ISI
North American
Government Bond Fund Shares
- --------------------------------------------------------------------------------
Directors and Officers
Edward S. Hyman R. Alan Medaugh
Chairman President
Richard T. Hale Gary V. Fearnow
Vice Chairman Vice President
James J. Cunnane Nancy Lazar
Director Vice President
John F. Kroeger Edward J. Veilleux
Director Vice President
Louis E. Levy Scott J. Liotta
Director Vice President
Eugene J. McDonald Carrie L. Butler
Director Vice President
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Harry Woolf Edward J. Stoken
Director Secretary
Laurie D. DePrine
Assistant Secretary
Investment Objective
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.
================================================================================
Investment Advisor
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
================================================================================
Shareholder Servicing Agent
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
================================================================================
Distributor
Armata Financial Corp.
P.O. Box 515
Baltimore, MD 21203
ISI Mutual Funds
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
ISI International Strategy and Investment
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American Government
Bond Fund, Inc.)
[North American Logo]
SEMI-ANNUAL REPORT
September 30, 1996
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the six months
ended September 30, 1996.
The Fund seeks a high level of current income consistent with prudent
investment risk by investing in government fixed-income securities of the U.S.,
Canada and Mexico. We believe that by investing in all three North American
markets, the Fund can generate a higher yield over the long term than is
possible from a portfolio of only U.S. Treasury securities.
For the first half of this fiscal year, the Fund's total return was 4.95%.
During the six months, long-term Treasury rates rose from 6.72% to 6.92%, which
resulted in a six-month total return of -0.4% for the 30-year Treasury. The
unfavorable market performance in the U.S. was offset by the Fund's Canadian and
Mexican holdings. Since its inception on January 15, 1993, the Fund has
generated a cumulative total return of 14.15%. Figures for the Fund's
performance assume the reinvestment of dividends and capital gains distributions
and exclude the impact of any sales charge.
Portfolio Management
Our investment approach is to actively manage the portfolio, adjusting the
Fund's average maturity and percentage weighting across the U. S., Canada and
Mexico as we anticipate changes in the market. The following table illustrates
the structure of the portfolio in these two critical areas over the past 18
months.
Portfolio Mix
(% of Investments)
3/31/95 9/30/95 3/31/96 9/30/96
U.S. 65.8% 72.8% 74.3% 68.1%
Canada 25.6 11.9 12.2 14.6
Mexico 8.6 15.3 13.5 17.3
Portfolio Maturity
(In Years)
3/31/95 9/30/95 3/31/96 9/30/96
U.S. 10.4 14.2 12.2 14.7
Canada 18.0 18.1 22.2 22.4
Mexico 0.3 0.3 0.3 0.2
During the last six months, we increased the Fund's investments in Canada
and Mexico, while we marginally reduced the Fund's investments in the U. S. The
improving economic climate in Canada and Mexico caused us to shift the Fund's
asset mix a bit. Our U. S. market outlook continues to be positive, and during
the past six months we extended the maturity of the Fund's U.S. holdings from
12.2 years to 14.7 years. For more details, please see the section titled
Outlook for North America that follows this letter.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
R. Alan Medaugh
President
October 18, 1996
1
<PAGE>
Outlook for North America
Review of the U.S.
In early 1996, mortgage rates fell sharply, the Fed eased slightly, and
refinancing activity surged, all giving the economy a temporary lift that now
appears to have run its course.
Mortgage rates are now back above 8%, the Fed has stopped easing,
refinancing activity has dried up, the consumer debt problem has gotten worse,
banks have become less willing to lend, and oil price increases may be taking a
notch out of discretionary spending. Auto and housing have peaked. Earnings and
capital spending are slowing. Today's relatively flat yield curve is consistent
with 1% to 2% real growth, which is about what we are now seeing.
The economy is likely to remain sluggish for the remainder of the year into
1997. As in past soft landings, growth scares and the resulting interest rate
jumps have worked to produce slow but sustainable growth with low inflation and
declining interest rates. We see the rest of 1996 and the first half of 1997
following this general pattern. This should produce a good environment for bond
investments. Below is a summary of our U.S. Outlook.
