[FLAG INVESTORS LOGO]
Total Return
U.S. Treasury Fund
Shares
Semi-Annual Report
April 30, 1999
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
We are pleased to report on the progress of your Fund for the period ended
April 30, 1999. As of this date, the Fund recorded a 12-month total return of
6.4%. Since its inception on August 10, 1988, the Fund has produced a cumulative
total return of 138.86%, which translates into an average annual total return of
8.5%. These figures assume the reinvestment of dividends and capital gain
distributions and exclude the impact of any sales charge.
Overview
Over the last 12 months, the Federal Reserve cut short term rates three
times reacting to the financial crises coming out of Asia, Russia and Latin
America. This pushed rates to their lowest level since the 1960's. After the
October lows, stronger U.S. economic performance has pushed rates up about 1% on
long-term Treasuries. On balance, Treasury rates are somewhat lower now than 12
months ago. Please see chart below.
30-Year U.S. Treasury Yield
4/30/98-4/30/99
[GRAPHIC]
In the printed version of the document a line graph appears which depicts the
following plot points:
30-Year
U.S. Treasury
Yield
4/30/98-4/30/99
---------------
Mar-90 8.44
Jun-90 8.65
Sep-90 8.80
Dec-90 8.55
Mar-91 8.20
Jun-91 8.32
Sep-91 8.18
Dec-91 7.85
Mar-92 7.80
Jun-92 7.90
Sep-92 7.44
Dec-92 7.53
Mar-93 7.08
Jun-93 6.86
Sep-93 6.32
Dec-93 6.13
Mar-94 6.56
Jun-94 7.36
Sep-94 7.59
Dec-94 7.96
Mar-95 7.64
Jun-95 6.96
Sep-95 6.71
Dec-95 6.23
Mar-96 6.30
Jun-96 6.93
Sep-96 6.97
Dec-96 6.61
Mar-97 6.82
Jun-97 6.93
Sep-97 6.53
Dec-97 6.14
Mar-98 5.88
Jun-98 5.85
Sep-98 5.47
Dec-98 5.11
Mar-99 5.37
ISI raised reserves in the fund as its fundamental analysis detected strong
economic growth. At the end of April, 1999, the portfolio had 29.9% in reserves
as a buffer against higher rates. We expect the U.S. economy will slow in the
2nd Quarter and that will precipitate a rally in bonds. We are relying on our
research to spot reinvestment opportunities. Please see ISI's Economic Outlook
that follows this letter for more details.
1
<PAGE>
Letter to Shareholders (concluded)
- --------------------------------------------------------------------------------
Low Inflation and Bond Value
The steady decline in the rate of inflation as measured by the Gross
Domestic Product (GDP) Deflator is a hallmark of the 1990's. This has had a
powerful effect on bond yields. Please see chart below for both the Deflator and
long bond yields.
U.S. 30 YEAR TREASURY YIELD 99: 2Q 5.55%
U.S. GDP PRICE DEFLATOR Y/Y % 99: 1Q 1.0%
[GRAPHIC]
In the printed version of the document a line graph appears which depicts the
following plot points:
U.S.
30 Year
Treasury Yield
minus
U.S. GDP
Price Deflator
--------------
Mar-90....................................... 4.43
Jun-90....................................... 4.41
Sep-90....................................... 4.35
Dec-90....................................... 3.89
Mar-91....................................... 3.56
Jun-91....................................... 4.22
Sep-91....................................... 4.40
Dec-91....................................... 4.49
Mar-92....................................... 4.83
Jun-92....................................... 5.02
Sep-92....................................... 4.92
Dec-92....................................... 4.91
Mar-93....................................... 4.35
Jun-93....................................... 4.30
Sep-93....................................... 3.66
Dec-93....................................... 3.53
Mar-94....................................... 4.32
Jun-94....................................... 5.05
Sep-94....................................... 5.10
Dec-94....................................... 5.47
Mar-95....................................... 5.12
Jun-95....................................... 4.54
Sep-95....................................... 4.47
Dec-95....................................... 4.16
Mar-96....................................... 4.27
Jun-96....................................... 5.06
Sep-96....................................... 5.12
Dec-96....................................... 4.82
Mar-97....................................... 4.90
Jun-97....................................... 4.93
Sep-97....................................... 4.69
Dec-97....................................... 4.47
Mar-98....................................... 4.69
Jun-98....................................... 4.84
Sep-98....................................... 4.51
Dec-98....................................... 4.22
Mar-99....................................... 4.30
The forces behind disinflation are global competition, improving technology
and government downsizing. These forces remain in place and are likely to keep
U.S. inflation under 1.25% for 1999. So today's historically low rates are
sustainable because real yields, what's left after subtracting inflation from
bond yields, are still above average for the last three years. For a graph of
the real yield on long Treasuries, please see the chart below.
