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, 1997
<PAGE>
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 and Secretary
Eugene J. McDonald Carrie L. Butler
Director Vice President
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Laurie D. Collidge
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
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the fiscal year
ended March 31, 1997.
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 total return over the long term
than is possible from a portfolio containing only U.S. Treasury securities.
The Fund's total return for the fiscal year ended March 31, 1997 was 7.90%.
The performance of the Mexican and Canadian sections improved the Fund's
overall results. For example, the Lehman Brothers Emerging Americas Index:
Mexico Section had a total return of 18.74% and the Lehman Brothers Canadian
Bond Index had a total return of 11.12%, both in U.S. dollars, compared to
the Lehman Brothers Intermediate U.S. Treasury Index's total return of 4.65%.
This is the second year in which the Fund's Mexican and Canadian investments
have positively impacted the Fund's overall performance. Since inception, the
Fund has generated a cumulative return of 17.37%. Please see the chart below
for a detailed performance comparison.
Performance Comparisons*
For the year ended March 31, 1997
North American Government Bond Fund 7.90%
Lehman Brothers Intermediate Treasury Index 4.65%
Lehman Brothers Emerging Americas Index:
Mexico Section 18.74%
*These figures assume the reinvestment of dividends and capital gains
distributions but exclude the impact of any sales charge. If the sales charge
were 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 6.
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)
1996 1997
------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S. 74.3% 69.9% 68.1% 78.3% 76.2%
Canada 12.2 14.1 14.6 10.5 11.0
Mexico 13.5 16.0 17.3 11.2 12.8
Portfolio Maturity
(In Years)
1996 1997
------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S.* 12.2 11.9 12.5 13.0 11.7
Canada 22.2 22.6 22.4 27.1 26.9
Mexico 0.3 0.3 0.2 0.2 0.1
Average 11.3 10.9 12.4 13.5 11.7
- ---------------------------------------------------
*Including reserves.
Review of Fiscal 1997
U.S. rates rose early in the fiscal year, so we increased the average
maturity of the U.S. section to take advantage of the high yields. In late
1996, as the U.S. economy again experienced strong growth, U.S. rates began
to climb. For capital preservation, we reduced the maturity of the U.S.
section, lowering it from 13.0 years in December 1996 to 11.7 years in March
1997.
Canadian bonds substantially outperformed U.S. issues through September,
but then as Canadian yields moved below U.S. yields, the Canadian dollar came
under pressure. As a
1
<PAGE>
Investment Advisor's Report (concluded)
result, we moved funds from Canadian issues to U.S. issues, reducing the
Canadian portfolio from 14.6% to 10.5% between September 1996 and December
1996.
Mexican rates (represented by 91-day Cetes) decreased during the fiscal
year from 39.9% in March 1996 to 21.3% in March 1997. Inflation declined, but
not as rapidly as rates, and money growth picked up. The peso was supported by
an influx of foreign direct investment. Because of upcoming elections and fast
money growth, we reduced the Mexican section from 17.3% in September 1996 to
12.8% in March 1997.
Please see our more detailed economic review for North America that follows
this letter.
Outlook for Fiscal 1998
At the end of fiscal 1997, the Fund was weighted toward the U.S., but
within the U.S. section we held reserves. We think that long-term Treasury rates
over 7%, accompanied by low inflation, will begin to curtail U.S. growth. As we
see the economy slowing through our proprietary weekly company surveys, we will
be reinvesting these reserves. By the fall we expect to see the economy slow and
long-term rates move back toward 6%. Lower U.S. rates in the second half of
fiscal 1998 should help the Fund's performance. The U.S. dollar is likely to be
stable, which also sets a good backdrop for Canadian and Mexican investments.
Both Canada and Mexico face national elections this fiscal year. The
election in Mexico is scheduled for July 6. Canadian Prime Minister Chretien has
called for an early election on June 2 because his Liberal party is well ahead
in the opinion polls. We expect the election process will provide a buying
opportunity in both bond markets. In Canada this opportunity is likely to occur
before the vote, while in Mexico it is likely to come after the vote.
Overall, the markets this fiscal year are likely to provide the Fund with
good total return opportunities.
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 28, 1997
2
<PAGE>
Outlook for North America
Review of U.S.
