<PAGE>
ISI NORTH AMERICAN
GOVERNMENT BOND FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175
North American Government Bond Fund, Inc. (the "Fund") is designed to
provide a high level of current income, consistent with prudent investment
risk, by investing primarily in a portfolio of fixed-income securities issued
or guaranteed by the governments of the United States, Canada and Mexico.
Shares of the ISI class of the Fund ("Shares") are available through
Armata Financial Corp. as well as Participating Dealers and Shareholder
Servicing Agents. (See "How to Invest in the Fund.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing, and should be retained for future
reference. A Statement of Additional Information dated August 1, 1996 has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by contacting the Fund at the above address and telephone.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 1, 1996.
<PAGE>
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or Armata. This
Prospectus does not constitute an offering by the Fund or Armata in any
jurisdiction in which such offering may not lawfully be made. Shares may be
offered only to residents of those states in which such shares are eligible
for purchase.
TABLE OF CONTENTS
PAGE
<TABLE>
<CAPTION>
<S> <C>
1. Fee Table ........................ 2
2. Financial Highlights ............. 2
3. Investment Objective, Policies
and Risk Factors .................. 3
4. Investment Restrictions .......... 11
5. How to Invest in the Fund ........ 11
6. How to Redeem Shares ............. 13
7. Telephone Transactions ........... 14
8. Dividends and Taxes .............. 14
9. Management of the Fund ........... 15
10. Investment Advisor ............... 16
11. Administrator .................... 16
12. Distributor ...................... 17
13. Custodian, Transfer Agent and
Accounting Services ............... 17
14. Performance Information .......... 17
15. General Information .............. 18
</TABLE>
LOGO
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
An open-end mutual fund designed to provide a high level of current
income, consistent with prudent investment risk, by investing primarily in a
portfolio consisting of fixed-income securities issued or guaranteed by the
governments of the United States, Canada and Mexico.
AUGUST 1, 1996
LOGO
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1. Fee Table
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
Maximum Sales Charge Imposed on Purchases ............... 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Maximum Deferred Sales Charge .......................... None
ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average net assets)
Management Fees (net of fee waivers) ................... .27%*
12b-1 Fees ............................................. .40%
Asset Based Sales Charge ................ .15%
Service Fee ............................. .25%
Other Expenses (net of fee waivers) .................... .58%*
----------
Total Fund Operating Expenses (net of fee waivers) ..... 1.25%*
- ----------
*The Advisor and the Administrator have voluntarily agreed to waive
proportionate amounts of their respective fees, to the extent required, so
that the Fund's Total Operating Expenses do not exceed 1.25% of the Fund's
average net assets. Absent fee waivers, Management Fees would be .40%, Other
Expenses (including administration fees) would be .67% and Total Fund
Operating Expenses would be 1.47%, respectively, of the Fund's average net
assets.
EXAMPLE:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period:* $42 $69 $99 $186
- ----------
*The example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly or indirectly. A
person who purchases Shares through a financial institution may be charged
separate fees by the financial institution. The Expenses and Example
appearing in the table above are based on the Fund's expenses for the fiscal
year ended March 31, 1996 which, net of fee waivers, were 1.25% of the Fund's
average net assets. (For more complete descriptions of the various costs and
expenses, see "How to Invest in the Fund -- Offering Price," "Investment
Advisor," "Administrator" and "Distributor.") The rules of the SEC require
that the maximum sales charge (in the Shares' case, 3.00% of the offering
price) be reflected in the above table. However, certain investors may
qualify for reduced sales charges. (See "How to Invest in the Fund --
Offering Price.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more in total sales charges than the
equivalent of the maximum front-end sales charges permitted by the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
2. Financial Highlights
The Fund has offered the Shares since January 15, 1993. The financial
highlights included in this table are a part of the Fund's financial statements
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for the periods indicated and have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The financial statements and financial highlights for
the fiscal year ended March 31, 1996 and the report thereon of Coopers & Lybrand
L.L.P. are included in the Statement of Additional Information. Additional
performance information is contained in the Fund's Annual Report for the fiscal
year ended March 31, 1996, which can be obtained at no charge by calling the
Fund at (800) 955-7175.
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year
Ended For the Period
March 31, January 15, 1993*
---------------------------------- through
1996 1995 1994 March 31, 1993
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Per Share
Operating
Performance:
Net asset value at
beginning of
period ....... $ 8.06 $ 9.53 $ 10.14 $ 10.00
--------- ---------- --------- ----------
Income from
Investment
Operations:
Net investment
income ....... 0.81 0.63 0.89 0.10
Net realized and
unrealized
gain/(loss) on
investments .. 0.22 (1.38) (0.58) 0.12
--------- --------- --------- ----------
Total from
Investment
Operations ... 1.03 (0.75) 0.31 0.22
Less Distributions:
Dividends from net
investment
income and
short-term
gains ........ -- (0.45) (0.92) (.08)
Return of capital-
tax .......... (0.72) (0.27) -- --
--------- --------- --------- ----------
Total
distributions . (0.72) (0.72) (0.92) (0.08)
--------- --------- --------- ----------
Net asset value at
end of period . $ 8.37 $ 8.06 $ 9.53 $ 10.14
========= ========= ========= ==========
Total Return** .... 12.97% (8.31)% 2.77% 2.18%
Ratios to Average Net
Assets:
Expenses ........ 1.25%(2) 1.25%(2) 1.25%(2) 1.25%(1,2)
Net investment
income ....... 9.49%(3) 7.04%(3) 7.04%(3) 7.62%(1,3)
Supplemental Data:
Net assets at end of
period (000) . $60,860 $66,292 $93,622 $40,937
Portfolio turnover
rate ......... 125% 104% 219% 104%
</TABLE>
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- ------
* Commencement of Operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
1 Annualized.
2 Without the waiver of advisory and administration fees, the ratio of
expenses to average net assets would have been 1.47%, 1.45%, 1.44% and
2.19% (annualized) for the years ended March 31, 1996, March 31, 1995,
March 31, 1994, and for the period ended March 31, 1993, respectively.
3 Without the waiver of advisory and administration fees, the ratio of net
investment income to average net assets would have been 9.27%, 6.84%, 6.85%
and 6.68% (annualized) for the years ended March 31, 1996, March 31, 1995,
March 31, 1994 and for the period ended March 31, 1993, respectively.
3. Investment Objective, Policies and Risk Factors
The investment objective of the Fund is to provide a high level of current
income, consistent with prudent investment risk. This objective is
fundamental and may not be changed without shareholder approval. There is no
assurance that the Fund will be able to achieve its investment objective.
The Fund seeks to achieve its investment objective by investing under normal
circumstances at least 65% of its total assets in the following bonds and
debentures: (i) U.S. Treasury Securities (including Treasury bills, Treasury
notes, Treasury bonds and Separate Trading of Registered Interest and
Principal of Securities ("STRIPS")), which securities are direct obligations
of the United States Government (see "United States Government Securities"
below); and (ii) bonds or debentures issued or guaranteed by the Canadian and
Mexican governments or their subdivisions, agencies or instrumentalities
("Government Securities") and denominated either in U.S. dollars or in the
local foreign currency. The Fund will invest no more than 25% of its total
assets in Canadian Government Securities (see "Canadian Government
Securities" below) and no more than 25% of its total assets in Mexican
Government Securities (see "Mexican Government Securities" below).
In addition, the Fund will invest no more than 33% of its total assets in
securities denominated or payable in each of Canadian dollars and Mexican
pesos. Subject to the foregoing currency denomination limits, the Fund may
invest in bankers acceptances and certificates of deposit denominated or
payable in the local foreign currency and issued by one of the five most
highly capitalized banks in Canada or Mexico.
Subject to the foregoing guidelines, International Strategy and Investment
Inc. ("ISI" or the "Advisor") will invest the Fund's assets and allocate
investments from time to time among U.S., Canadian and Mexican Government
Securities, based on its assessment of which fixed-income securities best
enable the Fund to achieve its investment objective of seeking a high level
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of current income, consistent with prudent investment risk. Subject to the
limitations described above, the percentage of assets invested in a particular
country or denominated in a particular currency, as well as the average maturity
of the securities held in the Fund's portfolio, will vary in accordance with the
Advisor's analysis of market conditions, relative yields, and changes in general
economic and political conditions in the United States, Canada and Mexico, and
the Advisor's expectations regarding interest rate changes and changes in
currency exchange rates among the U.S. dollar, the Canadian dollar and the
Mexican peso. Based on the Advisor's analysis of such factors, it is possible
that, from time to time, none of the Fund's assets will be invested in Canada or
Mexico or denominated or payable in Canadian dollars or Mexican pesos.
Under normal circumstances, the dollar weighted expected average maturity of
the Fund's portfolio will vary depending on the Advisor's assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. It is currently anticipated
that during periods of stable interest rates, the Fund's portfolio will have
a dollar weighted expected average maturity of approximately ten years; and
during periods of declining interest rates, the Fund's portfolio will have a
dollar weighted expected average maturity of between fifteen and twenty-five
years. ISI may shorten the dollar weighted average maturity substantially for
temporary, defensive purposes, such as, when ISI believes interest rates are
or will be increasing substantially. There can be no assurance that the
Advisor's economic analyses will accurately predict interest rate movements
or that the portfolio strategies based upon such analyses will be effective.
Under normal circumstances, the Canadian Government Securities held in the
Fund's portfolio will be rated, at the time of purchase, Aa or higher by
Moody's Investors Service, Inc. ("Moody's") or AA or higher by Standard &
Poor's Ratings Group ("S&P") or, if not rated by Moody's or S&P, determined
to be of comparable quality by the Advisor under criteria approved by the
Fund's Board of Directors ("Comparable Quality"). Except as provided below,
the Mexican Government Securities in which the Fund may invest will be rated,
in the case of long-term securities, Baa or higher by Moody's, or BBB or
higher by S&P, or Comparable Quality, or in the case of short-term
securities, Prime-3 or higher by Moody's, A-3 or higher by S&P, or Comparable
Quality. Where deemed appropriate by the Advisor, the Fund may invest up to
10% of its total assets (measured at the time of the investment) in Mexican
Government Securities or in fixed-income securities issued by governments of
other countries in Latin America or elsewhere (and denominated in either U.S.
dollars or the local foreign currency), which securities are rated Ba by
Moody's or BB by S&P, or Comparable Quality. If a fixed-income security held
by the Fund is rated Baa or BBB, in the case of a long-term security, or
Prime-3 or A-3 in the case of a short-term security, and is subsequently
downgraded by a rating agency, such security will be included in the Fund's
below investment grade holdings for purposes of the foregoing 10% limit. In
addition, the Fund will retain such security in its portfolio only until the
Advisor determines that it is practicable to sell the security without undue
market or tax consequences to the Fund. Moreover, in the event that such
downgraded securities constitute 5% or more of the Fund's total assets, the
Advisor will seek to sell immediately sufficient securities to reduce the
total to below 5%.
Securities rated either Baa by Moody's or BBB by S&P have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken their capacity to make principal and
interest payments than would be the case with investments in securities with
higher credit ratings.
Securities rated Ba or BB are considered to be below investment grade
securities and are known as "junk bonds." They are considered to be
speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The future of such below investment
grade securities cannot be considered well assured and the issuer's ability
to make timely payments of principal and interest may be subject to material
contingencies. Investing in higher yield, high risk, lower rated bonds
entails substantially greater risk than investing in investment grade bonds
including not only credit risk, but potentially greater market volatility and
lower liquidity. Yields and market values of these securities will fluctuate
over time, reflecting changing interest rates and the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated securities may decline in value,
regardless of prevailing interest rates. Accordingly, adverse economic
developments, including a recession or a substantial period of rising
interest rates, may disrupt the high yield securities market, affecting both
the value and liquidity of such securities. The market prices of these
securities may fluctuate more than those of higher rated securities and
4
<PAGE>
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. An economic downturn could adversely
affect the ability of issuers of such securities to make payments of principal
and interest to a greater extent than issuers of higher rated securities might
be affected. A description of fixed-income security ratings is contained in the
Appendix to the Statement of Additional Information. During the fiscal year
ended March 31, 1996, the Fund held no bonds rated below investment grade.
The Fund may also invest in repurchase agreements with respect to U.S.
Treasury Securities, Canadian Treasury Securities and Mexican Treasury
Securities and in commercial paper rated Prime-1 by Moody's, A-1 by S&P, or
Comparable Quality. For temporary, defensive purposes, the Fund may invest up
to 100% of its assets in such instruments. Investment of all or a substantial
portion of the Fund's assets in such instruments may cause a decrease in the
Fund's yield.
Although the Fund reserves the right to invest up to 35% of its total assets in
fixed-income securities which are issued or guaranteed by the governments of
countries located in Latin America (other than Mexico) or other foreign
countries, or any of their political subdivisions, agencies, instrumentalities
and authorities, the Fund has no current intention to make such investments
during the coming year. Any investment in such fixed-income securities would be
rated, at the time of purchase, Baa or higher by Moody's BBB or higher by S&P,
or Comparable Quality except that the Fund may invest in such fixed-income
securities rated at the time of purchase, Ba by Moody's or BB by S&P, or
Comparable Quality subject to the limitation of 10% of the Fund's total assets
discussed above.
The Fund may also engage in certain other investment practices, including
practices to protect against fluctuations in foreign currencies, which
practices are described more fully under the heading "Other Investment
Policies" below.
UNITED STATES GOVERNMENT SECURITIES
The Fund will invest in U.S. Treasury obligations (including Treasury bills,
Treasury notes, Treasury bonds and STRIPS) which are issued by the U.S.
Government and backed by the full faith and credit of the United States and
which differ only in their interest rates, maturities and times of issuance.
STRIPS are U.S. Treasury Securities which trade at a yield to maturity higher
than do comparable maturity U.S. Treasury obligations. STRIPS do not pay
interest currently, but are purchased at a discount and are payable in full
at maturity. However, the value of STRIPS may be subject to greater market
fluctuations including yield, from changing interest rates prior to maturity
than the value of other U.S. Treasury Securities of comparable maturities
that bear interest currently. Because STRIPS do not pay current income, the
Fund will not invest in them to a significant extent.
CANADIAN GOVERNMENT SECURITIES
Canadian Government Securities include securities issued or guaranteed by the
Government of Canada, any of its provinces (Alberta, British Columbia,
Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) or by their respective political
subdivisions, agencies and instrumentalities, which securities have been
rated Aa or higher by Moody's, AA or higher by S&P, or Comparable Quality.
These securities may be denominated or payable in U.S. dollars or Canadian
dollars.
Canadian Government Securities in which the Fund may invest include
Government of Canada bonds and Government of Canada Treasury bills. The Bank
of Canada, acting on behalf of the Canadian federal government, is
responsible for the distribution of Treasury bills and federal bond issues.
Government of Canada Treasury bills are debt obligations with maturities of
less than one year. Government of Canada issues of bonds frequently consist
of several different bonds with various maturity dates representing different
segments of the yield curve with maturities ranging from one to 25 years.
All Canadian provinces have outstanding bond issues and several provinces
also guarantee bond issues of provincial authorities, agencies and provincial
Crown corporations. Each new issue yield is based upon a spread from an
outstanding Government of Canada issue of comparable term and coupon. Spreads
in the marketplace are determined by various factors, including the relative
supply and the rating assigned by the rating agencies. Most provinces also
issue treasury bills.
Many municipalities and municipal financial authorities in Canada raise funds
through the bond market in order to finance capital expenditures. Unlike U.S.
municipal securities, which have special tax status, Canadian municipal
5
<PAGE>
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the provincial bond market.
Currently, Government of Canada long-term fixed-income securities denominated
or payable in Canadian dollars have been rated AAA by S&P, and Government of
Canada long-term fixed-income securities denominated or payable in U.S.
dollars have been rated AA+ by S&P.
MEXICAN GOVERNMENT SECURITIES
Mexican Government Securities in which the Fund may invest include those
securities which are issued or guaranteed in full by the Mexican federal
government or its instrumentalities and which securities are rated (i) in the
case of long-term securities, Baa or higher by Moody's or BBB or higher by
S&P, Comparable Quality or (ii) in the case of short-term securities, Prime-3
or higher by Moody's, A-3 or higher by S&P, or Comparable Quality. These
securities may be denominated or payable in Mexican pesos or U.S. dollars.
The debt market in Mexico began to develop rapidly after the promulgation of
the Securities Market Law in 1975. Since 1975, the government has authorized
a range of Mexican government issued debt securities, all of which are traded
on the Mexican Stock Exchange. In addition, a variety of other special
purpose bonds are issued by, and backed by the full faith and credit of, the
Mexican federal government. Government of Mexico securities denominated and
payable in the Mexican peso include: (i) Cetes, book-entry securities sold
directly by the Mexican government on a discount basis and with maturities
ranging from seven to 364 days; (ii) Bondes, long-term development bonds with
a minimum term of 364 days issued directly by the Mexican government; and
(iii) Ajustabonos, adjustable bonds (face amount adjusted quarterly based on
quarterly inflation rate) with a minimum three-year term issued directly by
the Mexican government.
The Fund may also invest up to 10% of its assets in dollar-denominated,
collateralized "Brady Bonds" which are securities created through the
exchange of existing commercial bank loans to the Mexican government for new
bonds under a debt restructuring plan introduced by the former U.S. Secretary
of the Treasury. The Brady Bonds in which the Fund may invest may be fixed
rate or floating rate bonds which are collateralized in full as to principal
by U.S. Treasury zero coupon bonds having the same maturity as the bonds, and
on which the first 18-months of interest coupon payments are collateralized
by funds (cash or securities) held in escrow by an agent for the bondholders.
On March 22, 1995, S&P downgraded the ratings assigned to long-term
fixed-income securities (i.e., bondes and ajustabonos) and short-term debt
securities (i.e., cetes) issued by the Mexican government denominated in
Mexican pesos from A to BBB+ and from A-1 to A-2, respectively. On February
1, 1995, S&P downgraded the rating assigned to long-term fixed-income
securities issued by the Mexican government denominated in U.S. dollars from
BB+ to BB. Long-term fixed-income securities issued by private sector
entities in the same country may be rated by the rating agency, but no rating
will exceed the rating assigned to similar maturity fixed-income securities
issued by the government of such country.
RISK FACTORS
Currency Risks. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Accordingly, the value of the
assets of the Fund as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In an attempt to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to and may occasionally use forward foreign currency exchange
contracts and futures contracts and may purchase and write (sell) options on
foreign currencies. (See "Other Investment Policies -- Forward Foreign
Currency Exchange Contracts.") The Fund may use such forward contracts and
options when, for example, it enters into a contract for the purchase or sale
of a security denominated in a foreign currency, and the Fund desires to
"lock in" the U.S. dollar price of the security. Also, when the Advisor
believes that the currency of a particular foreign country may suffer a
substantial movement against the U.S. dollar, the Fund may enter into forward
contracts and options approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. (See "Other
Investment Policies -- Futures Contracts and Options.")
Risks Of International Investing. Investments in foreign securities will
occasion risks relating to political and economic developments abroad,
6
<PAGE>
including the possibility of expropriations or confiscatory taxation,
limitations on the use or transfer of Fund assets and any effects of foreign
social, economic or political instability. Foreign securities are not subject to
the regulatory requirements applicable to U.S. securities and, therefore, there
may be less publicly available information about such securities. Moreover,
foreign securities are not subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. securities.