U.S. REAL 30 YEAR TREASURY YIELD
Deflated GDP Price Deflator Y/Y %
99: 1Q 4.35%
[GRAPHIC]
In the printed version of the document a line graph appears which depicts the
following plot points:
U.S. U.S.
30 Year GDP Price
Treasury Yield Deflator Y/Y%
-------------- -------------
Mar-90........................ 8.44 4.0
Jun-90........................ 8.65 4.2
Sep-90........................ 8.80 4.4
Dec-90........................ 8.55 4.7
Mar-91........................ 8.20 4.6
Jun-91........................ 8.32 4.1
Sep-91........................ 8.18 3.8
Dec-91........................ 7.85 3.4
Mar-92........................ 7.80 3.0
Jun-92........................ 7.90 2.9
Sep-92........................ 7.44 2.5
Dec-92........................ 7.53 2.6
Mar-93........................ 7.08 2.7
Jun-93........................ 6.86 2.6
Sep-93........................ 6.32 2.7
Dec-93........................ 6.13 2.6
Mar-94........................ 6.56 2.2
Jun-94........................ 7.36 2.3
Sep-94........................ 7.59 2.5
Dec-94........................ 7.96 2.5
Mar-95........................ 7.64 2.5
Jun-95........................ 6.96 2.4
Sep-95........................ 6.71 2.2
Dec-95........................ 6.23 2.1
Mar-96........................ 6.30 2.0
Jun-96........................ 6.93 1.9
Sep-96........................ 6.97 1.8
Dec-96........................ 6.61 1.8
Mar-97........................ 6.82 1.9
Jun-97........................ 6.93 2.0
Sep-97........................ 6.53 1.8
Dec-97........................ 6.14 1.7
Mar-98........................ 5.88 1.2
Jun-98........................ 5.85 1.0
Sep-98........................ 5.47 1.0
Dec-98........................ 5.11 0.9
Mar-99........................ 5.37 1.1
2
<PAGE>
ISI expects bond yields to drop in the months ahead as this powerful
disinflationary trend continues.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- ------------------------
R. Alan Medaugh
President
May 7, 1999
3
<PAGE>
Economic Outlook for 1999
- --------------------------------------------------------------------------------
Overview
ISI expects U.S. real Gross Domestic Product (GDP) to slow to 3% over the
rest of 1999. In a global context, we expect Japan, the World's second largest
economy to remain weak under the weight of declining employment and capital
expenditures. In each of the last three years, after a growth scare, yields on
long-term Treasuries have declined. ISI expects this year's slowing of the U.S.
economy to produce a similar interest rate decline.
U.S. Economy
Since the start of last year's strong fourth quarter, oil prices are up by
$3 per barrel, bond yields are up by 1% and home mortgage refinancing activity
has declined by roughly 65%. As a result of these changes, we expect the U.S. to
slow down.
Already the U.S. economy's performance has begun to slow its rate of
growth. Activity is still at a very high level, but momentum is slowing, as can
be seen by the year-on-year slowdowns in employment, help-wanted ads, home
sales, consumer sentiment, and nondefense capital goods orders. Please see graph
below of Existing Home Sales which shows the change of momentum in this strong
part of the economy.
