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 Brian C. Nelson
Director Vice President and Secretary
Eugene J. McDonald Carrie L. Butler
Director Vice President
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Harry Woolf Denice DeFlorio
Director Assistant Vice President
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]
ANNUAL REPORT
March 31, 1996
<PAGE>
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the fiscal year
ended March 31, 1996.
The Fund's objective is to seek 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 than is possible from a
portfolio of only U.S. Treasury securities over the long term.
The Fund's total return for the fiscal year ended March 31, 1996 was 13.0%.
Lower interest rates in the U.S., Canada and Mexico, combined with a better
currency environment for the Canadian dollar and the Mexican peso, produced a
higher return than was available from the U.S. Treasury market alone. Since its
inception on January 15, 1993, the Fund has generated a cumulative total return
of 8.8%. Please see the chart below for a detailed performance comparison.
Performance Comparisons*
For the year ended March 31, 1996
North American Government
Bond Fund 13.0%
Lehman Brothers Intermediate
Treasury Index 9.1%
Lehman Brothers Emerging Americas
Index: Mexico Section 46.1%
* These figures assume the reinvestment of dividends and capital
gains distributions but exclude the impact of any sales charge. If the
sales charge was reflected, the performance quoted would be lower. The
unmanaged indices listed above are widely recognized as indicators of
performance in their respective sectors. 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. Please review the Additional Performance
Information on page 5.
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 year.
PORTFOLIO MIX
(% of Investments)
1995 1996
------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S. 65.8% 76.4% 72.8% 80.3% 74.3%
Canada 25.6 8.4 11.9 9.9 12.2
Mexico 8.6 15.2 15.3 9.8 13.5
PORTFOLIO MATURITY
(In Years)
1995 1996
------------------------------ ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S. 10.4 11.9 14.2 14.3 12.2
Canada 18.0 21.0 18.1 20.5 22.2
Mexico 0.3 0.3 0.3 0.2 0.3
Average 11.3 10.9 12.4 13.5 11.7
Review of Fiscal 1996
As the fiscal year began, adverse political events unfolded in Canada due
to the pending vote on separation of the Quebec Province from Canada. Early in
the fiscal year, we reduced the Fund's investments in Canada from 25.6% of the
portfolio to 8.4%. As political peace and effective government actions on
deficit reduction emerged toward the end of the fiscal year, we increased the
Fund's Canadian investments to 12.2% of the portfolio. We also modestly
increased the level of investments in Mexico during the fiscal year, from 8.6%
to 13.5%. The resolve of the Mexican government to hold the line on government
spending even in the face of the worst recession since the 1930s, along with
political calm,
1
<PAGE>
OUTLOOK FOR NORTH AMERICA
has produced relative stability in the currency market. Mexico's high interest
rate policy has benefited fixed-income investors.
In the U.S., a mid-year growth scare temporarily increased interest rates.
By September 1995, we had lengthened the average maturity of the Fund's
investments in U.S. Treasuries from 10.4 years to 14.2 years. In the first
quarter of 1996, we reduced this section's average maturity from 14.3 years to
12.2 years as another temporary growth scare seemed to be unfolding.
Outlook for Fiscal 1997
Our outlook calls for declining U.S. interest rates over the next fiscal
year. The foreign exchange strength of the U.S. dollar seems likely to continue
in fiscal year 1997, creating a favorable investment backdrop for North America.
In addition, the picture for Canadian inflation and upcoming cuts in government
spending at both the federal and provincial levels appear positive for bond
investors. Mexico is likely to see economic growth pick up during the next
twelve months. High rates on Mexican Treasury bills (Cetes) and a relatively
stable peso are additional advantages for fixed-income investors. 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
April 12, 1996
Outlook for the U.S.
The economy firmed in early 1996 due to better weather after the blizzards
and an end to the Boeing strike and government shutdowns. Adding to this
stimulus, auto rebates brought some sales forward, and a drop in mortgage rates
in late 1995 spurred housing. The bond market reacted to this burst of growth by
pushing up interest rates 75 basis points (0.75%), from 6.00% to 6.75% on long
maturity Treasuries. Because of the jump in Treasury rates, mortgage rates
backed-up, erasing most of their late 1995 drop. Now, along with a softer
housing sector, auto dealers and department stores tell us that sales have
slowed in March.
During previous economic soft landings there have been growth scares that
provoked similar jumps in bond yields. These quick market reactions have cooled
the pace of the economy, allowing interest rates to resume a declining trend. We
expect the recent jump in rates will be listed as another successful market
precautionary move and will also lead to lower rates.
The economy is likely to remain sluggish throughout 1996 due to a number of
macro economic forces. First, Federal Reserve easing typically takes at least
two years to lift the economy. The Federal Reserve began to ease in 1995,
meaning that a growth response is unlikely before 1997. Interest rates are high;
for example, the Prime Rate is almost 2% above the yield on 10-year Treasuries.
This is more typical of an economy entering a recession, not an upturn.
