- --------------------------------------------------------------------------------
Investment Advisor's Report
- --------------------------------------------------------------------------------
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:
U.S.
30 Year
Treasury Yield
--------------
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.
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.
GDP Price
Deflator Y/Y%
-------------
Mar-90........................ 4.0
Jun-90........................ 4.2
Sep-90........................ 4.4
Dec-90........................ 4.7
Mar-91........................ 4.6
Jun-91........................ 4.1
Sep-91........................ 3.8
Dec-91........................ 3.4
Mar-92........................ 3.0
Jun-92........................ 2.9
Sep-92........................ 2.5
Dec-92........................ 2.6
Mar-93........................ 2.7
Jun-93........................ 2.6
Sep-93........................ 2.7
Dec-93........................ 2.6
Mar-94........................ 2.2
Jun-94........................ 2.3
Sep-94........................ 2.5
Dec-94........................ 2.5
Mar-95........................ 2.5
Jun-95........................ 2.4
Sep-95........................ 2.2
Dec-95........................ 2.1
Mar-96........................ 2.0
Jun-96........................ 1.9
Sep-96........................ 1.8
Dec-96........................ 1.8
Mar-97........................ 1.9
Jun-97........................ 2.0
Sep-97........................ 1.8
Dec-97........................ 1.7
Mar-98........................ 1.2
Jun-98........................ 1.0
Sep-98........................ 1.0
Dec-98........................ 0.9
Mar-99........................ 1.1
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,
1
<PAGE>
- --------------------------------------------------------------------------------
Investment Advisor's Report
- --------------------------------------------------------------------------------
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.
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
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
- --------------------------------------------------------------------------------
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
2
<PAGE>
- --------------------------------------------------------------------------------
Economic Outlook for 1999 (concluded)
- --------------------------------------------------------------------------------
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.
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.
3
<PAGE>
- --------------------------------------------------------------------------------
Additional Performance Information
- --------------------------------------------------------------------------------
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include the Fund's total return, according to a standardized formula,
for various time periods through the end of the most recent calendar quarter.
The SEC standardized total return figures include the impact of the Fund's
maximum initial sales charge. Returns would be higher for investors who
qualified for a lower initial sales charge.
While the total return figures are required by SEC rules, such comparisons
are of limited utility since the Fund's total return is 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.
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
% Return with
Periods ended 3/31/99: Sales Charge
- ------------------------------------------------------------------------------
One Year 1.58%
- ------------------------------------------------------------------------------
Five Years 6.62%
- ------------------------------------------------------------------------------
Ten Years 8.19%
- ------------------------------------------------------------------------------
Since Inception (8/10/88) 8.03%
- ------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Total Return U.S. Treasury Fund, Inc.
- --------------------------------------------------------------------------------
Statement of Net Assets
April 30, 1999
(Unaudited)
Maturity Par Market
Interest Rate 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 -- 99.5%
(Cost $301,800,389)** 290,706,888
Other Assets in Excess of Liabilities, Net -- 0.5% 1,332,327
------------
Net Assets-- 100.0% $292,039,215
============
5
<PAGE>
- --------------------------------------------------------------------------------
Total Return U.S. Treasury Fund, Inc.
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
April 30, 1999
(Unaudited)
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.
6
<PAGE>
- --------------------------------------------------------------------------------
Total Return U.S. Treasury Fund, Inc.
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended April 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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)
============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Total Return U.S. Treasury Fund, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six Months For the Year 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:
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>
See Notes to Financial Statements.
(1) Unaudited.
8
<PAGE>
- --------------------------------------------------------------------------------
Total Return U.S. Treasury Fund, Inc.