U.S. EXISTING HOME SALES 3 Mo. Avg. Y/Y % Mar 8.2%
[GRAPHIC]
In the printed version of the document a line graph appears which depicts the
following plot points:
U.S. Existing
Home Sales
3 Mo. Avg. Y/Y%
---------------
31-Jan-88.................................... -14.5
29-Feb-88.................................... -13.7
31-Mar-88.................................... -9.9
30-Apr-88.................................... -6.9
31-May-88.................................... -4.0
30-Jun-88.................................... 0.8
31-Jul-88.................................... 3.0
31-Aug-88.................................... 6.8
30-Sep-88.................................... 7.1
31-Oct-88.................................... 8.1
30-Nov-88.................................... 8.5
31-Dec-88.................................... 12.0
31-Jan-89.................................... 14.3
28-Feb-89.................................... 13.3
31-Mar-89.................................... 7.2
30-Apr-89.................................... -1.3
31-May-89.................................... -7.7
30-Jun-89.................................... -12.3
31-Jul-89.................................... -12.5
31-Aug-89.................................... -10.1
30-Sep-89.................................... -5.9
31-Oct-89.................................... -3.8
30-Nov-89.................................... -3.2
31-Dec-89.................................... -6.9
31-Jan-90.................................... -4.5
28-Feb-90.................................... -4.4
31-Mar-90.................................... -0.3
30-Apr-90.................................... -0.1
31-May-90.................................... 2.6
30-Jun-90.................................... 2.8
31-Jul-90.................................... 1.9
31-Aug-90.................................... 0.2
30-Sep-90.................................... -4.4
31-Oct-90.................................... -7.4
30-Nov-90.................................... -10.9
31-Dec-90.................................... -11.7
31-Jan-91.................................... -15.1
28-Feb-91.................................... -14.6
31-Mar-91.................................... -12.6
30-Apr-91.................................... -5.2
31-May-91.................................... 0.1
30-Jun-91.................................... 3.9
31-Jul-91.................................... 3.8
31-Aug-91.................................... -1.0
30-Sep-91.................................... -1.2
31-Oct-91.................................... -2.1
30-Nov-91.................................... 0.5
31-Dec-91.................................... 3.7
31-Jan-92.................................... 8.0
29-Feb-92.................................... 13.3
31-Mar-92.................................... 14.3
30-Apr-92.................................... 12.1
31-May-92.................................... 5.6
30-Jun-92.................................... 2.0
31-Jul-92.................................... 1.1
31-Aug-92.................................... 3.0
30-Sep-92.................................... 5.1
31-Oct-92.................................... 9.0
30-Nov-92.................................... 14.3
31-Dec-92.................................... 19.5
31-Jan-93.................................... 16.5
28-Feb-93.................................... 10.6
31-Mar-93.................................... 2.2
30-Apr-93.................................... -0.2
31-May-93.................................... 0.9
30-Jun-93.................................... 4.9
31-Jun-93.................................... 9.2
31-Aug-93.................................... 14.1
30-Sep-93.................................... 15.5
31-Oct-93.................................... 13.4
30-Nov-93.................................... 12.2
31-Dec-93.................................... 11.1
31-Jan-94.................................... 13.2
28-Feb-94.................................... 12.0
31-Mar-94.................................... 14.5
30-Apr-94.................................... 15.5
31-May-94.................................... 17.3
30-Jun-94.................................... 13.0
31-Jul-94.................................... 6.7
31-Aug-94.................................... 1.9
30-Sep-94.................................... -1.2
31-Oct-94.................................... -2.1
30-Nov-94.................................... -5.9
31-Dec-94.................................... -9.2
31-Jan-95.................................... -10.1
28-Feb-95.................................... -9.5
31-Mar-95.................................... -8.4
30-Apr-95.................................... -11.8
31-May-95.................................... -12.1
30-Jun-95.................................... -9.6
31-Jul-95.................................... -2.7
31-Aug-95.................................... 3.2
30-Sep-95.................................... 5.9
31-Oct-95.................................... 9.1
30-Nov-95.................................... 10.0
31-Dec-95.................................... 9.2
31-Jan-96.................................... 8.7
29-Feb-96.................................... 10.0
31-Mar-96.................................... 12.0
30-Apr-96.................................... 18.6
31-May-96.................................... 19.4
30-Jun-96.................................... 16.3
31-Jul-96.................................... 10.7
31-Aug-96.................................... 5.0
30-Sep-96.................................... 3.5
31-Oct-96.................................... 0.2
30-Nov-96.................................... 0.1
31-Dec-96.................................... 1.8
31-Jan-97.................................... 2.9
28-Feb-97.................................... 3.2
31-Mar-97.................................... 1.7
30-Apr-97.................................... -1.1
31-May-97.................................... -1.9
30-Jun-97.................................... 0.1
31-Jul-97.................................... 2.2
31-Aug-97.................................... 3.9
30-Sep-97.................................... 6.4
31-Oct-97.................................... 9.4
30-Nov-97.................................... 9.9
31-Dec-97.................................... 10.1
31-Jan-98.................................... 8.2
28-Feb-98.................................... 10.9
31-Mar-98.................................... 14.3
30-Apr-98.................................... 18.0
31-May-98.................................... 17.1
30-Jun-98.................................... 16.0
31-Jul-98.................................... 15.8
31-Aug-98.................................... 15.3
30-Sep-98.................................... 11.7
31-Oct-98.................................... 8.0
30-Nov-98.................................... 9.5
31-Dec-98.................................... 11.3
31-Jan-99.................................... 12.9
28-Feb-99.................................... 10.2
31-Mar-99.................................... 7.8
4
<PAGE>
- --------------------------------------------------------------------------------
The above mentioned swings, plus the change from tax refunds to April 15
tax payments, are likely to slow U.S. growth to 3% going forward. The shift to
slower growth is likely to produce lower U.S. interest rates.
