<PAGE>
Annual Report
Josephthal
JOSEPHTHAL STRATEGIC GROWTH FUND
OCTOBER 31, 2000
AUDITED
FINANCIAL
STATEMENTS
[LOGO OF STRATEGIC GROWTH FUND] NORTH AMERICAN FUNDS
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
Chairman's Message
-------------------------------------------------------------------------------
Dear Shareholder,
As Chairman and CEO of Josephthal & Co. Inc., I extend a warm welcome to you
as a shareholder of the Josephthal Strategic Growth Fund. The following
paragraphs include an economic outlook as well as general market commentary
from The Josephthal Strategic Growth Fund's lead portfolio manager, Mr. Howard
Schachter.
The Josephthal Strategic Growth Fund's Class A performance from its inception
on September 18th through the fiscal year, ended October 31, 2000, was -1.20%.
The Fund, designed to invest in companies for the fastest growing sectors in
the economy (ie, technology, health care, specialty retailing), has maintained
a large cash position and utilized active hedging techniques as part of a
defensive strategy to successfully weather the uncertain and volatile
marketplace since its inception.
This past year, rising oil prices, a weak Euro, and a string of earnings and
revenue disappointments by a number of large US multi-national companies led
to an extremely volatile equity market. With regard to the general economic
outlook, we remain cautious in the short term due to a number of circumstances
that have arisen recently. As mentioned above, rising energy prices throughout
2000 hint of a possible inflationary environment for 2001 at a time when there
are indications that the economy is entering a slowdown period. This economic
slowdown is evidenced by a downward revision by Wall Street analysts of
corporate earnings estimates for 2001, as well as a reduction in the
expenditures corporations are spending on capital improvements (such as
computer and phone system upgrades). Inventories have risen to historically
high levels and will have to be worked down before traditional growth can
resume. Consumer sentiment in the short term is negative, while consumer debt
is near or at all time high levels.
Despite these conditions, we believe that the long-term prospects in both the
U.S. and abroad remain bright as the economy will likely have a soft landing
with corporate earnings potentially rising 5-10% next year. We expect the Fed
to begin monetary easing soon with the probability of rate cuts early in 2001,
which should help investor psychology significantly. This bodes well for
traditional growth stocks in which the Fund primarily invests.
With the Josephthal Strategic Growth Fund's significant cash reserves and a
hedged select stock portfolio of some of the nation's leading growth
companies, we believe the Fund is well positioned to take advantage of the
opportunities created by today's depressed market conditions when conditions
dictate a more positive investment approach.
Thank you for investing in the Josephthal Strategic Growth Fund, a portfolio
of the North American Funds, managed by Josephthal & Co. Inc. We look forward
to serving your investment needs in the New Year and in the years ahead.
Sincerely,
/s/ Paul Fitzgerald
Paul Fitzgerald
Chairman & CEO
Josephthal & Co. Inc.