- --------------------------------------------------------------------------------
Financial Highlights--ISI Class Share
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six Months For the Years Ended October 31,
Ended April 30, -----------------------------------------------------------------
1999(3) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period.. $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22 $ 11.35
--------- --------- --------- --------- --------- ---------
Income from Investment Operations:
Net investment income................... 0.23 0.51 0.55 0.56 0.57 0.51
Net realized and unrealized gain/(loss)
on investments........................ (0.42) 0.71 0.30 (0.23) 1.04 (1.16)
--------- --------- --------- --------- --------- ---------
Total from Investment Operations........ (0.19) 1.22 0.85 0.33 1.61 (0.65)
Less Distributions:
Net investment income and
short-term gains...................... (0.39) (0.64) (0.55) (0.65) (0.64) (1.15)
Tax return of capital distribution...... -- -- (0.08) -- -- (0.05)
Distribution in excess of
net investment income................. -- -- (0.01) (0.04) -- --
Net realized long-term gains............ (0.17) -- -- -- -- (0.28)
--------- --------- --------- --------- --------- ---------
Total distributions..................... (0.56) (0.64) (0.64) (0.69) (0.64) (1.48)
--------- --------- --------- --------- --------- ---------
Net asset value at end of period........ $ 9.87 $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
========= ========= ========= ========= ========= =========
Total Return(1)........................... (1.92)% 12.50% 9.00% 3.44% 18.09% (6.22)%
Ratios to Average Daily Net Assets:
Expenses................................ 0.81%(2) 0.85% 0.83% 0.81% 0.80% 0.77%
Net investment income................... 4.48%(2) 4.98% 5.62% 5.69% 5.94% 4.98%
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares......... $ 123,391 $ 122,785 $ 122,229 $ 143,791 $ 164,206 $ 175,149
ISI Class Shares...................... $ 162,986 $ 171,336 $ 171,074 $ 193,486 $ 206,615 $ 200,309
Portfolio turnover rate................. 55% 179% 92% 199% 194% 68%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Unaudited.
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
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A. 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 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:
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.
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, the value of the collateral declines or if
the broker enters into an insolvency proceeding.
Federal Income Taxes -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income and net realized capital gains, it will
be exempt from most, if Notes to Financial Statements (continued) not all,
federal income and excise taxes. As a
10
<PAGE>
result, the Fund has made no provisions for federal income taxes.
Security Transactions, Investment Income, Distributions and Other -- The Fund
uses the trade date to account for security transactions and the specific
identification 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.
B. 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 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 ended 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 0.05% of the Fund's gross income. For the six month period ended 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 ended 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 ended 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 0.25% shareholder servicing fee) of the Flag Investors
11
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Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Class B Shares' average daily net assets. For the six months ended 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 Distributor's fee was
$168,395 of which $28,176 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 period
ended April 30, 1999 was $2,095, and the accrued liability was $65,282.
C. Capital Share Transactions -- The Fund is authorized to issue up to 99.5
million shares of $.001 par value capital stock (44 million ISI Class, 44
million Flag Investors Class A, 5 million Flag Investors Class B, and 6.5
million undesignated). Transactions in shares of the Fund were as follows:
ISI Class Shares
----------------------------------
For the For the
Six Months Year
Ended Ended
April 30,(1) October 31,
1999 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
Flag Investors Class A Shares
----------------------------------
For the For the
Six Months Year
Ended Ended
April 30,(1) October 31,
1999 1998
------------ ------------
Shares sold ........................ 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)
============ ============
Flag Investors Class B Shares
----------------------------------
For the For the
Six Months Year
Ended Ended
April 30,(1) October 31,
1999 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
=========== ===========
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<PAGE>
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Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
D. Investment Transactions -- Excluding short-term obligations, purchases of
investment securities aggregated $145,034,050 and sales of investment
securities aggregated $199,861,494 for the period 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.
E. Net Assets -- On April 30, 1999, net assets consisted of:
Paid-in capital:
ISI Class Shares ...................... $169,351,952
Flag Investors Class A Shares ......... 125,433,029
Flag Investors Class B Shares ......... 5,851,064
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
============
F. 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%
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
13
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ISI
Total Return
U.S. Treasury Fund Shares
Directors and Officers
Edward S. Hyman
Chairman
Richard T. Hale
Vice Chairman
James J. Cunnane
Director
Joseph R. Hardiman
Director
Louis E. Levy
Director
Eugene J. McDonald
Director
Rebecca W. Rimel
Director
Truman T. Semans
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
Amy M. Olmert
Secretary
Joseph A. Finelli
Treasurer
Scott J. Liotta
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.
- --------------------------------------------------------------------------------
Investment Advisor
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ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
- --------------------------------------------------------------------------------
Shareholder Servicing Agent
- --------------------------------------------------------------------------------
Investment Company Capital Corp.
P.O. Box 219426
Kansas City, MO 64121-9426
(800) 882-8585
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
ISI Group Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
- --------------------------------------------------------------------------------
ISI
International Strategy & Investment
- --------------------------------------------------------------------------------
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
TREASURIES
GRAPHIC
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SEMI-ANNUAL REPORT
April 30, 1999
