prospectus.
You will not be charged a sales charge on purchases of $1 million or
more of Class A Shares. You may, however, be required to pay a contingent
deferred sales charge if you redeem the purchased shares within 24 months. The
charge will be made at the rate of 0.50% 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 if
your securities dealer has agreed to return to the Fund's distributor (the
"Distributor") 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.
<PAGE>
You may purchase Class A Shares at net asset value (without sales
charge) under any of the following circumstances:
1) If you are purchasing shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional
fee by your broker or agent if you purchase shares in this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a full
description of the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Distributor, the Advisor,
the Fund's administrator, and any broker-dealer authorized to sell Class
A Shares.
7
<PAGE>
You may also purchase Class A Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Class B Shares
You will not be charged a sales charge at the time of purchase of Class
B Shares. However, you will be charged a contingent deferred sales charge on
certain Class B Shares redeemed within five years of your 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. 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 first, you have
redeemed first, any Class B Shares in your account that represent reinvested
dividends and distributions and second, the Class B Shares you 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 since you
purchased the shares (the "holding period"). For purposes of determining this
holding period, all purchases 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
Payment was Made amount 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 of your
purchase.
Waiver of Contingent Deferred Sales Charge. The contingent deferred
sales charge will be waived: (i) following your death or initial determination
of disability (as defined in the Internal Revenue Code of 1986, as amended);
or (ii) to the extent that the redemption represents a minimum required
distribution from your individual retirement account or other retirement plan.
The waiver with respect to (i) above is only applicable in cases where your
account is registered (a) in your individual name, (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. You,
or your representative, must notify the Fund's transfer agent (the "Transfer
Agent") prior to the time of redemption if such circumstances exist and you
are eligible for this waiver. For information on the imposition and waiver of
the contingent deferred sales charge, contact the Transfer Agent.
Automatic Conversion to Class A Shares. Five years after the beginning
of the calendar month of your purchase, 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 charge. The conversion is not a taxable event to you.
For purposes of conversion to Class A Shares, shares received as
dividends and other distributions paid on Class B Shares in your account will
be considered to be held in a separate sub-account. Each time any Class B
Shares in your 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.
You may also purchase Class B Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
<PAGE>
Purchases by Exchange
You may exchange Class A shares of any other Flag Investors fund with
the same sales charge structure for an equal dollar amount of Class A Shares
without payment of the sales charges described above or any other charge. In
addition, you may exchange Class A shares of any Flag Investors fund with a
lower sales charge (with the exception of Flag Investors Cash Reserve Prime
Class A Shares) for an equal dollar amount of Class A Shares if you have owned
the shares you are redeeming for at least 24 months. If you have owned them for
less than 24 months, you may exchange them for Class A Shares if you pay the
difference in sales charges. You may enter both your redemption and purchase
orders on the same Business Day or, if you have already redeemed the shares of
the other fund, you may enter your purchase order within 90 days of the
redemption.
When you acquire Fund shares through an exchange from another fund in the
Flag Investors family of funds, the period for which the original shares were
held prior to the exchange will be combined with the holding period of the
shares acquired in the exchange for purposes of determining what, if any,
contingent deferred sales charge is applicable when those shares are redeemed.
8
<PAGE>
The net asset value of shares purchased and redeemed in an exchange
request received on the same Business Day will be determined on that 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.
You may exercise this exchange privilege 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.
Purchases Through Automatic Investing Plan
You 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 your checking account using a pre-authorized check and will be
invested in the class of shares selected, 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 you or the Fund
upon 30 days' prior written notice to the other party. If you wish to enroll
in the Automatic Investing Plan or if you wish to obtain additional
information, complete the appropriate section of the Application Form attached
to this Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and capital gains
distributions will be reinvested in additional Fund shares of the same class at
net asset value. You may elect to receive your distributions in cash or to
terminate automatic reinvestment by completing the appropriate section of the
attached Application Form or by giving written notice to the Transfer Agent at
the address listed on the inside back cover of this Prospectus, either directly
or through your securities dealer or Shareholder Servicing Agent, at least five
days before the next date on which dividends or distributions will be paid.
You may also have your distributions invested in shares of other funds
in the Flag Investors family of funds. Call your securities dealer or the
Transfer Agent for additional information.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day
through your securities dealer, your Shareholder Servicing Agent or the
Transfer Agent. You may redeem up to $50,000 of either class by telephone.
(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 your order (or, if stock certificates
have been issued for the shares to be redeemed, after you tender 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. You will be paid for redeemed shares by check which
will be mailed within seven days after your redemption order is received in
proper form.
<PAGE>
The Transfer Agent, your securities dealer or your Shareholder Servicing
Agent may require the following documents in order to redeem your shares:
1) A letter of instructions, specifying your account number and the number
of shares or dollar amount to be redeemed, signed by all owners of the
shares in the exact names in which the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature 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 your account
have been redeemed on a dividend payable date, the dividend will be remitted
to you by check.
The Fund has the power under its Articles of Incorporation to redeem
your account upon 60 days' notice if its value falls below $500 due to your
redemptions.
Systematic Withdrawal Plan
If you hold Class A Shares or Class B Shares having a value of $10,000
or more you may arrange to have a portion of your shares redeemed monthly or
quarterly under the Fund's Systematic Withdrawal Plan. Such payments are drawn
from income dividends, and
9
<PAGE>
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, your account may eventually be exhausted. Because Class A Share
purchases include a sales charge that you will not recover at the time of
redemption, you should not have a withdrawal plan in effect at the same time
you are making recurring purchases. In addition, you may be subject to a
contingent deferred sales charge upon redemption of Class B Shares. (See "How
to Invest in the Fund -- Class B Shares.") If you wish to participate in the
Fund's Systematic Withdrawal Plan, complete the appropriate section of the
Application Form attached to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem shares of either class in amounts up to $50,000 or
exchange shares in any amount, 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).
Telephone transaction privileges are automatic unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. 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) next determined on the following 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 you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction request will be
recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by 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 summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
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. Unless
you are otherwise exempt, you will be generally subject to federal income or
capital gains taxes on the amounts so distributed to you. Reinvested
distributions will be taxed as if they had been distributed on the
reinvestment date.
You will be taxed on 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, as gains from the sale or exchange of a capital asset held for
more than one year regardless of the length of time you have held the shares.
You will be taxed on all other
10
<PAGE>
income distributions as ordinary income. Fund distributions generally will not
be eligible for the corporate dividends received deduction. You will be
advised annually as to the federal income tax status of distributions made
during the year.
Ordinarily, you should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been received by you and paid by the Fund in
the year in which the dividends were declared.
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.
The sale, exchange or redemption of Fund shares is a taxable event for
you.
You are urged to consult with your tax advisor 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. You are
urged to consult with your tax advisor regarding whether, and under what
conditions such exemption is available.
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. A majority of the Directors of the Fund have no
affiliation with the Distributor, the Advisor or the Fund's administrator.
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
International Strategy & 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. 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, 1997, the Advisor had approximately $510 million under
management. The Advisor also acts as investment advisor to Managed Municipal
Fund, Inc., North American Government Bond Fund, Inc. and ISI Strategy Fund,
Inc., open-end management investment companies with approximately $180 million
in aggregate net assets as of December 31, 1997.
As compensation for its services for the fiscal year ended October 31,
1997, the Advisor received an annual fee equal to 0.28% 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 (1.50%) of
the Fund's gross income.
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 eighteen
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
11
<PAGE>
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam Management
Company and Fidelity Management and Research.
ADMINISTRATOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of
Bankers Trust New York Corporation, 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, 1997, ICC received a fee equal to 0.12% 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 (0.50%) of the Fund's gross income.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of the Class A Shares and the Class B Shares since
August 31, 1997. ICC Distributors is a registered broker-dealer that offers
distribution services to a variety of registered investment companies
including other funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc. ICC Distributors is not affiliated with the Fund's
administrator.
The Fund has adopted two separate 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, including certain banks and BT Alex.
Brown Incorporated, to provide shareholder services, pursuant to which the
Distributor may allocate on a proportional basis up to all of its distribution
fee as compensation for such financial institutions' ongoing shareholder
services. Such financial institutions may charge you separately for these
services.
As compensation for providing distribution services for the Class A
Shares for the period from August 31, 1997 through October 31, 1997, the
Distributor received a fee equal to 0.25% (annualized) 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 August 31,
1997 through October 31, 1997, the Distributor received a fee equal to 0.35%
(annualized) of the Class B Shares' average daily net assets and a shareholder
servicing fee equal to 0.25% (annualized) of the Class B Shares' average daily
net assets. The distribution fee is used to compensate the Distributor for its
services and expenses in distributing the Class B Shares. The shareholder
servicing fee is used to compensate the Distributor, securities dealers and
Shareholder Servicing Agents for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you with
information on your investment.