The U.S. economy has just put together two very strong quarters, resulting
in the fastest growth performance since mid-1994. As a result, the Federal
Reserve Board raised short-term rates by 25 basis points (0.25%), and Chairman
Greenspan is on record saying that the Federal Reserve could take further action
if growth remains strong. Treasury bond rates have moved above 7%, while
inflation as measured by the GDP Deflator hovers around 2%. The Federal Reserve
is likely to take one more rate step at its May meeting, raising short-term
rates another 25 basis points. We expect that the combination of higher
short-term and long-term rates will slow growth from a fast 4% pace in the first
quarter of 1997 to below 2% by the fourth quarter of 1997. In the second half of
fiscal year 1998, we expect rates to begin trending lower in reaction to slowing
growth. It is also likely that the Federal Reserve will begin lowering rates as
it sees a return to slow, steady growth.
We will be using our proprietary weekly company survey results (see chart
top right), the pace of unemployment claims, the direction of industrial
commodity prices and money growth to gauge when the economy has begun to slow.
When this occurs, we would begin recommitting our reserves to take advantage of
the capital gains opportunity from declining rates.
ISI COMPANY SURVEYS OVERALL AVERAGE
Retailers, Auto Dealers, Manufacturing Companies,
Homebuilders, Banks
0=Weak 100=Strong 4 Wk. Avg. April 11:51.2
[Graph appears here--see plot points below]
Level 4 Wk. Avg.
-------------------------------------
1/7/94 57.0 NA
1/14/94 60.0 NA
1/21/94 43.5 NA
1/28/94 48.4 52.2
2/4/94 51.0 50.7
2/11/94 43.8 46.7
2/18/94 53.5 49.2
2/25/94 55.9 51.0
3/4/94 49.2 50.6
3/11/94 51.6 52.5
3/18/94 52.2 52.2
3/25/94 50.9 51.0
4/1/94 52.7 51.9
4/8/94 53.2 52.3
4/15/94 52.1 52.2
4/22/94 53.3 52.8
4/29/94 55.2 53.4
5/6/94 51.5 53.0
5/13/94 51.8 52.9
5/20/94 53.7 53.0
5/27/94 55.9 53.2
6/3/94 52.8 53.5
6/10/94 55.0 54.3
6/17/94 53.6 54.3
6/24/94 55.5 54.2
7/1/94 55.1 54.8
7/8/94 54.7 54.7
7/15/94 52.9 54.5
7/22/94 57.3 55.0
7/29/94 56.6 55.4
8/5/94 56.7 55.9
8/12/94 55.3 56.5
8/19/94 56.1 56.2
8/26/94 55.9 56.0
9/2/94 56.8 56.0
9/9/94 61.3 57.5
9/16/94 51.4 56.4
9/23/94 50.3 54.9
9/30/94 50.6 53.4
10/7/94 57.3 52.4
10/14/94 54.9 53.3
10/21/94 55.9 54.7
10/28/94 59.6 56.9
11/4/94 50.0 55.1
11/11/94 56.7 55.5
11/18/94 56.2 55.6
11/25/94 53.8 54.2
12/2/94 52.6 54.8
12/9/94 53.0 53.9
12/16/94 53.8 53.3
12/23/94 54.2 53.4
12/30/94 59.7 55.1
1/6/95 62.8 57.6
1/13/95 54.6 57.8
1/20/95 56.0 58.3
1/27/95 52.6 56.5
2/3/95 50.0 53.3
2/10/95 51.6 52.6
2/17/95 53.4 51.9
2/24/95 56.4 52.8
3/3/95 53.1 53.6
3/10/95 52.0 53.7
3/17/95 54.5 54.0
3/24/95 55.6 53.8
3/31/95 53.2 53.8
4/7/95 56.1 54.9
4/14/95 51.3 54.1
4/21/95 52.4 53.3
4/28/95 49.5 52.3
5/5/95 48.1 50.3
5/12/95 48.7 49.6
5/19/95 51.7 49.5
5/26/95 54.0 50.6
6/2/95 55.0 52.3
6/9/95 53.9 53.6
6/16/95 50.9 53.5
6/23/95 52.4 53.1