<PAGE>
Report of Independent Accountants
-------------------------------------------------------------------------------
To the Trustees of the North American Funds and the Shareholders of Josephthal
Strategic Growth Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Josephthal
Strategic Growth Fund (the "Fund") at October 31, 2000, the results of its
operations, the changes in its net assets and the financial highlights for the
period September 18, 2000 (commencement of operations) through October 31,
2000, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at October 31, 2000 by correspondence with the custodian and
brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 27, 2000
2
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value. Cost $39,529,793 (See
accompanying Portfolio of Investments) (Note 2).................. $39,140,719
Cash............................................................. 442
Receivables:
Investments sold................................................ 143,306
Fund shares sold................................................ 177,404
Dividends....................................................... 1,812
Interest........................................................ 4,802
From adviser.................................................... 5,553
Other assets..................................................... 51,657
-----------
Total assets................................................... 39,525,695
-----------
LIABILITIES:
Payables:
Investments purchased........................................... 1,532,945
Fund shares redeemed............................................ 54,501
Custodian and transfer agent fees............................... 27,940
Distribution fee................................................ 7,815
Other accrued expenses.......................................... 17,130
-----------
Total liabilities ............................................. 1,640,331
-----------
NET ASSETS....................................................... $37,885,364
-----------
NET ASSETS CONSIST OF:
Undistributed net investment income/(loss) (Note 2)............. $101,121
Accumulated undistributed net realized gain (loss) on
investments and written options................................. (55,684)
Unrealized appreciation (depreciation) on investments........... (389,074)
Capital shares at par value of $.001 (Note 3)................... 3,836
Additional paid-in capital...................................... 38,225,165
-----------
Net assets..................................................... $37,885,364
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES continued - OCTOBER 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET ASSET VALUES:
Class A Shares
Net assets at value............................................... $28,191,209
Shares outstanding................................................ 2,853,967
Net asset value (NAV) and redemption price per share............... $9.88
-----
Public offering price per share (100/94.25 of NAV)
On sales of $100,000 or more the offering price is reduced........ $10.48
------
Class B Shares
Net assets at value............................................... $8,388,805
Shares outstanding................................................ 850,046
Net asset value, offering price and redemption price per share..... $9.87
-----
Class C Shares
Net assets at value............................................... $1,305,350
Shares outstanding................................................ 132,245
Net asset value, offering price and redemption price per share..... $9.87
-----
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
STATEMENT OF OPERATIONS - FOR THE PERIOD ENDED OCTOBER 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 18, 2000*
through
October 31, 2000
-------------------
<S> <C>
INVESTMENT INCOME:
Interest................................................... $169,122
Dividends.................................................. 1,937
---------
Total income............................................... 171,059
---------
EXPENSES:
Distribution for Class A................................... 9,413
Distribution for Class B................................... 8,104
Distribution for Class C................................... 1,126
Investment adviser fee (Note 5)............................ 32,512
Custodian fee.............................................. 1,925
Transfer agent fee......................................... 26,015
Accounting/administration.................................. 10,578
Audit and legal fees....................................... 4,601
Miscellaneous.............................................. 10,319
---------
Expenses before reimbursement by investment adviser........ 104,593
Reimbursement of expenses by investment adviser (Note 5)... 34,655
---------
Net expenses.............................................. 69,938
---------
Net investment income..................................... 101,121
---------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions.................................... (64,359)
Written options............................................ 8,675
Change in unrealized appreciation (depreciation) on
investments................................................ (389,074)
---------
Net loss on investments................................... (444,758)
---------
Net decrease in net assets resulting from operations..... ($343,637)
---------
</TABLE>
---------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Period From
September 18, 2000*
through
October 31, 2000
-------------------
<S> <C>
OPERATIONS:
Net investment income.................................... $101,121
Net realized gain (loss) on investment transactions...... (64,359)
Net realized gain (loss) on written options.............. 8,675
Change in unrealized appreciation/(depreciation) on
investments.............................................. (389,074)