Securities of foreign issuers, including foreign governments, may be less
liquid than comparable securities of U.S. issuers and, therefore, their price
changes may be more volatile. Furthermore, foreign exchanges and broker-
dealers are generally subject to less government and exchange scrutiny and
regulation than their United States counterparts. Brokerage commissions,
dealer concessions and other transaction costs may be higher on foreign
markets, including markets for foreign government securities, than in the
United States. In addition, differences in clearance and settlement
procedures on foreign markets may occasion delays in settlements of Fund
trades effected in such markets. Inability to dispose of portfolio securities
due to settlement delays could result in losses to the Fund due to subsequent
declines in value of such securities and the inability of the Fund to make
intended security purchases due to settlement problems could result in a
failure of the Fund to make potentially advantageous investments.
Canada. The Canadian government debt securities market is significantly
smaller than the U.S. debt securities market. Although continued growth is
anticipated, it is less well developed and less liquid than its U.S.
counterpart. Recently, Canadian real economic growth has picked up after
several years of marginal performance. A return to marginal growth could
affect the Advisor's determination of the appropriate allocation of the
Fund's investments within Canada and among the United States, Canada and
Mexico.
Canadian dollars are fully exchangeable into U.S. dollars without foreign
exchange controls or other legal restriction. Since the major developed
country currencies were permitted to float freely against one another, the
range of fluctuation in the U.S. dollar/Canadian dollar exchange rate has
been narrower than the range of fluctuation between the U.S. dollar and most
other major currencies. During the last several years, Canada has experienced
a weakening of its currency. In January 1995, the Canadian dollar fell to a
nine-year low against the U.S. dollar, decreasing in value by approximately
25% from October 1991; however, from January 20, 1995 through February 15,
1996, the Canadian dollar increased in value by approximately 3.4% against
the U.S. dollar. The range of fluctuation that occurred in the past is not
necessarily indicative of the range of fluctuation that will occur in the
future. Future rates of exchange cannot be predicted.
Mexico. Because the Fund intends to invest in Mexican Government Securities,
investors in the Fund should be aware of certain special considerations
associated with investing in debt obligations of the Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican
government actions concerning the economy could have a significant effect on
market conditions and prices and yields of Mexican Government Securities.
The value of the Fund's portfolio investments may be affected by changes in
oil prices, interest rates, taxation and other political or economic
developments in Mexico, including recent political and social problems and
rates of inflation which have exceeded the rates of inflation in the U.S. and
Canada. The Fund can provide no assurance that future developments in the
Mexican economy, in Mexican government policy or in the political landscape
will not impair its investment flexibility, operations or ability to achieve
its investment objective. Moreover, recent events in Latin America have shown
that economic, financial and political events in one country of the region
can negatively influence the economic, financial and political conditions of
another country of the region.
In the early 1990s, the Mexican economy experienced improvement in a number of
areas, including growth in domestic product and a substantial reduction in the
rate of inflation and in the public sector's financial deficit. In 1994, Mexico
experienced an economic crisis that led to the devaluation of the Mexican peso
in December 1994, high exchange rate volatility, high inflation, high domestic
interest rates, a potentially unstable banking sector, high unemployment, a loss
of consumer purchasing power and a negative growth rate for the country.
However, as of July 1, 1996, the current Mexican fiscal and mon-
7
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etary policy appears to have brought the crisis under control. Inflation,
interest rates and unemployment are all down, exchange rate volatility has been
lessened and Mexico's gross domestic product growth is expected to be 2% for the
first half of 1996. Furthermore, the government has taken control of several of
the weakest banks and has infused capital into the banking system to fortify its
loan portfolios.
Over the last decade and notwithstanding the Mexican crisis, much of the past
improvement in the Mexican economy has been attributable to a series of
economic policy initiatives by the Mexican government over the past which
have sought to modernize and reform the Mexican economy, control inflation,
reduce the financial deficit, increase public revenues through the reform of
the tax system, establish a competitive and stable currency exchange rate,
liberalize trade restrictions and increase investment and productivity, while
reducing the government's role in the economy. In this regard, the Mexican
government has been proceeding with a program for privatizing certain state
owned enterprises, developing and modernizing the securities markets,
increasing investment in the private sector and permitting increased levels
of foreign investment. For example, current privatization plans are moving
forward in the telecommunication, satellite, railroad, port, airport,
natural gas and secondary petrochemical plant sectors. Moreover, the adoption
by Canada, the United States and Mexico of the North American Free Trade
Agreement ("NAFTA") has also contributed to the growth of the Mexican economy
as has the passage of a new Mexican Foreign Investment Law in December 1993.
The successful implementation of the economic policy initiatives and the
growth of the Mexican economy involve significant structural changes to the
Mexican economy and will necessitate continued economic and fiscal
discipline. In addition, as a condition to receiving assistance from the
United States International Monetary Fund, Mexico has agreed to adhere to a
program of strict economic reform. Moreover, for the continued right to have
access to additional funds, it must continue with such austerity programs. An
important aspect of Mexico's economic policy is the ability of the government
to be successful in its continuing efforts to control its financial deficit,
finance its current account deficit, further reduce inflation and stabilize
the Mexican peso. There is no assurance that Mexico's economic policy
initiatives will be successful or that succeeding administrations will
continue these initiatives.
Due to the Mexican crisis, bank bailout and subsidies currently being offered to
Mexican citizens by the government to ease the burden of the austerity measures,
the Mexican government, as of July 1996, has a total indebtedness of around 50%
of gross domestic product. Depending on the performance of the economy, this
percentage could rise to 60% by the end of the year.
In 1994 and 1995, Mexico's economy was undermined by a series of political
events such as high-level assassinations and an armed uprising in the state
of Chiapas that were outside the control of the government and which helped
provoke and fuel the December 1994 Mexican crisis. No assurance can be given
that similar political events will not occur or continue to exist which could
adversely affect the Fund.
In 1982, Mexico imposed foreign exchange controls and maintained a dual
foreign exchange rate system, with a "controlled" rate and a "free market"
rate. In November, 1991, Mexico abolished the controlled rate and now
maintains only the free exchange rate. Under economic policy initiatives
implemented since December 1987, the Mexican government introduced a schedule
of gradual devaluations of the Mexican peso against the U.S. dollar. These
gradual devaluations continued until December, 1994. On December 22, 1994,
the Mexican government announced that it would permit the Mexican peso to
float against other currencies, resulting in a continued decline against the
U.S. dollar. The Fund's net asset value and its computation and distribution
of income to its shareholders will be adversely affected by continued
reductions in the value of the Mexican peso relative to the U.S. dollar
because all Fund assets must be converted to U.S. dollars prior to any
distributions to shareholders. (See the Statement of Additional Information.)
Non-Diversified Status. The Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and as such is not limited by the Investment
Company Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
8
<PAGE>
"Code"). (See "Dividends, Distributions and Taxes.") In order to qualify
under Subchapter M of the Code, among other requirements, the Fund will limit
its investments so that at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer (other than U.S. Government
securities) and (ii) with respect to 50% of the market value of its total
assets not more than 5% will be invested in the securities of a single issuer
(other than U.S. Government securities). To the extent that a relatively high
percentage of the Fund's assets may be invested in the obligations of a
limited number of issuers, the Fund's portfolio securities may be more
susceptible to any single economic, political or regulatory occurrence than
the portfolio securities of a diversified investment company. The limitations
described in this paragraph are not fundamental policies and may be revised
to the extent applicable federal income tax requirements are revised.
Securities issued or guaranteed by foreign governments, their political
subdivisions, agencies and instrumentalities are not treated like U.S.
Government securities for purposes of the diversification tests described in
the preceding paragraph, but instead are subject to these tests in the same
manner as the securities of non-governmental issuers. In this regard,
securities issued or guaranteed by a foreign government, its political
subdivisions, agencies or instrumentalities may in certain circumstances not
be treated as issued by a single issuer for purposes of these diversification
tests. Thus, in order to meet the diversification tests and thereby maintain
its status as a regulated investment company, the Fund may be required to
diversify its portfolio of Canadian Government Securities and Mexican
Government Securities in a manner which would not be necessary if the Fund
limited its investments to U.S. Government securities.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The Fund may also engage in certain other investment practices described more
fully below.
Repurchase Agreements. The Fund may agree to purchase U.S. Treasury
Securities, Canadian Treasury Securities or Mexican Treasury Securities from
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Repurchase agreements related to Canadian or Mexican Treasury
Securities will be of a duration of no more than one day. The collateral for
such repurchase agreements will be held by the Fund's custodian or a duly
appointed sub-custodian. The Fund will enter into repurchase agreements only
with banks and broker-dealers that have been determined to be creditworthy by
the Fund's Board of Directors under criteria established with the assistance
of the Advisor. The seller under a repurchase agreement would be required to
maintain the value of the securities subject to the repurchase agreement at
not less than the repurchase price. Default by the seller would, however,
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
security, the Fund may be delayed or limited in its ability to sell the
collateral.
There are several additional risks related to repurchase agreements with
respect to treasury securities issued by foreign governments. First, although
the Fund will only enter into repurchase agreements collateralized by
Canadian or Mexican Treasury securities that initially have a value at least
equal to the repurchase price, under certain circumstances it might be
possible that the value of the collateral being held with respect to any such
repurchase agreement would be reduced to such an extent that the agreement
would be undercollateralized. Second, in the event of default or bankruptcy
of the selling institution, enforcement of the Fund's rights would be subject
to additional difficulties and delays due to legal considerations applicable
in such foreign country.
Currency and Interest Rate Hedging Transactions. To hedge against adverse
price movements in the currencies in which securities held in the Fund's
portfolio are denominated (as well as the denominated currencies of the
securities it might wish to purchase) the Fund may engage in transactions in
forward foreign currency contracts, options on currencies, and futures
contracts and options on futures contracts on currencies. (See "Risk Factors
- -- Currency Risks.") The Fund will not engage in any such transactions if the
consummation of such transactions would obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's securities
and other assets denominated in that currency.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a currency at a future date, which may be any fixed number of days
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<PAGE>
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. The Fund may enter into forward contracts as a
hedge against fluctuations in future foreign exchange rates. Currently, only
a limited market exists for hedging transactions relating to the Mexican
peso.
If deemed appropriate by the Advisor, the Fund will enter into forward
contracts to "lock in" the price of a security in the denominated foreign
currency. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar or other currency which is being
used for the security purchase and the foreign currency in which the security
is denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received. In
addition, the Fund may enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and
on which options have been written. (See "Futures Contracts and Options"
below.)
Futures Contracts and Options. The Fund may purchase and sell futures
contracts on debt securities and indices of debt securities (i.e., interest
rate futures contracts) as a hedge against or to minimize adverse principal
fluctuations resulting from anticipated interest rate changes. The Fund may
also purchase and sell currency futures contracts as a hedge to protect
against anticipated changes in currency rates or as an efficient means to
adjust its exposure to the currency market. The Fund may also write (sell)
covered call options on futures contracts, purchase put and call options on
futures contracts and may enter into closing transactions with respect to
such options on futures contracts purchased or sold. The Fund may also write
covered put options on futures contracts and may enter into closing
transactions with respect to such options on futures contracts. When the Fund
purchases a futures contract, or writes a put option or purchases a call
option thereon, an amount of cash and liquid assets will be deposited in a
segregated account with the Fund's custodian so that the segregated amount,
plus the amount of initial margin deposits held in the account of its broker,
equals the market value of the futures contract, thereby ensuring that the
use of the futures contract is unleveraged. The Fund will not enter into
futures contracts for speculation and will only enter into futures contracts
that are traded on a recognized futures exchange. The Fund will not enter
into futures contracts or options thereon if immediately thereafter the sum
of the amounts of initial margin deposits on the Fund's open futures
contracts and premiums paid for unexpired options on futures contracts would
exceed 5% of the value of the Fund's total assets; provided, however, that in
the case of an option that is "in-the-money" the amount may be excluded in
calculating the 5% limitation.
The use of futures contracts by the Fund entails certain risks, including but
not limited to the following: no assurance that futures contracts
transactions can be offset at favorable prices; possible reduction of the
Fund's income due to the use of hedging; possible reduction in value of both
the security or currency hedged and the hedging instrument; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the contract and the security or currency being hedged; failure to
qualify as a Regulated Investment Company under Subchapter M of the Code; and
potential losses in excess of the amount initially invested in futures
contracts themselves. If the expectations of the Advisor regarding movements
in securities prices, interest rates or exchange rates are incorrect, the
Fund might have experienced better investment results without hedging. The
use of futures contracts and options on futures contracts requires special
skills in addition to those needed to select portfolio securities.
Purchase of When-Issued Securities. From time to time, in the ordinary course
of business, the Fund may purchase securities, at the current market value of
the securities, on a forward commitment or "when-issued" basis. When such
transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment will take place after the date of the
commitment. A segregated account of the Fund, consisting of cash, cash
equivalents or U.S. Treasury Securities or other high quality liquid debt
securities equal at all times to the amount of the when-issued commitments
will be established and maintained by the Fund at the Fund's custodian.
Additional cash or liquid debt securities will be added to the account when
necessary. While the Fund will purchase securities on a forward commitment or
"when-issued" basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period.
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<PAGE>
At the time of delivery of the securities, their value may be more or less than
the purchase or sale price.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are at all times
secured by cash or money market instruments, which are maintained in a
segregated account pursuant to applicable regulations and that are at least
equal to the market value, determined daily, of the loaned securities. As
with any extensions of credit, there are risks of delay in recovery and in
some cases even loss of rights in the collateral should the borrower of the
securities fail financially. In determining whether to lend securities to a
particular borrower, the Advisor (subject to review by the Fund's Board of
Directors) will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will not lend portfolio securities
in excess of 20% of the value of its total assets. The Board of Directors
will monitor the Fund's lending of portfolio securities.
4. Investment Restrictions
The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions listed below are matters of
fundamental policy, and as such, may not be changed without the affirmative
vote of a majority of the outstanding shares. The Fund may not:
1) Invest 25% or more of the value of its total assets in securities of
issuers in any one industry (for these purposes, the United States
Government, its agencies and instrumentalities are not considered to be an
industry); and
2) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equalling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase securities
for investment.
The Fund's investment program is subject to other investment restrictions
which are set forth in the Fund's Statement of Additional Information.
5. How to Invest in the Fund
Shares may be purchased from Armata Financial Corp. ("Armata"), P.O. Box 515,
Baltimore, Maryland 21203, through any securities dealer which has entered
into a dealer agreement with Armata ("Participating Dealers") or through any
financial institution which has entered into a shareholder servicing
agreement with the Fund ("Shareholder Servicing Agents"). Shares may also be
purchased by completing the Application Form attached to this Prospectus and
returning it, together with payment of the purchase price plus any applicable
front-end sales charge, to the address shown on the Application Form.
The minimum initial investment is $5,000, except that the minimum initial
investment for qualified retirement plans and IRAs is $1,000 and the minimum
initial investment for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent investment must be at least $250, except that the
minimum subsequent investment for participants in the Fund's Automatic
Investing Plan is $100 for monthly investments and $250 for quarterly
investments. (See "Purchases Through Automatic Investing Plan" below.) The
Fund reserves the right to suspend the sale of Shares at any time at the
discretion of Armata. Orders for purchases of Shares are accepted on any day
on which the New York Stock Exchange is open for business (a "Business Day").
Purchase orders for Shares will be executed at a per Share purchase price
equal to the net asset value next determined after receipt of the purchase
order plus any applicable front-end sales charge (the "Offering Price") on
the date such net asset value is determined (the "Purchase Date"). Purchases
made by mail must be accompanied by payment of the Offering Price. Purchases
made through Armata or a Participating Dealer or Shareholder Servicing Agent
must be in accordance with such entity's payment procedures. Armata may, in
its sole discretion, refuse to accept any purchase order.
The net asset value per Share is determined once daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) on each
Business Day. Net asset value per Share is calculated by valuing all assets
held by the Fund, deducting liabilities, and dividing the resulting amount by
the number of then outstanding Shares. Securities are valued on the basis of
their last sale price (or in the absence of recorded sales, at the average of
readily available closing bid and asked prices). Securities or other assets
for which market quotations are not readily available are valued at their
fair value as determined in good faith by the Advisor under procedures
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<PAGE>
established from time to time and monitored by the Fund's Board of Directors.
Debt obligations with maturities of 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Directors.
OFFERING PRICE
Shares may be purchased from Armata, Participating Dealers or Shareholder
Servicing Agents at the Offering Price, which includes a sales charge which
is calculated as a percentage of the Offering Price and decreases as the
amount of purchase increases as shown below.
<TABLE>
<CAPTION>
Sales
Sales Charge as Dealer
Charge as Percentage Retention
Percentage of Net as Percentage
of Offering Amount of Offering
Amount of Purchase Price Invested Price*
------------------ ----------- ---------- -------------
<S> <C> <C> <C>
Less than $ 100,000 ..... 3.00% 3.09% 2.75%
$100,000 - $ 249,999 ..... 2.50% 2.56% 2.25%
$250,000 - $ 499,999 ..... 2.00% 2.04% 1.75%
$500,000 - $ 999,999 ..... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999 ..... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 ..... 0.50% 0.50% 0.50%
$3,000,000 and over ......... none none none
</TABLE>
- ------
*Armata may from time to time reallow to Participating Dealers up to 100% of
the sales charge included in the Offering Price of Shares. Participating
Dealers who receive 90% or more of such reallowance may be deemed to be
underwriters under the Securities Act of 1933.
A shareholder who purchases additional Shares may obtain reduced sales
charges as set forth in the table above through a right of accumulation. In
addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Shares and purchases of
shares of other mutual funds in the ISI family of funds. The applicable sales
charge will be determined based on the total of (a) the investor's current
purchase plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of all Shares and of all shares of such other
mutual funds in the ISI family of funds held by the shareholder. To obtain a
reduced sales charge through a right of accumulation, the shareholder must
provide Armata, either directly or through a Participating Dealer or
Shareholder Servicing Agent, as applicable, with sufficient information to
verify that the shareholder has such a right. The right of accumulation may
be amended or terminated at any time as to subsequent purchases. The term
"purchase" refers to an individual purchase by a single purchaser, or to
concurrent purchases which will be aggregated by a purchaser, the purchaser's
spouse and their children under the age of 21 years purchasing Shares for
their own account.
<PAGE>
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent, which states the investor's intention
to invest not less than $100,000 within a 13-month period in Shares. Each
purchase of Shares under a Letter of Intent will be made at the Offering
Price applicable at the time of such purchase to the full amount indicated on
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Letter of Intent is 5% of the full amount. Shares
purchased with the first 5% of the full amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales charge applicable to the Shares actually purchased if the full
amount indicated is not invested. Such escrowed Shares will be involuntarily
redeemed to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrowed Shares will be released. An
investor who wishes to enter into a Letter of Intent in conjunction with an
investment in Shares may do so by completing the appropriate section of the
Application Form attached to this Prospectus.
The Fund may sell Shares at net asset value (without sales charge) to the
following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Shares on behalf
of their fiduciary and advisory clients, provided such clients have paid an
account management fee for these services; (ii) investors who have redeemed
Shares, or shares of any other mutual fund in the ISI family of funds that
has similar or higher sales charges, in an amount that is not more than the
total redemption proceeds provided that the purchase is within six months
after the redemption and the amount of the purchase is at least $5,000; and
(iii) current or retired Directors of the Fund, directors and employees (and
their immediate families) of ISI, the Fund's administrator and their
respective affiliates, and employees of Participating Dealers.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other mutual funds in the ISI family of funds that have
similar or higher sales charges may exchange their shares of those funds for
an equal dollar amount of Shares. Shares issued pursuant to this offer will
not be subject to the sales charges described above. The net asset value of
shares purchased and redeemed in an exchange request received on a Business
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<PAGE>
Day will be determined on the same day, provided that the exchange request is
received prior to 4:00 p.m. (Eastern Time). Exchange requests received after
4:00 p.m. (Eastern Time) will be effected on the next Business Day. The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange.