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 the Distributor's overhead expenses. If the cost of providing distribution
services is less than the payments received, the Distributor may retain the
unexpended portion of the distribution fee. The Distributor or the Fund's
administrator, and their respective affiliates, may make payments from their
own resources to securities dealers or Shareholder Servicing Agents. Payments by
the Distributor will include additional discounts or promotional incentives in
the form of cash or other compensation (including merchandise or travel).
12
<PAGE>
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. 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, 1997, ICC received a fee equal to 0.03% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust New
York Corporation, acts as custodian of the Funds' assets. (See the Statement
of Additional Information.)
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 of 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. 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 your bank with respect to the
account through which your shares may be purchased, although not included in
calculations of performance, will reduce your performance results.
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. 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
Unless required by Maryland law the Fund does not expect to hold annual
meetings of shareholders but special meetings of shareholders will be held
under certain circumstances. However, 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
You will be furnished 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.
Shareholder Inquiries
If you have questions concerning your shares, you should contact the Fund
at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or your securities
dealer or Shareholder Servicing Agent.
14
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
(Class A and Class B)
(Classes of Total Return U.S. Treasury Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
1-800-553-8080
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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:
Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flat 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 $_________
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 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 are selected, all
distributions will be reinvested in additional shares of the same class of the
Fund at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] 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)
Please attach a voided check.
- ---------------------------------- -----------------------------------------
Bank Name Depositor's Signature Date
- ---------------------------------- -----------------------------------------
Existing Flag Investors Fund Depositor's Signature Date
Account No., if any (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 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
your 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.
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
__________________________ _________________________________________________
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>
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
International Strategy & Investment Group Inc. (the "Distributor"), as well as
your securities dealer or shareholder servicing agent. (See "How to Invest in
the Fund.")
This Prospectus sets forth basic information that you should know about
the Fund prior to investing. You should retain it for future reference. A
Statement of Additional Information dated March 1, 1998, 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, 1998.
<PAGE>
1. Fee Table
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 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 .............................................................. 0.28%
12b-1 Fees ................................................................... 0.25%
Other Expenses ............................................................... 0.30%
----
Total Fund Operating Expenses ................................................ 0.83%
====
</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: $53 $70 $89 $142
</TABLE>
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and expenses
that you will bear directly or indirectly when you invest in Shares. 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. If you purchase Shares through a financial
institution, you may be charged separate fees by the financial institution. 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, you may
qualify for reduced sales charges or no sales charge at all. (See "How to
Invest in the Fund -- Offering Price.") Due to the continuous nature of Rule
12b-1 fees, you 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. if you hold your Shares for a long time. The above
table has not been audited by Deloitte & Touche LLP, the Fund's independent
auditors.
2. Financial Highlights
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, 1997 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,
1997, 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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Per-
formance:
Net asset value at beginning
of period ................... $ 9.83 $ 10.19 $ 9.22 $ 11.35 $ 10.47
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income ....... 0.55 0.56 0.57 0.51 0.62
Net realized and unreal-
ized gain/(loss) on
investments ................ 0.30 (0.23) 1.04 (1.16) 1.12
-------- -------- -------- -------- --------
Total from Investment
Operations ................. 0.85 0.33 1.61 (0.65) 1.74
-------- -------- -------- -------- --------
Less Distributions:
Distributions from net
investment income and
short-term gains ........... (0.55) (0.65) (0.64) (1.15) (0.79)
Tax return of capital
distribution ............... (0.08) -- -- (0.05) --
Distributions in excess of
net investment income....... (0.01) (0.04) -- -- --
Distributions from net
realized long-term
gains ...................... -- -- -- (0.28) (0.07)
-------- -------- -------- -------- --------
Total Distributions ......... (0.64) (0.69) (0.64) (1.48) (0.86)
-------- -------- -------- -------- --------
Net asset value at end of
period ..................... $ 10.04 $ 9.83 $ 10.19 $ 9.22 $ 11.35
======== ======== ======== ======== ========
Total Return(2)............... 9.00% 3.44% 18.09% (6.22)% 17.33%
Ratios to Average Daily
Net Assets:
Expenses .................... 0.83% 0.81% 0.80% 0.77% 0.77%
Net investment income ....... 5.62% 5.69% 5.94% 4.98% 5.21%
Supplemental Data:
Net assets at end of
period (000):
ISI Class Shares ........... $171,074 $193,486 $206,615 $200,309 $232,103
Flag Investors Class A
Shares .................... $122,229 $143,791 $164,206 $175,149 $224,790
Portfolio turnover rate ..... 92% 199% 194% 68% 249%
</TABLE>
- ------------------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended October 31, August 10, 1988(1)
------------------------------------------------------ through
1992 1991 1990 1989 October 31, 1988
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Per-
formance:
Net asset value at beginning
of period ................... $ 10.41 $ 9.76 $ 10.55 $ 10.24 $10.00
-------- -------- -------- -------- -------
Income from Investment
Operations:
Net investment income ....... 0.76 0.70 0.73 0.71 0.10
Net realized and unreal-
ized gain/(loss) on
investments ................ 0.05 0.79 ( 0.60) 0.44 0.21
-------- -------- -------- -------- -------
Total from Investment
Operations ................. 0.81 1.49 0.13 1.15 0.31
-------- -------- -------- -------- -------
Less Distributions:
Distributions from net
investment income and
short-term gains ........... (0.70) (0.84) (0.92) (0.84) (0.07)
Tax return of capital
distribution ............... -- -- -- -- --
Distributions in excess of
net investment
income...................... -- -- -- -- --
Distributions from net
realized long-term
gains ...................... (0.05) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions ......... (0.75) (0.84) (0.92) (0.84) (0.07)
-------- -------- -------- -------- -------
Net asset value at end of
period ..................... $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24
======== ======== ======== ======== =======
Total Return(2) .............. 8.96% 15.89% 1.43% 11.87% 3.10%
Ratios to Average Daily
Net Assets:
Expenses .................... 0.77% 0.87% 0.89% 0.97% 1.12%(3)
Net investment income ....... 5.65% 6.88% 7.40% 7.51% 5.80%(3)
Supplemental Data:
Net assets at end of
period (000):
ISI Class Shares ........... $207,518 $168,128 $131,872 $ 89,943 $22,597
Flag Investors Class A
Shares .................... $250,210 $237,688 $198,556 $135,523 $55,757
Portfolio turnover rate ..... 191% 141% 79% 184% 72%
</TABLE>
- ------------------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
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 high 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. 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
3
<PAGE>
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 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.
Investments in 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 to limit the effects of adverse market action. The
value of when-issued securities 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 when-issued securities.
4. Investment Restrictions
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities including repurchase agreements with remaining maturities
in excess of seven days. 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.
5. How to Invest in the Fund
You may purchase Shares through your securities dealer or through any
financial institution that is authorized to service shareholder accounts
("Shareholder Servicing Agents"). You may also purchase Shares 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.
Your initial investment must be at least $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
4
<PAGE>
$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.) You may purchase Shares on any day on which the New York Stock
Exchange is open for business (a "Business Day"). Your purchase order will be
executed at a per share purchase price equal to the net asset value next
determined after it is received plus any applicable front-end sales charge
(the "Offering Price"). If your purchase is made by mail, it must be
accompanied by payment of the Offering Price. Purchases made through your
securities dealer or Shareholder Servicing Agent must be in accordance with
their payment procedures. Your purchase order may not be accepted if the sale
of Fund shares has been suspended or if it is determined that your purchase
would be detrimental to the interests of the Fund's shareholders.
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. For this purpose, portfolio securities will be given
their market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board
of Directors.
Offering Price
Your Share purchase is made 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:
Sales Sales
Charge as Charge as Dealer
Percentage Percentage Compensation
of of Net as Percentage
Offering Amount of Offering
Amount of Purchase Price Invested Price*
- ----------------------------- ------------ ------------ --------------
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
<PAGE>
- ------------------------
* The Distributor may make payments of up to 100% of the sales charge to your
securities dealer. Dealers that receive a reallowance of 100% of the sales
charge may be considered underwriters for purposes of the federal
securities laws.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Shares of this
Fund and any other fund in the ISI family of funds. The applicable sales
charge will be determined based on the total value of your current purchases
plus the value of your existing investments. (For this purpose existing
investments will be valued at the higher of cost or current value.) You may
combine your purchases and investments with those of your spouse and your
children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation, you
must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may
amend or terminate this right of accumulation at any time as to subsequent
purchases.