Second, credit card delinquencies and personal bankruptcies are also at
high, recession-
2
<PAGE>
OUTLOOK FOR NORTH AMERICA (continued)
ary levels. Retail sales gains have slowed from 8% to 4% partly because of a
high consumer debt burden. Substantial retail sales growth usually occurs
after a period of consumer installment debt liquidation. So far, the
consumer is still adding debt.
Finally, capital spending has slowed from 10% growth to 5%, which is
typical of a slowing economy. Unlike 1994, foreign economies are slowing, making
it likely that export growth will slow and hold back 1996 growth.
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 1996 as following this general pattern, which
is good for bond investors.
ISI ECONOMIC FORECAST
1996 1997
1st Qtr. 2nd Qtr.* 3rd Qtr.* 4th Qtr.* 1st Qtr.*
REAL GDP 1.0% 1.5% 1.0% 1.0% 1.0%
GDP DEFLATOR** 1.5% 1.5% 1.5% 1.5% 1.5%
30-YEAR BOND
YIELDS 6.8% 6.5% 6.2% 6.0% 5.5%
* Estimated.
** A more accurate cost of living barometer than the Consumer Price Index.
Outlook for Canada
In 1995, real economic growth slowed from 4.6% to 2.4%. Exports were the
leading economic sector and the Canadian trade surplus moved up from C$15.0
billion to C$21.8 billion. Inflation was moderate, with the GDP deflator up only
2.0%, a rate similar to the U.S. inflation rate. Canadian interest rates were
above U.S. interest rates during 1995, with Canadian long-term rates averaging
about 150 basis points (1.50%) higher than U.S. long-term rates. The Canadian
dollar strengthened modestly during 1995 due to high interest rates and low
inflation. In 1996, Canadian real growth is likely to stay at about 2%, allowing
inflation to continue at a moderate pace. With long-term interest rates above
U.S. rates, 1996 is shaping up to be a good year.
Recently, the Canadian political picture has turned quite favorable. First,
the federal government has continued to hold down spending and is on track for a
balanced budget by the year 2000 (see chart below). Second, the new Ontario and
Quebec provincial governments have turned their attention to fixing their
deficits through budget cutting. Third, the Buchard government in the Province
of Quebec has stated a policy that prohibits new referendum on sovereignty until
late 1998 or early 1999. This policy should calm the waters, allowing both
Canada and Quebec to focus on governing rather than on the heated topic of
separation.
CANADA NOMINAL GOV'T SPENDING Y/Y %
95: 4Q -1.2%
[Graph here]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
78:1 78:2 78:3 78:4 79:1 79:2 79:3 79.4 80:1 80:2 80:3 80:4
Y/Y% 9.5 7.7 9.3 10.0 11.3 10.6 10.4 9.2 9.9 12.2 15.4 15.6
81:1 81:2 81:3 81:4 82:1 82:2 82:3 82:4 83:1 83:2 83:3 83:4
Y/Y% 15.0 14.6 17.0 17.6 16.6 15.4 12.3 13.4 8.8 9.5 7.5 4.6
84:1 84:2 84:3 84:4 85:1 85:2 85:3 85:4 86:1 86:2 86:3 86:4
Y/Y% 8.0 4.6 3.9 5.0 7.5 7.7 6.4 7.3 4.3 3.7 6.6 4.7
87:1 87:2 87:3 87:4 88:1 88:2 88:3 88:4 89:1 89:2 89:3 89:4
Y/Y% 5.0 7.3 4.4 6.1 7.8 7.3 9.6 7.9 7.0 9.1 8.8 8.8
90:1 90:2 90:3 90:4 91:1 91:2 91:3 91:4 92:1 92:2 92:3 92:4
Y/Y% 10.1 7.2 8.4 10.0 7.6 8.9 7.0 5.4 5.5 3.6 3.2 3.0
93:1 93:2 93:3 93:4 94:1 94:2 94:3 94:4 95:1 95:2 95:3 95:4
Y/Y% 2.2 1.8 0.7 0.0 -0.7 -1.3 -0.8 -0.9 0.3 0.3 -1.1 -1.2
96:1
Y/Y% NA
</TABLE>
Source: ISI Inc.
Canadian rates appear to have more room to decline than U.S. rates during
1996. The Canadian dollar is also likely to be relatively stable in 1996.
3
<PAGE>
OUTLOOK FOR NORTH AMERICA (concluded)
Outlook for Mexico
The Mexican economy suffered a major setback in 1995, recording a real
growth decline of 7% and a currency devaluation-induced inflation rate of 60%.
To stem the inflation tide, domestic demand was suppressed through wage gains of
roughly 20% less than inflation. Higher interest rates also restrained the
domestic economy and the government maintained a balanced budget posture despite
high unemployment. Exports were strong, jumping from 14.2% of the economy in
1994 to an estimated 30.2% of the economy in 1995. As a result, the trade
balance swung from a large deficit position of -$18 billion in 1994 to a surplus
of +$8 billion in 1995. Foreign exchange reserves, which were an anemic $1
billion in late 1994, totaled over $15 billion in early 1996.