6/30/95 51.5 52.2
7/7/95 53.5 52.1
7/14/95 52.3 52.4
7/21/95 52.2 52.4
7/28/95 56.0 53.5
8/4/95 53.8 53.6
8/11/95 53.5 53.9
8/18/95 52.4 53.9
8/25/95 51.5 52.8
9/1/95 53.1 52.6
9/8/95 54.7 52.9
9/15/95 53.7 53.2
9/22/95 53.8 53.8
9/29/95 50.8 53.3
10/6/95 48.0 51.6
10/13/95 44.4 49.3
10/20/95 46.0 47.3
10/27/95 42.8 45.3
11/3/95 44.2 44.4
11/10/95 48.0 45.3
11/17/95 49.7 46.2
11/24/95 49.9 48.0
12/1/95 42.8 47.6
12/8/95 42.0 46.1
12/15/95 40.7 43.9
12/22/95 40.2 41.4
12/29/95 45.5 42.1
1/5/96 47.1 43.4
1/12/96 45.1 44.5
1/19/96 42.7 45.1
1/26/96 47.7 45.6
2/2/96 47.5 45.7
2/9/96 45.7 45.9
2/16/96 52.6 48.4
2/23/96 53.6 49.9
3/1/96 53.2 51.3
3/8/96 54.0 53.3
3/15/96 48.8 52.4
3/22/96 47.5 50.9
3/29/96 49.9 50.1
4/5/96 51.3 49.4
4/12/96 47.3 49.0
4/19/96 47.3 49.0
4/26/96 52.0 49.5
5/3/96 51.5 49.5
5/10/96 53.1 51.0
5/17/96 49.0 51.4
5/24/96 52.2 51.4
5/31/96 50.6 51.2
6/7/96 52.6 51.1
6/14/96 49.5 51.2
6/21/96 47.4 50.0
6/28/96 48.8 49.6
7/5/96 50.7 49.1
7/12/96 45.6 48.1
7/19/96 46.6 47.9
7/26/96 45.4 47.1
8/2/96 46.9 46.1
8/9/96 48.0 46.7
8/16/96 48.6 47.2
8/23/96 49.1 48.2
8/30/96 49.0 48.7
9/6/96 51.1 49.4
9/13/96 47.7 49.2
9/20/96 47.6 48.8
9/27/96 47.1 48.4
10/4/96 49.6 48.0
10/11/96 49.0 48.3
10/18/96 47.8 48.4
10/25/96 48.6 48.8
11/1/96 45.7 47.8
11/8/96 46.1 47.1
11/15/96 46.5 46.7
11/22/96 46.5 46.2
11/29/96 45.8 46.2
12/6/96 45.6 46.1
12/13/96 43.9 45.5
12/20/96 43.2 44.6
12/27/96 46.7 44.9
1/3/97 46.3 45.0
1/10/97 47.6 45.9
1/17/97 46.4 46.7
1/24/97 50.0 47.6
1/31/97 48.1 48.0
2/7/97 52.4 49.2
2/14/97 51.6 50.5
2/21/97 50.1 50.6
2/28/97 49.8 51.0
3/7/97 55.0 51.6
3/14/97 53.6 52.1
3/21/97 52.2 52.7
3/28/97 51.0 52.9
4/4/97 50.2 51.8
4/11/97 51.4 51.2
4/18/97 50.1 50.7
4/25/97 46.6 49.6
5/2/97 48.1 49.1
Source: ISI Inc.
Slower growth would allow the bond-friendly underlying forces to reassert
their market influence. These strong secular forces that are holding down
inflation and could bring down rates are:
(bullet) Global Trade and Competition
(bullet) Worldwide Conservative Government Budget Policy
(bullet) Technology and Industrial Innovation
A downward trend in U.S. rates accompanied by a stable U.S. dollar would be
a strong positive background for investing in Canada and Mexico.
3
<PAGE>
Outlook for North America (continued)
Review of Mexico
The Mexican economy has recovered from the major peso devaluation that
caused real GDP to contract at -6.2% in 1995. Real GDP in 1996 bounced back at a
5.1% pace. The Mexican government has targeted at least a 4% real growth rate
for 1997 within the context of falling inflation and general financial market
stability. The 1994 peso devaluation resulted in an opportunity to expand
Mexican exports. Mexican exports and industrial production have responded by
surging. Recently, however, exports and industrial production have plateaued
(see chart below). The trade surplus at the end of 1996 was down to half the
level recorded shortly after the devaluation.