Until February 28, 1997, shareholders of any other mutual fund who have paid
a sales charge on their shares of such fund, and shareholders of any
closed-end fund, may exchange shares of such funds for an equal dollar amount
of Shares by submitting to Armata or a Participating Dealer the proceeds of
the redemption or sale of shares of such funds, together with evidence of the
payment of a sales charge (for mutual funds only) and the source of such
proceeds. Shares issued pursuant to this offer will not be subject to the
sales charges described above or any other charge.
The Fund may modify or terminate these offers of exchange at any time, and
will provide shareholders with 60 days' written notice prior to any such
modification or termination. The exchange privilege with respect to other ISI
funds may also be exercised by telephone. (See "Telephone Transactions"
below.)
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Shares regularly by means of an Automatic Investing
Plan with a pre-authorized check drawn on their checking accounts. Under this
plan, the shareholder may elect to have a specified amount invested monthly
or quarterly in Shares. The amount specified by the shareholder will be
withdrawn from the shareholder's checking account using the pre-authorized
check. This amount will be invested in Shares at the applicable Offering
Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued by either
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan may
do so by completing the appropriate section of the Application Form attached
to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
Unless the shareholder elects otherwise, all income dividends (consisting of
dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional Shares at the then
net asset value per Share on the payment date. Shareholders may elect to have
income dividends or capital gains paid in cash. Shareholders wishing to
change their election must give written notice to the Transfer Agent (see
"Custodian, Transfer Agent and Accounting Services" below) either directly or
through Armata, a Participating Dealer or a Shareholder Servicing Agent at
least five days before the next date on which dividends or distributions will
be paid.
Alternately, shareholders may have their distributions invested in shares of
other funds in the ISI family of funds. Shareholders who are interested in
this option should call (800) 882-8585 for additional information.
Reinvestments of distributions will be effected without a sales charge.
6. How to Redeem Shares
Any or all of a shareholder's investments may be redeemed on any Business Day
by transmitting a redemption order through Armata, a Participating Dealer, or
a Shareholder Servicing Agent or by regular or express mail to the Fund's
transfer agent (the "Transfer Agent"). Shareholders may also redeem Shares by
telephone (in amounts up to $50,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per Share next determined
after receipt of the order (or, if stock certificates have been issued for
the Shares to be redeemed, after the tender of the stock certificates for
redemption). Payment for redeemed Shares will be made by check and will
ordinarily be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:
1) A letter of instructions, specifying the shareholder's account number with
Armata or a Participating Dealer, if applicable, and the number of Shares
or dollar amount to be redeemed, signed by all owners of the Shares in the
exact names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under
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<PAGE>
state law), securities exchange or association, clearing agency, or savings
association;
3) If Shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for Shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of Shares will be paid on the
next dividend payable date. If all of the Shares in a shareholder's account
have been redeemed on a dividend payable date, the dividend will be remitted
by check to the shareholder.
The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 as a result of redemptions
upon 60 days' written notice.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Shares having a value of $10,000 or more may arrange to
have a portion of their Shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Such payments are drawn from income dividends,
and, to the extent necessary, from Share redemptions (which would be a return
of principal and, if reflecting a gain, would be taxable). If redemptions
continue, a shareholder's account may eventually be exhausted. Because Share
purchases include a sales charge that will not be recovered at the time of
redemption, a shareholder should not have a withdrawal plan in effect at the
same time he is making recurring purchases of Shares. A shareholder who
wishes to enroll in the Systematic Withdrawal Plan may do so by completing
the appropriate section of the Application Form attached to this Prospectus.
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other ISI
funds, or redeem shares in amounts up to $50,000, by notifying the Transfer
Agent by telephone at (800) 882-8585 on any Business Day between the hours of
8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its
address listed under "Custodian, Transfer Agent and Accounting Services."
Telephone transaction privileges are automatic. Shareholders may specifically
request that no telephone redemptions or exchanges be accepted for their
accounts. This election may be made on the Application Form or at any time
thereafter by completing and returning appropriate documentation supplied by
the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected
at the net asset value as next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
written instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent
telephone instructions if either of them does not employ these procedures. If
these procedures are employed, neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to
be genuine. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone transactions.
In such event, requests should be made by regular or express mail. Shares
held in certificate form may not be exchanged or redeemed by telephone. (See
"How to Invest in the Fund -- Purchases by Exchange" and "How to Redeem
Shares.")
8. Dividends and Taxes
The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income (including net short-term capital gains) in the
form of monthly dividends but such dividends are not guaranteed. The Fund may
distribute to shareholders any net capital gains (net long-term capital gains
less net short-term capital losses) on an annual basis or, alternatively, may
elect to retain net capital gains and pay tax thereon.
14
<PAGE>
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning. The following summary is based on current tax laws and regulations,
which may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.
The Fund has been and intends to continue to be taxed as a regulated
investment company under Subchapter M of the Code. So long as the Fund
qualifies for this tax treatment, it will be relieved of federal income tax
on amounts distributed to shareholders. Shareholders, unless otherwise
exempt, will generally pay income or capital gains taxes on the amounts so
distributed. Reinvested dividends will be taxed as if they had been
distributed on the reinvestment date.
Distributions from the Fund out of net capital gains (net long-term capital
gains less net short-term capital losses), if any, are treated by the
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the Shares. All other income distributions are taxed to
the shareholders as ordinary income, whether received in cash or in
additional Shares. Fund distributions generally will not be eligible for the
corporate dividends received deduction.
Ordinarily, shareholders will include all dividends declared by the Fund as
income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.
The Fund intends to make sufficient distributions of its ordinary income and
capital gains net income prior to the end of each calendar year to avoid
liability for federal excise tax.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult with their tax advisors concerning the application of state and local
taxes to investments in the Fund, which may differ from the federal income
tax consequences described above. For example, under certain specified
circumstances, state income tax laws may exempt from taxation distributions
of a regulated investment company to the extent that such distributions are
derived from interest on federal obligations. Shareholders are urged to
consult with their tax advisors regarding whether and under what conditions
such exemption is available.
The sale, exchange or redemption of Shares is a taxable event to a
shareholder.
<PAGE>
9. Management of the Fund
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to
the Fund's officers, to Armata, as distributor of the Shares, to the Fund's
administrator, and to the Advisor. Two directors and all of the officers of
the Fund are officers or employees of Armata, ISI or the Fund's
administrator. The other directors of the Fund have no affiliation with
Armata, ISI or the Fund's administrator.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C>
*Edward S. Hyman Chairman
*Richard T. Hale Vice Chairman
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Rebecca W. Rimel Director
Harry Woolf Director
R. Alan Medaugh President
Edward J. Veilleux Vice President
Gary V. Fearnow Vice President
Nancy Lazar Vice President
Brian C. Nelson Vice President
Carrie L. Butler Vice President
Denice DeFlorio Assistant Vice President
Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Hyman and Hale are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act.
15
<PAGE>
10. Investment Advisor
ISI, a registered investment advisor, serves as investment advisor to the
Fund pursuant to an Investment Advisory Agreement dated as of December 15,
1992 (the "Investment Advisory Agreement"). ISI employs Messrs. Edward S.
Hyman and R. Alan Medaugh. Due to their stock ownership, Messrs. Hyman and
Medaugh may be deemed to be controlling persons of ISI. As of May 31, 1996,
the Advisor had approximately $1 billion in fixed-income securities under
management for clients both within and outside of the United States. The
Advisor also acts as investment advisor to Total Return U.S. Treasury Fund,
Inc. and Managed Municipal Fund, Inc., both of which funds are U.S. open-end
investment companies with approximately $468 million in aggregate net assets
as of May 31, 1996.
Pursuant to the terms of the Investment Advisory Agreement, the Advisor is
responsible for decisions to buy and sell securities for the Fund, for
broker-dealer selection, and for negotiation of commission rates under
standards established and periodically reviewed by the Board of Directors. In
general, purchases and sales of securities by the Fund will usually be
principal transactions, and therefore the Fund will not incur substantial
brokerage commission expense. However, the Advisor's primary consideration in
effecting securities transactions will be to obtain best price and execution.
To the extent that the execution and prices of more than one dealer are
comparable, the Advisor may, in its discretion, effect transactions with
dealers that furnish statistical or other information or services that may
benefit the Fund's investment program.
The Advisor and the Administrator have agreed, on a voluntary basis, to waive
a proportionate amount of their fees to the extent required so that the
Fund's total operating expenses do not exceed 1.25% of the Fund's average net
assets. (See "Fee Table.") Furthermore, the Advisor has agreed to reduce its
aggregate fees attributable to the Fund or make payments to the Fund, if
necessary, to the extent required to satisfy any expense limitations imposed
by any securities laws or regulations thereunder of any state in which the
Shares are qualified for sale. As compensation for its services for the
fiscal year ended March 31, 1996, the Advisor received from the Fund a fee
(net of fee waivers) equal to .27% of the Fund's average daily net assets.
The address of the Advisor is 717 Fifth Avenue, New York, New York 10022,
telephone (800) 955-7175.
PORTFOLIO MANAGERS
Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh, President
of the Fund and ISI, have shared direct portfolio management responsibility
for the Fund since its inception. Mr. Hyman is responsible for developing the
economic analysis upon which the Fund's selection of investments is based.
(See "Investment Objective, Policies and Risk Factors.") Before joining ISI,
Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence Inc.
and prior thereto, an economic consultant at Data Resources. He writes a
variety of international and domestic economic reports which follow trends
that may determine the direction of interest rates. These international and
domestic reports are sent to ISI's private institutional clients in the
United States and overseas. The periodical Institutional Investor, which
rates analysts and economists on an annual basis, has rated Mr. Hyman as its
"first team" economist, which is its highest rating, in each of the last
sixteen years.
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto, Senior Vice President and bond portfolio
manager at Fiduciary Trust International. While at Fiduciary Trust
International, Mr. Medaugh led their Fixed- Income Department which managed
$5 billion of international fixed income portfolios for institutional
clients. Mr. Medaugh also had prior experience as a bond portfolio manager at
both Putnam Management Company and Fidelity Management and Research.
11. Administrator
Investment Company Capital Corp. ("ICC" or the "Administrator") 135 East
Baltimore Street, Baltimore, Maryland 21202, provides administration services
to the Fund. ICC is an indirect subsidiary of Alex. Brown Incorporated and an
affiliate of Armata.
ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
the Shares are distributed and oversight of the relationship between the Fund
and its other service providers.
For its services, ICC is entitled to receive an annual fee, calculated daily
and paid monthly, in an amount equal to .20% of the Fund's average net
assets. ICC and the Advisor have agreed, on a voluntary basis, to waive a
16
<PAGE>
proportionate amount of their fees, to the extent required so that the Fund's
total operating expenses do not exceed 1.25% of the Fund's average net assets.
(See "Fee Table.") For the fiscal year ended March 31, 1996, ICC received a fee
(net of fee waivers) equal to .11% of the Fund's average net assets. ICC is also
the Fund's transfer and dividend disbursing agent and provides accounting
services to the Fund. (See "Custodian, Transfer Agent and Accounting Services.")
12. Distributor
Armata Financial Corp. acts as distributor of the Shares. Armata is a
broker-dealer that was formed in 1983 and is an affiliate of the
Administrator. Pursuant to a Distribution Agreement and a Plan of
Distribution (the "Plan") adopted pursuant to Rule 12b-1 under the Investment
Company Act, for the fiscal year ended March 31, 1996, Armata received a fee
equal to .40% of the average daily net assets invested in Shares. Armata
expects to allocate on a proportional basis most of its annual distribution
fee to its investment representatives or up to all of its fee to
Participating Dealers as compensation for their ongoing shareholder services,
including processing purchase and redemption requests and responding to
shareholder inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Armata may allocate all or a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services (e.g., processing purchases and redemptions, maintaining
shareholder account records and communicating with shareholders). Such
financial institutions may impose separate fees in connection with these
services and investors should review this Prospectus in conjunction with any
such institution's fee schedule. In addition, financial institutions may be
required to register as dealers pursuant to state securities laws. Amounts
allocated to Participating Dealers and Shareholder Servicing Agents may not
exceed amounts payable to Armata under the Plan with respect to shares held
by or on behalf of customers of such entity.
Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay
Armata's overhead expenses. If the cost of providing distribution services to
the Fund in connection with the sale of the Shares is less than .40% of the
average daily net assets invested in Shares for any period, Armata may retain
the unexpended portion of the distribution fee as profit. Armata or its
associated persons will, from time to time and from its own resources, pay or
allow additional discounts or promotional incentives in the form of cash or
other compensation (including merchandise and travel) to Participating
Dealers.
The address of Armata is 135 East Baltimore Street, Baltimore, Maryland
21202.
13. Custodian, Transfer Agent and Accounting Services
PNC Bank, National Association ("PNC Bank"), a national banking association with
offices at Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113,
acts as custodian of the Fund's assets. Barclays International, Johnson Smirk
Building, Four Royal Mint Court, London EC3N4HJ, has been retained to serve as
the Fund's custodian with respect to its foreign investments. Investment Company
Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202, telephone
(800) 882-8585, is the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund.
14. Performance Information
From time to time, the Fund may quote total return and yield data in
advertisements or in reports to shareholders. Both total return and yield
data will be computed according to the standardized calculations required by
the SEC to provide consistency and comparability in investment company
advertising.
The yield of the Fund will be determined by dividing the net investment
income earned by the Fund during a 30 day period by the maximum offering
price per Share on the last day of the period and annualizing the result on a
semi-annual basis.
Advertisements or reports citing performance data will show the average
annual total return, net of the Fund's sales charge, over one, five and ten
year periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such return quotations will be
computed by finding average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
17
<PAGE>
ending redeemable value, net of all sales loads and other fees, according to the
required standardized calculation. The Fund's total return for a given period is
based upon changes in the Fund's net asset value and the Fund's yield for the
period. If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which such
comparative data and indices are stated, which is normally total return rather
than yield. For these purposes, the performance of the Fund, as well as the
performance of such investment companies or indices, may not reflect sales
charges, which, if reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers
Government Corporate Bond Index (or any of its sub-indices), the return on 90
day U.S. Treasury bills, the Standard & Poor's 500 Stock Index and the Dow
Jones Industrial Average. The Fund may also use total return performance data
as reported in the following national publications which monitor the
performance of mutual funds: Money Magazine, Forbes, Business Week, Barron's,
Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.
Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, the Fund's
current yield and any statement of performance will fluctuate from time to
time and are not necessarily representative of the Fund's future performance.
Yield and performance data should also be considered in light of the risks
associated with the Fund's investment objective and policies.
The Fund's annual portfolio turnover rate (the lesser of the value of the
purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding securities with maturities of one
year or less) may vary from year-to-year, as well as within a year, depending
on market conditions. A high level of portfolio turnover may generate
relatively high transaction costs and may increase the amount of taxes
payable by the Fund's shareholders. For the fiscal years ended March 31, 1996
and March 31, 1995, the Fund's portfolio turnover rate was 125% and 104%,
respectively. The Fund paid no brokerage commissions during such periods.
15. General Information
CAPITAL SHARES
The Fund was incorporated under the laws of the State of Maryland on October
20, 1992, and is authorized to issue 25 million shares of capital stock with
a par value of $.001 per share. Shares of the Fund have equal rights with
respect to voting. Voting rights are not cumulative, so the holders of more
than 50% of the outstanding Shares voting together for election of Directors
may elect all the members of the Board of Directors of the Fund. The fiscal
year end of the Fund is March 31. In the event of liquidation or dissolution
of the Fund, each Share is entitled to its portion of the Fund's assets after
all debts and expenses have been paid. The Board of Directors of the Fund is
authorized to establish additional series and classes of shares of capital
stock. Each series would evidence interests in a separate portfolio of
securities, and each class would evidence separate classes of each series of
the Fund. The Board has no present intention of establishing any additional
series or classes of the Fund.
ANNUAL MEETINGS
The Fund does not expect to hold annual meetings of shareholders but special
meetings of shareholders will be held under certain circumstances.
Shareholders of the Fund reserve the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio. The annual financial statements are
audited by the Fund's independent accountants, Coopers & Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Shares should contact the
Transfer Agent at (800) 882-8585, Armata, ISI, a Participating Dealer or
Shareholder Servicing Agent, as appropriate.
18
<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "ISI North American Government Bond Fund Shares" and
mail with this application to:
Armata Financial Corp./ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
For an IRA information kit, please call ISI at (800) 955-7175.
The minimum initial purchase is $5,000, except that the minimum initial
purchase for qualified retirement plans or IRA's is $1,000 and the minimum
initial purchase for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent purchase requires a $250 minimum, except that the
minimum subsequent purchase under the Fund's Automatic Investing Plan is $100
for monthly purchases and $250 for quarterly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.
- -----------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- -----------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- -----------------------------------------------------------------------------
Tax ID Number
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
<PAGE>
- -----------------------------------------------------------------------------
Existing Account No., if any
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the Uniform Gifts to Minors Act
------------------
State of Residence
MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
STATEMENT OF INTENTION (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Arrangement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares
of ISI North American Government Bond Fund Shares in an aggregate amount at
least equal to:
$100,000 $250,000 $500,000 $1,000,000 $2,000,000 $3,000,000
- --- --- --- --- --- ---
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the ISI Fund(s) set forth below to be applied for a
reduced sales charge. List the Account numbers of other ISI Funds that you or
your immediate family (spouse and children under 21) already own that qualify
for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options is selected, all distributions will be
reinvested.
Income Dividends Capital Gains
[ ] Reinvested in [ ] Reinvested in
additional shares additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
- -------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for Automatic Investing to automatically invest
$________ for me, on a monthly or quarterly basis, on or about the 20th of each
month or if quarterly, the 20th of January, April, July and October, and to
draw a bank draft in payment of the investment against my checking account.
(Bank drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $5,000
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- -------------------------------------------------------------------------------
Bank Name
- -------------------------------------------------------------------------------
Existing ISI North American Government
Bond Fund Account No., if any
Please attach a voided check.
- ------------------------------------------------------------------------------
Depositor's Signature Date
- ------------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
- -------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of __________, 19____, please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $________,
from shares that I own, payable to the account registration address as shown
above. (Participation requires minimum account value of $10,000)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
<PAGE>
- -------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other ISI Funds) unless I mark one or both of the boxes below.
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:
---------------------------------------------------------------------
Address:
---------------------------------------------------------------------
Bank Account No.:
------------------------------------------------------------
Bank Account Name:
------------------------------------------------------------
- ------------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated August 1, 1996. Under
penalties of perjury, I certify (1) that the number shown on this form is my
correct taxpayer identification number and (2) that I am not subject to
backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified me that I am no
longer subject to backup withholding. (Strike out the language in (2) if it
is not correct.)
If a non-resident alien, please indicate country of residence:
-----------------
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- -------------------------------------------------------------------------------
Signature Date
- -------------------------------------------------------------------------------
Signature (if a joint acct., both must sign) Date
- -------------------------------------------------------------------------------
FOR DEALER USE ONLY
Dealer's Name:
--------------------------------------------------------------
Dealer's Address:
--------------------------------------------------------------
--------------------------------------------------------------
Representative:
--------------------------------------------------------------
Dealer Code:
--------------------------------------------------------------
Branch Code:
--------------------------------------------------------------
Rep. No.
--------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
____________________________
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
717 Fifth Avenue
New York, New York 10022
____________________________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S PROSPECTUS FOR THE APPLICABLE CLASS, WHICH MAY BE
OBTAINED FROM YOUR PARTICIPATING DEALER OR BY WRITING
OR CALLING ARMATA FINANCIAL CORP., P.O. BOX 515, BALTIMORE,
MARYLAND 21203, (410) 727-1700.