Inflation
ISI expects U.S. inflation to be under 1.25% for 1999. A large part of the
good inflation news comes from restrained wage growth and high worker
productivity. The U.S. recently reported its Employment Cost Index (ECI)
registered a low 0.4% increase (1.6% annual rate) for first quarter. The U.S.
slowdown in labor costs is also being echoed in a number of other economies
around the world. For example, average hourly earnings are in slowing trends in
the UK, Australia, France, and Italy. Average monthly wages are down 1.7% year
to year in Japan. In Singapore, 60% of companies plan to freeze staff wages.
Wages respond with a lag. So, the global slump in 1998 may be slowing wages in
1999. In addition, restructurings and mergers in the U.S., Europe, and now Japan
are putting labor on the defensive. A global slowdown in wage inflation seems to
be unfolding and this would result in very low inflation reports. Low inflation
means that real interest rates, what's left after deducting inflation from a
bond's yield, will be high even if long Treasury rates drop.
World Economy
ISI expects only moderate world growth in 1999. For example, prices in
Japan are declining on all fronts, i.e. consumer prices, wages, property prices,
and rents. In the face of this deflation, employment is also declining, down
250,000 month-to-month in March alone, which would be the equivalent of a
500,000 drop in our monthly employment report, i.e. a stunning plunge. There are
clear growth positives emerging for Japan, most notably, permanent cuts in tax
rates and zero interest rates. But these are likely to be offset by declining
employment, pay cuts, and cuts in capital expenditures. Japan's government is
encouraging restructurings. Indeed, another step in that direction was taken
recently when the government announced it was putting together "a package of
bills to promote corporate restructuring and eliminate excess capacity." The
government also approved a plan recently calling for a decade-long freeze on its
hiring of new workers. The plan's objective is to cut government employment by
250,000 over the next 10 years. The world's second largest economy looks likely
to experience another year of sub-par growth, setting a subdued tone for Asia in
general.
5
<PAGE>
Economic Outlook for 1998 (concluded)
- --------------------------------------------------------------------------------
Looking out a year, stronger growth is possible after a prolonged series of
Central Bank easings (134 over the last 7 months). The stock markets are
performing well around the world, reflecting a long term optimism about growth
but the near term difficulties sighted above are likely to produce sluggish
growth in 1999. We will be using our proprietary surveys of U.S. companies and
international economic reports to monitor changes in global growth prospects.
6
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include the Fund's total return of each class, according to a
standardized formula, for various time periods through the end of the most
recent calendar quarter.
The SEC standardized total return figures include the impact of the maximum
initial sales charge for the Class A Shares and the contingent deferred sales
charge applicable to the specified time period for the Class B Shares. Returns
would be higher for Class A Shares investors who qualified for a lower initial
sales charge or for Class B Shares investors who continued to hold their shares
past the end of the specified time period.
Average Annual Total Return
Periods Ended 3/31/99 1 Year 5 Years Since Inception*
- -----------------------------------------------------------------------------
Class A Shares 1.53% 6.61% 8.03%
.............................................................................
Class B Shares 4.00% -- 8.53%
.............................................................................
* Inception dates: Class A 8/10/88, Class B 6/20/96.
While the total return figures are required by SEC rules, such comparisons
are of limited utility since the total return of the Fund's classes are adjusted
for sales charges and expenses while the total return of the indices are not. In
fact, if you wished to replicate the total return of these indices, you would
have to purchase the securities they represent, an effort that would require a
considerable amount of money and would incur expenses that are not reflected in
the index results.
The SEC total return figures may differ from total return figures in the
shareholder letter because the time periods may be different and because the SEC
figures include the impact of sales charges while the total return figures in
the shareholder letter do not. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate,
and investor's shares may be worth more or less than their original cost when
redeemed. Past performance is not an indicator of future results.