You may also obtain the reduced sales charges shown above by executing a written
Letter of Intent that states your 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 does not
require that you 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 your name) to secure payment of the higher sales charge applicable
to the Shares actually purchased if you do not purchase the full amount. Such
escrowed Shares will be redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
Shares will be released. If you wish to enter into a Letter of Intent in
conjunction with an investment in Shares, you may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
You may purchase Shares at net asset value (without sales charge) under the
following circumstances:
1) If you are purchasing Shares in a fiduciary or advisory account with a bank,
bank trust department, registered
5
<PAGE>
investment advisory company, financial planner or securities dealer
purchasing Shares on your behalf. To qualify for this provision, you must
be paying an account management fee for the fiduciary or advisory
services. You may be charged an additional fee by your broker or agent if
you purchase Shares in this manner.
2) If you are reinvesting some or all of the proceeds of a redemption of
Shares made within the last six months provided that the amount you are
reinvesting is at least $5,000.
3) If you are exchanging an investment in another ISI fund for an investment
in this Fund (see "Purchases by Exchange" for a full description of the
conditions).
4) If you are a current or retired Director of the Fund, a director,
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Advisor, the Fund's
administrator, and any broker-dealer authorized to sell Shares.
Purchases by Exchange
You may exchange shares of any other fund in the ISI family of funds with the
same sales charge structure for an equal dollar amount of Shares without payment
of the sales charges described above or any other charge. In addition, you may
exchange shares of any fund in the ISI family of funds with a lower sales charge
structure, or that were purchased through a special offer, for an equal dollar
amount of Shares if you have owned the shares you are redeeming for at least 24
months. If you have owned them for less than 24 months, you may exchange them
for Shares if you pay the difference in sales charges. You may enter both your
redemption and purchase orders on the same Business Day or, if you have already
redeemed the shares of the other fund, you may enter your purchase order within
six months of the redemption, provided the amount of the purchase order is at
least $5,000.
The net asset value of shares purchased and redeemed in an exchange request
received on the same Business Day will be determined on that 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, 1999, you may exchange shares of any other mutual fund on
which you have paid a sales charge or shares of any closed-end fund, for an
equal dollar amount of Shares by submitting to the Distributor or your
securities 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.
You may exercise the exchange privilege with respect to other ISI funds by
telephone. (See "Telephone Transactions" below.) The Fund may modify or
terminate these offers of exchange at any time upon 60 days' written notice.
Purchases Through Automatic Investing Plan
You may elect to have a specified amount invested monthly or quarterly in
Shares. The amount specified will be withdrawn from your checking account using
a pre-authorized check and 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 either by you
or the Fund upon 30 days' prior written notice to the other party. If you wish
to enroll in the Automatic Investing Plan or if you wish to obtain additional
information, complete the appropriate section of the Application Form attached
to this Prospectus.
<PAGE>
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and capital gains
distributions will be reinvested in additional Shares at net asset value. You
may elect to receive your distributions in cash or to terminate automatic
reinvestment by completing the appropriate section of the attached Application
Form or by giving written notice to the Fund's transfer agent (the "Transfer
Agent") at the address listed on the inside back cover of this Prospectus
either directly or through your securities dealer or Shareholder Servicing
Agent, at least five days before the next date on which dividends or
distributions will be paid.
You may also have your distributions invested in shares of other funds in the
ISI family of funds. Call your securities dealer or the Transfer Agent for
additional information.
6. How to Redeem Shares
You may redeem all or part of your investment on any Business Day through your
securities dealer, your Shareholder Servicing Agent or the Transfer Agent. You
may
6
<PAGE>
redeem up to $50,000 worth of Shares by telephone. (See "Telephone
Transactions" below.) A redemption order is effected at the net asset value
per share next determined after receipt of your order (or, if stock
certificates have been issued for the Shares to be redeemed, after you tender
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. You will be paid for redeemed Shares by check which
will be mailed within seven days after your redemption order is received in
proper form.
The Transfer Agent, your securities dealer or your Shareholder Servicing Agent
may require the following documents in order to redeem your Shares:
1) A letter of instructions, specifying your account number and the number
of Shares or dollar amount to be redeemed, signed by all owners of the
Shares in the exact names in which the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature 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 your account have been
redeemed on a dividend payable date, the dividend will be remitted to you by
check.
The Fund has the power under its Articles of Incorporation to redeem your
account upon 60 days' notice if its value falls below $500 due to your
redemptions.
Systematic Withdrawal Plan
If you hold Shares having a value of $10,000 or more you may arrange to have a
portion of your 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, your account may eventually be exhausted. Because Share purchases
include a sales charge that you will not recover at the time of redemption,
you should not have a withdrawal plan in effect at the same time you are
making recurring purchases. If you wish to participate in the Systematic
Withdrawal Plan, complete the appropriate section of the Application Form
attached to this Prospectus.
7. Telephone Transactions
You may redeem Shares in amounts up to $50,000 or exchange Shares in any
amount, 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). Telephone
transaction privileges are automatic unless you specifically request that no
telephone redemptions or exchanges be accepted for your account. 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 next determined on the following 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 you to provide certain personal identification information
at the time your account is opened and prior to effecting each transaction
requested by telephone. You may be required to provide additional telecopied
written instructions. 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. Your telephone transaction request will be
recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by mail. Shares held in certificate form may not be
7
<PAGE>
exchanged or redemed 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 summary of certain federal income tax consequences affecting the
Fund and its shareholders is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. No attempt
has been made to present a detailed explanation of the federal, state or local
tax treatment of the Fund or the shareholders, and the discussion here is not
intended as a substitute for careful tax planning.
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. Unless
you are otherwise exempt, you will be generally subject to 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.
You will be taxed on 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, as gains from the sale or exchange of a capital asset held for more than
one year regardless of the length of time you have held the Shares. You will
be taxed on all other income distributions as ordinary income. Fund
distributions generally will not be eligible for the corporate dividends
received deduction. You will be advised annually as to the federal income tax
status of distributions made during the year.
Ordinarily, you should include all dividends as income in the year of payment.
However, dividends declared payable to shareholders of record in December of
one year, but paid in January of the following year, will be deemed for tax
purposes to have been received by you and paid by the Fund in the year in
which the dividends were declared.
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.
The sale, exchange or redemption of Shares is a taxable event for you.
You are urged to consult with your tax advisor 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. You are urged
to consult with your tax advisor regarding whether, and under what conditions
such exemption is available.
<PAGE>
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 its distributors, to the Advisor and to the
Fund's administrator. A majority of the 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
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, Esq. Director
R. Alan Medaugh President
Nancy Lazar Vice President
Carrie L. Butler Vice President
Margaret M. Beeler Assistant Vice President
Keith C. Reilly Assistant Vice President
Joseph A. Finelli Treasurer
Amy M. Olmert Secretary
Scott J. Liotta Assistant Secretary
8
<PAGE>
10. Investment Advisor
International Strategy & 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. 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,
1997, the Advisor had approximately $510 million under management. The Advisor
also acts as investment advisor to Managed Municipal Fund, Inc., North American
Government Bond Fund, Inc. and ISI Strategy Fund, Inc., open-end management
investment companies with approximately $180 million in aggregate net assets as
of December 31, 1997.
As compensation for its services for the fiscal year ended October 31, 1997, the
Advisor received an annual fee equal to 0.28% 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 (1.50%) of the
Fund's gross income.
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 eighteen 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"), an indirect subsidiary of Bankers
Trust New York Corporation, 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
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, 1997, ICC received a fee equal to 0.12% 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 (0.50%)
of the Fund's gross income.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")
12. Distributor
International Strategy & Investment Group Inc. ("ISI Group" or the
"Distributor") has served as distributor of the Shares since April 1, 1997
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. ISI Group is a broker-dealer that was formed in 1991 and is an
affiliate of the Advisor. ISI Group employs Mr. Edward S. Hyman and Ms. Nancy
Lazar. Due to their stock ownership, Mr. Hyman and Ms. Lazar may be deemed to be
controlling persons of ISI Group. As compensation for its services for the
period from April 1, 1997 through October 31, 1997, the Distributor received a
fee equal to 0.25% (annualized) of the average daily net assets. The Distributor
may allocate on a proportional basis up to all of its fee to selected securities
9
<PAGE>
dealers as compensation for their ongoing shareholder services, including
processing redemption and sale requests and responding to your inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks to provide shareholder services,
pursuant to which the Distributor may allocate on a proportional basis
up to all of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
charge you separately for these services.