================================================================================
ISI ECONOMIC FORECAST
96:1Q 96:2Q 96:3Q 96:4Q* 97:1Q* 97:2Q* 97:3Q*
- --------------------------------------------------------------------------------
Real GDP 2.0% 4.8% 2.0% 1.0% 1.0% 1.0% 3.5%
- --------------------------------------------------------------------------------
GDP Deflator** 2.2% 1.8% 2.0% 1.5% 1.5% 1.5% 2.0%
- --------------------------------------------------------------------------------
30-Year Bond
Yields*** 6.7% 6.9% 6.9% 6.5% 6.0% 5.7% 5.9%
- --------------------------------------------------------------------------------
Fed Funds
Rate*** 5.2% 5.2% 5.2% 5.2% 5.0% 4.8% 4.8%
- --------------------------------------------------------------------------------
* Estimated.
** A more accurate cost of living barometer than the CPI.
*** End of quarter.
Review of Mexico
General
The devaluation of the peso in 1994-1995 spurred exports while it curtailed
domestic demand. The export boom swung the trade balance from a negative $1.5
billion per month to a positive $0.5 billion per month in the space of one year
(see chart below).
MEXICO EXPORTS
Aug $7731.8
[Graph appears here--See plot points below]
88:1 1,693.7
88:2 1,861.0
88:3 1,773.0
88:4 1,822.8
88:5 1,871.5
88:6 1,763.9
88:7 1,662.8
88:8 1,822.2
88:9 1,518.8
88:10 1,433.2
88:11 1,684.7
88:12 l,657.5
89:1 1,800.1
89:2 1,805.7
89:3 1,877.7
89:4 2,020.4
89:5 2,035.3
89:6 2,071.8
89:7 1,961.4
89:8 1,869.9
89:9 1,790.5
89:10 1,791.9
89:11 1,846.7
89:12 1,893.6
90:1 2,256.4
90:2 2,148.6
90:3 1,982.4
90:4 1,818.8
90:5 1,937.8
90:6 1,799.8
90:7 2,094.1
90:8 2,338.9
90:9 2,629.7
90:10 2,659.3
90:11 2,656.0
90:12 2,516.7
91:1 2,526.9
91:2 2,191.5
91:3 2,051.5
91:4 2,523.8
91:5 2,498.7
91:6 2,205.4
91:7 3,856.3
91:8 3,410.3
91:9 3,505.1
91:10 3,627.8
91:11 3,566.6
91:12 3,541.8
92:1 3,484.7
92:2 3,634.1
92:3 3,856.0
92:4 3,926.5
92:5 3,895.6
92:6 3,960.6
92:7 4,046.9
92:8 3,754.4
92:9 3,899.4
92:10 3,872.4
92:11 3,768.5
92:12 4,096.6
93:1 3,847.5
93:2 4,100.4
93:3 4,219.8
93:4 4,360.1
93:5 4,178.3
93:6 4,501.5
93:7 4,348.6
93:8 4,231.5
93:9 4,377.0
93:10 4,497.4
93:11 4,503.9
93:12 4,720.2
94:1 4,468.6
94:2 4,808.2
94:3 4,869.6
94:4 4,878.4
94 5 5,027.9
94:6 5,094.0
94:7 4,984.8
94:8 5,209.4
94:9 5,020.9
94:10 5,164.8
94:11 5,963.7
94:12 5,392.0
95:1 6,397.4
95:2 6,337.3
95:3 6,404.1
95:4 6,126.1
95:5 6,799.4
95:6 6,512.9
95:7 6,349.0
95:8 7,071.1
95:9 6,983.2
95:10 6,901.5
95:11 6,753.1
95:12 6,906.5
96:1 7,636.8
96:2 7,381.2
96:3 7,185.2
96:4 8,282.9
96:5 7,748.8
96:6 7,397.0
96:7 8,462.4
96:8 7,842.9
96:9 8,469.4
96:10 NA
Source: ISI Inc.