Statement of Additional Information Dated: August 1, 1996
Relating to Prospectus Dated: August 1, 1996
of
ISI North American Government Bond Fund Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History............................... 1
2. Investment Objective, Policies and
Risk Considerations......................................... 1
3. Additional Information About
Canada and Mexico............................................. 7
4. Valuation of Shares and Redemption............................ 20
5. Federal Tax Treatment of Dividends and
Distributions............................................... 21
6. Management of the Fund........................................ 24
7. Investment Advisory and Other Services........................ 27
8. Administration................................................ 29
9. Distribution of Fund Shares................................... 29
10. Portfolio Transactions...................................... 32
11. Capital Stock................................................. 32
12. Reports....................................................... 33
13. Custodian, Transfer Agent and
Accounting Services......................................... 33
14. Independent Accountants...................................... 34
15. Control Persons and Principal Holders of
Securities.................................................. 34
16. Performance and Yield Computations............................ 34
17. Financial Statements ......................................... 36
APPENDIX - Moody's Investors Service and Standard & Poor's
Ratings Definitions
<PAGE>
1. GENERAL INFORMATION AND HISTORY
North American Government Bond Fund, Inc. (the "Fund") is an open-end,
non-diversified management investment company. Under the rules and regulations
of the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The Fund
currently has one class of shares: ISI North American Government Bond Fund
Shares. The prospectus for such class of the Fund's shares contains important
information concerning the Fund, and may be obtained without charge from Armata
Financial Corp. ("Armata"), P.O. Box 515, Baltimore, Maryland 21203, or from
Participating Dealers that offer shares of the Fund (the "Shares") to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectus. To
avoid unnecessary repetition, references are made to related sections of the
Prospectus. In addition, the Prospectus and this Statement of Additional
Information omit certain information concerning the Fund and its business that
is contained in the Registration Statement respecting the Fund and its Shares
filed with the SEC. Copies of the Registration Statement as filed, including
such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
October 20, 1992. The Fund filed a registration statement with the SEC
registering itself as an open-end, non-diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933 and commenced operations
on January 15, 1993.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Investment Objective, Policies and Risk Considerations of the Fund
The Fund's investment objective and its general investment policies are
described in the Prospectus. Additional investment restrictions are set forth
below. This Statement of Additional Information also describes other investment
practices in which the Fund may engage. These practices include entering into
repurchase agreements and purchasing securities for future delivery. The Fund
may also engage in certain other investment practices as a means of protecting
against fluctuations in foreign currencies, which practices are described more
fully below.
Except as described below under "Investment Restrictions of the Fund,"
the investment policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Directors may change such
policies without an affirmative vote of a majority of the Fund's outstanding
Shares (as defined under "Capital Stock" below). The Fund's investment objective
is fundamental, however, and may not be changed without such a vote.
Below Investment Grade Bonds
The Fund may purchase bonds including debentures, that are rated BB by
S&P or Ba by Moody's, or that are unrated by S&P or Moody's if such bonds, in
the judgment of the Fund's investment advisor, International Strategy and
Investment Inc. ("ISI" or the "Advisor"), meet the quality criteria established
by the Board of Directors. These bonds are generally known as "junk bonds."
These securities may trade at substantial discounts from their face values.
Appendix A to this Statement of Additional Information sets forth a description
of the S&P and Moody's rating categories, which indicate the rating agency's
opinion as to the probability of timely payment of interest and principal.
Generally, securities which are rated lower than BBB by S&P or Baa by Moody's
are described as below investment grade. Securities rated lower than investment
<PAGE>
grade are of a predominately speculative character and their future cannot be
considered well-assured. The issuer's ability to make timely payments of
principal and interest may be subject to material contingencies. Securities in
the lowest rating categories may be unable to make timely interest or principal
payments and may be in default and in arrears in interest and principal
payments.
Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, the Advisor does not rely
exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities but supplements such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high yield securities will be significantly affected not only by credit
quality but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisor of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.
Investing in higher yield, high risk, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high yield bonds will fluctuate over
time, reflecting not only changing interest rates but also the bond market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing interest
rates. In addition, in adverse economic conditions, the liquidity of the
secondary market for junk bonds may be significantly reduced, and there may be
significant disparities in the prices quoted for high yield bonds by various
dealers. In addition, adverse economic developments could disrupt the high yield
market, affecting both price and liquidity, and could also affect the ability of
issuers to repay principal and interest, thereby leading to a default rate
higher than has been the case historically.
Yields and market values of high yield bonds will fluctuate over time,
reflecting not only changing interest rates but the bond market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated bonds may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
In adverse economic conditions, the liquidity of the secondary market
for high yield bonds may be significantly reduced. Even under normal conditions,
the market for high yield bonds may be less liquid than the market for
investment grade corporate bonds. There are fewer securities dealers in the high
yield market and purchasers of high yield bonds are concentrated among a smaller
group of securities dealers and institutional investors. In periods of reduced
market liquidity, the market for high yield bonds may become more volatile and
there may be significant disparities in the prices quoted for high yield
securities by various dealers. Under conditions of increased volatility and
reduced liquidity, it would become more difficult for the Fund to value its
portfolio securities accurately because there might be less reliable, objective
data available.
Finally, prices for high yield bonds may be affected by legislative and
regulatory developments. In addition, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructuring such as takeovers, mergers or
leveraged buy outs. Such legislation may significantly depress the prices of
outstanding high yield bonds.
2
<PAGE>
Repurchase Agreements
The Fund may agree to purchase U.S. Treasury securities, Canadian
Treasury securities or Mexican Treasury securities from financial institutions,
such as banks and broker-dealers, subject to the seller's agreement to
repurchase the securities at an established time and price. Repurchase
agreements related to Canadian Treasury securities and Mexican Treasury
securities will be of a duration of no more than one day. Repurchase agreements
related to U.S. Treasury Securities will be of a duration of no more than seven
days from the date of purchase. The collateral for such repurchase agreements
will be held by the Fund's custodian or a duly appointed sub-custodian. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors under
criteria established with the assistance of the Advisor. The seller under a
repurchase agreement would be required to maintain the value of the securities
subject to the repurchase agreement at not less than the repurchase price. The
Fund does not bear the risk of a decline in value of the underlying securities
unless the seller defaults under its repurchase obligation. Default by the
seller would, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligation. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, the Fund may be delayed or limited in its ability to
sell the collateral. There are several additional risks related to repurchase
agreements with respect to treasury securities issued by foreign governments.
First, although the Fund will only enter into repurchase agreements
collateralized by Canadian or Mexican Treasury Securities that initially have a
value at least equal to the repurchase price, under certain circumstances, it
might be possible that the value of the collateral being held with respect to
any such repurchase agreement would be reduced to such an extent that the
agreement would be undercollateralized. Second, in the event of default or
bankruptcy of the selling institution, enforcement of the Fund's rights would be
subject to additional difficulties and delays due to legal considerations of the
applicable foreign country.
Currency and Interest Rate Hedging Transactions
To hedge against adverse price movements in the currencies in which
securities held in the Fund's portfolio are denominated (as well as the
denominated currencies of the securities it might wish to purchase), the Fund
may engage in transactions in forward foreign currency contracts, options on
currencies, and futures contracts and options on futures contracts on
currencies. The Fund will not engage in any such transactions in excess of the
value of the securities denominated or payable in the foreign currency which are
then held in the Fund's portfolio.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time of
the contract. The Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
Currently, only a limited market exists for hedging transactions
relating to the Mexican peso. This may limit the Fund's ability to hedge
effectively its investments in Mexico. Hedging against a decline in the value of
a currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Such transactions
also limit the opportunity for gain if the value of the hedge currency should
rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates.
3
<PAGE>
The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. By entering into a forward contract
for the purchase or sale, for a fixed amount of dollars or other currency, of
the amount of foreign currency involved in the underlying security transactions,
the Fund will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase and the foreign currency in which
the security is denominated during the period between the date on which the
security is purchased or sold and the date on which payment is made or received.
In addition, the Fund may enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and on
which options have been written. (See "Futures Contracts and Options" below.)
If the currency in which the Fund's portfolio securities (or portfolio
securities that the Fund anticipates purchasing) are denominated rises in value
with respect to the currency which is being purchased (or sold), then the Fund
will have realized fewer gains than had the Fund not entered into the forward
contracts. Moreover, the precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible, because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Advisor. The Fund generally will not enter into a forward contract with a
term of greater than one year, although it may enter into forward contracts for
periods of up to five years. The Fund may be limited in its ability to enter
into hedging transactions involving forward contracts by the Code requirements
relating to qualifications as a regulated investment company. (See "Federal
Income Tax Treatment of Dividends and Distributions.")
Futures Contracts and Options. The Fund may purchase and sell futures
contracts that are currently traded, or may in the future be traded, on U.S. and
foreign commodity exchanges on such underlying fixed-income securities as U.S.
Treasury bonds, notes, and bills and/or any Canadian or Mexican currencies
("currency" futures) and on such indexes of U.S. or foreign fixed-income
securities as may exist or come into being, such as the Moody's Investment Grade
Corporate Bond Index ("index" futures). As a futures contract purchaser, the
Fund incurs an obligation to take delivery of a specified amount of the currency
underlying the contract at a specified time in the future for a specified price.
As a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying currency at a specified time in return for an
agreed upon price.
The Fund may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.
While the futures contracts and options transactions to be engaged in
by the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Advisor could be incorrect in its expectations as to
the direction or extent of various interest rate or price movements or the time
span within which the movements take place. For example, if the Fund sold
futures contracts for the sale of securities in anticipation of an increase in
interest rates, and then interest rates went down instead, causing bond prices
to rise, the Fund would lose money on the sale.
Another risk which will arise in employing futures contracts to protect
against the price volatility of portfolio securities is that the prices of
securities, currencies and indexes subject to futures contracts (and thereby the
4
<PAGE>
futures contract prices) may correlate imperfectly with the behavior of the U.S.
dollar cash prices of the Fund's portfolio securities and their denominated
currencies.
Purchase of When-Issued Securities
From time to time, in the ordinary course of business, the Fund may
purchase securities, at the current market value of the securities, on a forward
commitment or "when issued" basis. When such transactions are negotiated, the
price is fixed at the time of the commitment, but delivery and payment will take
place after the date of the commitment. A segregated account of the Fund,
consisting of cash, cash equivalents or U.S. Treasury securities, or other high
quality liquid debt securities equal at all times to the amount of the
when-issued commitments will be established and maintained by the Fund at the
Fund's custodian. Additional cash or liquid debt securities will be added to the
account when necessary. While the Fund purchases securities on a forward
commitment or "when issued" basis only with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date if it is
deemed advisable. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the
time of delivery of the securities, their value may be more or less than the
purchase or sale price.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements, the Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are at all times secured by cash or money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined daily,
of the loaned securities. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. In determining whether to lend
securities to a particular borrower, the Advisor (subject to review by the
Fund's Board of Directors) will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Fund any income earned thereon and the Fund may invest
any cash collateral in portfolio securities, thereby earning additional income.
The Fund will not lend portfolio securities in excess of 20% of the value of its
total assets. The Board of Directors will monitor the Fund's lending of
portfolio securities.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are in
addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. The percentage limitations contained in
these restrictions apply at the time of purchase of securities. Accordingly, the
Fund will not:
1. With respect to 50% of its net assets, invest more than 5%
of its total assets in the securities of any single issuer (the U.S.
Government and its agencies and instrumentalities are not considered an
issuer for this purpose);
2. With respect to 50% of its net assets, invest in the
securities of any single issuer if, as a result, the Fund would hold
more than 10% of the voting securities of such issuer (the U.S.
Government and its agencies and instrumentalities are not considered an
issuer for this purpose);
3. Invest in real estate or mortgages on real estate;
5
<PAGE>
4. Purchase or sell commodities or commodities contracts or
futures contracts, except that the Fund may enter into forward foreign
currency exchange contracts, futures contracts and options in
accordance with its investment objective and policies;
5. Act as an underwriter of securities within the meaning of
the federal securities laws;
6. Issue senior securities, except that the Fund may enter
into forward foreign currency contracts and futures contracts in
accordance with its investment objective and policies;
7. Make loans, except that the Fund may purchase or hold debt
instruments and may lend its portfolio securities and enter into
repurchase agreements in accordance with its investment objective and
policies;
8. Effect short sales of securities;
9. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions);
10. Purchase participations or other interests in oil, gas or
other mineral exploration or development programs;
11. Purchase any securities of unseasoned issuers which have
been in operation directly or through predecessors for less than three
years;
12. Invest in shares of any other investment company
registered under the Investment Company Act.
13. Purchase or retain the securities of any issuer, if to the
knowledge of the Fund, any officer or Director of the Fund or its
Advisor owns beneficially more than .5% of the outstanding securities
of such issuer and together they own beneficially more than 5% of the
securities of such issuer;
14. Invest in companies for the purpose of exercising
management or control;
15. Invest in puts or calls, or any combination thereof,
except that the Fund may enter into options, forward foreign currency
contracts and futures contracts, in accordance with its investment
objective and policies; or
16. Purchase warrants, if by reason of such purchase more than
5% of its net assets (taken at market value) will be invested in
warrants, valued at the lower of cost or market. Included within this
amount, but not to exceed 2% of the value of the Fund's net assets, may
be warrants which are not listed on the New York or American Stock
Exchange. For the purpose of the foregoing calculations, warrants
acquired by the Fund in units or attached to securities will be deemed
to be without value and therefore not included within the preceding
limitations.
The following are investment restrictions that may be changed by a vote
of the majority of the Fund's Board of Directors. The Fund will not:
1. Invest more than 10% of the value of its net assets in
illiquid or restricted securities (as defined under federal and state
securities laws);
2. Invest in real estate limited partnerships; or
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<PAGE>
3. Invest in oil, gas or mineral leases.
3. ADDITIONAL INFORMATION ABOUT CANADA AND MEXICO
The information in this section is based on material obtained by the
Fund from various Canadian and Mexican governmental and other economic sources
believed to be accurate but has not been independently verified by the Fund or
the Advisor. It is not intended to be a complete description of Canada or
Mexico, the Canadian and Mexican economies, or the consequences of investing in
Mexican and Canadian fixed-income securities.
Additional Information About Canada
Territory and Population
Canada is the second largest country in the world in terms of land mass
with an area of 9.22 million square kilometers (3.85 million square miles). It
is located north of the continental United States of America and east of Alaska.
Canada is comprised of ten provinces (Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Island, Quebec and
Saskatchewan) and two territories (the Northwest Territories and the Yukon
Territory). Its population is approximately 29 million.
Government
Canada is a constitutional monarchy with Queen Elizabeth II of the
United Kingdom its nominal head of state. The Queen is represented by the
Canadian governor-general, appointed on the recommendation of the Canadian prime
minister. Canada's government has a federal structure, with a federal government
and ten provincial governments. Its Parliament consists of a House of Commons
and a Senate. Members of the House of Commons are elected by Canadian citizens
over 18 years of age. Senators are appointed on a regional basis by the Prime
Minister. The federal government is headed by the Prime Minister who is chosen
from the party that has won the majority of seats in the House of Commons. The
provincial governments each have a Legislative Assembly and a Premier.
Legislative authority resides in the federal parliament and the ten
provincial legislative assemblies. Provinces have extensive power with specific
areas of jurisdiction. The federal government has defined areas of jurisdiction
and the power to act in areas declared by Parliament to be for the general
advantage of Canada. This general power has been used to justify federal action
in certain areas of provincial jurisdiction. Concurrent federal and provincial
jurisdiction exists in certain matters, including agriculture, immigration and
pensions. The powersharing issue between the federal government and provincial
governments has been contentious and has proven to be a central issue in the
process of constitutional reform.
Politics
Since World War II, the federal government has been formed by either
the Liberal Party or the Progressive Conservative Party. In October 1993, the
Liberal Party under the leadership of Mr. Jean Chretien, won 178 of the 295
seats in the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. He remains popular and unless the Liberal Party
calls for an earlier election, the next general election will take place in
October 1998.
Canada has had three major developments regarding unity and
constitutional reform in four years. The first two major developments were the
rejection of the Meech Lake Agreement in 1990 and the Charlottetown Accord in
1992. Those reforms would have given Quebec constitutional recognition as a
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distinct society, transferred powers from the federal to the provincial
governments and reformed the Senate by providing for more equal representation
among the provinces.
The third major development was the possibility of Quebec's
independence. On September 12, 1994, the Quebec separatist party, Parti
Quebecois under the leadership of Jacques Parizeau, won 77 seats in the
provincial election with 44.7% of the vote. The Liberal Party won 47 seats with
44.3% of the vote. The Parti Quebecois' agenda included a call for a referendum
supporting independence. If the referendum had been approved, Quebec would have
become a separate country, but would have retained formal political and economic
links with Canada similar to those that join members of the European Union. On
October 30, 1995, the referendum was defeated in a close ballot, in which 50.6%
voted against secession and 49.4% voted for secession. It is expected that the
closeness of the vote will result in federally-sponsored legislation or the
proposal of constitutional amendments with regard to the relationship between
the federal government and the provinces. It is also a possibility that another
referendum will take place within the next few years. Therefore, it is expected
that Quebec's position within Canada will continue to dominate political debate.
Monetary and Banking System
The central bank of Canada is the Bank of Canada. Its main functions
are to advise on the formulation and execution of monetary policy, supervising
commercial banks acting as a fiscal agent to the federal government and
managing the foreign exchange fund. The currency unit of Canada is the Canadian
dollar. Canada does not impose foreign exchange controls on capital receipts or
payments by residents or non-residents.
North American Free Trade Agreement
Canada and the United States are each other's largest trading partners
and, as a result, there is a significant linkage between the two economies.
Bilateral trade between Canada and the United States, in 1993, was larger than
between any other two countries in the world. On January 2, 1988, Canada and the
United States signed the Free Trade Agreement (the "FTA"), which was ratified by
the Canadian Parliament and the United States Senate. In the summer of 1991, the
United States, Canada and Mexico began negotiating the North American Free Trade
Agreement ("NAFTA"). NAFTA was signed on December 17, 1992 at separate
ceremonies in Washington D.C., Mexico City and Ottawa. On December 30, 1993,
after the Legislatures in the United States and Mexico had ratified NAFTA, the
Canadian Government announced that it had proclaimed NAFTA into law and had
exchanged the written notifications with the United States and Mexico needed to
bring NAFTA into force. As a result, NAFTA effectively replaced the FTA. Talks
between Chile and the three existing NAFTA partners were formally started on
June 7, 1995. It is expected that Chile will become a party to the agreement.
When fully-implemented, NAFTA is designed to create a North America Free Trade
Area, expand the flow of goods, services and investment and eventually
eliminate tariff barriers, import quotas and technical barriers among Canada,
the United States, Mexico and future parties to NAFTA.
Economic Information Regarding Canada
Canada experienced rapid economic expansion during most of the 1980's.
Its economy, like many other industrialized nations, fell into a recession from
late 1990 through 1992. The 1990-1992 recession partly created and partly
highlighted some difficulties which the present government is attempting to
resolve. The relatively low level of economic activity during this period
reduced the growth of tax receipts with the result that the already high levels
of government debt increased.
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Recent Developments
The deterioration in the government's fiscal position, which started
during the 1990-1992 recession, has since been aggravated by a reluctance to
decrease expenditures or increase taxes. In its 1995 budget, the Liberal Party
introduced new spending cuts, the largest in over thirty years, to reduce
Canada's budget deficit. Canada's budget deficit is one of the largest for any
of the Organization for Economic Cooperation and Development ("OECD") members.
For the fiscal year 1994-95, its budget deficit is estimated to be more than 5%
of gross domestic product ("GDP"), compared to 2.5% for the United States. The
government has stated its commitment to reduce the deficit to approximately 3%
of GDP in the 1996-1997 fiscal year. While the government's budget deficit
objectives can be achieved, it will require continued economic growth, lower
interest rates and additional reductions in government spending.