Payments under the Plan are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used
to pay the Distributor's overhead expenses. If the cost of providing
distribution services for the Shares is less than the payments received, the
Distributor may retain the unexpended portion of the distribution fee. The
Distributor or its associated persons will from time to time and from its own
resources pay or allow additional discounts or promotional incentives in the
form of cash or other compensation (including merchandise or travel).
13. Custodian, Transfer Agent and Accounting Services
Investment Company Capital Corp. 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, 1997, ICC received a fee equal to 0.03% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust New
York Corporation, acts as custodian of the Fund's assets. (See the Statement
of Additional Information.)
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. 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 your bank with respect to the account through
which your Shares may be purchased, although not included in calculations of
performance, will reduce your performance results.
10
<PAGE>
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
Unless required by Maryland law, 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
You will be furnished 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.
Shareholder Inquiries
If you have questions concerning your Shares, you should contact the Transfer
Agent at (800) 882-8585, the Fund at (800) 955-7175, or your securities dealer
or Shareholder Servicing Agent.
11
<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:
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.
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
<PAGE>
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
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 are 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)
Please attach a voided check.
- ------------------------------------- -------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------- -------------------------------------
Existing ISI Total Return U.S. Treasury Depositor's Signature Date
Fund Account No., if any (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: _____________________
_________________________
Signature and Taxpayer Certification
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 your ultimate U.S. tax liability.
<PAGE>
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.
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding.
- ------------------------------------- -------------------------------------
Signature Date Signature (if a joint Date
account, both must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: ____________________________ Dealer Code:______________________
Dealer's Address: __________________________ Branch Code:______________________
__________________________
Representative: ___________________________ Rep. No.__________________________
<PAGE>
ISI TOTAL RETURN U.S TREASURY FUND SHARES
(A Class of Total Return U.S. Treasury Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
1-800-955-7175
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY &
One South Street INVESTMENT GROUP INC.
Baltimore, Maryland 21202 717 Fifth Avenue
New York, New York 10022
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
1-800-882-8585
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
<PAGE>
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
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 ......... 4
6. How to Redeem Shares .............. 6
7. Telephone Transactions ............ 7
8. Dividends and Taxes ............... 8
9. Management of the Fund ............ 8
10. Investment Advisor ................ 9
11. Administrator ..................... 9
12. Distributor ....................... 9
13. Custodian, Transfer Agent and
Accounting Services .............. 10
14. Performance Information ........... 10
15. General Information ............... 11
[GRAPHIC OMITTED]
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, 1998
PROSPECTUS
<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 SHAREHOLDER SERVICING AGENT OR BY
CALLING THE FUND AT (800) 767-FLAG (FOR THE FLAG INVESTORS
SHARES CLASSES) OR (800) 955-7175 (FOR THE ISI SHARES CLASS).
Statement of Additional Information Dated: March 1, 1998
Relating to the Prospectuses of
ISI Total Return U.S. Treasury Fund Shares Dated: March 1, 1998
and
Flag Investors Total Return U.S. Treasury Fund Class A and Class B Shares
Dated: March 1, 1998
<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...................................... 7
6. Investment Advisory and Other Services...................... 13
7. Administration.............................................. 14
8. Distribution of Fund Shares................................. 15
9. Portfolio Transactions...................................... 19
10. Capital Shares.............................................. 20
11. Semi-Annual Reports......................................... 21
12. Custodian, Transfer Agent and
Accounting Services....................................... 21
13. Independent Auditors........................................ 21
14. Control Persons and Principal Holders of
Securities................................................ 22
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 by calling the Fund's distributors (the
"Distributors") at (800) 767-FLAG (for a prospectus for the Flag Investors
Shares) or (800) 955-7175 (for a prospectus for the ISI Shares), or from
Participating Dealers that offer shares of the respective classes of the Fund
(the "Shares") to prospective investors. Prospectuses may also be obtained from
Shareholder Servicing Agents. As used herein the term "Prospectus" describes
information common to the prospectuses of the three classes of the Fund's
Shares, unless the term "Prospectus" is modified by the appropriate class
designation. As used herein, the "Fund" refers to Total Return U.S. Treasury
Fund, Inc. and specific references to any class of the Fund's Shares will be
made using the name of such class. Some of the information required to be in
this Statement of Additional Information is also included in the Fund's current
Prospectuses. To avoid unnecessary repetition, references are made to related
sections of the Prospectuses. In addition, the Prospectuses and this Statement
of Additional Information omit certain information respecting the Fund and its
business that is contained in the Registration Statement respecting the Fund and
its Shares filed with the SEC. Copies of the Registration Statement as filed,
including such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
June 3, 1988. The Fund filed a registration statement with the SEC registering
itself as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
its Shares under the Securities Act of 1933, as amended (the "Securities Act"),
and commenced operations on August 10, 1988. 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 (now BT Alex. Brown Incorporated), BT 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 shareholder approval. The Fund's investment
objective is fundamental, however, and may not be changed without shareholder
approval.
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 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.
-2-
<PAGE>
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal 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. 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 the Fund's total assets are outstanding, the Fund will
not purchase securities;
2. 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);
3. 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);
4. 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;
5. Invest in real estate or mortgages on real estate;
6. Purchase or sell commodities or commodities contracts or
futures contracts;
7. Act as an underwriter of securities within the meaning of the
Federal securities laws;
8. Issue senior securities;
9. 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;
10. Effect short sales of securities;
11. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions);
12. Purchase participations or other interests in oil, gas or
other mineral exploration or development programs;
13. Purchase any securities of unseasoned issuers which have been
in operation directly or through predecessors for less than three
years;
14. Invest in shares of any other investment company registered
under the Investment Company Act;
-3-
<PAGE>
15. 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;
16. Invest in companies for the purpose of exercising management
or control;
17. Invest in puts or calls or any combination thereof;
18. 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, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.
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
-4-
<PAGE>
the remaining shareholders of the Fund to make payment of the redemption price
in whole or in part by a distribution in kind of readily marketable securities
from the portfolio of the Fund in lieu of cash, in conformity with applicable
rules of the SEC, the Fund will make such distributions in kind. If Shares are
redeemed in kind, the redeeming shareholder will incur brokerage costs in later
converting the assets into cash. The method of valuing portfolio securities is
described under "How to Invest" in each Prospectus 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, derive at least 90% of its gross
income from dividends, interest, certain
-5-
<PAGE>
payments with respect to securities, loans and gains from the sale or other
disposition of stock or securities, or from other income derived with respect to
its business of investing in stock or securities.
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 gain or loss
from the sale of a capital asset held for more than one year, 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 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.
-6-
<PAGE>
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 eighteen months, mid-term capital gain or loss if the Shares have
been held for more than twelve but not more than eighteen months, and otherwise
will be short-term capital gain or loss. However, 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.
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 advisors as to the consequences of federal, state and local tax rules
affecting an investment in the Fund.
-7-
<PAGE>
5. MANAGEMENT OF THE FUND
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 & Investment Inc., 717 Fifth Avenue, New York,
New York 10022. Chairman, International Strategy & Investment Inc.
(registered investment advisor), Chairman, ISI Inc. (investments) and
Chairman and President, International Strategy & Investment Group Inc.
(registered investment advisor and registered broker-dealer),
1991-Present.
* RICHARD T. HALE, Vice Chairman and Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor) and
Chartered Financial Analyst.
*TRUMAN T. SEMANS, Director (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly, Vice
Chairman, Alex. Brown Incorporated (now BT Alex. Brown Incorporated);
Vice Chairman, Alex. Brown Capital Advisory & Trust Company and
Director, Investment Company Capital Corp. (registered investment
advisor).
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).
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) and 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 and 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 DP Mann
Holdings (insurance); Formerly, Director, AMBAC Treasurers Trust
(registered investment company).
-8-
<PAGE>
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 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, Esq., 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) and American Science &
Engineering (x-ray detection equipment); 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 & Investment Inc.,
1991-Present.
NANCY LAZAR, Vice President (8/1/57)
International Strategy & Investment Inc., 717 Fifth Avenue, New York,
New York 10022. Executive Vice President and Secretary, International
Strategy & Investment Inc., 1991-Present.