<CAPTION>
-------------------
<S> <C>
Net decrease in net assets resulting from operations...... (343,637)
Increase in net assets from capital share transactions
(Note 3).................................................. 38,229,001
<CAPTION>
-------------------
<S> <C>
Increase in net assets.................................... 37,885,364
Net assets at beginning of period......................... -
<CAPTION>
-------------------
<S> <C>
Net assets at end of period............................... $37,885,364
<CAPTION>
-------------------
</TABLE>
---------------------
* Commencement of Operations
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from 9/18/00 *
through 10/31/00
---------------------------
Class A Class B Class C
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00 $10.00
-----------------------------------------------------------------------------
Investment Operations:
Net investment income** 0.03 0.03 0.03
Net realized and unrealized loss on investments (0.15) (0.16) (0.16)
<CAPTION>
---------------------------
<S> <C> <C> <C>
Total from investment operations (0.12) (0.13) (0.13)
-----------------------------------------------------------------------------
Net Asset Value, End of Period $9.88 $9.87 $9.87
-----------------------------------------------------------------------------
Total Return (1.20%)+ (1.30%)+ (1.30%)+
-----------------------------------------------------------------------------
Ratios/Supplemental Data
Net assets, end of period (000's) $28,191 $8,389 $1,305
-----------------------------------------------------------------------------
Ratio of net expenses to average net assets 1.77%# 2.42%# 2.42%#
-----------------------------------------------------------------------------
Ratio of net investment income to average net
assets 2.94%# 2.32%# 2.34%#
-----------------------------------------------------------------------------
Portfolio turnover rate 98%+ 98%+ 98%+
-----------------------------------------------------------------------------
Expense ratio before fee waiver by adviser 2.69%# 3.35%# 3.35%#
-----------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
+ Not annualized
# Annualized
** Net investment income per share has been calculated using the average share
method.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS - October 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
COMMON STOCKS - 26.28%
Biotechnology - 1.67%
Amgen, Inc.* 7,500 $ 434,531
Lexicon Genetics, Inc.* 5,000 100,625
Sangstat Medical Corp.* 12,000 120,000
-----------
655,156
Commerical Services & Supplies - 0.40%
Cendant Corp.* 13,000 156,000
-----------
Communications Equipment - 4.23%
ADC Telecommunications, Inc.* 10,000 213,750
Antec Corp.* 10,000 126,875
Avanex Corp.* 1,500 152,344
Avaya, Inc.* 416 5,590
C-Cor.net Corporation* 10,000 156,250
Cabletron Systems Inc* 5,000 135,625
Cisco Systems, Inc.* 5,000 269,375
Lucent Technologies, Inc. 5,000 116,563
Motorola, Inc. 9,000 224,438
Stratos Lightwave, Inc.* 5,000 132,188
Tellabs, Inc.* 2,500 124,844
-----------
1,657,842
Computers & Peripherals - 3.16%
Compaq Computer Corp. 5,000 152,050
Dell Computer Corp.* 5,000 147,500
EMC Corp.* 2,000 178,125
Finisar Corp.* 5,000 144,063
Gateway, Inc.* 2,500 129,025
International Business Machines Corp. 5,000 487,800
-----------
1,238,563
Financial Services - 0.34%
Citigroup, Inc. 2,500 131,563
-----------
Diversified Telecommunications - 0.88%
AT&T Corp. 5,000 115,938
Nortel Networks Corp. 5,000 227,500
-----------
343,438
Electrical Equipment - 0.65%
Flextronics International* 5,000 190,000
Harris Corp. 2,000 63,375
-----------
253,375
Electronic Equipment - 1.18%
Applied Micro Circuits Corp.* 2,000 152,750
Kemet Corp.* 7,500 209,063
Zygo Corp.* 2,000 99,000
-----------
460,813
Food Products - 0.47%
Dreyers Grand Ice Cream, Inc. 7,500 184,688
-----------
Health Care Equipment - 0.26%
Apria Healthcare Group, Inc.* 5,000 100,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
Internet Software & Services - 0.70%
Critical Path, Inc.* 2,500 $ 121,406
Verticalnet, Inc.* 5,500 153,398
-----------
274,804
Media - 1.13%
Walt Disney Company 5,000 179,063
USA Networks, Inc.* 13,000 263,250
-----------
442,313
Multiline Retail - 1.00%
BJs Wholesale Club, Inc.* 5,000 164,688
Wal Mart Stores, Inc. 5,000 226,875
-----------
391,563
Pharmaceuticals - 1.38%
Bristol Myers Squibb Co. 5,000 304,688
Pfizer, Inc. 2,500 107,969
Schering Plough Corp. 2,500 129,219
-----------
541,875
Semiconductor Equipment & Products - 5.84%
Advanced Micro Devices, Inc.* 13,000 294,125
Altera Corp.* 6,000 245,625
Atmel Corp.* 7,500 112,031
Cypress Semiconductor Corp.* 5,000 187,188
Integrated Silicon Solution* 8,000 107,000
Intel Corp. 2,500 112,500
Lattice Semiconductor Corp.* 10,000 291,875
Microchip Technology, Inc.* 4,000 126,500
Microsemi Corp.* 2,500 100,000
Novellus Systems, Inc.* 3,000 122,813
PMC Sierra, Inc.* 1,500 254,250
Silicon Storage Technology, Inc.* 5,000 113,750
Xilinx, Inc.* 3,000 217,306
-----------
2,284,963
Software - 1.73%
Microsoft Corp.* 3,000 206,625
New Era Of Networks, Inc.* 5,000 77,813
Oracle Corp.* 5,000 165,000
Peoplesoft, Inc.* 2,500 109,102
Verity, Inc.* 5,000 117,500
-----------
676,040
Specialty Retail - 1.26%
Bed Bath & Beyond, Inc.* 2,500 64,531
Home Depot, Inc. 10,000 430,000
-----------
494,531
-----------
TOTAL COMMON STOCKS
(Cost $10,736,126) $10,287,527
-----------
COMMON STOCK UNITS - 0.52%
Unit Investment Trust - 0.52%
NASDAQ 100 Share Index 2,500 $ 204,258
-----------
TOTAL COMMON STOCK UNITS
(Cost $202,087) $ 204,258
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS - October 31, 2000 - continued
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
-----------------------------------------------------
PUT OPTIONS - 1.76%
-----------------------------------------------------
<CAPTION>
Number of
Contracts Value
--------- -------
<S> <C> <C>
ADC Telecommunications, Inc.