In addition to the growth of the federal government deficit, provincial
government debt has risen rapidly. Developments, including increased spending on
social services at the provincial level, were responsible for a significant
amount of the growth of public debt from 1990-1992. In response to the increase
in provincial debt, a number of rating agencies downgraded some provincial debt
ratings. All provinces now have plans to balance their respective budgets. This
may prove to be difficult considering the increase in interest rates and the
federal government's plan to reduce certain transfers to the provinces.
During 1994, despite growing output and low inflation, concern over the
country's deficit and the uncertainty associated with Quebec's status within
Canada lead to a weakening of its currency and higher interest rates. During the
first two quarters of 1995, however, in an attempt to increase domestic growth,
the Bank of Canada decreased interest rates. The easing of monetary policy has
also been facilitated by a renewed strength in the Canadian dollar. This
decrease in interest rates since the beginning of 1995 has improved the
government's prospects of meeting its fiscal targets. From October 1991 through
February 15, 1996, the Canadian dollar decreased in value compared to the U.S.
dollar by approximately 18%. On January 20, 1995, the Canadian dollar fell to
70.2, its lowest rate in almost nine years and close to its record low of 69.2.
The Bank of Canada responded by increasing rates on Treasury bills and selling
U.S. dollars. The Canadian dollar has increased in value from 70.2 against the
U.S. dollar on January 20, 1995 to 72.5 on February 15, 1996.
The following provides certain statistical and related information
regarding historical rates of exchange between the U.S. dollar and the Canadian
dollar, information concerning inflation rates, historical information regarding
the Canadian gross domestic product and information concerning yields on certain
Canadian Government Securities. Historical figures are not necessarily
indicative of future fluctuations.
Currency Exchange Rates
The exchange rate between the U.S. dollar and the Canadian dollar is at
any moment related to the supply of and demand for the two currencies and
changes in the rate result over time from the interaction of many factors
directly or indirectly affecting economic conditions in the United States and
Canada, including economic and political developments in other countries and
government policy and intervention in the money markets.
Despite the recent drop in value of the Canadian dollar, the range of
fluctuation in the U.S. dollar/Canadian dollar exchange rate has been narrower
than the range of fluctuation between the U.S. dollar and most other major
currencies. However, the range that occurred in the past is not necessarily
indicative of fluctuations in that rate that may occur over time which may be
wider or more confined than the range that occurred over an historic period of
comparable length. Future rates of exchange cannot be predicted, particularly
over extended periods of time.
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The following table sets forth, for each year indicated, the annual
average of the daily noon buying rates in New York for cable transfers in U.S.
dollars for one Canadian dollar as certified by the Federal Reserve Bank of New
York:
U.S.Dollars
-----------
1981.......................................................... 0.83
1982.......................................................... 0.81
1983.......................................................... 0.81
1984.......................................................... 0.77
1985.......................................................... 0.73
1986.......................................................... 0.72
1987.......................................................... 0.75
1988.......................................................... 0.81
1989.......................................................... 0.84
1990.......................................................... 0.86
1991.......................................................... 0.87
1992.......................................................... 0.83
1993.......................................................... 0.78
1994.......................................................... 0.73
1995.......................................................... 0.73
Source: Board of Governors of the Federal Reserve System, Federal
Reserve Bulletin.
Inflation Rate of the Canadian Consumer Price Index
Inflation has remained below 2% since 1991 and the government and the
Bank of Canada have reaffirmed the target of holding inflation inside a band of
1-3% for 1995.
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The following table sets forth for each year indicated the average
change in the Canadian consumer price index for the twelve months ended December
31 for the years 1981 through 1994 and for the eight months ended August 31,
1995 (1986=100).
National Consumer
Price Index
-----------------
(percent)
1981......................................... 12.4
1982......................................... 10.9
1983......................................... 5.7
1984......................................... 4.4
1985......................................... 3.9
1986......................................... 4.2
1987......................................... 4.4
1988......................................... 4.0
1989......................................... 5.0
1990......................................... 4.8
1991......................................... 5.6
1992......................................... 1.5
1993......................................... 1.8
1994......................................... 0.2
1995(1)...................................... 2.3(2)
---
(1) For the eight months ended August 31.
(2) Annualized.
Source: Bank of Canada Review, Winter 1994-1995; Statistics Canada.
Canadian Gross Domestic Product
The following table sets forth Canada's gross domestic product for the
years 1981 through 1994 at historical and constant prices.
Change from
Gross Domestic Gross Domestic Prior Year at
Product Product at 1986 Prices Constant Prices
------- ---------------------- ---------------
(percent)
(millions of Canadian Dollars)
1981. . . . . . . . . . . 355,994 440,127 3.7
1982. . . . . . . . . . . 374,442 425,970 (3.2)
1983. . . . . . . . . . . 405,717 439,448 3.2
1984. . . . . . . . . . . 444,735 467,167 6.3
1985. . . . . . . . . . . 477,988 489,437 4.8
1986. . . . . . . . . . . 505,666 505,666 3.3
1987. . . . . . . . . . . 551,597 526,730 4.2
1988. . . . . . . . . . . 605,906 552,958 5.0
1989. . . . . . . . . . . 650,748 566,486 2.4
1990. . . . . . . . . . . 669,467 565,155 (0.2)
1991. . . . . . . . . . . 676,477 555,052 (1.8)
1992. . . . . . . . . . . 690,122 559,305 0.8
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1993. . . . . . . . . . 712,855 571,722 2.2
1994. . . . . . . . . . 750,053 597,936 4.6
Source: Bank of Canada Review, Winter 1994-1995; Statistics Canada
Yields on Canadian Government Treasury Bills
The following table sets forth the average monthly yield on 3-month and
6-month government of Canada Treasury bills and 5-year and 10-year Canada
Benchmark Bonds from January 1994 through September 1995.
Treasury Bills Benchmark Bonds
-------------- ---------------
1994 3 Months 6 Months 5 Years 10 Years
---- -------- -------- ------- --------
January 3.63% 3.71% 5.40% 6.39%
February 3.84 4.17 6.12 6.94
March 5.47 6.04 7.47 7.95
April 5.86 6.28 7.44 7.95
May 6.14 6.55 8.01 8.41
June 6.38 7.29 8.82 9.11
July 5.76 6.64 8.96 9.36
August 5.52 5.79 8.32 8.74
September 5.20 5.69 8.36 8.88
October 5.39 6.04 8.55 9.14
November 5.86 6.52 8.81 9.16
December 7.14 8.12 8.99 9.07
Treasury Bills Benchmark Bonds
-------------- ---------------
1995 3 Months 6 Months 5 Years 10 Years
---- -------- -------- ------- --------
January 8.10 8.47 9.18 9.34
February 8.11 8.15 8.46 8.76
March 8.29 8.35 8.23 8.57
April 7.87 7.87 7.93 8.31
May 7.40 7.36 7.41 7.88
June 6.73 6.65 7.33 7.81
July 6.65 6.87 7.79 8.27
August 6.34 6.62 7.58 8.00
September 6.58 6.80 7.54 7.89
Source: Bank of Canada Review, Winter 1994-1995; Statistics Canada.
Additional Information About Mexico
Area and Population
The United Mexican States ("Mexico"), a nation formed by 31 states and
a Federal District (Mexico City), is the third largest nation in Latin America,
occupying a territory of 759,529 square miles. To the north, the country shares
a border with the United States of America and to the south, it has borders with
Guatemala and Belize. Its coastline extends over 6,304 miles along both the Gulf
of Mexico and the Pacific Ocean. Mexico is the second most populous nation in
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Latin America, with an estimated population of 91.6 million. Mexico's three
largest cities are Mexico City, Guadalajara and Monterrey.
Government
The present form of government was established by the Constitution,
which took effect on May 1, 1917. The Constitution established Mexico as a
Federal Republic and provides for the separation of the executive, legislative
and judicial branches. The President and the members of Congress are elected by
popular vote of Mexican citizens over 18 years of age.
Executive authority is vested in the President, who is elected for a
single six-year term. The executive branch consists of 19 Ministries, the
Attorney General, the Department of the Federal District and the Attorney
General of Mexico City.
Legislative authority is vested in the Congress, which is composed of
the Senate and the Chamber of Deputies. Senators serve a six-year term. Deputies
serve a three-year term and neither Senators nor Deputies may serve consecutive
terms in the same chamber. The Senate has 128 members, two for each state and
two for the Federal District. The Chamber of Deputies has 500 members, of whom
300 are elected by direct vote from the electoral districts, and 200 are
selected by a system of proportional representation. The Constitution provides
that the President may veto bills and that Congress may override such vetoes
with a two-thirds majority of each Chamber. Judicial authority is vested in the
Supreme Court of Justice, circuit and district courts. The Supreme Court has 11
members, each of whom holds office for a maximum period of fifteen years. Its
president is elected every four years.
Politics
The Partido Revolucionario Institucional ("PRI") is the dominant
political party in Mexico. Since 1929, the PRI has won all presidential
elections and has held a majority in General Congress and until 1989, it had
also won all of the state governorships. The oldest opposition party in Mexico
is the Partido Accion Nacional ("PAN"). However, the National Action Party (the
"PAN"), which is pro-business and pro-Catholic church, recently has made great
strides in taking away the PRI's political supremacy. The PAN has now won three
governorships and controls 13 of Mexico's 20 largest cities outside of Mexico
City. The third major party in Mexico is the Partido de la Revolucion
Democratica ("PRD").
In 1994, the PRI's candidate, Ernesto Zedillo Ponce de Leon, was
elected president by 50.2% of the votes, while the PAN's candidate came in
second with 26.7% and the PRD's candidate came in third with 17.1% of the votes.
Three-quarters of both chambers of the Mexican Congress were also up for
election. With respect to the Congresssional elections, the PRI maintained its
majority in both Chambers with 93 seats in the Senate and 300 seats in the
Chamber of Deputies. The PAN has the second largest representation with 25 seats
in the Senate and 119 seats in the Chamber of Deputies. Finally, the PRD has 10
seats in the Senate and 71 seats in the Chamber of Deputies. The next
congressional elections will take place in 1997.
Continuing the reform of the political system, the Mexican Government
and leaders of the PRI signed an agreement with the opposition parties on
January 17, 1995 to continue to democratize the country's political system. The
parties agreed that they would work together to arrive at a definitive agreement
that would include controls on fund-raising and campaign spending, full access
to the media for the opposition parties and the complete independence of the
federal elections agency.
Money and Banking
Banco de Mexico, chartered in 1925, is the central bank of Mexico. It
is the Federal Government's primary instrument for the execution of monetary
policy and the regulation of currency and credit. It is authorized by law to
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regulate interest rates payable on time deposits, to establish minimum reserve
requirements for credit institutions and to provide discount facilities for
certain types of bank loans. The currency unit of Mexico is the peso. Mexico
repealed its exchange control rules in 1991 and now maintains only a market
exchange rate. The peso may be freely converted into any other currency and no
restrictions apply to the repatriation of capital or on the transfer of profits
abroad.
A constitutional amendment relating to Banco de Mexico's activities and
role within the Mexican economy became effective on August 23, 1993. The
amendment's purpose was to reinforce the independence of Banco de Mexico, which
may in the future act as a counterbalance to the executive and legislative
branches in fiscal policy matters. The amendment significantly strengthens Banco
de Mexico's authority with respect to monetary policy and related activities and
the regulation of the financial services industry. On April 1, 1994, a new law
governing the activities of Banco de Mexico became effective. The new law was
intended to put into effect the greater degree of autonomy granted to Banco de
Mexico under the constitutional amendment described above and also established a
Foreign Exchange Commission charged with determining the nation's exchange rate
policies. As a result of the devaluation of the peso at the end of 1994 and
during 1995 whereby the peso lost over 100% of its value, the Central Bank has
maintained a free-floating system for the peso against other currencies.
To help stabilize the Mexican financial markets and allow investors to
more fully cover their positions, the Central Bank has recently approved the
listing of derivative products based on the IPC on the Chicago Board Options
Exchange and on the Chicago Mercantile Exchange. Further, futures and options
contracts based on Mexican Brady Bonds are now allowed to be traded. Finally,
last year the Central Bank approved a domestic futures market as well as the
trading of currency options. Thus, on April 25, 1995, the peso was listed on the
Chicago Mercantile Exchange allowing companies and individuals to have some
certainty in the value of the peso at a given time.
Although the Central Bank allows the peso to float freely, it does
occasionally intervene in the exchange markets when the peso comes under
speculative attack. The Bank was forced to adopt this policy after extreme
speculation in September 1995 set back the Government's recovery programs by
months when the peso shot down in value and interest rates were thereby forced
upwards. However, for the first half of 1996, the bank did not intervene once in
the markets since it appears that the government's austerity measures are having
success at stabilizing the economy and financial system.
Trade Reform - NAFTA
Mexico has been a member of the General Agreement on Tariffs and Trade
("GATT") since 1986 and has become a member of the Organization for Economic
Cooperation. Mexico has also entered into NAFTA with the United States and
Canada. In addition, Mexico signed a framework for a free trade agreement in
1992 with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua and entered
into definitive free trade agreements with Bolivia, Chile, Colombia and
Venezuela. Mexico has also signed tax treaties with Canada, France, Germany,
Ireland, the Netherlands, Spain, Sweden, Switzerland, South Korea, Singapore,
the United Kingdom and the United States. Finally, Mexico has also signed tax
treaties with Belgium, Ecuador, Japan and Norway, which are either pending
approval by the respective other country or are waiting to come into effect.
In connection with the implementation of NAFTA, amendments to several
laws relating to financial services (including the Banking Law and the
Securities Market Law) became effective on January 1, 1994. These measures
permit non-Mexican financial groups and financial intermediaries, through
Mexican subsidiaries, to engage in various activities in the Mexican financial
system, including banking and securities activities. Additional amendments
published in February and May of 1995 permit foreign investors to (i) acquire a
majority position in holding affiliate companies, (ii) directly hold up to 49%
of the capital stock of bank holding companies and full service banking
institutions and up to 30% of the capital stock of brokerage firms and
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securities specialists and (iii) participate in sectors that previously had
been reserved for Mexican Nationals, such as television and radio broadcasting.
However, investment in corporations and partnerships engaged in certain
industries, such as oil, railroad and broadcast television are exclusively
reserved for Mexican citizens and/or government. In addition, other amendments
permit private Mexican companies to participate in certain industrial activities
that were previously reserved for the Mexican government, such as railroads and
the transportation, storage and distribution of gas. In such activities, foreign
investors may hold up to 49% and 100% respectively, of the capital stock of such
Mexican companies. NAFTA had no direct effect on the Mexican securities being
purchased by the Fund.
Economic Information Regarding Mexico
In February 1990, Mexico became the first Latin American country to
reach an agreement with external creditor banks and multinational agencies
under the U.S. Treasury's approach to debt reduction known as the "Brady Plan."
As part of the Brady Plan, commercial banks and Mexico agreed to debt reduction
and new financing in a set of agreements comprising the 1989-1992 Financing
Package. The implementation of this package resulted in a substantial reduction
in Mexico's foreign debt and debt service obligations. On June 1, 1992, Mexico
achieved a further reduction in its foreign public debt of $7.17 billion to a
total of approximately $73.5 billion. At December 31, 1992, December 31, 1993
and December 31, 1994, the net amount of the debt was $75.755*/ billion,
78.747*/ billion and $85.436*/ billion, respectively.
Currency Exchange Rates
The following provides some statistical and other related information
regarding historical rates of exchange between the U.S. dollar and the Mexican
peso along with information concerning interest rates on certain Mexican
government securities. Historical figures are not necessarily indicative of
future fluctuations.
From late 1982 to November 11, 1991, Mexico maintained, a dual foreign
exchange rate system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports of goods,
advances and payments of registered foreign debt and funds used for payments of
royalties and technical assistance under registered agreements requiring such
payments. The free market rate was used for all other transactions not expressly
falling within the category of transactions which permit parties to have access
to U.S. dollars at the controlled rate. The dual system assisted in controlling
the value of the Mexican peso, particularly from 1983 to 1985. In later years
the difference between the two rates was not significant. Mexico has now
repealed the controlled rate.
Under economic policy initiatives implemented since December 1987, the
Mexican Government introduced a schedule of gradual devaluations of the Mexican
peso which initially amounted to an average depreciation of the Mexican peso
against the U.S. dollar of one Mexican peso per day. The extended initiatives
include an adjustment in the scheduled devaluation rate of the Mexican peso
against the U.S. dollar. On May 28, 1990, the Mexican peso began devaluing by an
average of .80 Mexican pesos per day instead of one Mexican peso per day. On
November 12, 1990 this average was decreased to .40 Mexican pesos per day and on
November 11, 1991 the daily devaluation rate was lowered to .20 Mexican pesos
- --------
*/Source: Banco de Mexico.
15
<PAGE>
per day. On October 21, 1992, the maximum rate at which the Mexican peso can
devalue against the U.S. dollar was accelerated to .40 Mexican pesos per day.
Because the peso had deteriorated to such an extent over the previous
15 years, on January 1, 1993, the Mexican Government introduced a new currency,
the new peso, which eliminated 3 zeros from the peso. Thus, each new peso was
worth 1,000 old Mexican pesos and the new peso was designated with the symbol
"N$". The change was not a devaluation but merely a move to simplify the math
involved in the use of Mexican currency. (The use of the word "new," which was
always intended to be temporary to aid the transition to the new currency, was
removed on January 1, 1996, and Mexico's currency is again simply known as the
Mexican peso -- though it remains with three zeros less.)
With regard to exchange controls, in 1982, Mexico imposed strict
foreign exchange controls which shortly thereafter were relaxed and were
eliminated in 1991. There is no assurance that future regulatory actions in
Mexico would not affect the Fund's ability to acquire or hold U.S. dollar
denominated securities or otherwise obtain U.S. dollars.
Recent Developments
On December 20, 1994, the Mexican Government announced a new policy
that would allow a more substantial yet still controlled devaluation of the
Mexican peso. On December 22, 1994, the Mexican Government announced that it
would not continue with the policy announced two days earlier and it would
instead permit the peso to float against other currencies, resulting in a
continued decline against the U.S. dollar. On December 23, 1994, the exchange
rate was 4.67 new pesos to the U.S. dollar, and on January 4, 1995, it had
fallen further to 5.57 new pesos to the U.S. dollar.
The attempted controlled devaluation by the government ignited an
economic, financial, social and political crisis, which was arguably the worst
in Mexico's history. Foreign investors started taking all of their money out of
the country, which prompted the government to offer interest rates that reached
80%. However, no one was interested in the high rates because the Mexican
Government had approximately US$11billion in short-term treasury certificates
(Cetes) coming due in the first quarter of 1995, but nearly zero foreign
reserves and no funds coming in. In short, there was the danger that the
government would default on its foreign obligations. In turn, the steep surge in
interest rates, extreme devaluation in the peso, racing inflation, resulting
bankruptcy of companies (due to drop in consumer demand, inability to buy
imported machinery and inputs to run business and inability to pay debt at new
interest rates) and skyrocketing unemployment (it is estimated some 2.5 million
Mexicans lost their jobs in 1995) provoked a crisis in Mexico's financial system
as bank's non-performing loan portfolios began to become unmanageable.
