ISI
INTERNATIONAL STRATEGY & INVESTMENT
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A CLASS OF TOTAL RETURN
U.S. TREASURY FUND, INC.)
TREASURIES
SEMI-ANNUAL REPORT
APRIL 30, 2000
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT ADVISOR'S REPORT
--------------------------------------------------------------------------------
We are pleased to report on the progress of your Fund for the period ended
April 30, 2000. For the first six months of the fiscal year, the Fund recorded a
total return of 4.24%. Since its inception on August 10, 1988, the Fund has
produced a cumulative total return of 144.13%, which translates into an average
annual total return of 7.9%. These figures assume the reinvestment of dividends
and capital gain distributions and exclude the impact of any sales charge.
PORTFOLIO MANAGEMENT
The U.S. Treasury is in the process of paying down its debt through a
combination of reduced issuance and the repurchase of older high coupon bonds.
The Fund has invested in high coupon issues to take advantage of the Treasury
buy back action. These issues have recently outperformed other Treasuries.
Please see below as an example of yield spread change during the last six
months.
[Line graph omitted}
plot points as follows:
10/29/00 50.06
49
11/12/99 45
42
45
12/3/99 43
41
46
12/24/99 42
39
31
1/14/00 23
14
0.83
2/4/00 4.57
-7.08
-10.35
2/25/00 0.44
-6.63
-0.01
3/17/00 -1.41
-0.31
4.49
4/7/00 4.21
12.58
4.35
4/28/00 0.67
Six months ago the high coupon long treasuries had a yield 50 basis points
higher than 10-year Treasuries. At the end of April, the yields were the same.
At this point there is likely to be some additional relative appreciation for
the long issue, but as the buy backs go on, the Fund is likely to invest in the
ten-year maturity area, selling its long maturities and reducing cash reserves.
Our fundamental analysis of the economy indicates that strong growth will
persist into the second quarter keeping pressure on interest rates. The long
duration implications of the Fund's successful use of the buy back segment of
the Treasury market has been balanced by maintaining a high degree of short term
reserves. At the end of April the Fund had about 26% in short term investments.
ISI is looking for the right opportunity to reinvest in the ten- year maturity
range. Please see our Economic Outlook report that follows this letter for more
details.
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/SIGNATURE
R. Alan Medaugh
President
May 5, 2000
1
<PAGE>
ECONOMIC OUTLOOK
--------------------------------------------------------------------------------
OVERVIEW
Currently, we see more negatives than positives for bonds. In establishing
our position on bonds, we look at three perspectives: 1) fundamentals, 2)
sentiment, and 3) technicals. Currently, we believe the fundamentals and
technicals are negative, while sentiment is positive. This mix puts us cautious
on bonds. We are watching the "fundamentals" for a possible change, given that
our company surveys last week predicted a slow down in the economy, money growth
is slowing, and commodity prices have weakened. But strong growth reports have
been dominant so far. First quarter nominal growth was reported last week to be
running at an 8.1% annual rate. Inflation readings have also picked up. The
Employment Cost Index, a report closely watched by the Federal Reserve, jumped
to a 4.3% annual rate for the first quarter. The pick-up in inflation has gained
consumer attention according to the University of Michigan Inflation Expectation
report. Inflation expectations are up 100 basis points in the last year,
implying future pressure on wage demands. We expect the Federal Reserve will
increase the Federal Funds rate by 50 basis points in two 25 basis point moves
at the May and June meetings.
U.S. ECONOMY
Over the last five years a distinct economic growth pattern has persisted,
with the first quarter of the year strong relative to the fourth quarter of the
preceeding year as illustrated in the following chart. For seasonal strength to
continue for five years means the forces behind the growth are accelerating
faster than the Bureau of Labor Statistics can adjust its seasonal models. We
believe the keys to this first quarter growth are accelerating tax refunds,
rising bonus payments and home mortgage refinancing windfalls.
[Bar chart omitted]
plot points as follows:
12/31/95 2.6
3/31/96 3.3
12/31/96 2.9
3/31/97 4.4
12/31/97 3.3
3/31/98 5.8
12/31/98 4.6
3/31/99 6.5
12/31/99 5.9
3/31/00 7.5
The question is what's next. It would seem that the first quarter
acceleration story suggests growth slows in the second quarter. However, that
has not been the case. In the past four years, second quarter consumer spending
has accelerated half the time. This year there is a special stimulus: the repeal
of the Social Security earnings test for workers aged 65 to 69. This will
provide roughly a $1.4 billion tax cut for the second quarter, or almost $6
billion at an annual rate. So, it is likely that this year may see growth
persist at a higher rate into the second quarter. As a result, the Federal
Reserve will be forced to continue with its increases in short rates.