CARRIE L. BUTLER, Vice President (5/1/67)
International Strategy & Investment Inc., 717 Fifth Avenue, New York,
New York 10022. Assistant Vice President, International Strategy &
Investment Inc., 1991-Present.
MARGARET M. BEELER, Assistant Vice President (3/1/67)
International Strategy & Investment Inc., 717 Fifth Avenue, New York,
New York 10022. Assistant Vice President, International Strategy &
Investment Inc., May 1996- Present. Formerly, Marketing Representative,
U.S. Healthcare, Inc., 1995-1996; Sales Manager, Donna Maione, Inc.,
1994-1995; Sales Manager, Deborah Wiley California, 1989-1994.
KEITH C. REILLY, Assistant Vice President (6/22/66)
International Strategy & Investment Inc., 717 Fifth Avenue, New York,
New York 10022. Assistant Vice President, International Strategy &
Investment Inc., May 1996-Present. Formerly, Select Private Banking
Officer, Assistant Manager, Chemical Bank, 1995-1996; Financial
Consultant, Dreyfus Corporation, 1989-1995.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown 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.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.
-9-
<PAGE>
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994-July
1996; Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.
- -------------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or by any of its affiliates.
There are currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman serves as
Chairman of four funds in the Fund Complex. Mr. Hale serves as Chairman of four
funds and as a Director of eight other funds in the Fund Complex. Mr. Medaugh
serves as a Director and President of two funds and as President of two other
funds in the Fund Complex. Mr. Semans serves as Chairman of five funds and as a
Director of six other funds in the Fund Complex. Messrs. Cunnane, Kroeger, Levy
and McDonald serve as Directors of each fund in the Fund Complex. Ms. Rimel and
Mr. Vogt serve as Directors of 11 funds in the Fund Complex. Ms. Lazar and Ms.
Butler serve as Vice Presidents and Ms. Beeler and Mr. Reilly serve as Assistant
Vice Presidents of four funds in the Fund Complex. Mr. Finelli serves as
Treasurer, Ms. Olmert serves as Secretary and Mr. Liotta 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 BT Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of the Advisor, the Distributors or the Fund's administrator may be considered
to have received remuneration indirectly. As compensation for services as
director, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (an "Independent Director") receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with attendance at Board and committee meetings) from all
Flag Investors/ISI Funds and BT Alex. Brown Cash Reserve Fund, Inc. for which he
or she 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, 1997,
Independent Directors' fees attributable to the assets of the Fund totalled
$11,972. 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, 1997.
-10-
<PAGE>
<TABLE>
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, 1997 Expenses October 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward S. Hyman(1) $0 $0 $0
Chairman
Richard T. Hale(1) $0 $0 $0
Vice Chairman
W. James Price(1,2) $0 $0 $0
Vice Chairman
Charles W. Cole, Jr.(1,3) $0 $0 $0
Director
Truman T. Semans(1) $0 $0 $0
Director
James J. Cunnane $1,993(4) (5) $39,000 for service on 13
Director Boards in the Fund Complex
John F. Kroeger $2,504(4) (5) $49,000 for service on 13
Director Boards in the Fund Complex
Louis E. Levy $1,993(4) (5) $39,000 for service on 13
Director Boards in the Fund Complex
Eugene J. McDonald $1,993(4) (5) $39,000 for service on 13
Director Boards in the Fund Complex
Rebecca W. Rimel $1,451(4) (5) $39,000 for service on 11(6)
Director Boards in the Fund Complex
Carl W. Vogt, Esq. $1,466(4) (5) $39,000 for service on 11(6)
Director Boards in the Fund Complex
Harry Woolf(2) $ 574(4) (5) $ 9,750 for service on 12
Director Boards in the Fund Complex
</TABLE>
- ----------
(1) Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
(2) Retired effective December 31, 1996. Mr. Woolf was appointed President
of certain funds in the Fund Complex effective September 1, 1997. For
serving as President, Mr. Woolf receives compensation from such funds
in addition to his retirement benefits.
(3) Resigned effective September 1, 1997.
(4) Of the amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald,
Vogt and Woolf and Ms. Rimel, $1,993, $0, $0, $1,933, $1,466, $574 and
$1,451 was deferred pursuant to a deferred compensation plan.
(5) The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
Fund for the fiscal year ended October 31, 1997 was approximately
$19,142.
(6) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve.
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 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
-11-
<PAGE>
Complex for the rest of his life. 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, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger, 15
years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms. Rimel, 2 years
and for Mr. Vogt, 2 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
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
</TABLE>
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, Levy, McDonald and Vogt and Ms.
Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors funds and BT
Alex. Brown Cash Reserve Fund, Inc. 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 any officer, director, or employee of
the Fund, International Strategy & Investment Group, Inc. or the Advisor,
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 foregoing also would apply to any officer, director or
employee of ICC Distributors, Inc. that is an access person. The preclearance
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. The substantive
restrictions applicable to investment personnel include a ban on acquiring any
securities in an initial public offering, a prohibition from profiting on
short-term trading in securities and 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.
-12-
<PAGE>
6. INVESTMENT ADVISORY AND OTHER SERVICES
International Strategy & 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., North
American Government Bond Fund, Inc. and ISI Strategy 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 0.20%
$100,000,000 - $200,000,000 0.18%
$200,000,001 - $300,000,000 0.16%
$300,000,001 - $500,000,000 0.14%
$500,000,001 and over 0.12%
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 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 Independent Directors by votes cast in person at a meeting
called for such purpose. The Investment Advisory Agreement was most recently
approved by the Fund's Board of Directors in the foregoing manner on September
16, 1997. The Fund or the Advisor may terminate the Investment Advisory
Agreement on sixty days' written notice without penalty. The Investment
-13-
<PAGE>
Advisory Agreement will terminate automatically in the event of assignment.
Advisory fees paid by the Fund to ISI for the last three fiscal years were as
follows:
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
$ 848,963 $ 953,088 $ 999,452
- --------------------------------------------------------------------------------
7. ADMINISTRATION
Investment Company Capital Corp. 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 0.10%
$100,000,000 - $200,000,000 0.09%
$200,000,001 - $300,000,000 0.08%
$300,000,001 - $500,000,000 0.07%
$500,000,001 and over 0.06%
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. Administration fees paid by the Fund to ICC
for the last three fiscal years were as follows:
- --------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
$ 374,611 $ 419,655 $ 438,267
- --------------------------------------------------------------------------------
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services".) ICC
is an indirect subsidiary of Bankers Trust New York Corporation.
-14-
<PAGE>
8. DISTRIBUTION OF FUND SHARES
International Strategy & Investment Group Inc. ("ISI Group") serves as
distributor for the ISI Shares pursuant to a Distribution Agreement effective
April 1, 1997 ("ISI Distribution Agreement"). Prior to April 1, 1997, Armata
Financial Corp. served as distributor for the ISI Shares for the same rate of
compensation and on substantially the same terms and conditions as ISI Group.
ICC Distributors Inc. ("ICC Distributors") serves as distributor for the Flag
Investors Shares pursuant to an agreement effective August 31, 1997 ("Flag
Distribution Agreement"). Prior to August 31, 1997, Alex. Brown & Sons
Incorporated ("Alex. Brown") served as distributor for the Flag Investors Shares
for the same rate of compensation and on substantially the same terms and
conditions as ICC Distributors. The Distribution Agreements provide that ICC
Distributors (in the case of the Flag Investors Shares) or ISI Group (in the
case of the ISI Shares) has the exclusive right to distribute the related class
of Shares either directly or through other broker-dealers.
The ISI Distribution Agreement provides that the ISI Group on behalf
of the ISI Shares, (i) will solicit and receive orders for the purchase of ISI
Shares (ii) 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 (iii) receive
requests for redemption and transmit such redemption requests to the Fund's
transfer agent as promptly as possible (iv) respond to inquiries from the Fund's
shareholders concerning the status of their accounts with the Fund; (v) provide
the Fund's Board of Directors for their review with quarterly reports required
by Rule 12b-1; (vi) maintain such accounts, books and records as may be required
by law or be deemed appropriate by the Fund's Board of Directors; and (vii) take
all actions deemed necessary to carry into effect the distribution of the
Shares. Pursuant to the ISI Distribution Agreement, ISI has not undertaken to
sell any specific number of ISI Shares. The ISI Distribution Agreement further
provides that, in connection with the distribution of Shares, ISI Group will be
responsible for all promotional expenses. The services by ISI Group to the Fund
are not exclusive, and ISI Group shall not be liable to the Fund or its
shareholders for any act or omission by ISI Group 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.