MEXICO FOREIGN EXCHANGE RESERVES
Mar 8 $15.8
[Graph appears here]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MAR 3 95 MAR 10 95 MAR 17 95 MAR 24 95 MAR 31 95 APR 7 95
$ MLNS NA NA 7.9 8.0 6.9 6.9
APR 14 9 5 APR 21 95 APR 28 95 MAY 5 95 MAY 12 95 MAY 19 95
$ MLNS 6.7 8.7 8.7 8.3 8.3 10.5
MAY 26 95 JUN 2 95 JUN 9 95 JUN 16 95 JUN 23 95 JUN 30 95 JUL 7 95
$ MLNS 10.6 10.5 10.7 10.3 10.4 10.1 14.4
JUL 14 95 JUL 21 95 JUL 28 95 AUG 4 95 AUG 11 95 AUG 18 95
$ MLNS 13.6 13.9 13.8 13.3 12.9 13.4
AUG 25 95 SEP 1 95 SEP 8 95 SEP 15 95 SEP 22 95 SEP 29 95 OCT 6 95
$ MLNS 13.5 15.1 15.2 15.1 15.1 14.7 14.8
OCT 13 95 OCT 20 95 OCT 27 95 NOV 3 95 NOV 10 95 NOV 17 95
$ MLNS 13.8 13.7 13.6 14.2 14.1 13.7
NOV 24 95 DEC 1 95 DEC 8 95 DEC 15 95 DEC 22 95 DEC 29 95 JAN 5 96
$ MLNS 13.7 13.6 13.6 14.6 16.1 15.7 15.7
JAN 12 96 JAN 19 96 JAN 26 96 FEB 2 96 FEB 9 96 FEB 16 96
$ MLNS 16.0 16.0 16.0 15.4 15.5 15.8
FEB 23 96 MAR 1 96 MAR 8 96 MAR 15 96 MAR 22 96 MAR 29 96 APR 5 96
$ MLNS 15.8 16.0 15.8 15.8 15.8 15.5 15.7
APR 12 96 APR 19 96 APR 26 96 MAY 3 96 MAY 10 96
$ MLNS 15.6 15.7 15.6 NA NA
</TABLE>
Source: ISI Inc.
The Zedillo government has begun a step-by-step approach toward opening the
political process. Protracted negotiations with the Chiapas rebels have made
progress. The Attorney General, an opposition politician, has added credibility
to the government's political program. Congressional elections are slated for
1997.
We expect inflation to subside to the 25% range in 1996 with real growth of
3%. The banking industry must undergo significant change before it fully emerges
from the hard times of 1995. We see 1996 as a year of economic healing, with
high interest rates and a relatively stable peso rewarding bond investors.
Faster growth and lower inflation are likely in 1997.
4
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return With
Periods ended 3/31/96: Sales Charge(1)
- --------------------------------------------------------------------------------
One Year 9.58%
- --------------------------------------------------------------------------------
Since Inception (1/15/93) 1.68%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
January 15, 1993 - March 31, 1996
[Graph appears here]
ISI LEHMAN BROTHERS
NORTH AMERICAN CONSUMER LEHMAN BROTHERS EMERGING AMERICAS
GOVERNMENT PRICE INTERMEDIATE INDEX:
BOND FUND INDEX TREASURY INDEX MEXICO SECTION
1/93 9,700 10,000 10,000 10,000
3/93 9,911 10,070 10,185 10,568
3/94 10,186 10,323 10,423 11,361
3/95 9,339 10,624 10,868 9,138
3/96 10,550 10,894 11,857 13,352
(1) Assumes maximum sales charge of 3.0%.
* These figures assume the reinvestment of dividends and capital gains
distributions. The indices listed above are unmanaged and are widely
recognized as indicators of performance in their respective sectors. The
Lehman Brothers Intermediate Treasury Index is a performance indicator of
the intermediate-term U.S. Treasury market, the CPI is a general indicator
of inflation and the Lehman Brothers Emerging Americas Index: Mexico Section
is an indicator of the interest rate structure of Mexican government and
private corporate debt. Management is not aware of any single index that is
truly representative of the Fund since the Fund's assets are allocated
across three different countries and each country's weighting is
periodically adjusted to reflect the advisor's outlook on current market
conditions. Past performance is not an indicator of future results.
Fund's inception through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its currently effective 3.0% maximum
sales charge.
While this table is required by SEC rules, such comparisons are of limited
utility since the indices shown are not adjusted for sales charges and ongoing
management, distribution and operating expenses applicable to the Fund. An
investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The Fund's 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.
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.
5
<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>
6
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
Statement of Net Assets (concluded)
March 31, 1996
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) $8.63
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
* Yield as of March 31, 1996.
** Also aggregate cost for federal tax purposes.
(dagger) Principal value is shown in local currency: Canadian dollars (C$),
Mexican pesos (Ps) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
7
<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.
8
<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.
9
<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.
10
<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
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<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
recorded on the ex-dividend 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
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<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
13