MEXICO INDUSTRIAL PRODUCTION
January: 110.9
[Graph appears here--see plot points below]
31-Jan-88 82.7
29-Feb-88 83.9
31-Mar-88 81.7
30-Apr-88 82.0
31-May-88 81.0
30-Jun-88 83.0
31-Jul-88 81.1
31-Aug-88 84.1
30-Sep-88 84.4
31-Oct-88 83.9
30-Nov-88 86.4
31-Dec-88 87.4
31-Jan-89 86.8
28-Feb-89 87.0
31-Mar-89 83.5
30-Apr-89 89.2
31-May-89 87.6
30-Jun-89 88.6
31-Jul-89 87.9
31-Aug-89 89.2
30-Sep-89 87.8
31-Oct-89 87.3
30-Nov-89 89.4
31-Dec-89 87.1
31-Jan-90 90.8
28-Feb-90 90.7
31-Mar-90 92.4
30-Apr-90 89.4
31-May-90 93.5
30-Jun-90 93.6
31-Jul-90 94.2
31-Aug-90 95.3
30-Sep-90 94.0
31-Oct-90 96.4
30-Nov-90 95.9
31-Dec-90 94.7
31-Jan-91 97.3
28-Feb-91 95.7
31-Mar-91 90.9
30-Apr-91 99.6
31-May-91 97.6
30-Jun-91 96.5
31-Jul-91 97.7
31-Aug-91 97.1
30-Sep-91 97.2
31-Oct-91 99.6
30-Nov-91 99.7
31-Dec-91 98.1
31-Jan-92 98.7
29-Feb-92 100.8
31-Mar-92 99.4
30-Apr-92 97.5
31-May-92 100.3
30-Jun-92 100.6
31-Jul-92 102.2
31-Aug-92 99.7
30-Sep-92 102.2
31-Oct-92 99.9
30-Nov-92 99.8
31-Dec-92 102.9
31-Jan-93 100.8
28-Feb-93 100.9
31-Mar-93 102.6
30-Apr-93 101.8
31-May-93 99.8
30-Jun-93 100.3
31-Jul-93 100.7
31-Aug-93 99.1
30-Sep-93 101.3
31-Oct-93 100.3
30-Nov-93 99.3
31-Dec-93 101.0
31-Jan-94 99.6
28-Feb-94 100.7
31-Mar-94 103.1
30-Apr-94 106.3
31-May-94 105.2
30-Jun-94 108.4
31-Jul-94 105.8
31-Aug-94 107.7
30-Sep-94 106.4
31-Oct-94 105.8
30-Nov-94 105.7
31-Dec-94 102.8
31-Jan-95 102.1
28-Feb-95 98.5
31-Mar-95 98.6
30-Apr-95 91.8
31-May-95 96.0
30-Jun-95 94.8
31-Jul-95 93.6
31-Aug-95 96.3
30-Sep-95 95.7
31-Oct-95 95.9
30-Nov-95 97.8
31-Dec-95 99.0
31-Jan-96 103.0
29-Feb-96 104.2
31-Mar-96 102.4
30-Apr-96 101.1
31-May-96 107.0
30-Jun-96 105.9
31-Jul-96 109.6
31-Aug-96 108.6
30-Sep-96 108.3
31-Oct-96 111.5
30-Nov-96 109.8
31-Dec-96 110.3
31-Jan-97 110.2
28-Feb-97 112.6
Source: ISI Inc.
Domestic inflation has been reduced from a 1995 high of 52% to 24.5% in
March 1997. Rapid money growth may hold back significant inflation progress in
1997. The Monetary Base is expanding at a rapid 31.4% annual rate, up from 7% in
mid-1995. The Bank of Mexico has targeted a 15% inflation rate for 1997, but
even that may be too high because the U.S. inflation rate is a low 2%. The
inflation differential is likely to produce some peso slippage versus the dollar
in 1997. So far the currency has been stable, helped by Mexico's successful
refinancing of its U.S. Treasury loans and a recent surge in foreign direct
investment.
The July 6 elections will be the first held nationwide since the 1994
Presidential election. All seats in the Lower House and one- third of the Senate
are being contested. Also, an election is being held for the first time for
Mayor of Mexico City. Until now, this post has been filled by a Presidential
appointee. This office has been in the hands of the ruling party, the PRI, for
over 50 years. It will be a closely watched and contested race. The left of
center PDR is running its 1988 and 1994 candidate for President while the right
of center PAN is running a future Presidential hopeful. Polls show this is a
very tight three-way race. It is seen as an early indication of the 2000
Presidential election. The election-year pressure on the PRI to keep growth
moving and the peso stable might take a toll on the currency after the July
elections.
4
<PAGE>
Outlook for North America (concluded)
Review of Canada
Canada's real GDP growth and industrial production have accelerated
somewhat. The degree of slack in the Canadian economy remains large--the 9.3%
unemployment rate is considerably higher than the estimated full employment
rate. The slack in the Canadian economy should help to contain price pressures,
keeping inflation close to the midpoint of the Bank of Canada's 1% to 3% target
range. The political picture is one of very successful deficit reduction.
Spending has been cut and an economic recovery has boosted government revenue.
This has resulted in significant deficit reduction (see chart below).