7
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Statement of Net Assets April 30, 1999
(Unaudited)
Par Market
Interest Rate Maturity Date (000) Value
- --------------------------------------------------------------------------------
U.S. Treasury Bonds - 61.7%
8.875% 2/15/19 $31,000,000 $ 41,540,000
8.125% 8/15/19 23,750,000 29,891,607
8.500% 2/15/20 41,000,000 53,549,854
8.125% 8/15/21 7,900,000 10,035,473
10.375% 11/15/12 34,250,000 45,177,908
------------
Total U.S. Treasury Bonds
(Cost $189,251,012) 180,194,842
------------
Zero Coupon U.S. Treasury Bonds (S.T.R.I.P.S.) - 8.0%
6.103%* 5/15/17 69,500,000 23,497,046
------------
Total Zero Coupon U.S. Treasury Bonds
(S.T.R.I.P.S.) (Cost $25,534,377) 23,497,046
------------
Repurchase Agreements - 29.8%
Goldman Sachs & Co., 4.80%
Dated 04/30/99, to be repurchased on 05/03/99,
collateralized by U.S. Treasury Bonds with
a market value of $29,585,835.
(Cost $29,005,000) 29,005,000
J.P. Morgan Securities, Inc., 4.83%
Dated 04/30/99, to be repurchased on 5/03/99,
collateralized by U.S. Treasury Bonds with
a market value of $29,585,879.
(Cost $29,005,000) 29,005,000
Morgan Stanley & Co., 4.83%
Dated 04/30/99, to be repurchased on 5/03/99,
collateralized by U.S. Treasury Bonds with
a market value of $29,854,563.
(Cost $29,005,000) 29,005,000
------------
Total Repurchase Agreements
(Cost $87,015,000) 87,015,000
------------
Total Investments
(Cost $301,800,389)** 99.5% 290,706,888
Other Assets in Excess of Liabilities, Net 0.5% 1,332,327
----- ------------
Net Assets 100.0% $292,039,215
===== ============
8
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Market Value
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($123,391,453 / 12,501,283 shares outstanding) $ 9.87
======
Flag Investors Class B Share
($5,662,068 / 573,666 shares outstanding) $ 9.87
======
ISI Class Share
($162,985,694 / 16,512,124 shares outstanding) $ 9.87
======
Maximum Offering Price Per:
Flag Investors Class A Share
($9.87 / 0.955) $10.34
======
Flag Investors Class B Share $ 9.87
======
ISI Class Share
($9.87 / 0.9555) $10.33
======
- --------------------
*Yield as of April 30,1999
*** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
9
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Statement of Operations
For the Six
Months Ended
April 30,
- --------------------------------------------------------------------------------
1999(1)
Investment Income:
Interest ................................................. $ 7,816,899
------------
Expenses:
Investment advisory fee .................................. 382,382
Distribution fee ......................................... 376,296
Administration fee ....................................... 171,640
Transfer agent fee ....................................... 78,045
Professional fees ........................................ 70,051
Accounting fee ........................................... 41,904
Custodian fee ............................................ 27,959
Registration fees ........................................ 25,430
Printing and postage ..................................... 13,594
Miscellaneous ............................................ 25,272
------------
Total expenses .................................. 1,212,573
------------
Net investment income ....................................... 6,604,326
------------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions ............. 5,710,895
Change in unrealized appreciation/depreciation
of investments ........................................ (18,145,433)
------------
Net loss on investments .................................. (12,434,538)
------------
Net decrease in net assets resulting from operations ........ $ (5,830,212)
============
- ------------
(1)Unaudited.
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- ----------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six For the Year
Months Ended Ended
April 30, October 31,
- ----------------------------------------------------------------------------------------------------------------------
1999(1) 1998
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ....................................................... $ 6,604,326 $ 14,588,210
Net realized gain from security transactions ................................ 5,710,895 13,531,220
Change in unrealized appreciation/
depreciation on investments .............................................. (18,145,433) 6,533,717
------------ ------------
Net increase/(decrease) in net assets
resulting from operations ................................................ (5,830,212) 34,653,147
------------ ------------
Dividends to Shareholders from:
Net investment income and short-term gains:
Flag Investors Class A Shares ............................................ (4,693,708) (7,541,487)
Flag Investors Class B Shares ............................................ (173,592) (119,476)
ISI Class Shares ......................................................... (6,361,770) (10,498,284)
------------ ------------
Net realized long-term gains
Flag Investors Class A Shares ............................................ (2,005,713) --
Flag Investors Class B Shares ............................................ (68,070) --
ISI Class Shares ......................................................... (2,770,395) --
------------ ------------
Total distributions ................................................... (16,073,248) (18,159,247)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares ................................................ 27,052,452 34,205,451
Value of shares issued in
reinvestment of dividends ................................................ 10,915,984 11,075,840
Cost of shares repurchased .................................................. (22,034,804) (57,907,621)
------------ ------------
Increase/(decrease) in net assets derived
from capital share transactions .......................................... 15,933,632 (12,626,330)
------------ ------------
Total increase/(decrease) in net assets ..................................... (5,969,828) 3,867,570
Net Assets:
Beginning of period ......................................................... 298,009,043 294,141,473
------------ ------------
End of period including undistributed net
investment income (loss) of ($4,120,188)
and ($1,490,713), respectively ........................................... $292,039,215 $298,009,043
============ ============
</TABLE>
- ------------
(1)Unaudited.