Strike Price $25.00, Exp. 11/18/01 50 $21,250
Strike Price $22.50, Exp. 11/18/00 50 13,125
Advanced Micro Devices, Inc.
Strike Price $22.50, Exp. 11/18/00 30 4,875
Strike Price $17.50, Exp. 11/18/00 50 313
Strike Price $20.00, Exp. 11/18/00 50 2,813
Altera Corp.
Strike Price $35.00, Exp. 11/18/00 25 2,188
Strike Price $30.00, Exp. 11/18/00 35 219
Amgen, Inc.
Strike Price $50.00, Exp. 12/16/00 25 7,500
Strike Price $55.00, Exp. 12/16/00 50 23,750
Antec Corp.
Strike Price $12.50, Exp. 12/16/00 100 24,050
Applied Micro Circuits Corp.
Strike Price $62.50, Exp. 11/18/00 20 5,625
Apria Healthcare Group, Inc.
Strike Price $17.50, Exp. 11/18/00 50 625
A T & T Corp.
Strike Price $25.00, Exp. 12/16/00 50 16,250
Atmel Corp.
Strike Price $15.00, Exp. 11/18/00 75 7,969
Avanex Corp.
Strike Price $85.00, Exp. 11/18/00 15 7,313
Bed Bath & Beyond, Inc.
Strike Price $25.00, Exp. 11/18/00 50 5,000
BJs Wholesale Club, Inc.
Strike Price $30.00, Exp. 12/16/00 50 4,688
Bristol Myers Squibb Co.
Strike Price $55.00, Exp. 11/18/00 50 2,500
C-COR.net Corp.
Strike Price $12.50, Exp. 11/18/00 100 1,875
Cabletron Systems, Inc.
Strike Price $27.50, Exp. 11/18/00 50 10,625
Cisco Systems, Inc.
Strike Price $65.00, Exp. 11/18/00 50 55,000
Citigroup, Inc.
Strike Price $50.00, Exp. 12/16/00 25 4,219
Compaq Computer Corp.
Strike Price $27.50, Exp. 11/18/00 50 1,750
Cree, Inc.
Strike Price $90.00, Exp. 11/18/00 10 4,000
Critical Path, Inc.
Strike Price $35.00, Exp. 11/18/00 25 1,250
Dell Computer Corp.
Strike Price $27.50, Exp. 12/16/00 50 8,438
Walt Disney Company
Strike Price $37.50, Exp. 11/18/00 50 11,875
EMC Corp.
Strike Price $90.00, Exp. 11/18/00 20 11,750
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
--------- -------
<S> <C> <C>
Finisar Corp.
Strike Price $30.00, Exp. 11/18/00 50 $20,000
Flextronics Int'l. Ltd.
Strike Price $35.00, Exp. 12/16/00 50 14,688
Gateway, Inc.
Strike Price $45.00, Exp. 11/18/00 25 2,125
Harris Corp.