However, the Zedillo administration, with the help of the International
Monetary Fund (the "IMF") and the United States government, took control of the
crisis. In fact, over the last year and a half since the outbreak of the crisis,
the Zedillo administration has made tremendous progress at stabilizing Mexico's
economy and financial markets. The IMF and the United States Government provided
approximately US$38.5 billion in emergency funds to help Mexico meet its
short-term maturing obligations. Then, with the immediate liquidity crisis
resolved, Zedillo went about zealously implementing and even exceeding the IMF's
austerity measures by increasing taxes, cutting government spending and removing
price controls on basic goods. The net effect has been the stabilizing of the
exchange rate (the peso closed at the end of June 1996 at 7.59, down from 7.71
at the close of December 1995) and of the financial markets (the stock market is
up 19% in dollar terms for the first half of 1996), the taming of inflation
(inflation for the first half of 1996 was 15.3%, far lower than the more than
30% during the same period in 1995), the increasing of foreign reserves (US$16
billion in mid-May 1996) and the reduction of unemployment (down officially from
7.6% in August 1995 to 5.4% in May 1996).
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<PAGE>
Zedillo has also ameliorated the country's bank crisis by taking
control of several of the weakest banks and by infusing capital into the
industry in exchange for ownership participation in the banks. The government
currently owns approximately 9% of the banking system's assets and 50% of its
non-performing loan portfolio. As a result, the financial system appears to have
stabilized. The government plans to return the assets to private investors by
using a "Resolution Trust" style agency to sell them at depressed values.
As part of his fiscal and monetary policies, Zedillo has shrunk
public participation in the economy from 40% of gross domestic product ("GDP")
to 25%, and has diminished the money supply by 12%. Mexico's money supply is
currently estimated to be underfunded by about US$5 billion. To fill this gap,
the government lends money but then also uses its position as creditor to
leverage its borrowers to follow policies in tune with its own to keep tight
control of the financial markets. As a result, on June 21, 1996, there was
approximately US$8 billion in circulation, which was about US$1 billion less
than there was on December 31, 1995. The depressed money supply has brought
inflation under control and bolstered the peso.
Another indication that Mexico is emerging from its crisis is that it
has regained access to foreign lenders. In fact, the government recently paid
down US$4.7 billion in debt it owed under the emergency package provided to it
by the United States Government through the contracting of a loan at a better
rate which, overall, will save it US$50 million in interest. With the payment,
Mexico has paid over half of the US$12.5 billion it originally borrowed from the
United States as a result of the crisis.
Nevertheless, the crisis has taken its toll. As a result of the foreign
loans Mexico contracted, the bail-out of its banking sector and the subsidy it
is currently providing Mexican citizens by keeping electricity, housing,
education, and certain product (tortillas) prices below inflation, Mexico is
accumulating a total indebtedness which could reach 60% of the country's GDP by
year's end. Currently, total indebtedness is about 50% of GDP.
Statistical and Related Information Concerning Mexico
The following table sets forth the Mexican peso to U.S. dollar exchange
rates for each year from 1982 to 1995 and including the months of January to
May, 1996.
Free Market Rate *Controlled Rate
---------------- ----------------
End of End of
Period Average Period Average
------ ------- ------ -------
1982 ................ 148 57 96 57
1983 ................ 161 150 143 120
1984 ................ 210 185 192 167
1985 ................ 447 310 371 256
1986 ................ 915 637 923 611
1987 ................ 2.209 1.378 2.198 1.366
1988 ................ 2.281 2.273 2.257 2.250
1989 ................ 2.641 2.483 2.637 2.453
1990 ................ 2.945 2.838 2.939 2.807
1991 ................ 3.075 3.016 3.065 3.007
1992 ................ 3.115 3.094 N/A N/A
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1993 .................. 3.105 3.155 N/A N/A
1994 .................. 5.325 5.075 N/A N/A
1995 .................. 7.6750 6.4077 N/A N/A
January 1996 ........... 7.4730 -- N/A N/A
February 1996 .......... 7.5043 -- N/A N/A
March 1996 ............. 7.5556 -- N/A N/A
April 1996 ............. 7.4478 -- N/A N/A
May 1996 ............... 7.4213 -- N/A N/A
- ----------
* From late 1982 to November 11, 1991, Mexico maintained a dual foreign
exchange rate system with a "controlled" rate and a "free market" rate.
Mexico has now repealed the controlled rate.
Source: Banco de Mexico/American Chamber of Commerce in Mexico.
Wages and Prices
After relatively long periods of economic growth and stability lasting
until the early 1970s, Mexico's economy suffered the effects of high inflation.
The economy improved in the late 1970s as a result of government policies and
important discoveries of oil reserves. However, between 1977 and 1981, these
factors contributed to an increase in inflation to an average annual rate of
22.4% for that period compared to an average annual rate of 2.4% between 1960
and 1971, and 16.6% between 1972 and 1976.
The economy experienced a setback in 1981 because of the severe drop in
oil prices and high world interest rates which resulted in a substantial
increase in the country's external debt burden. With no new lending to be
obtained from international creditors, the balance of payments equilibrium could
no longer be sustained. The Mexican peso was devalued and inflation rose
sharply. Through much of the 1980s, the Mexican economy continued to be affected
by high inflation, low growth and excessive domestic and foreign indebtedness.
The inflation rate, as measured by the consumer price index, rose from 28.7% in
December 1981 to 159.2% in December 1987. In December 1987, the Mexican
Government agreed with labor and business to curb the economy's inflationary
pressures by freezing the surge in wages and prices.
The Pacto de Solidaridad Economico (Pact for Economic Solidarity, the
"PSE") was announced in December 1987 and included the implementation of
restrictive fiscal and monetary policies, the elimination of trade barriers and
the reduction of import tariffs. The PSE was renamed the Pacto para la
Estabilidad y el Crecimiento Economica (Pact for Stability and Economic Growth,
the "PECE") in November 1988. Under the PECE, the prices of certain goods and
services provided by the public sector (particularly gasoline, energy for
industrial use and utility services) were increased. The private sector agreed
to accept the increases without increasing private sector prices. Furthermore,
the government committed itself to implementing measures to reduce agricultural
sector costs.
The PECE has been extended on five occasions. After substantive
increases in public sector prices and utility rates, price controls were
introduced. These policies lowered the consumer inflation rate from 159.2% in
February 1987 to 19.7% in 1989. The inflation rate rose to 29.9% in 1990 as
prices were liberalized. Inflation declined in 1991, falling to 18.8% by
year-end. The inflation rate declined in 1992 to 11.9%, to 8.0% in 1993 and to
7.1% in 1994. However, due to the Mexican crisis, the progress made in reducing
inflation was reversed and 1995 registered an annual inflation of 51.9%. But, as
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mentioned above, President Zedillo has been successful in bringing inflation
under control for the first half of 1996, coming in at 15.3%. Inflation for the
year is expected to be under 30%.
On January 3, 1995, in response to the economic turmoil following the
devaluation of the peso, President Zedillo announced an emergency economic plan
and a new plan called the Programa de Ajuste Economico (Economic Adjustment
Plan) was entered into by the government with representatives of labor and
business. Like the PECE pacts, the plan's purpose was to keep prices down in
exchange for no unrealistic salary demands by labor groups.
As part of Zedillo's austerity measures in the face of the crisis, on
March 27, 1995, the government raised the Value-Added Tax from 10% to 15%,
further reduced government spending and increased the cost of many
price-controlled goods, including petroleum and electricity, by 35%. It later
removed or eased price controls on many basic goods, such as on bread, milk and
sugar.
Due to the necessity of implementing such a severe fiscal monetary
policy to put Mexico's fiscal house back in order, as of July 1, 1996, wages had
only recovered 60% of their pre-devaluation (December 19, 1994) levels. This
means that Mexican's purchasing power is significantly depressed and that the
recovery will be slow in taking off. To help release some of the pressures, the
government is currently providing Mexican citizens a subsidy in the cost of
electricity, housing and education by keeping their price increases behind
inflation.
Consumer Price Index
The following table sets forth the changes in the Mexican consumer
price index for the years 1984 through 1995, and for the first six months of
1996.
Annual Increases in
National Consumer
Price Index
-------------------
(percent)
1984.......................................... 59.2
1985.......................................... 63.7
1986.......................................... 105.7
1987.......................................... 159.2
1988.......................................... 51.7
1989.......................................... 19.7
1990.......................................... 29.9
1991.......................................... 18.8
1992.......................................... 11.9
1993.......................................... 8.0
1994.......................................... 7.1
1995.......................................... 51.97
January 1996.................................. 3.59
February 1996................................. 2.33
March 1996.................................... 2.20
April 1996.................................... 2.84
May 1996...................................... 1.82
June 1996..................................... 1.86
Source: Banco de Mexico/American Chamber of Commerce.
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Mexican Gross Domestic Product
The following table sets forth Mexico's gross domestic product for the
years 1987 through 1995.
Period Annual figures in Yearly variation
millions of constant
pesos (1980)
1987 4 825 445 1.9
1988 4 887 841 1.3
1989 5 048 950 3.3
1990 5 276 684 4.5
1991 5 468 560 3.6
1992 5 619 836 2.8
1993 5 658 539 0.7
1994 5 857 478 3.5
1995 5 451 531 (6.9)
Source: INEGI
Interest Rates
During 1994, the rate on the 28-day Cetes (Mexican Treasury
certificate) increased from 10.52% in January to 20.07% in December and further
increased to 37.73% in January 1995. During the same time period, the rate on
the 91-day Cetes increased from 10.75% in January 1994 to 39.26% in January 1995
and the rate on the six-month Cetes increased from 10.78% in January 1994 to
35.02% in January 1995. During the height of the crisis, the 28-day Cetes
reached rates as high as 120%, but by March 1996 began to descend to rates below
40%. As of May 1996, the 28-day Cetes rate stood at 28.45%, the 91-day Cetes
rate stood at 31.07% and the six-month Cetes rate stood at 32.67%.
4. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day") if there is sufficient trading in Fund portfolio
securities to affect net asset value materially, but may not be determined on
days during which no Shares are tendered for redemption and the Fund receives no
order to sell Shares. The New York Stock Exchange is open for business on all
weekdays except for the following holidays: New Year's Day, Presidents' Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the price at which Shares are redeemed,
the net asset value per Share is calculated by valuing all securities held by
the Fund, deducting the Fund's actual and accrued liabilities (including
liability for dividends declared) and dividing the resulting amount by the
number of then outstanding Shares. To determine the net asset value per Share of
any class, the net asset value calculated as described above will be further
adjusted to reflect the pro rata portion of income and expenses attributable to
that class. For this purpose, securities are valued on the basis of their last
sale price (or, in the absence of recorded sales, at the average of readily
available closing bid and asked prices). Securities or other assets for which
market quotations are not readily available are valued at their fair value as
determined in good faith by the Advisor under procedures established and
monitored by the Board of Directors. Debt obligations with maturities of 60 days
or less will be valued at amortized cost, which constitutes fair value as
determined by the Directors. In the case of such securities that were originally
20
<PAGE>
purchased with maturities in excess of 60 days, such amortization will be based
on the market or fair value of the securities on the 61st day prior to maturity.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check as
described in the Prospectus. However, if the Board of Directors determines that
it would be in the best interests of the remaining shareholders of the Fund to
make payment of the redemption price in whole or in part by a distribution in
kind of readily marketable securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming shareholder
will incur brokerage costs in later converting the assets into cash. The method
of valuing portfolio securities is described under "Valuation of Shares," and
such valuation will be made as of the same time the redemption price is
determined. The Fund, however, has elected to be governed by Rule 18f-1 under
the Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder. A corporate
shareholder requesting a redemption must have on file with the Fund's Transfer
Agent, Armata, a Participating Dealer or Shareholder Servicing Agent all
required resolutions and certificates, such as resolutions authorizing the
redemption and secretary's certificates.
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
The following general discussion of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. Future legislation or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Qualification as Regulated Investment Company
The Fund has been and expects to continue to be taxed as a regulated
investment company (a "RIC") under Subchapter M of the Code. As a RIC, the Fund
is exempt from federal income tax on its net investment income and capital gains
which it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (net investment income and the excess
of net short-term capital gains over net long-term capital losses) for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below. Distributions of investment company taxable
income made during the taxable year or, under certain specified circumstances,
within twelve months after the close of the taxable year will satisfy the
Distribution Requirement. The Distribution Requirement for any year may be
waived if a RIC establishes to the satisfaction of the Internal Revenue Service
that it is unable to satisfy the Distribution Requirement by reason of
distributions previously made for the purpose of avoiding liability for federal
excise tax (discussed below).
The Fund may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
21
<PAGE>
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Fund must distribute to satisfy the
Distribution Requirement. In some cases, the Fund may have to borrow money or
dispose of investments in order to make sufficient cash distributions to satisfy
the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, in order
to qualify as a RIC, the Fund must, generally, (1) derive at least 90% of its
gross income from dividends, interest, certain payments with respect to
securities, loans and gains from the sale or other disposition of stock or
securities, or from other income derived with respect to its business of
investing in stock or securities and (2) derive less than 30% of its gross
income from, among other things, gains on the sale or other disposition of stock
or securities (as defined in section 2(a)(36) of the Investment Company Act)
held for less than three months (the "Short-Short Gain Test").
Finally, at the close of each quarter of its taxable year, at least 50%
of the value of the Fund's assets must consist of cash and cash items, U.S.
Government securities, securities of other RICs, and securities of other issuers
(as to which the Fund has not invested more than 5% of the value of its total
assets in securities of such issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or two or more issuers which the Fund controls and which are engaged in the
same, similar, or related trades or businesses (the "Asset Diversification
Test"). The Fund will not lose its status as a RIC if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of portfolio
assets not attributable to a purchase. The Fund may curtail its investment in
certain securities where the application thereto of the Asset Diversification
Test is uncertain.
Fund Distributions
The Fund anticipates that it will distribute substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in Shares.
The Fund may either retain or distribute to shareholders the excess, if
any, of net long-term capital gains over net short-term capital losses ("net
capital gains") for each taxable year. If such gains are distributed as a
capital gains distribution, they are treated by shareholders as long-term
capital gains, regardless of the length of time the shareholder has held Shares,
whether or not such gains were recognized by the Fund prior to the date on which
a shareholder acquired Shares and whether or not the distribution was paid in
cash or reinvested in Shares. The aggregate amount of distributions designated
by the Fund as capital gains distributions may not exceed the net capital gains
of the Fund for any taxable year, determined by excluding any net capital losses
or net long-term capital losses attributable to transactions occurring after
October 31 of such year and by treating any such net capital or long-term
capital losses as if they arose on the first day of the following taxable year.
Conversely, if the Fund elects to retain its net capital gains, it will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
applicable corporate tax rate. In such event, it is expected that the Fund also
will elect to have shareholders treated as having received a distribution of
such gains, with the result that they will be required to report such gains on
their returns as long-term capital gains, will receive a refundable tax credit
for their allocable share of capital gains tax paid by the Fund on the gains,
and will increase the tax basis for their Shares by an amount equal to 65
percent of the deemed distribution.
Investors should be careful to consider the tax implications of buying
Shares of the Fund just prior to the ex-dividend date of an ordinary income
dividend or capital gains distribution. The price of Shares purchased at that
time may reflect the amount of the forthcoming ordinary income dividend or
capital gains distribution. Those purchasing just prior to an ordinary income
dividend or capital gains distribution will be taxable on the entire amount of
the dividend or distribution received even though the dividend or capital gains
distribution was earned by the Fund before the shareholder purchased the Shares.
Generally, a gain or loss on the sale of Shares will be a capital gain
or loss, which will be long-term capital gain or loss if the Shares have been
held for more than one year and otherwise will be short-term capital gain or
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<PAGE>
loss. However, investors should be aware that any loss realized upon the sale,
exchange or redemption of Shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gains distributions have been
paid with respect to such Shares (or any undistributed net capital gains of the
Fund with respect to such Shares have been included in determining the
shareholder's long-term capital gains). In addition, any loss realized on a sale
or other disposition of Shares will be disallowed to the extent an investor
repurchases (or enters into a contract or option to repurchase) Shares within a
period of 61 days (beginning 30 days before and ending 30 days after the
disposition of the Shares). Investors should particularly note that this loss
disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
If for any taxable year the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders and such distributions will be
taxable to shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions will be
eligible for the dividends received deduction in the case of corporate
shareholders.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly or (3) who has
failed to certify to the Fund that he is not subject to backup withholding.
Excise Tax; Miscellaneous Considerations
The Code imposes a non-deductible 4% excise tax on RICs that do not
distribute in each calendar year an amount equal to 98% of their ordinary income
for the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. The excise tax is imposed on
the undistributed part of this required distribution. In addition, the balance
of such income must be distributed during the next calendar year to avoid
liability for the excise tax in that year. For the foregoing purposes, a company
is treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year. For purposes of the excise
tax, a RIC must reduce its capital gain net income by the amount of any net
ordinary loss for the calendar year (but only to the extent the capital gain net
income for the one-year period ending October 31 exceeds the net capital gains
for such period). Because the Fund intends to distribute all of its income
currently (or to retain, at most, its "net capital gains" and pay tax thereon),
the Fund does not anticipate incurring any liability for this excise tax.
However, investors should note that the Fund may, in certain circumstances, be
required to liquidate portfolio investments in order to make sufficient
distributions to avoid excise tax liability and, in addition, that the
liquidation of investments in such circumstances may affect the ability of the
Fund to satisfy the Short-Short Gain Test.
Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from the rules for federal income taxation
described above. Shareholders are urged to consult their tax advisors as to the
consequences of state and local tax rules affecting an investment in the Fund.
6. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are the responsibility of the
Board of Directors. The Board approves all significant agreements between the
Fund and persons or companies furnishing services to the Fund, including the
Fund's agreements with its investment advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's officers, to Investment Company Capital Corp. ("ICC"), acting as the
Fund's administrator ("ICC" or the "Administrator"), to Armata acting as the
Fund's distributor, and to ISI, as the Fund's investment advisor. Two directors
and all of the officers of the Fund are directors, officers or employees of ICC,
Armata or ISI. The other directors of the Fund have no affiliation with ICC,
Armata or ISI.
23
<PAGE>
Directors and Officers
The Directors and executive officers of the Fund, their respective
dates of birth and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is 717 Fifth Avenue, New York, New York 10022.
*EDWARD S. HYMAN, Chairman and Director (4/8/45)
Chairman, International Strategy and Investment Inc., 1991 to Present;
Formerly, Vice Chairman and Member of the Board of Directors, C.J.
Lawrence Inc. (money manager), 1972-1991.
*RICHARD T. HALE, Vice Chairman and Director (7/17/45)
135 East Baltimore Street, Baltimore, Maryland 21202. Managing
Director, Alex. Brown & Sons Incorporated; Chartered Financial Analyst.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (merchant banking), 1993-Present;
Formerly, Senior Vice-President and Chief Financial Officer, General
Dynamics Corporation (defense); Director, The Arch Fund (mutual fund).
JOHN F. KROEGER, Director (8/11/24)
37 Pippin Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); Formerly, Consultant, Wendell
& Stockel Associates, Inc. (consulting firm) and General Manager, Shell
Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993,
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director (7/14/32)
Duke Management, Erwin Square, Suite 1000, 2200 W. Main Street, Durham,
North Carolina 27705. President, Duke Management Company (investments);
Executive Vice President, Duke University (education, research and
healthcare).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103. President and Chief Executive
Officer, The Pew Charitable Trusts; Director and Executive Vice
President, The Glenmede Trust Company; Formerly, Executive Director,
The Pew Charitable Trusts.
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, ATL and Spacelabs Medical Corp. (medical equipment) and
Family Health International (non-profit research and education);
Trustee, Reed College (education); Director, Research America
(non-profit medical research); Formerly, Trustee, Rockefeller
Foundation; Director, Merrill Lynch Cluster C Funds (registered
investment companies) .
R. ALAN MEDAUGH, President (8/20/43)
President, International Strategy and Investment Inc.; Formerly,
Managing Director, C.J. Lawrence Fixed Income Management (money
manager).