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- ------------------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A
(For a share outstanding throughout each period)
For the Six
Months Ended
April 30,
- ------------------------------------------------------------------------------------------
1999(2)
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............................... $ 10.62
--------
Income from Investment Operations:
Net investment income ................................................ 0.23
Net realized and unrealized gain/(loss) on investments ............... (0.42)
--------
Total from Investment Operations ..................................... (0.19)
Less Distributions:
Distributions from net investment income
and short-term gains .............................................. (0.39)
Tax return of capital distribution ................................... --
Distributions in excess of net investment income ..................... --
Net realized long-term gains ......................................... (0.17)
--------
Total distributions .................................................. (0.56)
--------
Net asset value at end of period ..................................... $ 9.87
========
Total Return(1) ......................................................... (1.92)%
Ratios to Average Daily Net Assets:
Expenses ............................................................. 0.81%
Net investment income ................................................ 4.48%(3)
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares ..................................... $123,391
ISI Class Shares .................................................. $162,986
Portfolio turnover rate .............................................. 55%
</TABLE>
- -----------
(1) Total return excludes the effect of sales charge.
(2) Unaudited.
(3) Annualized.
12
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period.................. $ 10.04 $ 9.83 $ 10.19 $ 9.22 $ 11.35
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................................... 0.51 0.55 0.56 0.57 0.51
Net realized and unrealized gain/(loss) on investments.. 0.71 0.30 (0.23) 1.04 (1.16)
-------- -------- -------- -------- --------
Total from Investment Operations........................ 1.22 0.85 0.33 1.61 (0.65)
Less Distributions:
Distributions from net investment income
and short-term gains................................. (0.64) (0.55) (0.65) (0.64) (1.15)
Tax return of capital distribution...................... -- (0.08) -- -- (0.05)
Distributions in excess of net investment income........ -- (0.01) (0.04) -- --
Net realized long-term gains............................ -- -- -- -- (0.28)
-------- -------- -------- -------- --------
Total distributions..................................... (0.64) (0.64) (0.69) (0.64) (1.48)
-------- -------- -------- -------- --------
Net asset value at end of period........................ $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
======== ======== ======== ======== ========
Total Return(1)............................................ 12.50% 9.00% 3.44% 18.09% (6.22)%
Ratios to Average Daily Net Assets:
Expenses................................................ 0.85% 0.83% 0.81% 0.80% 0.77%
Net investment income................................... 4.98% 5.62% 5.69% 5.94% 4.98%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares........................ $122,785 $ 122,229 $143,791 $ 164,206 $ 175,149
ISI Class Shares..................................... $171,336 $ 171,074 $193,486 $ 206,615 $ 200,309
Portfolio turnover rate................................. 179% 92% 199% 194% 68%
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
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 Period
For the Six June 20, 1996(1)
Months Ended For the Years through
April 30, Ended October 31, October 31,
- -----------------------------------------------------------------------------------------------
1999(4) 1998 1997 1996
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning
of period ................... $10.62 $10.03 $ 9.85 $10.00
------ ------ ------ ------
Income from Investment
Operations:
Net investment income .......... 0.20 0.55 0.56 0.22
Net realized and unrealized
gain/(loss) on investments .. (0.41) 0.65 0.23 (0.15)
------ ------ ------ ------
Total from Investment
Operations .................. (0.21) 1.20 0.79 0.07
Less Distributions:
Distributions from net
investment income and
short-term gains ............ (0.37) (0.61) (0.56) (0.22)
Tax return of capital
distribution ................ -- -- (0.04) --
Distributions in excess of net
investment income ........... -- -- (0.01) --
Net realized long-term gains ... (0.17) -- -- --
------ ------ ------ ------
Total distributions ............ (0.54) (0.61) (0.61) (0.22)
------ ------ ------ ------
Net asset value at end
of period ................... $ 9.87 $10.62 $10.03 $ 9.85
====== ====== ====== ======
Total Return(2) ................... (2.10)% 12.29% 8.49% 6.37%
Ratios to Average Daily Net Assets:
Expenses ....................... 1.19%(3) 1.20% 1.18% 1.40%(3)
Net investment income .......... 4.21%(3) 4.59% 5.24% 5.45%(3)
Supplemental Data:
Net assets at end
of period (000) $ 5,662 $ 3,888 $ 838 $ 123
Portfolio turnover rate 55% 179% 92% 199%
</TABLE>
- ------------
(1)Commencement of operations.