2
<PAGE>
ECONOMIC OUTLOOK FOR 2000 (CONCLUDED)
--------------------------------------------------------------------------------
In the second half of 2000, we expect the Federal Reserve rate increases
along with those of other Central Banks will begin to dampen growth. Also
pointing to lower growth, money supply growth, which leads retail sales, has
rolled over in the last month. Equity prices have also been flat for the last
four months while exhibiting day to day volatility. This behavior is likely to
reduce consumer confidence. ISI sees a slow down developing from these factors.
FINANCIAL MARKETS
Strong growth in 1999 and a change in Federal Reserve policy pushed
interest rates up from 4.65% to 6.44% for 10-year U.S. Treasuries. After an
early 2000 rally, strong growth and a hawkish Federal Reserve have again moved
rates higher. The stock market has also played a role in raising rates. The
resulting long-term build up of consumer balance sheet wealth has stimulated
spending, helping bolster economic growth. A year-end 1999 money growth
acceleration to head off any Y2K problems most likely exacerbated the
performance of the speculative part of the equity market such as the NASDAQ. The
recent reversal of the money acceleration seemed to have produced a sizeable
drop in the same speculative stock sector. As a result, price volatility has
become an important feature in the financial markets.
Looking ahead, we expect growth to slow in the second half of 2000. This is
likely to cap the Federal Reserve's interest rate increases and begin to lower
long-term bond yields.
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.
The SEC standardized total return figures include the impact of the maximum
initial sales charge. Returns would be higher for investors who qualified for a
lower initial sales charge.
The SEC total return figures may differ from total return figures in the
shareholder letter 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, an investor's shares may be worth more or less
than their original cost when redeemed. Past performance is not an indicator of
future results.
AVERAGE ANNUAL TOTAL RETURN*
--------------------------------------------------------------------------------
% Return with
Periods ended 4/30/00: Sales Charge
--------------------------------------------------------------------------------
One Year -2.34
--------------------------------------------------------------------------------
Five Years 6.07
--------------------------------------------------------------------------------
Ten Years 7.77
--------------------------------------------------------------------------------
Since Inception (8/10/88) 7.48
--------------------------------------------------------------------------------
[line graph omitted]
plot points as follows:
ISI Total Lehman Bros. Lehman Bros. Lehman Bros.
Return Intermediate Treasury Long-Term
8/10/88 9555 10000 10000 10000
10/88 9852 10313 10407 10685
10/89 11021 11388 11676 12493
10/90 11178 12266 12345 12592
10/91 12954 13889 14140 14876
10/92 14116 15268 15608 16593
10/93 16564 16685 17659 20526
10/94 15534 16400 16871 18143
10/95 18344 18329 19464 23016
10/96 18975 19359 20449 23810
10/97 20682 20766 22210 26815
10/98 22231 22793 24780 31189
10/99 22377 21379 24403 31392
4/00 23284 23266 20529 26881
* Past performance is not an indicator of future results. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost. These figures assume the
reinvestment of dividends and capital gains distributions and include the
Fund's 4.45% maximum sales charge. The Lehman Brothers indices listed above
are unmanaged. The Intermediate Index and the Long-Term Index reflect the
performance of U.S. Treasury securities in their respective sectors. The
Treasury Index is more of a general index in that it reflects the performance
of all public obligations and does not focus on any one particular segment.
Management is not aware of any single index that is truly representative of
the Fund since its active maturity management policy allows the manager to
adjust the weighted average maturity throughout each U.S. Treasury sector.
Currently, the Fund's weighted average maturity is approximately 12.8 years.
4
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
APRIL 30, 2000
(UNAUDITED)
MATURITY PAR MARKET
INTEREST RATE DATE (000) VALUE
--------------------------------------------------------------------------------
U.S. TREASURY BONDS - 70.1%
10.375% 11/15/12 $24,250 $ 29,539,531
8.875 2/15/19 29,500 37,732,358
8.125 8/15/19 35,000 42,060,165
8.500 2/15/20 41,000 51,109,083
8.125 8/15/21 11,400 13,843,875
------------
TOTAL U.S. TREASURY BONDS
(Cost $188,897,720) .................................... 174,285,012
------------
ZERO COUPON U.S. TREASURY BONDS (STRIPS) 1 - 2.8%
6.245%* 5/15/17 19,500 6,850,292
------------
TOTAL ZERO COUPON U.S. TREASURY BONDS (STRIPS) 1
(Cost $7,598,893) ...................................... 6,850,292
------------
REPURCHASE AGREEMENTS - 26.1%
Goldman Sachs & Co., 5.63% Dated 4/28/00,
to be repurchased on 5/1/00, collateralized
by U.S. Treasury Notes with a market
value of $22,054,683.