The Flag Distribution Agreement provides that ICC Distributors shall;
(i) use reasonable efforts to sell Flag Investors Shares upon the terms and
conditions contained in the Flag Distribution Agreement and the Fund's then
current Prospectus; (ii) use its best efforts to conform with the requirements
of all federal and state laws relating to the sale of the Flag Investors Shares;
(iii) adopt and follow procedures as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. and any
other applicable self-regulatory organization; (iv) perform its duties under the
supervision and in accordance with the directives of the Fund's Board of
Directors and the Fund's Articles of Incorporation and By-Laws; and (v) provide
the Fund's Board of Directors with a written report of the amounts expended in
connection with the Flag Distribution Agreement. Pursuant to the Flag
Distribution Agreement, ICC Distributors shall devote reasonable time and effort
to effect sales of Flag Investors Shares but shall not be obligated to sell any
specific number of Shares. The services of ICC Distributors are not exclusive
and ICC Distributors shall not be liable to the Fund or its shareholders for any
error of judgment or mistake of law, for any losses arising out of any
investment, or for any action or inaction of ICC Distributors in the absence of
bad faith, willful misfeasance or gross negligence in the performance of ICC
Distributors' duties or obligations under the Flag Distribution Agreement or by
reason of ICC Distributors' reckless disregard of its duties and obligations
under the Flag Distribution Agreement. The Flag Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreements may be terminated at any time upon 60
days' written notice by the Fund, without penalty, by the vote of a majority of
the Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the
-15-
<PAGE>
event of an assignment. The Flag Distribution Agreement has an initial term of
one year from the date of effectiveness. It shall continue in effect from year
to year with respect to the Flag Investors classes of the Fund provided that it
is approved at least annually by (i) a vote of a majority of the outstanding
voting securities of the related class of the Fund or (ii) a vote of a majority
of the Fund's Board of Directors including a majority of the Independent
Directors and, with respect to each Flag Investors class of the Fund for which
there is a plan of distribution, so long as such plan of distribution is
approved at least annually by the Independent Directors in person at a meeting
called for the purpose of voting on such approval (see below). The ISI
Distribution Agreement has an initial term of two years and will remain in
effect from year to year provided that it is specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Independent Directors by votes cast in person at a meeting
specifically called for such purpose. The Flag Distribution Agreement, including
the form of Sub-Distribution Agreement, was initially approved by the Board of
Directors, including a majority of the Independent Directors, on August 4, 1997.
The ISI Distribution Agreement, including the form of Sub-Distribution
Agreement, was most recently approved by the Board of Directors, including a
majority of the Independent Directors on September 16, 1997.
ICC Distributors and ISI Group have entered into Sub-Distribution
Agreements with Participating Dealers ("Participating Dealers") under which such
Participating Dealers have agreed to process investor purchase and redemption
orders and respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund. Any Sub-Distribution Agreement may be
terminated in the same manner as the Distribution Agreements at any time and
shall automatically terminate in the event of an assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors and
ISI Group will allocate a portion of their respective distribution fees as
compensation for such financial institutions' ongoing shareholder services. The
Fund may also enter into Shareholder Servicing Agreements pursuant to which the
Distributors or the Fund's administrator or their respective affiliates will
provide compensation out of its own resources for ongoing shareholder services.
Although banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Fund, according to interpretations
from various bank regulatory authorities, financial institutions are not
prohibited from acting in other capacities for investment companies, such as the
shareholder servicing capacities described above. Should future legislative,
judicial or administrative action prohibit or restrict the activities of the
Shareholder Servicing Agents in connection with the Shareholder Servicing
Agreements, the Fund may be required to alter materially or discontinue its
arrangements with the Shareholder Servicing Agents.
As compensation for providing distribution and related administrative
services under the Distribution Agreements as described above, the Fund will pay
ICC Distributors for the Flag Investors Class A Shares and ISI Group for the ISI
Shares, on a monthly basis, an annual fee, equal to 0.25% of the average daily
net assets of the respective class of Shares. The Distributors expect to
allocate up to all of their fees to Participating Dealers and Shareholder
Servicing Agents. As compensation for providing distribution and related
administrative services for the Flag Investors Class B Shares, under the Flag
Distribution Agreement as described above, the Fund will pay ICC Distributors,
on a monthly basis, an annual fee equal to 0.35% of the Flag Investors Class B
Shares' average daily net assets. ICC Distributors expects to retain the entire
amount of the distribution fee as reimbursement for front-end payments to
Participating Dealers. In addition, with respect to the Flag Investors Class B
Shares, the Fund will pay ICC Distributors a shareholder servicing fee at an
annual rate of 0.25% of the average daily net assets of the Flag Investors Class
B Shares. (See the Prospectus). ICC Distributors expects to allocate most of its
shareholder servicing fee to Participating Dealers and Shareholder Servicing
Agents.
-16-
<PAGE>
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributors received fees
in the following amounts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
---------------------------------------------------------------------------------
Class 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flag Investors Shares 12b-1 Fee $322,511(1) $382,308(4) $411,117(4)
- -----------------------------------------------------------------------------------------------------------------------------------
Flag Investors Shareholder $ 843 (2) $ 30(4,5) N/A
Servicing Fee (Class B Shares)
- -----------------------------------------------------------------------------------------------------------------------------------
ISI Shares 12b-1 Fee $445,938(3) $495,975(6) $501,139(6)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $271,010 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$51,501.
(2) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $541 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$302.
(3) Of this amount, Armata, the ISI Shares' distributor prior to April 1,
1997, received $192,508 and ISI Group, the ISI Shares' distributor
effective April 1, 1997, received $253,430.
(4) Fees received by Alex. Brown, the Flag Investors Shares' distributor
for the fiscal years ended October 31, 1996 and 1995.
(5) For Flag Investors Class B Shares, amounts represent fees received for
the period from June 20, 1996 (commencement of offering of Flag
Investors Class B Shares) through October 31, 1996.
(6) Fees received by Armata, the ISI Shares' distributor for the fiscal
years ended October 31, 1996 and October 31 1995.
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 ICC Distributors or ISI Group for distribution and other
shareholder servicing assistance as set forth in the related Distribution
Agreement, and ICC Distributors and ISI Group are authorized to make payments
out of their fees to Participating Dealers and Shareholder Servicing Agents. The
Distribution 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 Independent Directors, by votes cast in
person at a meeting called for such purpose. The Plans were most recently
approved by the Fund's Board of Directors, including a majority of the
Independent Directors on September 16, 1997.
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 without
penalty, by a vote of a majority of the Fund's Independent Directors or by a
vote of a majority of the outstanding Shares.
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 ICC Distributors or ISI Group
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 Independent Directors shall be
committed to the discretion of the Independent Directors then in office.
-17-
<PAGE>
Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
or ISI Group, 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 0.25% 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 0.35% 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 Distribution Agreement terminates with respect to that class. In return for
payments received pursuant to the Plans in the last three fiscal years,
respectively, the Fund's distributors, 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 last three fiscal years, the Flag Investors Shares'
distributor received the following commissions or contingent deferred sales
charges and from such commissions or sales charges, the distributor retained the
following amounts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------------------
Class Received Retained Received Retained Received Retained
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors $ 40,869(1) $ 30,820(3) $113,136(5) $ 83,059(5) $209,203(5) $177,202(5)
Class A
Commissions
- -----------------------------------------------------------------------------------------------------------------------------------
Flag Investors $ 13,172(2) $ 6,155(4) $ 1,420(5,6) $ 1,420(5,6) N/A N/A
Class B
Contingent
Deferred Sales
Charge
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $35,148 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$5,721.
(2) Of this amount, Alex. Brown, the Flag Investors Shares' distributor
prior to August 31, 1997, received $6,492 and ICC Distributors, the
Flag Investors Shares' distributor effective August 31, 1997, received
$6,680.
(3) Of commissions received, Alex. Brown retained $30,820 and ICC
Distributors retained $0, respectively.
(4) Of sales charges received, Alex. Brown retained $6,155 and ICC
Distributors retained $0, respectively.
(5) By Alex. Brown, the Flag Investors Shares' distributor for the fiscal
years ended October 31, 1996 and October 31, 1995.
(6) For the period from June 20, 1996 (commencement of offering of Flag
Investors Class B Shares) through October 31, 1996.