(2)Total return excludes the effect of sales charge.
(3)Annualized.
(4)Unaudited.
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Total Return U.S. Treasury Fund, Inc. (the "Fund"), which was organized as
a Maryland Corporation on June 3, 1988 and began 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 Shares") and Flag Investors Total Return U.S. Treasury
Fund Class A Shares ("Flag Investors Class A Shares"), which both began
operations August 10, 1988, and Flag Investors Total Return U.S. Treasury Fund
Class B Shares ("Flag Investors Class B Shares"), which began operations June
20, 1996. The sale of the Class B Shares was terminated and existing Class B
Shares were converted to Class A shares on May 14, 1999.
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 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 not readily
available, 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 which approximates fair market value.
15
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
B. Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
C. Federal Income Taxes -- The Fund determines its distributions
according to income tax regulations, which may be different from
generally accepted accounting principles. As a result, the Fund
occasionally makes reclassifications within its capital accounts to
reflect income and gains that are available for distribution under
income tax regulations.
The Fund is organized as a regulated investment company. As long
as it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net
realized capital gains, it will be exempt from most, if not all,
federal income and excise taxes. As a result, the Fund has made no
provisions for federal income taxes.
D. Security Transactions, Investment Income, Distributions and Other --
The Fund uses the trade date to account for security transactions and
the specific identification cost method for financial reporting and
income tax purposes to determine the gain or loss on 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.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor. As compensation for its advisory services, the Fund pays ISI an annual
16
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 2--concluded
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. For the six month period
ending April 30, 1999 ISI's advisory fee was $382,382 of which $62,908 was
payable at the end of the period.
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's administrator. 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. For the six month period ending April 30, 1999 ICC's
administration fee was $171,640 of which $28,229 was payable at the end of the
period.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or administrator.
ICC also provides accounting services to the fund for which the Fund pays
ICC an annual fee that is calculated daily and paid monthly from the Fund's
average daily net assets. For the six month period ending April 30, 1999 ICC's
fee was $34,994 of which $6,910 was payable at the end of the period.
ICC also provides transfer agency services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the six
month period ending April 30, 1999 ICC's fee was $42,923 of which $35,122 was
payable at the end of the period.
ISI Group Inc. ("ISI Group"), which is affiliated with ISI provides
distribution services for the ISI Class of the Fund for which ISI Group is paid
an annual fee that is calculated daily and paid monthly at an annual rate equal
to 0.25% of the ISI Class' average daily net assets.
ICC Distributors, Inc. ("ICC Distributors") a member of the Forum Financial
Group of Companies, provides distribution services for the Flag Investors
Classes of the Fund for which ICC Distributors is paid an annual fee that is
calculated daily and paid monthly at an annual rate equal to 0.25% of the Flag
Investors Class A Shares' average daily net assets and 0.60% (including a Flag
Investors Total Return U.S. Treasury Fund Shares 0.25% shareholder servicing
fee) of the Flag Investors Class B Shares' average
17
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
daily net assets. For the six month period ending April 30, 1999 distribution
fees aggregated $376,296. ISI Group's fee was $207,901 of which $33,763 was
payable at the end of the period. ICC Distributors fee was $168,395 of which
$28,716 was payable at the end of the period.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the six month
period ending April 30, 1999 was $2,095, and the accrued liability was $65,282.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 99.5 million shares of $.001 par
value capital stock (44 million Flag Investors Class A, 44 million ISI Class, 5
million Flag Investors Class B and 6.5 million undesignated). Transactions in
shares of the Fund were as follows:
Flag Investors Class A Shares
-----------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1999(1) October 31, 1998
-----------------------------------
Shares sold ........................ 1,480,577 1,422,232
Shares issued to shareholders on
reinvestment of dividends ....... 418,902 418,958
Shares redeemed .................... (964,590) (2,454,224)
------------ ------------
Net increase/(decrease) in shares
outstanding ...................... 934,889 (613,034)
============ ============
Proceeds from sale of shares ....... $ 15,182,952 $ 14,837,317
Value of reinvested dividends ...... 4,337,535 4,289,957
Cost of shares redeemed ............ (9,816,015) (25,308,085)
------------ ------------
Net increase/(decrease) from capital
share transactions .............. $ 9,704,472 $ (6,180,811)
============ ============
- ------------
(1)Unaudited.