(Cost $21,622,000) ....................... 21,622 21,622,000
J.P. Morgan Securities, Inc., 5.70%
Dated 4/28/00, to be repurchased on
5/1/00, collateralized by U.S. Treasury
Notes with a market value of $22,053,968.
(Cost $21,621,000) ....................... 21,621 21,621,000
Morgan Stanley & Co., 5.68%
Dated 4/28/00, to be repurchased on
5/1/00, collateralized by U.S. Treasury
Notes with a market value of $22,162,315.
(Cost $21,621,000) ....................... 21,621 21,621,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $64,864,000) ..................................... 64,864,000
------------
TOTAL INVESTMENTS -- 99.0%
(Cost $261,360,613) .................................... 245,999,304
OTHER ASSETS IN EXCESS OF LIABILITIES-- 1.0% ................. 2,442,164
------------
NET ASSETS -- 100.0% .......................................... $248,441,468
============
5
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED)
APRIL 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER:
ISI Class Share
($141,214,078 / 14,982,918 shares outstanding) ............... $9.43
=====
Flag Investors Class A Share
($107,227,390 / 11,375,726 shares outstanding) ............... $9.43
=====
MAXIMUM OFFERING PRICE PER:
ISI Class Share
($9.43 / 0.9555) ............................................. $9.87
=====
Flag Investors Class A Share
($9.43 / 0.955) .............................................. $9.87
=====
--------------------------------------------------------------------------------
* Yield as of April 30, 2000.
(1) Separate trading of registered interest and principal of securities.
See Notes to Financial Statements.
6
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .................................................. $ 7,440,736
-----------
EXPENSES:
Investment advisory fee ................................... 342,194
Distribution fee .......................................... 316,252
Administration fee ........................................ 126,260
Transfer agent fee ........................................ 43,022
Accounting fee ............................................ 38,921
Custodian fee ............................................. 28,114
Professional fees ......................................... 26,428
Registration fees ......................................... 22,439
Printing and postage ...................................... 17,470
Miscellaneous ............................................. 2,069
-----------
Total expenses ........................................... 963,169
-----------
Net investment income .................................... 6,477,567
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions .............. (3,511,978)
Change in unrealized appreciation/depreciation on investments 7,395,398
-----------
Net gain on investments ................................... 3,883,420
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $10,360,987
===========
--------------------------------------------------------------------------------
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 APRIL 30, ENDED OCTOBER 31,
2000(1) 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ............................... $ 6,477,567 $ 13,390,796
Net realized gain/(loss) from security transactions . (3,511,978) 4,648,128
Change in unrealized appreciation/depreciation
on investments ................................... 7,395,398 (29,808,640)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations ........................ 10,360,987 (11,769,716)
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income and short-term gains:
ISI Class Shares ................................. (4,926,629) (11,554,616)
Flag Investors Class A Shares .................... (3,730,213) (8,710,017)
Flag Investors Class B Shares .................... -- (186,679)
Net realized long-term gains:
ISI Class Shares ................................. -- (2,770,396)
Flag Investors Class A Shares .................... -- (2,005,712)
Flag Investors Class B Shares .................... -- (68,070)
------------ ------------
Total distributions ................................. (8,656,842) (25,295,490)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from sale of shares ........................ 16,762,442 42,387,220
Value of shares issued in reinvestment of dividends . 5,450,050 17,749,854
Cost of shares repurchased .......................... (41,892,474) (54,663,606)
------------ ------------
Increase/(decrease) in net assets derived
from capital share transactions .................. (19,679,982) 5,473,468
------------ ------------
Total decrease in net assets ........................ (17,975,837) (31,591,738)
NET ASSETS:
Beginning of period ................................. 266,417,305 298,009,043
------------ ------------
End of year including distributions in excess of
net investment income of $556,835 for the
year ended October 31, 1999 ...................... $248,441,468 $266,417,305
============ ============
--------------------------------------------------------------------------------
<FN>
(1) Unaudited.