Over the same one-year time frame, the domestic economy sustained a
stunning 60% decline in retail sales activity (see chart below). High interest
rates and a deep cut in
MEXICO REAL RETAIL SALES
Jul 0.4
[Graph appears here--See plot points below]
88:1 1.55
88:2 1.51
88:3 1.40
88:4 1.31
88:5 1.38
88:6 1.35
88:7 1.30
88:8 1.31
88:9 1.30
88:10 1.37
88:11 1.36
88:12 1.39
89:1 1.36
89:2 1.37
89:3 l.28
89:4 1.42
89:5 1.38
89:6 1.38
89:7 1.38
89:8 1.36
89:9 1.47
89:10 1.38
89:11 1.37
89:12 1.43
90:1 1.33
90:2 1.24
90:3 1.31
90:4 1.27
90:5 1.31
90:6 1.33
90:7 1.30
90:8 1.27
90 9 1.29
90:10 1.24
90:11 1.38
90:12 1.27
91:1 1.34
91:2 1.28
91:3 1.20
91:4 1.33
91:5 1.31
91:6 1.26
91:7 1.30
91:8 1.34
91:9 1.24
91:10 1.28
91:11 1.27
91:12 1.22
92:1 1.26
92:2 1.37
92:3 1.35
92:4 1.33
92:5 1.25
92:6 1.24
92:7 1.24
92:8 1.13
92:9 1.21
92:10 1.53
92:11 1.10
92:12 1.04
93:1 1.15
93:2 1.13
93:3 1.13
93:4 1.02
93:5 1.10
93:6 1.10
93:7 1.07
93:8 1.02
93:9 0.99
93:10 0.98
93:11 0.91
93:12 0.93
94:1 0.96
94:2 0.98
94:3 0.97
94:4 1.03
94:5 1.03
94:6 1.03
94:7 1.01
94:8 1.01
94:9 1.03
94:10 0.99
94:11 0.97
94:12 0.98
95:1 0.89
95:2 0.79
95:3 0.76
95:4 0.63
95:5 0.58
95:6 0.56
95:7 0.55
9S:8 0.55
95:9 0.53
95:10 0.51
95:11 0.51
95:12 0.48
96:1 0.46
96:2 0.46
96:3 0.44
96:4 0.44
96:5 0.44
96:6 0.43
96:7 0.42
96:8 0.42
96:9 NA
96:10 NA
Source: ISI Inc.
2
<PAGE>
Outlook for North America
(continued)
real wages were the major factors behind the steep decline in domestic activity.
The squeeze was so dramatic that it raised concerns about political stability.
Despite the difficult economic backdrop, the political picture has been
stable. The opening up of the electoral process and the decentralizing of
federal government power is slowly evolving. The Zedillo government is
participating, especially in opening the election process. Zedillo's control of
the ruling party, the PRI, is important to the process. The 1997 Congressional
election is the next major test. The present political calm is based on the
assumption that a gradual ceding of political power by the President and the PRI
will take place. If that assumption comes into question, the result will be
disturbing to the financial markets. So far, recent state and local elections
show the process is on track, and the markets have responded positively.
Outlook
The economy has bottomed, benefiting from the strong export picture. The
peso was pushed too low in 1995 and its recent stability versus the U. S.
dollar, despite much higher Mexican inflation, has brought it back in line.
Going forward, Mexican inflation must continue to come down. The markets
expect progress and are hoping inflation will be back under 10% by the end of
1997. A new round of peso weakness is likely if inflation stays at its current
20% rate. We expect to see lower inflation and a continuation of a high interest
rate policy. Mexican investments are likely to generate good returns given the
current direction of the economy and politics.
Review of Canada
General
The Canadian government picture has turned around dramatically since its
1993 low point. The improvement has come from higher government receipts and a
contraction in outlays. As a result, the deficit has shrunk from C$45 billion to
C$21 billion over the last three years (see chart below). In addition,
provincial governments have gotten into the game by working to balance their
budgets. The result is a sharply curtailed dependence on foreign investors.
CANADA BUDGET DEFICIT 12 Mo. Sum
Jun-21
[Graph appears here--See plot points below]
87:1 -31
87:2 -31
87:3 -31
87:4 -30
87:5 -30
87:6 -29
87:7 -30
87:8 -29
87:9 -28
87:10 -29
87:11 -28
87:12 -28
88:1 -26
88:2 -27
88:3 -28
88:4 -28
88:5 -27
88:6 -27
88:7 -26
88:8 -27
88:9 -27
88:10 -27
88:11 -28
88:12 -28
89:1 -30
89:2 -29
89:3 -29
89:4 -28
89:5 -28
89:6 -29
89:7 -30
89:8 -31
89:9 -31
89:10 -30
89:11 -31
89:12 -30
90:1 -29
90:2 -28
90:3 -29
90:4 -28
90:5 -27
90:6 -26
90:7 -27
90:8 -27
90:9 -26
90:10 -27
90:11 -28
90:12 -29
91:1 -32
91:2 -33
91:3 -31
91:4 -33
91:5 -34
91:6 -36
91:7 -38
91:8 -38
91:9 -38
91:10 -39
91:11 -39
91:12 -38
92:1 -38
92:2 -37
92:3 -33
92:4 -33
92:5 -33
92:6 -33
92:7 -34
92:8 -33
92:9 -34
92:10 -34
92:11 -34
92:12 -35
93:1 -35
93:2 -36
93:3 -41
93:4 -43
93:5 -45
93:6 -45
93:7 -44
93:8 -43
93:9 -44
93:10 -44
93:11 -43
93:12 -43
94:1 -41
94:2 -41
94:3 -36
94:4 -35
94:5 -34
94:6 -33
94:7 -32
94:8 -32
94:9 -31
94:10 -30
94:11 -31
94:12 -29
95:1 -30
95:2 -30
95:3 -31
95:4 -31
95:5 -31
95:6 -31
95:7 -30
95:8 -30
95:9 -30
95:10 -29
95:11 -28
95:12 -28
96:1 -27
96:2 -26
96:3 -24
96:4 -23
96:5 -23
96:6 -21
96:7 -20
96:8 -19
96:9 NA
96:10 NA
Source: ISI Inc.