- --------
* A Director who is an "interested person" as defined in the Investment
Company Act.
24
<PAGE>
EDWARD J. VEILLEUX, Vice President (8/26/43)
135 East Baltimore Street, Baltimore, Maryland 21202. Principal, Alex.
Brown & Sons Incorporated; Executive Vice President, Investment Company
Capital Corp. (registered investment advisor); Vice President, Armata
Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (12/6/44)
135 East Baltimore Street, Baltimore, Maryland 21202. Managing
Director, Alex. Brown & Sons Incorporated; Manager, Special Products
Department, Alex. Brown & Sons Incorporated.
NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International Strategy and
Investment Inc., 1991-Present; Formerly, Vice President, C.J. Lawrence
Inc. (money manager), 1981- 1991.
BRIAN C. NELSON, Vice President (7/31/59)
135 East Baltimore Street, Baltimore, Maryland 21202. Vice President,
Alex. Brown & Sons Incorporated, Investment Company Capital Corp.
(registered investment advisor) and Armata Financial Corp. (registered
broker-dealer).
JOSEPH A. FINELLI, Treasurer (1/24/57)
135 East Baltimore Street, Baltimore, Maryland 21202. Vice President,
Alex. Brown & Sons Incorporated, September 1995-Present; Formerly,
Vice President and Treasurer, The Delaware Group of Funds (registered
investment companies); Vice President, Delaware Management Company,
Inc., 1980-1995.
CARRIE L. BUTLER, Vice President (5/1/67)
Assistant Vice President, International Strategy and Investment Inc.;
Formerly Mutual Fund Sales Assistant, C.J. Lawrence Fixed Income
Management (money manager), 1989-1991.
DENICE DE FLORIO, Assistant Vice President (4/23/69)
Assistant Vice President, International Strategy and Investment, Inc.,
1995-Present; Formerly, Assistant Portfolio Manager, Smith Barney's
Municipal Money Market Funds, 1993-1995; Taxable Money Market Funds and
Portfolio administrator, Offitbank, 1991- 1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April
1995-Present; Formerly, Legal Advisor, Federated Investors (registered
investment advisor), 1991-1995.
LAURIE D. DEPRINE, Assistant Secretary (1/1/66)
135 East Baltimore Street, Baltimore, Maryland 21202. Asset Management
Department, Alex. Brown & Sons Incorporated, 1991-Present; Formerly,
Student, 1989- 1991.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown, Armata or ISI or by any of their respective
affiliates. There are currently 12 funds in the Flag Investors/ISI Funds and
Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman
serves as a Director of three funds in the Fund Complex. Mr. Medaugh serves as
Director and President of one fund and as President of two other funds in the
Fund Complex. Mr. Hale serves as President and Director of one fund, Vice
President of one fund and as a Director of 10 other funds in the Fund Complex.
Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald, and Woolf serve as Directors
of each fund in the Fund Complex. Ms. Rimel serves as Director of five funds in
the Fund Complex. Ms. Lazar serves as Vice President and Ms. Butler and Ms.
DeFlorio serve as Assistant Vice President of three funds in the Fund Complex.
Mr. Fearnow serves as Vice President of 10 funds in the Fund Complex. Mr.
Veilleux serves as Executive Vice President of one fund and as Vice President of
11 funds in the Fund Complex. Mr. Nelson serves as Vice President and Secretary,
Mr. Finelli serves as Treasurer, Mr. Stoken serves as Secretary and Ms. DePrine
serves as Assistant Secretary of each of the funds in the Fund Complex.
25
<PAGE>
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown or Armata in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of ICC, Alex. Brown, Armata or ISI may be considered to have received
remuneration indirectly. As compensation for his or her services as Director,
each Director who is not an "interested person" of the Fund (as defined in the
Investment Company Act) (a "Non-Interested Director") receives an aggregate
annual fee (plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his or her attendance at Board and committee meetings) from all
Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he or
she serves. Payment of such fees and expenses are allocated among all such funds
described above in proportion to their relative net assets. For the fiscal year
ended March 31, 1996, Non-Interested Directors' fees attributable to the assets
of the Fund totalled approximately $4,004. The following table shows aggregate
compensation and retirement benefits paid to each of the Fund's Directors by the
Fund and the Fund Complex, respectively, in the fiscal year ended March 31,
1996.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Retirement Estimated Total Compensation from the
Position for the Fiscal Year Ended Benefits Accrued as Annual Benefits Fund and Fund Complex Paid to
March 31, 1996 Part of Fund Expenses Upon Retirement Directors for the Fiscal Year
Ended March 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
*Edward S. Hyman $0 $0 $0 $0
Chairman and Director
*Richard T. Hale $0 $0 $0 $0
Vice Chairman and
Director
James J. Cunnane $533(1) $ + $19,500 $39,000 for service on 13 Boards in
Director the Fund Complex(5)
**N. Bruce Hannay $496(2) $ + $19,500 $35,786 for service on 13
Director Boards in the Fund Complex(5)
John F. Kroeger $623(3) $ + $24,500 $45,950 for service on 13
Director Boards in the Fund Complex(5)
Louis E. Levy $533(3) $ + $19,500 $39,000 for service on 13
Director Boards in the Fund Complex(5)
Eugene J. McDonald $533(1) $ + $19,500 $39,000 for service on 13
Director Boards in the Fund Complex(5)
***Rebecca W. Rimel $489(4) $ + $19,500 $29,250 service on 6
Director Boards in the Fund Complex
Harry Woolf $533(1) $ + $19,500 $39,000 for service on 13
Director Boards in the Fund Complex(5)
</TABLE>
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired on January 31, 1996 and is now deceased.
*** Elected to the Board on June 1, 1995.
+ The Fund Complex has adopted a retirement plan for eligible Directors, as
described below. The actuarially computed pension expense for the year
ended March 31, 1996 was approximately $7,000.
1 $533 of this amount has been deferred pursuant to a deferred compensation
plan.
2 $422 of this amount has been deferred pursuant to a deferred compensation
plan.
3 $0 of this amount has been deferred pursuant to a deferred compensation
plan.
4 $489 of this amount has been deferred pursuant to a deferred compensation
plan.
26
<PAGE>
5 One of these funds ceased on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned in his or her last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that was served after completion of the first five years, up to a
maximum annual benefit of 50% of the fee earned in his or her last year of
service. The fee will be paid quarterly, for life, by each Fund for which he or
she serves. The Retirement Plan is unfunded and unvested. Messrs. Kroeger and
Woolf have qualified but have not received benefits. The Fund has one
Participant, a Director who retired effective December 31, 1994, who has
qualified for the Retirement Plan and who will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his or her annual compensation pursuant to a
Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald, Woolf and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select various Flag and Alex. Brown Funds in which all
or part of their deferral account shall be deemed to be invested. Distributions
from the deferring Directors' deferral accounts will be paid in cash, in
generally equal installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act (the "Code of Ethics").
The Code of Ethics significantly restricts the personal investing activities of
all employees of the Advisor and the directors and officers of the Fund's
distributors. As described below, the Code of Ethics imposes additional, more
onerous, restrictions on the Fund's investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that all employees of the Advisor, any
director or officer of the Fund's distributors, and all Directors, preclear
personal securities investments (with limited exceptions, such as non-volitional
purchases or purchases which are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and preclearance
of the acquisition of securities in private placements. Furthermore, the Code of
Ethics provides for trading "blackout periods" that prohibit trading by
investment personnel and certain other employees within periods of trading by
the Fund in the same security.
7. INVESTMENT ADVISORY AND OTHER SERVICES
ISI serves as the Fund's investment advisor pursuant to an Investment
Advisory Agreement dated as of January 15, 1993 (the "Investment Advisory
Agreement") that was approved by the Board of Directors of the Fund (including a
majority of the "Non-Interested" Directors) on December 15, 1992 and by the sole
shareholder of the Fund on December 15, 1992.
27
<PAGE>
ISI is a registered investment advisor that was formed in January,
1991. ISI employs Messrs. Edward S. Hyman, the Fund's Chairman, and R. Alan
Medaugh, the Fund's President. Due to their stock ownership, Messrs. Hyman and
Medaugh may be deemed to be controlling persons of ISI. ISI is also investment
advisor to Total Return U.S. Treasury Fund, Inc. and Managed Municipal Fund,
Inc., open-end investment companies with net assets of approximately $ 468
million as of May 31, 1996.
To supplement its investment analysis, the Advisor may, from time to
time, subscribe to research services located in Canada and Mexico, which
research services may include information about Canada or Mexico, respectively,
such as: statistical and background information on the economy, information on
political developments and general political stability forecasts and
interpretation with respect to money markets, and performance information.
As described in the Fund's Prospectus, the Advisor (a) formulates and
implements continuing programs for the purchases and sales of securities, (b)
determines what securities (and in what proportion) shall be represented in the
Fund's portfolio, (c) provides the Fund's Board of Directors with regular
financial reports and analyses with respect to the Fund's portfolio investments
and operations, and the operations of comparable investment companies, (d)
obtains and evaluates pertinent information about economic, statistical and
financial information pertinent to the Fund, (e) takes, on behalf of the Fund,
all actions which appear to the Advisor necessary to carry into effect its
purchase and sale programs. Any investment program undertaken by the Advisor
will at all times be subject to policies and control of the Fund's Board of
Directors. The Advisor shall not be liable to the Fund or its shareholders for
any act or omission by the Advisor or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
Pursuant to the terms of the Advisory Agreement, as compensation for
its services, the Advisor receives an annual fee, paid monthly, in an amount
equal to .40% of the average daily net assets of the Fund.
The Advisor and the Administrator have agreed to waive, on a voluntary
basis, a proportionate amount of their respective fees or to reimburse the Fund
to the extent required so that the Fund's total operating annual expenses do not
exceed 1.25% of the Fund's average net assets. For the fiscal years ended March
31, 1996, March 31, 1995 and March 31, 1994, the Advisor received fees of
$261,577, $339,170 and $280,472, respectively, and from such fees, waived
$88,655, $112,435 and $90,031, respectively. Absent such waivers and
reimbursements, the Fund's total operating expenses would have been 1.47, 1.45%
and 1.44%, respectively, of the Fund's average daily net assets. The Advisor has
also agreed to reduce its aggregate fees attributable to the Fund on a monthly
basis for any fiscal year, to the extent required, so that the amount of the
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the Shares
are registered or qualified for sale as such limitations may be raised or
lowered from time to time. Currently, the most restrictive of such expense
limitations requires the Advisor to reduce its fees to the extent required so
that ordinary expenses of the Fund (excluding brokerage commissions, interest,
taxes and extraordinary expenses such as legal claims, liabilities, litigation
costs and indemnification related thereto) do not exceed 2.5% of the first $30
million of the Fund's average daily net assets, 2.0% of the next $70 million of
the Fund's average daily net assets and 1.5% of the Fund's average daily net
assets in excess of $100 million. In addition, if required to do so by any
applicable state securities laws or regulations, the Advisor will reimburse the
Fund to the extent required to prevent the expense limitations of any state law
or regulation from being exceeded. Expenses incurred pursuant to the Plan (see
"Distribution of Fund Shares" below) would not come within state expense
limitation requirements.
The Investment Advisory Agreement will continue in effect from year to
year if such continuance is specifically approved (a) at least annually by the
Fund's Board of Directors or by a vote of a majority of the outstanding Shares
and (b) by the affirmative vote of a majority of the Non-Interested Directors by
28
<PAGE>
votes cast in person at a meeting called for such purpose. The Fund or the
Advisor may terminate the Investment Advisory Agreement on sixty days' written
notice without penalty. The Investment Advisory Agreement will terminate
automatically in the event of assignment.
8. ADMINISTRATION
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, provides administration services to the Fund. Such services
include: monitoring the Fund's regulatory compliance, supervising all aspects of
the Fund's service providers, arranging, but not paying for, the printing and
mailing of prospectuses, proxy materials and shareholder reports, preparing and
filing all documents required by the securities laws of any state in which the
Shares are sold, establishing the Fund's budgets, monitoring the Fund's
distribution plans, preparing the Fund's financial information and shareholder
reports, calculating dividend and distribution payments and arranging for the
preparation of state and federal tax returns.
As compensation for such services, ICC is entitled to receive from the
Fund a fee equal to .20% of the Fund's average daily net assets. ICC and the
Advisor have agreed to waive, on a voluntary basis, a proportionate amount of
their respective fees to the extent required so that the Fund's total annual
operating expenses do not exceed 1.25% of the Fund's average net assets. For the
fiscal years ended March 31, 1996 and March 31, 1995 and the fiscal period from
January 1, 1994 through March 31, 1994, ICC received a fee of $130,789, $169,585
and $44,233, respectively, and from such fee, waived $44,327, $56,218 and
$14,429. ICC also serves as the Fund's transfer and dividend disbursing agent.
(See "Custodian, Transfer Agent, Accounting Services"). ICC is an affiliate of
Armata. The services of ICC to the Fund are not exclusive and ICC is free to
render similar services to others. ICC also provides accounting services to the
Fund.
Prior to January 1, 1994, Alex. Brown & Sons Incorporated ("Alex.
Brown") provided administration services to the Fund. For the period from April
1, 1993 through December 31, 1993, Alex. Brown received a fee of $96,003 and
from such fee, waived $30,586.
9. DISTRIBUTION OF FUND SHARES
Armata serves as the distributor for the Shares pursuant to a
Distribution Agreement dated January 15, 1993 between Armata and the Fund. The
Distribution Agreement provides that Armata has the exclusive right to
distribute the Shares, either directly or through other broker-dealers. Armata,
a Maryland corporation, is a broker-dealer that was formed in 1983 and is an
affiliate of ICC (the Fund's administrator and transfer agent).
The Distribution Agreement further provides that Armata will: solicit
and receive orders for the purchase of Shares; accept or reject such orders on
behalf of the Fund in accordance with the Fund's currently effective prospectus
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible; receive requests for redemption and transmit such
redemption requests to the Fund's transfer agent as promptly as possible;
respond to inquiries from the Fund's shareholders concerning the status of their
accounts with the Fund; provide the Fund's Board of Directors for their review
with quarterly reports required by Rule 12b-1; maintain such accounts, books and
records as may be required by law or be deemed appropriate by the Fund's Board
of Directors; and take all actions deemed necessary to carry into effect the
distribution of the Shares. Armata has not undertaken to sell any specific
number of Shares. The Distribution Agreement further provides that, in
connection with the distribution of Shares, Armata will be responsible for all
of its promotional expenses. The services of Armata to the Fund are not
exclusive, and Armata shall not be liable to the Fund or its shareholders for
29
<PAGE>
any act or omission by Armata or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
As compensation for providing distribution and related administrative
services as described above, the Fund will pay Armata, on a monthly basis, an
annual fee, equal to .40% of the average daily net assets of the Shares. Armata
expects to allocate on a proportional basis a substantial portion of its annual
fees to its investment representatives or up to all of its fees to
broker-dealers who enter into Sub-Distribution Agreements with Armata under
which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning the
status of its accounts and the operations of the Fund. For distribution services
for the fiscal years ended March 31, 1996 and March 31, 1995, Armata received
fees of $261,577 and $339,170, respectively, and paid $248,396 and $328,556 as
compensation to sub-distributors. No compensation was paid to financial
institutions or to Armata's investment representatives.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Shares (the "Plan"). Under the Plan, the Fund pays a fee to Armata for
distribution and other shareholder servicing assistance as set forth in the
Distribution Agreement, and Armata is authorized to make payments out of its
fees to its investment representatives, to Participating Dealers and to
Shareholder Servicing Agents. Payments to Participating Dealers and Shareholder
Servicing Agents, if applicable, may not exceed fees payable to Armata under the
Plan.
The Distribution Agreement, form of Sub-Distribution Agreement and the
Plan were approved by the Fund's Board of Directors, including a majority of the
Non-Interested Directors (who have no direct or indirect financial interest in
the Plan or the Distribution Agreement or any Sub-Distribution Agreement) on
December 15, 1992 and were approved by the sole shareholder of the Fund on
December 15, 1992. The Distribution Agreement and the Plan will remain in effect
from year to year as specifically approved (a) at least annually by the Fund's
Board of Directors and (b) by the affirmative vote of a majority of the Non-
Interested Directors, by votes cast in person at a meeting called for such
purpose.
In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed only
if the Directors make a similar determination in each subsequent year. The Plan
may not be amended to increase materially the fee to be paid pursuant to the
Distribution Agreement without the approval of the shareholders of the Fund. The
Plan may be terminated at any time, and the Distribution Agreement may be
terminated at any time upon sixty days' notice, without penalty, by a vote of a
majority of the Fund's Non-Interested Directors or by a vote of a majority of
the outstanding Shares. Any Sub-Distribution Agreement may be terminated in the
same manner at any time. The Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment (as defined
in the Investment Company Act).
30
<PAGE>
For the fiscal year ended March 31, 1996, the Fund paid $261,577 to
Armata, the Fund's distributor, pursuant to the Plan. Armata, in turn, paid the
distribution-related expenses of the Fund including one or more of the
following: advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges.
During the continuance of the Plan, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plan to Armata pursuant to the Distribution
Agreement, to Participating Dealers pursuant to Sub-Distribution Agreements and
to Shareholder Servicing Agents pursuant to Shareholder Servicing Agreements.
Such reports shall be made by the persons authorized to make such payments. In
addition, during the continuance of the Plan, the selection and nomination of
the Fund's Non-Interested Directors shall be committed to the discretion of the
Non-Interested Directors then in office.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Armata will allocate a portion of its
respective distribution fees as compensation for such financial institutions'
ongoing shareholder services. Although banking laws and regulations prohibit
banks from distributing shares of open-end investment companies such as the
Fund, according to interpretations by various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit or
restrict the activities of the Shareholder Servicing Agents in connection with
the Shareholder Servicing Agreements, the Fund may be required to alter
materially or discontinue its arrangements with the Shareholder Servicing
Agents. Such financial institutions may impose separate fees in connection with
these services and investors should review the applicable Prospectus and this
Statement of Additional Information in conjunction with any such institution's
fee schedule. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
For the fiscal years ended March 31, 1996 and March 31, 1995, Armata
received sales commissions of $261,577 and $339,170, respectively, and from such
amounts retained $248,397 and $328,556 in each such year, respectively.
Except as described elsewhere, the Fund pays or causes to be paid all
organizational expenses and all continuing expenses of the Fund, including,
without limitation: investment advisory, administration and distribution fees;
the charges and expenses of any registrar, any custodian or depository appointed
by the Fund for the safekeeping of cash, portfolio securities and other
property, and any transfer, dividend or accounting agent or agents appointed by
the Fund; brokers' commissions, if any, chargeable to the Fund in connection
with portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and corporate fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the maintenance of registration of the Fund and
its Shares with the SEC and various states and other jurisdictions (including
filing fees, legal fees and disbursements of counsel); the costs and expenses of
printing, including typesetting and distributing prospectuses of the Fund and
supplements thereto to the shareholders; all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing proxy statements and
reports to shareholders; fees and travel expenses of Non-Interested Directors
and Non-Interested members of any advisory board or committee; all expenses
incident to the payment of any dividend, distribution, withdrawal or redemption,
whether in Shares or in cash; charges and expenses of any outside service used
for pricing of the Shares; fees and expenses of legal counsel or independent
auditors, in connection with any matter relating to the Fund; membership dues of
industry associations; interest payable on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Directors) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by ISI, ICC or Armata.
31
<PAGE>
10. PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities for
the Fund, selection of broker-dealers and negotiation of commission rates. Since
purchases and sales of portfolio securities by the Fund are usually principal
transactions, the Fund incurs little or no brokerage commissions. Portfolio
securities are normally purchased directly from the issuer or from a market
maker for the securities. The purchase price paid to broker-dealers serving as
market makers usually includes a mark-up over the bid to the broker-dealer based
on the spread between the bid and asked price for the security. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter.