</FN>
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--ISI SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
APRIL 30, FOR THE YEARS ENDED OCTOBER 31,
--------------------------------------------------------------
2000(3) 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period .... $ 9.35 $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................... 0.24 0.64 0.51 0.55 0.56 0.57
Net realized and unrealized gain/(loss)
on investments .......................... 0.16 (1.03) 0.71 0.30 (0.23) 1.04
-------- -------- -------- -------- -------- --------
Total from Investment Operations .......... 0.40 (0.39) 1.22 0.85 0.33 1.61
LESS DISTRIBUTIONS:
Net investment income and
short-term gains ........................ (0.32) (0.71) (0.64) (0.55) (0.65) (0.64)
Tax return of capital distribution ........ -- -- -- (0.08) -- --
Distribution in excess of
net investment income ................... -- -- -- (0.01) (0.04) --
Net realized long-term gains .............. -- (0.17) -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions ....................... (0.32) (0.88) (0.64) (0.64) (0.69) (0.64)
-------- -------- -------- -------- -------- --------
Net asset value at end of period .......... $ 9.43 $ 9.35 $ 10.62 $ 10.04 $ 9.83 $ 10.19
======== ======== ======== ======== ======== ========
TOTAL RETURN(1) .............................. 4.24% (3.82)% 12.50% 9.00% 3.44% 18.09%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses .................................. 0.74%(2) 0.81% 0.85% 0.83% 0.81% 0.80%
Net investment income ..................... 4.97%(2) 4.68% 4.98% 5.62% 5.69% 5.94%
SUPPLEMENTAL DATA:
Net assets at end of period(000):
Flag Investors Class A Shares ........... $107,227 $114,886 $122,785 $122,229 $143,791 $164,206
ISI Class Shares ........................ $141,214 $151,532 $171,336 $171,074 $193,486 $206,615
Portfolio turnover rate ................... 5% 77% 179% 92% 199% 194%
---------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Total return excludes the effect of sales charge.
(2) Annualized.
(3) Unaudited.
</FN>
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
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 two 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"), both of which began
operations August 10, 1988. Another class of shares, Flag Investors Total
Return U.S. Treasury Fund Class B Shares, began operations June 20, 1996.
The sale of Flag Investors Class B Shares was terminated and existing Flag
Investors Class B Shares were converted to Flag Investors Class A Shares on
May 14, 1999.
The ISI Class Shares have a 4.45% maximum front-end sales charge and the
Flag Investors Class A Shares have a 4.50% maximum front-end sales charge.
The classes have the same distribution fees.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with accounting principles generally accepted in
the United States. 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.
These 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. At April 30, 2000 there were no Board
Valued Securities. 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 and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
FEDERAL INCOME TAXES -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income and net realized capital gains, it
will be exempt from most, if not all, federal income and excise taxes. As a
result, the Fund has made no provisions for federal income taxes.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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 months ended April 30, 2000, ISI's advisory fee was
$342,194 of which $55,751 was payable at the end of the period.
Investment Company Capital Corp. ("ICCC"), an indirect subsidiary of
Deutsche Bank AG, is the Fund's administrator. As compensation for its
administrative services, the Fund pays ICCC an annual fee based on the
combined assets of the ISI Funds that is calculated daily and paid monthly
at the following annual rates: 0.20% of the first $75 million, 0.15% of the
next $75 million, 0.10% of the next $75 million, 0.05% of the next 275
million, and 0.03% of the amount over $500 million. For the six months
ended April 30, 2000, ICCC's administration fee was $126,260, of which
$21,343 was payable at the end of the period.
Certain officers and directors of the Fund are also officers or directors
of ISI or ICCC.
ICCC also provides accounting services to the fund for which the Fund pays
ICCC an annual fee that is calculated daily and paid monthly from the
Fund's average daily net assets. For the six months ended April 30, 2000,
ICCC's fee was $38,921, of which $6,398 was payable at the end of the
period.
ICCC also provides transfer agency services to the Fund for which the Fund
pays ICCC a per account fee that is calculated and paid monthly. For the
six months ended April 30, 2000, ICCC's fee was $43,022, of which $8,000
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
Class of the Fund for which ICC Distributors is paid an annual fee,
pursuant to Rule 12b-1 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. For the six months ended April 30, 2000, distribution
fees aggregated $316,252. ISI Group's fee was $179,944, of which $29,546
was payable at the end of the year. ICC Distributor's fee was $136,308, of
which $22,284 was payable at the end of the period.