For the last three fiscal years, the ISI Shares' distributor received
the following commissions and from such commissions the distributor retained the
following amounts:
-18-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------------------------
Class Received Retained Received Retained Received Retained
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ISI Shares $ 177,642(1) $ 0(2) $360,356(3) $ 53,175(3) $635,954(3) $53,363(3)
Commissions
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Of this amount, Armata, the ISI Shares' distributor prior to April 1,
1997, received $97,081 and ISI Group, the ISI Shares' distributor
effective April 1, 1997 received $80,561
(2) Of commissions received, Armata retained $0 and ISI Group retained $0,
respectively.
(3) By Armata, the ISI Shares' distributor for the fiscal years ended
October 31, 1996 and October 31, 1995.
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 Independent Directors and Independent members of any
advisory board or committee; all expenses incident to the payment of any
dividend, distribution, withdrawal or redemption, whether in Shares or in cash;
charges and expenses of any outside service used for pricing of the Shares; fees
and expenses of legal counsel or independent auditors, in connection with any
matter relating to the Fund; membership dues of industry associations; interest
payable on Fund borrowings; postage; insurance premiums on property or personnel
(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 ISI, ICC, ISI Group or ICC Distributors.
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
-19-
<PAGE>
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, 1997, October 31, 1996 and
October 31, 1995, 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, 1997,
the Fund held a 5.60% repurchase agreement issued by Goldman Sachs & Co. valued
at $37,041,000. Goldman Sachs & Co. is one of the Fund's "regular brokers or
dealers."
10. CAPITAL SHARES
Under the Fund's Articles of Incorporation, the Fund may issue up to
100 million Shares of its capital stock with a par value of $.001 per Share.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated four classes of Shares: Flag Investors Total Return U.S. Treasury
Fund Class A Shares (formerly known as the Flag Investors Total Return U.S.
Treasury Fund Shares), Flag Investors Total Return U.S. Treasury Fund Class B
Shares, Flag Investors Total Return U.S. Treasury Fund Class D Shares and ISI
Total Return U.S. Treasury Fund Shares. The Flag Investors Total Return U.S.
Treasury Fund Class 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
-20-
<PAGE>
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
Effective September 22, 1997, Bankers Trust Company ("Bankers Trust")
has been retained to act as custodian of the Fund's investments. Bankers Trust
receives such compensation from the Fund for its services as Custodian as may be
agreed to from time to time by Bankers Trust and the Fund. For the period from
September 22, 1997 through October 31, 1997, Bankers Trust accrued custodian
fees of $4,576. Investment Company Capital Corp. has been retained to act as the
Fund's transfer and dividend disbursing agent. As compensation for these
services, ICC receives up to $15.17 per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended October 31, 1997, such fees totalled $208,105.
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, 1997, ICC received fees of $86,088.
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 University Square, 117 Campus Drive, Princeton, New Jersey 08540.
-21-
<PAGE>
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, no shareholders owned beneficially 5%
or more of the Fund's outstanding Shares, as of February 2, 1998.
As of such date, to Fund management's knowledge, Directors and officers
as a group owned less than 1% of the Fund's total outstanding Shares of either
class.
15. PERFORMANCE AND YIELD COMPUTATIONS
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.
Total Return Calculation
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5- or 10-year
periods (or fractional portion thereof)of a hypothetical
$1,000 payment made at the beginning of the 1-,5- or
10-year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one-, five- and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date 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.
-22-
<PAGE>
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 investment for the periods
ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
One-Year Period Ended Five-Year Period Ended
October 31, 1997 October 31, 1997 Since Inception
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Ending Annual Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors
Class A Shares $1,040.98 4.09% $1,399.22 6.95% $2,066.96 8.19%
*August 10, 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Flag Investors
Class B Shares $1,064.86 6.49% N/A N/A $1,133.96 5.46%
*June 20, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ISI Shares
*August 10, 1988 $1,041.54 4.15% $1,399.94 6.96% $2,068.14 8.20%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
* Inception Date
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 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.
Yield Calculations
The yield based on the 30-day period ended October 31, 1997 was 5.31%
for the Flag Investors Class A Shares, 5.32% for the ISI Shares and 5.22% for
the Flag Investors Class B Shares, computed in the manner discussed below. The
yield of the Fund is calculated by dividing the net investment income per Share
earned by the Fund during a 30-day (or one month) period by the maximum offering
price per share on the last day of the period and analyzing the result on a
semiannual basis by adding one to the quotient, raising the sum to the power of
six, subtracting
-23-
<PAGE>
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.
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. The Fund's portfolio turnover rate in fiscal year 1997 was
92% and in fiscal year 1996 was 199%. The high portfolio turnover in 1996
resulted from a decision by the Advisor to lengthen the maturity of the Fund's
portfolio to take advantage of an ISI forecasted declining interest rate trend.
16. FINANCIAL STATEMENTS.
See next page.
-24-
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS OCTOBER 31, 1997
Par Value
Interest Rate Maturity Date (000) (Note 1)
- --------------------------------------------------------------------------------
U.S. TREASURY BONDS - 71.7%
12.000% 8/15/13 $35,900 $ 52,537,424
11.750 11/15/14 36,000 53,184,384
7.500 11/15/16 37,000 42,255,147
8.875 8/15/17 1,000 1,300,000
9.000 11/15/18 14,750 19,513,793
8.875 2/15/19 10,000 13,085,940
8.750 8/15/20 22,250 29,025,815
------------
Total U.S. Treasury Bonds
(Cost $210,613,472) 210,902,503
------------
U.S. TREASURY NOTES - 5.2%
6.375 9/30/01 15,000 15,314,070
------------
Total U.S. Treasury Notes
(Cost $15,119,028) 15,314,070
------------
ZERO COUPON U.S. TREASURY BONDS (S.T.R.I.P.S.) - 9.8%
5.520* 8/15/98 30,000 28,735,290
------------
Total U.S. Treasury S.T.R.I.P.S.
(Cost $28,701,146) 28,735,290
------------
REPURCHASE AGREEMENTS - 12.6%
Goldman Sachs & Co., 5.60%
Dated 10/31/97, to repurchased on 11/3/97,
collateralized by U.S. Treasury
Bonds with a market value of $37,782,559.
(Cost $37,041,000) 37,041 37,041,000
------------
Total Investments in Securities - 99.3%
(Cost $291,474,646)** 291,992,863
Other Assets in Excess of Liabilities, Net - 0.7% 2,148,610
------------
NET ASSETS - 100.0% $294,141,473
============
- 25 -
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($122,228,931 / 12,179,428 shares outstanding) $10.04
======
Flag Investors Class B Share
($838,393 / 83,601 shares outstanding) $10.03
======
ISI Class Share
($171,074,149 / 17,036,448 shares outstanding) $10.04
======
Maximum Offering Price Per:
Flag Investors Class A Share
($10.40 / 0.955) $10.51
======
Flag Investors Class B Share $10.03
======
ISI Class Share
($10.04 / 0.9555) $10.51
======
- ----------
* Yield as of October 31, 1997.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
- 26 -
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $19,868,979
-----------
Expenses:
Investment advisory fee (Note 2) 848,963
Distribution fee (Note 2) 769,292
Administration fee (Note 2) 374,611
Transfer agent fee (Note 2) 208,105
Accounting fee (Note 2) 86,088
Printing and postage 63,992
Legal 44,942
Custodian fee (Note 2) 41,752
Miscellaneous 29,139
Audit 23,999
Directors' fees 22,602
Registration fees 20,765
Insurance 11,731
-----------
Total expenses 2,545,981
-----------
Net investment income 17,322,998
-----------
Realized and unrealized gain/(loss) on investments:
Net realized loss from security transactions (2,143,673)
Change in unrealized appreciation or depreciation
of investments 10,567,788
-----------
Net gain on investments 8,424,115
-----------
Net increase in net assets resulting from operations $25,747,113
===========
See Notes to Financial Statements.
- 27 -
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 17,322,998 $ 19,964,042
Net gain/(loss) from security transactions (2,143,673) 3,072,425
Change in unrealized appreciation
or depreciation on investments 10,567,788 (11,517,095)
------------ ------------
Net increase in net assets
resulting from operations 25,747,113 11,519,372
------------ ------------
Dividends to Shareholders from (Note 1):
Net investment income and short-term gains:
Flag Investors Class A Shares (7,246,184) (10,138,099)
Flag Investors Class B Shares (17,762) (685)
ISI Class Shares (10,059,052) (13,146,313)
Tax return of capital distribution:
Flag Investors Class A Shares (1,040,753) --
Flag Investors Class B Shares (2,606) --
ISI Class Shares (1,433,152) --
Distributions in excess of net investment income:
Flag Investors Class A Shares (116,192) (561,610)
Flag Investors Class B Shares (291) (8)
ISI Class Shares (160,000) (723,712)
----------- -----------
Total distributions (20,075,992) (24,570,427)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 15,601,057 29,511,549
Value of shares issued in
reinvestment of dividends 12,541,599 14,241,221
Cost of shares repurchased (77,072,611) (64,122,099)
----------- -----------
Decrease in net assets derived
from capital share transactions (48,929,955) (20,369,329)
----------- -----------
Total decrease in net assets (43,258,834) (33,420,384)
Net Assets:
Beginning of year 337,400,307 370,820,691
------------ ------------
End of year $294,141,473 $337,400,307
============ ============
See Notes to Financial Statements.