Strike Price $25.00, Exp. 02/17/01 30 1,125
Home Depot, Inc.
Strike Price $50.00, Exp. 11/18/00 50 35,000
Strike Price $35.00, Exp. 01/20/01 50 3,750
Integrated Silicon Solution
Strike Price $12.50, Exp. 11/18/00 80 10,740
Intel Corp.
Strike Price $45.00, Exp. 11/18/00 25 6,563
International. Business Machines
Strike Price $90.00, Exp. 12/16/00 50 13,588
Kemet Corp.
Strike Price $25.00, Exp. 01/20/01 75 15,000
Lattice Semiconductor Corp.
Strike Price $25.00, Exp. 12/16/00 50 7,500
Strike Price $22.50, Exp. 11/18/00 50 625
Lexicon Genetics, Inc.
Strike Price $17.50, Exp. 11/18/00 50 7,025
Lucent Technologies, Inc.
Strike Price $22.50, Exp. 11/18/00 50 5,000
Microchip Technology, Inc.
Strike Price $30.00, Exp. 11/18/00 40 6,250
Microsemi Corp.
Strike Price $40.00, Exp. 11/18/00 25 8,125
Microsoft Corp.
Strike Price $60.00, Exp. 11/18/00 30 1,500
Motorola, Inc.
Strike Price $22.50, Exp. 11/18/00 50 2,500
Strike Price $20.00, Exp. 11/18/00 50 1,250
New Era of Networks, Inc.
Strike Price $15.00, Exp. 11/18/00 50 5,313
Nortel Networks Corp.
Strike Price $65.00, Exp. 11/18/00 25 52,813
Strike Price $60.00, Exp. 11/18/00 25 37,188
Novellus Systems, Inc.
Strike Price $30.00, Exp. 11/18/00 30 375
Oracle Corp.
Strike Price $35.00, Exp. 11/18/00 50 16,250
Peoplesoft, Inc.
Strike Price $42.50, Exp. 11/18/00 25 5,625
Pfizer, Inc.
Strike Price $42.50, Exp. 11/18/00 25 3,125
PMC Sierra, Inc.
Strike Price $180.00, Exp. 11/18/00 15 26,250
Schering Plough Corp.
Strike Price $50.00, Exp. 11/18/00 25 2,813
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS - October 31, 2000 - continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Contracts Value
--------- --------
<S> <C> <C>
Silicon Storage Technology, Inc.
Strike Price $20.00, Exp. 11/18/00 50 $ 5,000
Stratos Lightwave, Inc.
Strike Price $35.00, Exp. 11/18/00 35 29,750
Tellabs, Inc.
Strike Price $40.00, Exp. 11/18/00 25 781
USA Networks, Inc.
Strike Price $20.00, Exp. 11/18/00 30 2,438
Strike Price $17.50, Exp. 12/16/00 75 2,344
Verity, Inc.
Strike Price $25.00, Exp. 11/18/00 50 15,000
Verticalnet, Inc.
Strike Price $25.00, Exp. 12/16/00 55 17,188
Wal Mart Stores, Inc.
Strike Price $45.00, Exp. 12/16/00 50 13,750
Xilinx, Inc.
Strike Price $65.00, Exp. 11/18/00 30 6,000
Zigo Corp.
Strike Price $60.00, Exp. 11/18/00 20 23,492
--------
TOTAL PUT OPTIONS (Cost $634,617) $688,684
--------
</TABLE>
--------------------------------------------------------------------------------
CALL OPTIONS - 0.06%
<TABLE>
-------------------------------------------------------------------------
<CAPTION>
Number of
Contracts Value
---------- -----------
<S> <C> <C>
Cypress Semiconductor Corp.
Strike Price $35.00, Exp. 11/18/00 (Cost $17,963) 50 $ 21,250
-----------
<CAPTION>
Shares Value
---------- -----------
<S> <C> <C>
SHORT TERM INVESTMENTS - 71.38%
SSGA Money Market Fund
(Cost $27,939,000) 27,939,000 $27,939,000
-----------
TOTAL INVESTMENTS
(Cost $39,529,793) $39,140,719
===========
</TABLE>
* non-income producing
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
1. ORGANIZATION OF THE FUND. The Josephthal Strategic Growth Fund ("the Fund")
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company. The Fund is a series of the North American
Funds which is comprised of twenty three other portfolios which are not
included in this report.