11
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
C. CAPITAL SHARE TRANSACTIONS -- The Fund is authorized to issue up to 115
million shares of $.001 par value capital stock (44 million Flag Investors
Class A, 44 million ISI Class, 5 million Flag Investors Class B, 15 million
Flag Investors Class C, 500,000 Flag Investors Class D and 6.5 million
undesignated). Transactions in shares of the Fund were as follows:
ISI CLASS SHARES
----------------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
2000(1) 1999
------------ ------------
Shares sold ................ 1,077,389 1,446,867
Shares issued to share-
holders on reinvest-
ment of dividends ........ 338,261 983,017
Shares repurchased ......... (2,632,263) (2,351,273)
------------ ------------
Net increase/(decrease) in
shares outstanding ....... (1,216,613) 78,611
============ ============
Proceeds from sale
of shares ................ $ 10,057,882 $ 13,815,462
Value of reinvested
dividends ................ 3,146,484 10,372,002
Cost of shares
repurchased .............. (24,499,795) (23,047,940)
------------ ------------
Net increase/(decrease)
from capital share
transactions ............. $(11,295,429) $ 1,139,524
============ ============
--------
(1) Unaudited.
FLAG INVESTORS CLASS A SHARES
----------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
2000(1) 1999
------------ ------------
Shares sold ................ 717,849 2,468,335
Shares issued to share-
holders on reinvest-
ment of dividends ........ 249,745 718,480
Shares repurchased ......... (1,871,032) (3,016,885)
Conversion of shares
from Class B ............. -- 545,490
------------ ------------
Net increase/(decrease) in
shares outstanding ....... (903,438) 715,420
============ ============
Proceeds from sale
of shares ................ $ 6,704,560 $ 24,540,826
Value of reinvested
dividends ................ 2,303,566 7,196,033
Cost of shares
repurchased .............. (17,392,678) (29,260,245)
Conversion of shares
from Class B ............. -- 5,578,323
------------ ------------
Net increase/(decrease)
from capital share
transactions ............. $ (8,384,552) $ 8,054,937
============ ============
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
FLAG INVESTORS CLASS B SHARES(1)
--------------------------------
FOR THE
YEAR ENDED
OCTOBER 31,
1999
-------------
Shares sold ...................... 394,876
Shares issued to share-
holders on reinvest-
ment of dividends .............. 17,702
Shares repurchased ............... (232,994)
Conversion of shares
to Class A ..................... (545,490)
-----------
Net decrease in
shares outstanding ............. (365,906)
===========
Proceeds from sale
of shares ...................... $ 4,030,932
Value of reinvested
dividends ...................... 181,819
Cost of shares
repurchased .................... (2,355,421)
Conversion of shares
to Class A ..................... (5,578,323)
-----------
Net decrease from capital share
transactions ................... $(3,720,993)
===========
------------
(1) Converted to Class A shares May 14, 1999.
D. INVESTMENT TRANSACTIONS -- Excluding short-term obligations, purchases of
investment securities aggregated $31,656,082 and sales of investment
securities aggregated $9,533,725 for the six months ended April 30, 2000.
On April 30, 2000, aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value was
$15,361,309.
E. NET ASSETS -- On April 30, 2000, net assets consisted of:
Paid-in capital:
ISI Class Shares .............. $155,096,956
Flag Investors Class A Shares . 115,156,737
Distributions in excess of net
investment income ............. (2,736,110)
Accumulated distributions in
excess of capital gain on
investments ................... (3,714,806)
Unrealized depreciation
of investments ................ (15,361,309)
------------
$248,441,468
============
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%
13
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<PAGE>
--------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the 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.
--------------------------------------------------------------------------------
<PAGE>
ISI
TOTAL RETURN
U.S. TREASURY FUND SHARES
--------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Edward S. Hyman Margaret M. Beeler
CHAIRMAN ASSISTANT VICE PRESIDENT
R. Alan Medaugh Suzanne H. Ughetta
PRESIDENT ASSISTANT VICE PRESIDENT
Joseph R. Hardiman Keith C. Reilly
DIRECTOR ASSISTANT VICE PRESIDENT
Louis E. Levy Charles A. Rizzo
DIRECTOR TREASURER
Carl W. Vogt, Esq. Felicia A.Emry
DIRECTOR SECRETARY
Nancy Lazar Amy M. Olmert
VICE PRESIDENT ASSISTANT SECRETARY
Edward J. Veilleux Daniel O. Hirsch
VICE PRESIDENT ASSISTANT SECRETARY
Carrie L. Butler
VICE PRESIDENT
INVESTMENT OBJECTIVE
A mutual fund designed to provide a high level of total return with relative
stability of principal and, secondarily, high current income consistent with an
investment in securities issued by the United States Treasury.
INVESTMENT ADVISOR
ISI Inc.
535 Madison Avenue, 30th Floor
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.
535 Madison Avenue, 30th Floor
New York, NY 10022
(800) 955-7175