The reduction in government outlays has slowed the domestic sector of the
economy. Retail sales are up at only a 1.4% annual rate. This muted demand has
helped keep inflation low. At mid-year, the Canadian GDP price deflator was up
at only a 0.8% annual rate (see chart, page 4).
3
<PAGE>
Outlook for North America
(concluded)
Along with a positive inflation story, the Canadian dollar has also been
supported by the country's export performance. In July, goods exports were
growing at an 8.9% annual rate. For bond investors, the combination of low
credit demand, low inflation and strong exports has been good news. As a result,
Canadian rates have moved lower versus U.S. rates.
CANADA GDP DEFLATOR Y/Y %
96: 2Q 0.8%
[Graph appears here--See plot points below]
68:1 4.0
68:2 3.5
68:3 3.8
68:4 3.3
69:1 3.7
69:2 4.7
69:3 4.7
69:4 4.9
70:1 5.1
70:2 4.5
70:3 4.4
70:4 4.5
71:1 3.1
71:2 3.1
71:3 3.1
71:4 3.5
72:1 5.0
72:2 5.1
72:3 6.0
72:4 6.3
73:1 5.8
73:2 8.1
73:3 9.9
73:4 11.5
74:1 14.1
74:2 15.0
74:3 14.9
74:4 13.7
75:1 11.3
75:2 9.5
75:3 9.3
75:4 9.6
76:1 9.6
76:2 10.1
76:3 7.7
76:4 7.5
77:1 6.8
77:2 5.9
77:3 6.8
77:4 5.4
78:1 5.5
78:2 5.2
78:3 6.0
78:4 7.4
79:1 8.1
79:2 10.4
79:3 10.5
79:4 11.0
80:1 11.2
80:2 10.0
80:3 10.8
80:4 10.5
81:1 11.3
81:2 11.0
81:3 10.7
81:4 10.3
82:1 9.6
82:2 9.1
82:3 8.2
82:4 8.0
83:1 6.2
83:2 5.2
83:3 4.6
83:4 4.0
84:1 4.3
84:2 3.5
84:3 2.7
84:4 2.0
85:1 1.6
85:2 2.7
85:3 3.1
85:4 2.8
86:1 2.5
86:2 2.0
86:3 2.0
86:4 3.1
87:1 4.2
87:2 4.8
87:3 4.9
87:4 4.9
88:1 4.9
88:2 4.0
88:3 4.9
88:4 4.9
89:1 4.6
89:2 5.6
89:3 5.0
89:4 4.2
90:1 3.9
90:2 3.1
90:3 2.7
90:4 2.9
91:1 3.6
91:2 3.3
91:3 2.8
91:4 1.9
92:1 1.0
92:2 0.7
92:3 1.4
92:4 1.8
93:1 1.2
93:2 1.5
93:3 0.7
93:4 0.9
94:1 1.0
94:2 0.5
94:3 1.0
94:4 0.4
95:1 1.1
95:2 1.6
95:3 1.6
95:4 1.8
96:1 1.1
96:2 0.8
96:3 NA
96:4 NA
Source: ISI Inc.
Outlook
The forces producing lower inflation and a trade surplus are in place and
seem likely to continue benefiting investors. The political winds, which are now
fairly calm, may pick up as we enter 1997 because the Liberal government's
mandate will be drawing to a close. The specific problems with Quebec over the
turbulent issue of separation from Canada seem likely to surface again but not
until the late 1990s. In the meantime, the outlook for the Canadian market seems
good.