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of 5.75%. Class B and Class C shares are sold
without an initial sales charge. Class B shares are sold with a contingent
deferred sales charge which declines from 5% to zero depending on the period
of time shares are held. Class C shares are sold with a contingent deferred
sales charge of 1% in the first year after purchase. The redemption price per
share may differ from the net asset value per share. Class B shares will
automatically convert to Class A shares of the same portfolio eight years
after purchase. All three classes of shares have identical voting, dividend,
liquidation and other rights, except that each class has exclusive voting
rights with respect to its distribution plan (See Note 5). Investment income,
realized and unrealized capital gains and losses and common expenses of each
portfolio of North American Funds are allocated on a pro-rata basis to each
class based on their relative net assets.
American General Asset Management ("AGAM"), a subsidiary of American General
Corporation, serves as investment adviser and principal underwriter for the
Fund. AGAM is an indirect, wholly-owned subsidiary of American General
Corporation. Josephthal & Co., Inc. ("sub-adviser") serves as sub-adviser to
the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of
its financial statements. The preparation of financial statements is in
conformity with generally accepted accounting principles and requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
Security Valuation. Securities which are traded on a recognized exchange are
valued at the last sale price as of the close of business on a principal
securities exchange (domestic or foreign) or, lacking any sales, at the
closing bid price. Securities traded only in the over-the- counter market are
valued at the last bid price quoted by brokers making markets in the
securities at the close of trading on the Exchange. Portfolio debt securities
purchased with an original maturity greater than sixty days are valued by
pricing agents, approved by the Board of Trustees, whose quotations reflect
broker/dealer supplied valuations and electronic data processing techniques.
Other assets and securities for which no such quotation or valuation are
readily available are valued at their fair value as determined in good faith
under consistently applied procedures established by and under the general
supervision of the Trustees.
Foreign Currency Translations. The accounting records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of securities, other assets and other liabilities at the
current rate of exchange of such currencies against U.S. dollars; and
(ii) purchases and sales of securities, income and expenses at the rate of
exchange quoted on the respective dates of such transactions.
Gains and losses that arise from changes in foreign exchange rates have been
segregated from gains and losses that arise from changes in the market prices
of investments. These gains and losses are included with gains and losses on
foreign currency and forward foreign currency contracts. The Fund did not
engage in foreign currency transactions during the period.
Forward Foreign Currency Contracts. The Fund may purchase and sell forward
foreign currency contracts in order to hedge a specific transaction or
portfolio position.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held at the end of the period and the resulting net unrealized
appreciation (depreciation) and related net receivable or payable amount are
determined daily using forward currency exchange rates supplied by a quotation
service. The Fund could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts or if the value of
the foreign currency changes unfavorably.
Net realized gains (losses) on forward foreign currency contracts, include net
gains or losses realized by a portfolio on contracts which have matured. The
Fund did not engage in such contracts during the period.
11
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note 2 - continued
Options Contracts. The Fund may use option contracts to hedge against changes
in the value of securities the Fund owns or expects to purchase. The Fund may
also write options on securities it owns or in which it may invest in an
attempt to increase its current returns. The potential risk to the Fund is
that the change in value of options contracts may not correspond to the change
in value of the hedged instruments, but is generally limited to the premium
originally paid. Also, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Forward Commitments. The Fund may purchase debt securities on a "when-issued"
or "forward delivery" basis. Delivery and payment for securities which have
been purchased or sold on a forward commitment basis can take place a month or
more (not to exceed 120 days) after the date of the transaction. The price of
the underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The Fund
will establish a segregated account consisting of cash or liquid high-quality
debt securities equal to the amount of the commitment to purchase when-issued
or forward delivery securities. The value of the securities underlying a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the Fund's net asset value
starting on the day the Fund agrees to purchase the securities. The Fund did
not purchase securities on a forward commitment basis during the period.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which
they sell mortgage-backed securities for normal delivery in the current month
and simultaneously contract to repurchase similar, but not identical,
securities at the same price on an agreed upon date. The Fund receives
compensation as consideration for entering into the commitment to repurchase.