The Advisor's primary consideration in effecting security transactions
is to obtain, on an overall basis, the best net price and the most favorable
execution of orders. To the extent that the execution and prices offered by more
than one broker-dealer are comparable, the Advisor may, in its discretion,
effect transactions with dealers that furnish statistical, research or other
information or services which the Advisor deems to be beneficial to the Fund's
investment program. Such research services supplement the Advisor's own
research. Research services may include the following: statistical and
background information on the U.S., Canadian and Mexican economy, industry
groups and individual companies; forecasts and interpretations with respect to
the U.S., Canadian and Mexican money markets; information on federal, state,
local and political developments in the United States, Canada and Mexico;
portfolio management strategies; performance information on securities, indices
and investment accounts; information concerning prices of securities; the
providing of equipment used to communicate research information; and the
providing of access to consultants who supply research information. Certain
research services furnished by broker-dealers may be useful to the Advisor with
clients other than the Fund. Similarly, any research services received by the
Advisor through placement of portfolio transactions of other clients may be of
value to the Advisor in fulfilling its obligations to the Fund. No specific
value can be determined for research and statistical services furnished without
cost to the Advisor by a broker-dealer. The Advisor is of the opinion that
because the material must be analyzed and reviewed by its staff, its receipt
does not tend to reduce expenses, but may be beneficial in supplementing the
Advisor's research and analysis. Therefore, it may tend to benefit the Fund by
improving the quality of the Advisor's investment advice.
For the fiscal years ended March 31, 1996 and March 31, 1995, no
brokerage commissions were paid by the Fund.
The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of March 31, 1996, the
Fund held a 5.3% repurchase agreement issued by Goldman Sachs & Co. valued at
$2,980,000. Goldman Sachs & Co. is one of the Fund's "regular brokers or
dealers."
11. CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund may issue up to
twenty-five million Shares of its capital stock with a par value of $.001 per
Share.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and one class of
Shares. All Shares of the Fund regardless of class have equal rights with
respect to voting, except that with respect to any matter affecting the rights
of the holders of a particular series or class, the holders of each series will
vote separately. Any such series will be a separately managed portfolio and
shareholders of each series will have an undivided interest in the net assets of
that series. For tax purposes, the series will be treated as separate entities.
Generally, each class of Shares issued by a particular series will be identical
to every other class and expenses of the Fund (other than 12b-1 fees) are
32
<PAGE>
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively will be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and,
therefore, the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
The Fund's By-laws provide that any director of the Fund may be removed
by the shareholders by a vote of a majority of the votes entitled to be cast for
the election of Directors. A meeting to consider the removal of any Director or
Directors of the Fund will be called by the Secretary of the Fund upon the
written request of the holders of at least one-tenth of the outstanding Shares
of the Fund entitled to vote at such meeting.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The Fund's issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
12. REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
13. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), Airport Business Park, 200
Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of PNC Bank Corp., has
been retained to act as custodian of the Fund's investments. Barclays
International ("Barclays"), Johnson Smirk Building, Four Royal Mint Court,
London EC3N4HJ, has been retained to serve as the Fund's custodian with respect
to the Fund's foreign investments. PNC Bank and Barclays receive such
compensation from the Fund for their services in such capacities as may be
agreed to from time to time by PNC Bank, Barclays, and the Fund. Investment
Company Capital Corp., the Fund's administrator, 135 East Baltimore Street,
Baltimore, Maryland 21202 (telephone: (800) 882-8585) has been retained to act
as transfer and dividend disbursing agent. As compensation for providing these
services, ICC receives up to $15.00 per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For such services for
the fiscal year ended March 31, 1996, ICC received a fee of $74,221.
ICC also provides accounting services to the Fund. As compensation for
these services, ICC is entitled to receive an annual fee, calculated daily and
paid monthly, as shown below.
33
<PAGE>
Average Net Assets Accounting Services Fee
------------------ -----------------------
0 - $ 10,000,000 $13,000 (fixed fee)
$10,000,001 - $ 20,000,000 .100%
$20,000,001 - $ 30,000,000 .080%
$30,000,001 - $ 40,000,000 .060%
$40,000,001 - $ 50,000,000 .050%
$50,000,001 - $ 60,000,000 .040%
$60,000,001 - $ 70,000,000 .030%
$70,000,001 - $ 100,000,000 .020%
$100,000,001 - $ 500,000,000 .015%
$500,000,001 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services: express delivery service, independent pricing and storage. As
compensation for providing accounting services for the fiscal year ended March
31, 1996, ICC received fees of $57,976.
ICC also serves as the Fund's administrator.
14. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by the Fund's
independent accountants, Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. has
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 16, 1996, to Fund management's knowledge, the following
persons held beneficially or of record 5% or more of the Fund's outstanding
shares:
Alex. Brown & Sons Incorporated 14.20%*
135 East Baltimore Street
Baltimore, MD 21202
First Consumer National Bank 5.13%
9300 SW Gemini Drive
Beaverton, OR 97008-7106
As of such date, to Fund management's knowledge, Directors and officers
as a group owned less than 1% of the Fund's total outstanding Shares.
- ----------
* As of such date, to Fund Management's knowledge, Alex. Brown & Sons, Inc.
owned beneficially less than 1% of such Shares.
16. PERFORMANCE AND YIELD COMPUTATIONS
For purposes of quoting and comparing the performance of the Fund to
that of other open-end non-diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.
34
<PAGE>
Total Return Calculation
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1,
5 or 10 year periods (or fractional portion thereof)of a
hypothetical $1,000 payment made at the beginning of the 1,
5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's registration statement. During its first year of operation the
Fund may, in lieu of annualizing its total return, use an aggregate total return
calculated in the same manner. In calculating the ending redeemable value, the
maximum sales load is deducted from the initial $1,000 payment and all dividends
and distributions by the Fund are assumed to have been reinvested at net asset
value as described in the prospectus on the reinvestment dates during the
period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestment would be included as
would any recurring account charges that might be imposed by the Fund.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges before
being invested in Shares). The Fund will, however, disclose the maximum sales
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Calculated according to the SEC rules for the one-year period ended
March 31, 1996, the ending redeemable value of a hypothetical $1,000 payment for
the Fund's Shares was $1,096, resulting in a total return for such shares equal
to 9.58%. For the period from effectiveness of the Fund's registration statement
on January 15, 1993 to the end of the Fund's most recent fiscal year on March
31, 1996, the ending redeemable value of a hypothetical $1,000 payment was
$1,055, resulting in an average annual total return equal to 1.68%.
35
<PAGE>
Calculated according to the alternative computation which assumes no
sales charges and reinvestment of all distributions for the one-year period
ended March 31, 1996, the ending redeemable value of a hypothetical $10,000
investment in the Fund's Shares was $11,297, resulting in a total return for
such shares equal to 12.97%. For the period from effectiveness of the Fund's
registration statement on January 15, 1993 to the end of the Fund's most recent
fiscal year on March 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment was $10,877, resulting in an average annual total return
equal to 2.65%.
Yield Calculations
The yield based on the 30 day period ended March 31, 1996 was 9.12% and
was computed in the manner described below. The yield of the Fund is calculated
by dividing the net investment income per Share earned by the Fund during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period and analyzing the result on a semi-annual basis by adding one
to the quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. The Fund's yield calculations assume a
maximum sales charge of 3.00% for the Shares. The Fund's net investment income
per Share earned during the period is based on the average daily number of
Shares outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
Except as noted below, for the purpose of determining net investment
income earned during the period, interest earned on debt obligations held by the
Fund is calculated by computing the yield to maturity of each obligation based
on the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, based on the purchase price (plus actual
accrued interest), dividing the result by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued interest) in order
to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset value
per share. Undeclared earned income is net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be and is declared as a dividend shortly thereafter.
17. FINANCIAL STATEMENTS.
See next page.
36
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Statement of Net Assets
March 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Principal Value
Security Rate Date Value(dagger) (Note A)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CANADIAN SECURITIES - 12.17%
Province of British Columbia, Deb. 7.50% 6/9/14 C$ 6,000,000 $ 4,082,801
Government of Canada, Deb. 9.75 6/1/21 2,000,000 1,720,326
Government of Canada, Deb. 9.00 6/1/25 2,000,000 1,606,841
- -----------------------------------------------------------------------------------------------------
Total Canadian Securities
(Cost $8,010,023) 7,409,968
- -----------------------------------------------------------------------------------------------------
MEXICAN SECURITIES(1) - 13.53%
Mexican Treasury Cete 38.50* 4/3/96 Ps 8,463,450 1,120,216
Mexican Treasury Cete 39.44* 5/16/96 8,772,890 1,109,061
Mexican Treasury Cete 39.94* 6/6/96 6,570,000 812,083
Mexican Treasury Cete 39.87* 8/29/96 24,268,050 2,761,359
Mexican Treasury Cete 40.00* 10/3/96 22,089,570 2,431,499
- -----------------------------------------------------------------------------------------------------
Total Mexican Securities
(Cost $9,206,894) 8,234,218
- -----------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES - 68.12%
U.S. Treasury Bill 5.02 6/20/96 $ 9,000,000 8,899,600
U.S. Treasury Bond 10.375 11/15/09 9,850,000 12,341,745
U.S. Treasury Strip (Principal) 6.95* 11/15/09 14,500,000 5,721,526
U.S. Treasury Bond 8.75 5/15/17 10,250,000 12,404,099
U.S. Treasury Bond 7.25 8/15/22 2,000,000 2,092,188
- -----------------------------------------------------------------------------------------------------
Total U.S. Treasury Securities
(Cost $41,868,689) $41,459,158
- -----------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Statement of Net Assets (concluded)
March 31, 1996
Principal Value
Value+ (Note A)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 4.90%
Goldman Sachs & Co., 5.30%
Dated 3/29/96, to be repurchased on
4/1/96, collateralized by U.S. Treasury Bonds
with a market value of $3,039,838.
(Cost $2,980,000).................................. $2,980,000 $ 2,980,000
Total Investments in Securities - 98.72%
(Cost $62,065,606)**............................. 60,083,344
Other Assets in Excess of Liabilities, Net - 1.28% 776,883
Net Assets - 100.0%................................ $60,860,227
Net Asset Value and Redemption Price Per Share
($60,860,227 / 7,266,930 shares outstanding)..... $8.37
Offering Price Per Share
($8.37 / .970)................................... $8.63
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
* Yield as of March 31, 1996.
** Also aggregate cost for federal tax purposes.
+ Principal value is shown in local currency: Canadian dollars (C$),
Mexican pesos (Ps) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
-38-
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Statement of Operations
For the Year Ended March 31, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME (NOTE A):
Interest $ 6,959,377
EXPENSES:
Investment advisory fee (Note B) 261,577
Distribution fee (Note B) 261,577
Administration fee (Note B) 130,789
Transfer agent fee 74,221
Accounting fee (Note B) 57,976
Registration fee 35,001
Custodian fee 30,998
Legal 29,986
Audit 21,587
Printing and postage 16,221
Miscellaneous 12,658
Organizational expense (Note A) 10,526
Directors' fees 3,921
Insurance 2,856
Total expenses 949,894
Less: Fees waived (Note B) (132,982)
Net expenses 816,912
Net investment income 6,142,465
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 2,693,664
Net realized foreign exchange loss (5,576,291)
Change in unrealized appreciation/(depreciation) of investments 4,860,869
Change in unrealized appreciation/(depreciation) on translation of assets
and liabilities denominated in foreign currencies 77,092
Net gain on investments 2,055,334
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,197,799
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
-39-
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Statement of Changes in Net Assets
For the Year Ended March 31,
----------------------------
1996 1995
- --------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $6,142,465 $ 5,973,084
Net realized loss from security and
foreign currency transactions (2,882,627) (12,027,382)
Change in unrealized appreciation/(depreciation)
of investments 4,860,869 (798,039)
Change in unrealized appreciation/(depreciation)
on translation of assets and liabilities
denominated in foreign currencies 77,092 (63,148)
Net increase/(decrease) in net assets resulting
from operations 8,197,799 (6,915,485)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income -- (3,760,903)
Net realized short-term gains -- (621,691)
Return of capital-tax (5,474,647) (2,448,605)
Total distributions (5,474,647) (6,831,199)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 762,541 and 843,587
shares, respectively 6,579,788 7,637,704
Value of 335,134 and 414,693 shares issued in
reinvestment of dividends, respectively 2,852,645 3,689,590
Cost of 2,056,598 and 2,858,167 shares
repurchased, respectively (17,587,616) (24,909,993)
Total decrease in net assets derived from capital
share transactions (8,155,183) (13,582,699)
Total decrease in net assets (5,432,031) (27,329,383)
NET ASSETS:
Beginning of period 66,292,258 93,621,641
End of period 60,860,227 66,292,258
See accompanying Notes to Financial Statements.
-40-
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
For the Year Ended March 31, January 15, 1993*
------------------------------ through
1996 1995 1994 March 31, 1993
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 8.06 $ 9.53 $ 10.14 $ 10.00
Income from Investment Operations:
Net investment income 0.81 0.63 0.89 0.10
Net realized and unrealized gain/(loss)
on investments 0.22 (1.38) (0.58) 0.12
Total from Investment Operations 1.03 (0.75) 0.31 0.22
Less Distributions:
Dividends from net investment income
and short-term gains -- (0.45) (0.92) (0.08)
Return of capital (0.72) (0.27) -- --
Total distributions (0.72) (0.72) (0.92) (0.08)
Net asset value at end of period $ 8.37 $ 8.06 $ 9.53 $ 10.14
Total Return** 12.97% (8.31)% 2.77% 2.18%
Ratios to Average Daily Net Assets:
Expenses 1.25%(2) 1.25%(2) 1.25%(2) 1.25%(1)
Net investment income 9.49%(3) 7.04%(3) 7.04%(3) 7.62%(1)
Supplemental Data:
Net assets at end of period (000) $60,860 $66,292 $93,622 $40,937
Portfolio turnover rate 125% 104% 219% 104%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return excludes the effect of sales loads.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 1.47%, 1.45%, 1.44% and 2.19%
(annualized) for the years ended March 31, 1996, 1995, 1994 and for the
period ended March 31, 1993, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily net assets would have been 9.27%, 6.84%, 6.85% and
6.68% (annualized) for the years ended March 31, 1996, 1995, 1994 and for
the period ended March 31, 1993, respectively.
See accompanying Notes to Financial Statements.
-41-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Significant Accounting Policies -- North American Government Bond Fund, Inc.
(the "Fund") was organized as a Maryland Corporation on October 19, 1992
and commenced operations on January 15, 1993. The Fund is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Security Valuation -- Debt securities are generally traded in the
over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or by
an independent pricing service. Securities or other assets for which market
quotations are not readily available are valued at their fair value so
determined in good faith by the Investment Advisor under procedures
established and monitored by the Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized cost which
approximates market.
Repurchase Agreements -- The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an
agreed upon date and price. The seller, under a repurchase agreement, will
be required on a daily basis to maintain as collateral the value of the
securities subject to the agreement at not less than the repurchase price.
The agreement is conditioned upon the collateral being deposited under the
Federal Reserve book-entry system.
Foreign Currency Translation -- The Fund isolates that portion of its
realized gains resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales
of foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of interest recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid.
The Fund does not distinguish that portion of the unrealized appreciation of
the Fund that arises as a result of changes in the exchange rates from
fluctuations in market prices of investments during the period.
Federal Income Tax -- No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
The Fund has a capital loss carryforward of $1,066,645 (which may be carried
forward to offset future taxable capital gains, if any) which begins to
expire, if not previously utilized, in 2004.
Other -- Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when
applicable, the pro rata amortization of premiums and accretion of
discounts. Distributions to shareholders are recorded on the ex-dividend
-42-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
date. Income and capital gains distributions are determined in accordance
with U.S. federal income tax regulations, which may differ from generally
accepted accounting principles.
Costs incurred by the Fund in connection with its organization, registration
and the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") serves as the Fund's
investment advisor, and Investment Company Capital Corp. ("ICC") serves as
the Fund's administrator. As compensation for its advisory services, ISI
receives from the Fund an annual fee, calculated daily and paid monthly, at
the annual rate of 0.40% of the Fund's average daily net assets. As
compensation for its administrative services, ICC receives from the Fund an
annual fee, computed daily and paid monthly, at the annual rate of 0.20% of
the Fund's average daily net assets.
ISI and ICC have voluntarily agreed to reduce their respective annual fees
proportionately, if necessary, so that the Fund's annual expenses do not
exceed 1.25% of the Fund's average daily net assets. For the year ended
March 31, 1996, ISI and ICC waived fees of $88,655 and $44,327,
respectively.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $74,221 for
transfer agent services for the year ended March 31, 1996.
As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of the administrator, receives from the Fund an annual fee,
calculated daily and paid monthly, at an annual rate equal to 0.40% of the
Fund's average daily net assets. For the year ended March 31, 1996,
distribution fees were $261,577.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense for the
year ended March 31, 1996 was approximately $3,000.
C. Capital Share Transactions -- The Fund is authorized to issue up to 25
million shares of capital stock, par value $.001 per share, all of which
shares are designated as common stock.
D. Investment Transactions -- Purchases and sales of investment securities
other than short-term and U.S. Government obligations aggregated $3,519,036
and $14,348,059, respectively, for the year ended March 31, 1996. Purchases
and sales of U.S. Government obligations aggregated $52,347,273 and
$45,430,781, respectively.
At March 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $42,557
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $2,024,819.
E. Forward Currency Exchange Contracts -- Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in currency values. There were no outstanding contracts as of
March 31, 1996.
F. Net Assets -- At March 31, 1996, net assets consisted of:
Paid-in capital $ 66,204,102
Accumulated net realized loss
from security and foreign
currency transactions (3,362,258)
Unrealized depreciation of
investments (1,982,262)
Unrealized translation gain 645
------------
$ 60,860,227
-43-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
North American Government Bond Fund, Inc.:
We have audited the accompanying statement of net assets of North American
Government Bond Fund, Inc. as of March 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
March 31, 1996 by correspondence with the custodians. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of North
American Government Bond Fund, Inc. as of March 31, 1996 and the results of its
operations for the year then ended and the changes in its net assets and its
financial highlights for each of the respective periods presented, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 10, 1996
-44-
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated "A" has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Debt
rated "BB", has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating. Debt rated "B" has a greater vulnerability to
default but currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating. Debt rated "CCC" has a
currently identifiable vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely payment of interest
and repayment of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating. The rating
"CC" typically is applied to debt subordinated to senior debt that is assigned
an actual or implied "CCC" rating. The rating "C" typically is applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating
"CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The ratings from "AA" to "B" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
Moody's Bond Ratings
Bonds which are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
A-1
<PAGE>
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than Aaa securities. Bonds rated A possess
many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment some time in the future. Bonds rated Baa are
considered as medium grade obligations (i.e., they are neither highly protected
nor poorly secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Bonds rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class. Bonds rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small. Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest. Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Bonds rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa to B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
Standard & Poor's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by Standard
& Poor's, which uses the numbers 1, 2 and 3 to indicate relative degree of
safety. The designation A-1+ indicates there is an "overwhelming degree" of
safety with regard to the capacity for timely payment. The designation A-1
indicates that the degree of safety regarding timely payment is strong. The
designation A-2 indicates the capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1. Issues carrying the A-3 designation have an
adequate capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated "B" are regarded as having only
speculative capacity for timely payment. The rating "C" is assigned to
short-term debt obligations with a doubtful capacity for repayment. An issue
rated "D" is in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured sources
of alternate liquidity.
A-2
<PAGE>
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-3