SEC Calculations
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management.The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include the Fund's total return, according to a standardized formula, for
various time periods through the end of the most recent calendar quarter. The
SEC total return figures differ from those we reported because the time periods
may be different and because the SEC calculation includes the impact of the
Fund's currently effective 3.00% maximum sales charge.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
Periods ended 9/30/96:
- --------------------------------------------------------------------------------
One Year 2.48%
- --------------------------------------------------------------------------------
Since Inception (1/15/93) 2.78%
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
4
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Principal Value
Security Rate Date Value+ (Note A)
- ------------------------------------------------------------------------------------------------------
<S> <C>
CANADIAN SECURITIES -- 14.61%
Province of British Columbia, Deb. 7.50% 6/9/14 C$ 6,000,000 $ 4,313,532
Government of Canada, Deb. 9.75 6/1/21 2,000,000 1,800,866
Government of Canada, Deb. 9.00 6/1/25 3,000,000 2,527,278
- ------------------------------------------------------------------------------------------------------
Total Canadian Securities
(Cost $8,807,840) 8,641,676
- ------------------------------------------------------------------------------------------------------
MEXICAN SECURITIES(1) -- 17.29%
Mexican Treasury Cete 22.34* 10/3/96 Ps 22,089,570 2,924,978
Mexican Treasury Cete 25.02* 11/28/96 8,544,240 1,088,830
Mexican Treasury Cete 26.75* 12/11/96 26,231,070 3,303,138
Mexican Treasury Cete 27.46* 1/2/97 12,808,010 1,585,454
Mexican Treasury Cete 28.09* 4/30/97 11,600,740 1,320,527
- ------------------------------------------------------------------------------------------------------
Total Mexican Securities
(Cost $10,267,038) 10,222,927
- ------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 57.80%
U.S. Treasury Strip (Principal) 7.135* 11/15/09 $14,500,000 5,778,758
U.S. Treasury Bond 10.375 11/15/09 9,850,000 12,017,000
U.S. Treasury Bond 10.375 11/15/12 1,750,000 2,213,750
U.S. Treasury Bond 8.75 5/15/17 10,250,000 12,122,224
U.S. Treasury Bond 7.25 8/15/22 2,000,000 2,042,188
- ------------------------------------------------------------------------------------------------------
Total U.S. Treasury Securities
(Cost $35,260,436) $34,173,920
- ------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets (concluded)
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Principal Value
Value+ (Note A)
- -----------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS -- 8.91%
Goldman Sachs & Co., 5.65%
Dated 9/30/96, to be repurchased on
10/1/96, collateralized by U.S. Treasury
Notes with a market value of $5,371,482.
(Cost $5,266,000) $5,266,000 $ 5,266,000
- -----------------------------------------------------------------------------------------
Total Investments in Securities -- 98.61%
(Cost $59,601,314)** 58,304,523
Other Assets in Excess of Liabilities, Net-- 1.39% 820,497
- -----------------------------------------------------------------------------------------
Net Assets-- 100.00% $59,125,020
=========================================================================================
Net Asset Value and Redemption Price Per Share
($59,125,020 / 7,032,973 shares outstanding) $8.41
=====
Offering Price Per Share
($8.41 / .970) $8.67
=====
</TABLE>
(1) Cetes are short-term Mexican government debt securities.
* Yields as of September 30, 1996.
** Also aggregate cost for federal tax purposes.
+ Principal value is shown in local currency: Canadian dollars (C$), Mexican
pesos (Ps) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
6
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Six Months Ended September 30, 1996
(Unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME (NOTE A):
Interest $ 3,339,603
EXPENSES:
Investment advisory fee (Note B) 117,946
Distribution fee (Note B) 117,946
Administration fee (Note B) 58,973
Transfer agent fee 41,750
Custodian fee 30,000
Accounting fee (Note B) 27,839
Audit 19,500
Legal 18,500
Registration fee 17,500
Printing and postage 15,000
Organizational expense (Note A) 5,261
Miscellaneous 5,251
Directors' fees 2,500
Insurance 974
-----------
Total expenses 478,940
Less: Fees waived (Note B) (110,368)
-----------
Net expenses 368,572
-----------
Net investment income 2,971,031
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments (4,841)
Net realized foreign exchange loss (889,518)
Change in unrealized appreciation or depreciation of investments 685,471
Change in unrealized appreciation or depreciation on translation of assets
and liabilities denominated in foreign currencies 441
Net loss on investments (208,447)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,762,584
===========
</TABLE>
See accompanying Notes to Financial Statements.