The compensation is recorded as deferred income and amortized to income over
the roll period. As the holder, the counterparty receives all principal and
interest payments, including prepayments, made with respect to the similar
security. Mortgage dollar rolls may be renewed with a new sale and repurchase
price with a cash settlement made at renewal without physical delivery of the
securities subject to the contract. The Fund did not enter into mortgage
dollar rolls during the period.
Futures Contracts. The Fund may enter into futures contracts to hedge against
market risk. Upon entering into a futures contract, the Fund is required to
deposit with the custodian on behalf of the broker an amount of cash or cash
equivalents equal to a certain percentage of the contract amount, which is
known as the "initial margin". The potential risk to the Fund is that the
change in value of futures contracts may not correspond to the change in value
of the hedged instruments. Also, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Subsequent payments, called "variation margin", are made or received by the
Fund, depending upon the fluctuation of the value of the futures contract.
When futures contracts are closed, the difference between the opening value at
the date of purchase and the value at closing is recorded as realized
gain/(loss). The Fund did not enter into futures contracts during the period.
Securities Lending. The Fund may lend its portfolio securities in amounts up
to 33% of its total non-cash assets to brokers, dealers and other financial
institutions, provided such loans are callable at any time and are at all
times fully collateralized by cash, cash equivalents, short term investments
or securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and marked to market to the value of the loaned securities
on a daily basis. The Fund may bear the risk of delay in recovery of, or even
loss of rights in, the securities loaned should the borrower of the securities
fail financially. Consequently, loans of portfolio securities will only be
made to firms deemed by the sub-adviser to be creditworthy.
The Fund receives compensation for lending its securities either in the form
of fees or by retaining a portion of interest on the investment of any cash
received as collateral. Cash collateral provided is invested in the State
Street Bank and Trust Company Navigator Securities Lending Trust. The related
income is included as interest income in the Statements of Operations. All
collateral received will be in an amount equal to at least 100% of the market
value of the loaned securities and should be maintained at that level during
the period of the loan. During the loan period, the Fund continues to retain
rights of ownership, including dividends and interest of the loaned
securities. No securities of the Fund were loaned during the period.
Federal Income Taxes. It is the Fund's policy to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, as
amended, and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
Distributions of Income and Gains. Dividends from net investment income and
distributions of net capital gains, if any, are declared and paid to
shareholders annually.
12
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note 2 - continued
Repurchase Agreements. The Fund may enter into repurchase agreements. When the
Fund enters into a repurchase agreement through its custodian, it receives
delivery of securities, the amount of which at the time of purchase and each
subsequent business day is required to be maintained at such a level that the
market value is equal to 102% of the repurchase price, and the Fund will take
constructive receipt of all securities underlying the repurchase agreements
until such agreements expire. If the seller defaults, the Fund would suffer a
loss to the extent that proceeds from the sale of underlying securities were
less than the repurchase price.
Other. Investment security transactions are accounted for on the trade date.
Interest income is accrued as earned. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. The Fund uses the First In,
First Out method for determining realized gain or loss on investments, futures
and foreign currency for both financial and federal income tax reporting
purposes.
Capital Accounts. The Fund reports the accumulated undistributed net
investment income (loss) and accumulated undistributed net realized gain
(loss) accounts on a basis approximating amounts available for future tax
distributions (or to offset future taxable realized gains when a capital loss
carryforward is available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the net
asset value.