- 28 -
<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 year)
For the Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 9.83
------
Income from Investment Operations:
Net investment income 0.55
Net realized and unrealized gain/(loss) on investments 0.30
------
Total from Investment Operations 0.85
Less Distributions (Note 1):
Distributions from net investment income
and short-term gains (0.55)
Tax return of capital distribution (0.08)
Distributions in excess of net investment income (0.01)
Distributions from net realized long-term gains --
-------
Total distributions (0.64)
-------
Net asset value at end of year $ 10.04
=======
Total Return(1) 9.00%
Ratios to Average Daily Net Assets:
Expenses 0.83%
Net investment income 5.62%
Supplemental Data:
Net assets at end of year (000):
Flag Investors Class A Shares $122,229
ISI Class Shares $171,074
Portfolio turnover rate 92%
- ----------
(1) Total return excludes the effect of sales charge.
- 29 -
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.19 $ 9.22 $ 11.35 $ 10.47
------- ------ ------- -------
Income from Investment Operations:
Net investment income 0.56 0.57 0.51 0.62
Net realized and unrealized gain/(loss) on investments (0.23) 1.04 (1.16) 1.12
------- ------ ------- -------
Total from Investment Operations 0.33 1.61 (0.65) 1.74
Less Distributions (Note 1):
Distributions from net investment income
and short-term gains (0.65) (0.64) (1.15) (0.79)
Tax return of capital distribution -- -- (0.05) --
Distributions in excess of net investment income (0.04) -- -- --
Distributions from net realized long-term gains -- -- (0.28) (0.07)
------ ------- ------ -------
Total distributions (0.69) (0.64) (1.48) (0.86)
------ ------- ------ -------
Net asset value at end of year $ 9.83 $ 10.19 $ 9.22 $ 11.35
====== ======= ====== =======
Total Return(1) 3.44% 18.09% (6.22)% 17.33%
Ratios to Average Daily Net Assets:
Expenses 0.81% 0.80% 0.77% 0.77%
Net investment income 5.69% 5.94% 4.98% 5.21%
Supplemental Data:
Net assets at end of year (000):
Flag Investors Class A Shares $143,791 $164,206 $175,149 $224,790
ISI Class Shares $193,486 $206,615 $200,309 $232,103
Portfolio turnover rate 199% 194% 68% 249%
</TABLE>
See Notes to Financial Statements.
- 30 -
<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 For the Period
Year Ended June 20, 1996(1)
October 31, through October 31,
- --------------------------------------------------------------------------------
1997 1996
Per Share Operating Performance:
Net asset value at beginning of period $ 9.85 $10.00
------ ------
Income from Investment Operations:
Net investment income 0.56 0.22
Net realized and unrealized gain/(loss)
on investments 0.23 (0.15)
------ ------
Total from Investment Operations 0.79 0.07
Less Distributions:
Distributions from net investment income
and short-term gains (0.56) (0.22)
Tax return of capital distribution (0.04) --
Distributions in excess of net investment
income (0.01) --
------ ------
Total distributions (0.61) (0.22)
------ ------
Net asset value at end of period $10.03 $ 9.85
====== ======
Total Return(2) 8.49% 6.37%
Ratios to Average Daily Net Assets:
Expenses 1.18% 1.40%(3)
Net investment income 5.24% 5.45%(3)
Supplemental Data:
Net assets at end of period (000) $ 838 $ 123
Portfolio turnover rate 92% 199%(3)
- -------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
- 31 -
<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 and commenced operations August 10, 1988,
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. Under certain circumstances, it is necessary to reclassify prior year
information in order to conform to the current year's presentation. 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.
- 32 -
<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. 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.
- 33 -
<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"), an indirect subsidiary of
Bankers Trust New York Corporation, 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.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or administrator.
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 $86,088 for accounting services for the year ended
October 31, 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 $208,105 for
transfer agent services for the year ended October 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNCBank served as the Fund's custodian.
From September 22, 1997 to October 31, 1997, the Fund accrued $4,576 in custody
expenses.
As compensation for providing distribution services for the ISI Class,
the Fund pays ISI Group Inc. ("ISI Group"), which is affiliated with ISI, an
annual fee that is calculated daily and paid monthly. This fee is paid at an
annual rate equal to 0.25% of the ISI Class' average daily net assets. Prior to
April 1, 1997, Armata Financial Corp. served as the distributor for the ISI
Class for the same compensation and on substantially the same terms and
conditions as ISI Group.
- 34 -
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--concluded
As compensation for providing distribution services for the Flag Investors
classes, the Fund pays ICC Distributors, Inc. ("ICC Distributors"), a member of
the Forum Financial Group of companies, 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. Prior to September 1, 1997, Alex. Brown & Sons Incorporated served
as the distributor for the Flag Investors classes for the same compensation and
on substantially the same terms and conditions as ICCDistributors. For the year
ended October 31, 1997, distribution fees aggregated $769,292, of which $455,938
was attributable to the ISI Class Shares, $321,332 was attributable to the Flag
Investors Class A Shares and $2,022 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 year ended
October 31, 1997 was $19,142, and the accrued liability was $55,193.
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:
Flag Investors Class A Shares
----------------------------------
For the For the
Year Ended Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares sold 490,187 914,108
Shares issued to shareholders on
reinvestment of dividends 499,834 580,880
Shares redeemed (3,438,672) (2,986,509)
------------ ------------
Net decrease in shares outstanding (2,448,651) (1,491,521)
============ ============
Proceeds from sale of shares $ 4,746,207 $ 8,996,345
Value of reinvested dividends 4,867,694 5,722,783
Cost of shares redeemed (33,514,991) (29,396,253)
------------ ------------
Net decrease from capital share
transactions $(23,901,090) $(14,677,125)
============ ============
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<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 3 -- concluded
Flag Investors Class B Shares
----------------------------------
For the Period
For the June 20, 1996*
Year Ended through
October 31, 1997 October 31, 1996
---------------- ----------------
Shares sold 85,484 12,460
Shares issued to shareholders on
reinvestment of dividends 982 34
Shares redeemed (15,359) --
--------- --------
Net increase in shares outstanding 77,107 12,494
========= ========
Proceeds from sale of shares $ 833,099 $121,164
Value of reinvested dividends 9,591 322
Cost of shares redeemed (150,979) --
--------- --------
Net increase from capital share
transactions $ 691,711 $121,486
========= ========
- ------------
*Commencement of operations.
ISI Class Shares
----------------------------------
For the For the
Year Ended Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares sold 1,028,342 2,043,599
Shares issued to shareholders on
reinvestment of dividends 787,090 865,140
Shares redeemed (4,455,189) (3,510,096)
------------ ------------
Net decrease in shares outstanding (2,639,757) (601,357)
============ ============
Proceeds from sale of shares $ 10,021,751 $ 20,394,040
Value of reinvested dividends 7,664,314 8,518,116
Cost of shares redeemed (43,406,641) (34,725,846)
------------ ------------
Net decrease from capital share
transactions $(25,720,576) $ (5,813,690)
============ ============
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<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $256,600,289 and sales of investment securities aggregated
$338,535,804 for the year ended October 31, 1997.
On October 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $2,251,650 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $1,733,433.
NOTE 5--Net Assets
On October 31, 1997, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $121,909,369
Flag Investors Class B Shares 810,591
ISI Class Shares 174,608,782
Distributions in excess of net investment income (1,561,813)
Accumulated net realized loss from security transactions (2,143,673)
Unrealized appreciation of investments 518,217
------------
$294,141,473
============
NOTE 6--Tax Capital Loss Carryforward
On October 31, 1997, there was a tax capital loss carryforward of
$2,143,673, which expires in 2005. This carryforward will be used to offset any
future net capital gains.
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<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
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, 1997, 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, 1997 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, 1997, 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
Princeton, New Jersey
November 21, 1997
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