18
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
NOTE 3--concluded
Flag Investors Class B Shares
----------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1999(1) October 31, 1998
----------------------------------
Shares sold ...................... 394,876 313,798
Shares issued to shareholders on
reinvestment of dividends ..... 15,760 5,893
Shares redeemed .................. (202,876) (37,386)
----------- -----------
Net increase in shares outstanding 207,760 282,305
=========== ===========
Proceeds from sale of shares ..... $ 4,030,932 $ 3,234,727
Value of reinvested dividends .... 162,649 60,838
Cost of shares redeemed .......... (2,063,511) (385,163)
----------- -----------
Net increase from capital share
transactions .................. $ 2,130,070 $ 2,910,402
=========== ===========
ISI Class Shares
----------------------------------
For the Six For the
Months Ended Year Ended
April 30, 1999(1) October 31, 1998
----------------------------------
Shares sold ..................... 768,789 1,567,913
Shares issued to shareholders on
reinvestment of dividends .... 619,426 656,907
Shares redeemed ................. (997,012) (3,140,348)
------------ ------------
Net increase/(decrease) in shares
outstanding ................... 391,203 (915,528)
============ ============
Proceeds from sale of shares .... $ 7,838,569 $ 16,133,407
Value of reinvested dividends ... 6,415,801 6,725,045
Cost of shares redeemed ......... (10,155,280) (32,214,373)
------------ ------------
Net increase/(decrease) from capital
share transactions ........... $ 4,099,090 $ (9,355,921)
============ ============
- ------------
(1)Unaudited.
19
<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 aggre-
gated $145,034,050 and sales of investment securities aggregated $199,861,494
for the six months ended April 30, 1999.
On April 30, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $0 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $11,093,500.
NOTE 5--Net Assets
At April 30, 1999, net assets consisted of:
Paid-in capital
Flag Investors Class A Shares .......................... $ 125,433,029
Flag Investors Class B Shares .......................... 5,851,064
ISI Class Shares ....................................... 169,351,952
Net investment loss ....................................... (4,120,188)
Accumulated net realized gain from security transactions .. 6,616,858
Unrealized depreciation of investments .................... (11,093,500)
-------------
$ 292,039,215
=============
NOTE 6--Subsequent Event
Effective June 1, 1999 ICC's fees for providing administrative services to
the Fund were changed to the following schedule:
Combined Assets of ISI Funds Incremental Fee
---------------------------- ---------------
$0-$75,000,000 .20%
$75,000,000-$150,000,000 .15%
$150,000,000-$225,000,000 .10%
$225,000,000-$500,000,000 .05%
over $500,000,000 .03%
20
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Directors and Officers
Edward S. Hyman
Chairman
Richard T. Hale R. Alan Medaugh
Vice Chairman President
James J. Cunnane Nancy Lazar
Director Vice President
Joseph R. Hardiman Carrie L. Butler
Director Vice President
Louis E. Levy Margaret M. Beeler
Director Assistant Vice President
Eugene J. McDonald Keith C. Reilly
Director Assistant Vice President
Rebecca W. Rimel Amy M. Olmert
Director Secretary
Truman T. Semans Joseph A. Finelli
Director Treasurer
Carl W. Vogt, Esq. Scott J. Liotta
Director Assistant Secretary
Investment Objective
A mutual fund designed to provide a high level of total return with relative
stability of principal as well as the secondary objective of high current income
consistent with an investment in securities issued by the United States
Treasury.
This report is prepared for the
general information of shareholders. It
is authorized for distribution to
prospective investors only when preceded
or accompanied by an effective
prospectus.
For more complete information
regarding any of the Flag Investors
Funds, including charges and expenses,
obtain a prospectus from your investment
representative or directly from the Fund
at 1-800-767-FLAG. Read it carefully
before you invest.
21
<PAGE>
[FLAG INVESTORS LOGO]
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Communications Fund
Flag Investors Real Estate Securities Fund
Balanced
Flag Investors Value Builder Fund
Fixed Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Money Market
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC Distributors, Inc.
TRSA
(6/99)