7
<PAGE>
North American Government Bond Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
September 30, 1996 Ended March 31,
(Unaudited) 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Increase/(DECREASE) in Net Assets:
Operations:
Net investment income $ 2,971,031 $ 6,142,465
Net realized loss from security and
foreign currency transactions (894,359) (2,882,627)
Change in unrealized appreciation or depreciation
of investments 685,471 4,860,869
Change in unrealized appreciation or depreciation
on translation of assets and liabilities
denominated in foreign currencies 441 77,092
----------- -----------
Net increase in net assets resulting
from operations 2,762,584 8,197,799
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (2,561,827) --
Return of capital-tax -- (5,474,647)
----------- -----------
Total distributions (2,561,827) (5,474,647)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 317,459 and 762,541
shares, respectively 2,631,730 6,579,788
Value of 161,648 and 335,134 shares issued in
reinvestment of dividends, respectively . . 1,332,589 2,852,645
Cost of 713,064 and 2,056,598 shares
repurchased, respectively (5,900,283) (17,587,616)
----------- -----------
Total decrease in net assets derived from capital
share transactions (1,935,964) (8,155,183)
----------- -----------
Total decrease in net assets (1,735,207) (5,432,031)
NET ASSETS:
Beginning of period 60,860,227 66,292,258
----------- -----------
End of period $59,125,020 $60,860,227
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE>
North American Government Bond Fund, Inc.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six For the Year For the Period
Months Ended Ended March 31, January 15, 1993(1)
September 30, 1996 ------------------------------- through
(Unaudited) 1996 1995 1994 March 31, 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 8.37 $ 8.06 $ 9.53 $ 10.14 $ 10.00
Income from Investment Operations:
Net investment income 0.42 0.81 0.63 0.89 0.10
Net realized and unrealized gain/(loss)
on investments (0.02) 0.22 (1.38) (0.58) 0.12
Total from Investment Operations 0.40 1.03 (0.75) 0.31 0.22
Less Distributions:
Dividends from net investment
income and short-term gains (0.36) -- (0.45) (0.92) (0.08)
Return of capital -- (0.72) (0.27) -- --
Total distributions (0.36) (0.72) (0.72) (0.92) (0.08)
Net asset value at end of period $ 8.41 $ 8.37 $ 8.06 $ 9.53 $ 10.14
Total Return(2) 4.95% 12.97% (8.31)% 2.77% 2.18%
Ratios to Average Daily Net Assets:
Expenses(4) 1.25%(3) 1.25% 1.25% 1.25% 1.25%(3)
Net investment income(5) 10.13%(3) 9.49% 7.04% 7.04% 7.62%(3)
Supplemental Data:
Net assets at end of period (000) $59,125 $60,860 $66,292 $93,622 $40,937
Portfolio turnover rate 10% 125% 104% 219% 104%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Without the waiver of advisory fees (Note B), the ratio of expenses
to average daily net assets would have been 1.63% (annualized), 1.47%,
1.45%, 1.44% and 2.19% (annualized) for the six months ended September
30, 1996, for the years ended March 31, 1996, 1995, 1994 and for the period
ended March 31, 1993, respectively.
(5) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 9.75%
(annualized), 9.27%, 6.84%, 6.85% and 6.68% (annualized) for the six months
ended September 30, 1996, for the years ended March 31, 1996, 1995, 1994
and for the period ended March 31, 1993, respectively.
See accompanying Notes to Financial Statements.
9
<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
date. Income and
10
<PAGE>
Notes to Financial Statements (concluded)
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 six months
ended September 30, 1996, ISI and ICC waived fees of $73,579 and $36,789,
respectively.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $41,750 for
transfer agent services for the six months ended September 30, 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 six months ended September 30,
1996, distribution fees were $117,946.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the period January 1, 1996 through September 30, 1996 was
approximately $1,500 and the accrued liability was approximately $7,900.
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
$801,120 and $0, respectively, for the six months ended September 30, 1996.
Purchases and sales of U.S. Government obligations aggregated
$4,194,298 and $2,031,128, respectively.
At September 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $34,566
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $1,331,357.
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 September 30, 1996.
F. Net Assets -- At September 30, 1996, net assets consisted of:
Paid-in capital $64,268,138
Accumulated net realized loss
from security and foreign
currency transactions (3,847,413)
Unrealized depreciation of
investments (1,296,791)
Unrealized translation gain 1,086
-----------
$59,125,020
===========
11