3. CAPITAL SHARES. Share activity for the period ended October 31, 2000, is as
follows:
<TABLE>
<CAPTION>
Class A Class B Class C
---------------------- ------------------- -------------------
Shares Capital Shares Capital Shares Capital
--------- ----------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sold.................... 2,902,007 $28,917,035 873,524 $8,703,648 132,568 $1,317,922
Redeemed................ (48,040) (475,758) (23,478) (230,636) (323) (3,210)
--------- ----------- ------- ---------- ------- ----------
Net increase........... 2,853,967 $28,441,277 850,046 $8,473,012 132,245 $1,314,712
--------- ----------- ------- ---------- ------- ----------
</TABLE>
4. PURCHASES AND SALES OF SECURITIES. During the period ended October 31,
2000, the Fund purchased securities in the amount of $17,350,349, and received
$6,358,684 in proceeds on sales of securities (excluding short-term
investments).
At October 31, 2000, tax basis net unrealized depreciation was equal to the
aggregate gross unrealized appreciation for all securities in which there was
an excess of market value over tax cost and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost over
market value as follows:
<TABLE>
<CAPTION>
Tax Basis Net
Unrealized Tax Basis Tax Basis
Tax Basis Appreciation Unrealized Unrealized
Cost (Depreciation) Appreciation Depreciation
--------- -------------- ------------ ------------
<S> <C> <C> <C>
$39,735,013 ($594,294) $530,017 ($1,124,311)
</TABLE>
5. INVESTMENT ADVISORY AGREEMENTS. The Fund maintains an Investment Advisory
Agreement with AGAM ("the Adviser"), pursuant to approval by the Fund's Board
of Trustees and Fund shareholders. The Adviser is responsible for managing the
corporate and business affairs of the Fund and for selecting and compensating
sub-advisers to handle the investment and reinvestment of the assets of the
Fund, subject to the supervision of the Trustees of the Fund. As compensation
for its services, AGAM receives a fee from the Fund computed as an annual
percentage of average net assets as follows:
<TABLE>
<CAPTION>
Between Between
$50 million $200 million
First and and Excess over
$50 million $200 million $500 million $500 million
----------- ------------ ------------ ------------
<S> <C> <C> <C>
.900% .850% .825% .800%
</TABLE>
For the period ended October 31, 2000, AGAM paid aggregate subadvisory fees to
Josephthal of $18,062. In addition, AGAM retained net investment advisory fees
of $14,450 after payment of subadvisory fees.
13
<PAGE>
JOSEPHTHAL STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note 5 - continued
Expense Reimbursement and Distribution Plan. Pursuant to the Investment
Advisory Agreement, the Adviser will reduce the advisory fee, or, if
necessary, reimburse the Fund for expenses (excluding taxes, portfolio
brokerage commissions, interest, certain litigation and indemnification
expenses and extraordinary expenses) incurred in excess (Expense limitation)
of the following annual percentages of average net assets as highlighted in
the table below.
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940 to use its assets to finance certain
activities relating to the distribution of its shares to investors. The Plan
is a "compensation" plan providing for the payment by the Fund of a monthly
distribution fee to the Adviser as principal underwriter for the Fund as
highlighted in the table below:
<TABLE>
<CAPTION>
Class Class Class
A B C
----- ----- -----
<S> <C> <C> <C>
Expense limitation........................................... 1.77% 2.42% 2.42%
---- ---- ----
Rule 12b-1 fees.............................................. 0.35% 1.00% 1.00%
</TABLE>
In accordance with the Investment Advisory agreement, the Adviser, in addition
to providing advisory services, provides accounting and administrative
services for which AGAM charged $10,578 to the Fund, before reimbursement
based on expense limitations, for the period ended October 31, 2000. American
General Fund Distributors, Inc. received $2,670 in front end sales charges
during the period.
6. TRUSTEE'S FEES. The Fund pays each Trustee who is not an employee or a
director of AGAM or its affiliates a fee of $900 plus travel expenses for each
Board of Trustees meeting attended and an annual retainer of $3,600.
7. OPTIONS. During the period ended October 31, 2000, the following option
contracts were written:
<TABLE>
<CAPTION>
Number of
Contracts Premium
--------- -------
<S> <C> <C>
Options written............................................. 25 $8,675
Options closed and expired.................................. (25) (8,675)
Balance -- October 31, 2000................................. - $ -
</TABLE>
14
<PAGE>
NORTH AMERICAN FUNDS
286 Congress Street, Boston, MA 02210
1000:91326