CANADA BUDGET BALANCE
January: -10729.0
[Graph appears here--see plot points below]
CANADA
BUDGET
BALANCE
------------------------
28-Feb-91 -32,533
31-Mar-91 -30,585
30-Apr-91 -33,117
31-May-91 -34,070
30-Jun-91 -36,246
31-Jul-91 -37,527
31-Aug-91 -38,304
30-Sep-91 -37,982
31-Oct-91 -38,916
30-Nov-91 -38,890
31-Dec-91 -38,093
31-Jan-92 -38,141
29-Feb-92 -36,579
31-Mar-92 -33,422
30-Apr-92 -32,755
31-May-92 -32,779
30-Jun-92 -32,936
31-Jul-92 -34,083
31-Aug-92 -32,971
30-Sep-92 -33,988
31-Oct-92 -34,428
30-Nov-92 -33,696
31-Dec-92 -34,557
31-Jan-93 -34,695
28-Feb-93 -35,529
31-Mar-93 -41,028
30-Apr-93 -42,959
31-May-93 -44,732
30-Jun-93 -44,557
31-Jul-93 -43,917
31-Aug-93 -43,167
30-Sep-93 -43,501
31-Oct-93 -43,539
30-Nov-93 -42,972
31-Dec-93 -42,675
31-Jan-94 -41,328
28-Feb-94 -40,638
31-Mar-94 -36,141
30-Apr-94 -35,148
31-May-94 -34,120
30-Jun-94 -33,033
31-Jul-94 -32,051
31-Aug-94 -31,873
30-Sep-94 -31,042
31-Oct-94 -30,429
30-Nov-94 -31,093
31-Dec-94 -29,347
31-Jan-95 -29,718
28-Feb-95 -29,922
Source: ISI Inc.
The Liberal government has accomplished deficit reduction without suffering
in the public opinion polls. The government has called an early Parliamentary
election for June 2. The campaign will most likely present a buying opportunity
as the other parties vie for seats by criticizing the Liberals' policies and
probably narrow the Liberal lead. We expect the Liberals to be reelected with as
sizable a majority as they enjoy now. This would allow for further deficit
reduction and the beginning of tax cuts financed by lower interest expense.
Canadian government yields are now below U.S. rates for maturities up to 10
years. This is an unusual circumstance and is a tribute to Canadian policies.
Canada's trade and current account surplus also help the interest rate picture.
Canadian interest rates beyond 10 years are still above those in the U.S. The
Fund is concentrating on long maturity government bonds where there is an
opportunity for further near-term yield spread narrowing that favors Canada. As
the picture for U.S. rates brightens later this year, we would expect generally
lower Canadian rates in sympathy with a downward trend in the U.S.
The Canadian currency has weakened somewhat against the U.S. dollar, mostly
because Canadian money market rates are well below those in the U.S. The Bank of
Canada is sensitive to significant currency deterioration and is likely to
support the currency if further weakness develops. It has sizable reserves and
can also raise domestic short-term rates to produce currency stability. The Bank
has a great deal of policy latitude. We would expect the currency to strengthen
versus the U.S. dollar after this summer's elections.
5
<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 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 SEC also requires that we report the Fund's total returns, 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 currently effective maximum sales charge.
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.
- -------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return With
Periods ended 3/31/97: Sales Charge(1)
- -------------------------------------------------------
One Year 4.67%
- -------------------------------------------------------
Since Inception (1/15/93) 3.13%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
January 15, 1993-March 31, 1997
[Graph appears here--see plot points below]
<TABLE>
<CAPTION>
Lehman Brothers Lehman Brothers
ISI North American Intermediate Consumer Emerging Americas Index:
Government Bond Fund Treasury Index Price Index Mexico Section
<S><C>
1/93 9,700 10,000 10,000 10,000
3/93 9,911 10,186 10,049 10,322
3/94 10,186 10,425 10,301 11,097
3/95 9,339 10,867 10,596 8,616
3/96 10,550 11,856 10,897 12,589
3/97 11,384 12,408 11,198 14,948
</TABLE>
(1)Assumes maximum sales charge of 3.0%.
*These figures assume the reinvestment of dividends and capital
gains distributions. The indices listed above are unmanaged and are widely
recognized as indicators of performance in their respective sectors. The
Lehman Brothers Intermediate Treasury Index is a performance indicator of
the intermediate-term U.S. Treasury market, the CPI is a general indicator of
inflation and the Lehman Brothers Emerging Americas Index: Mexico Section is
an indicator of the interest rate structure of Mexican government and
private corporate debt. Management is not aware of any single index that is
truly representative of the Fund since the Fund's assets are allocated across
three different countries and each country's weighting is periodically
adjusted to reflect the advisor's outlook on current market conditions. Past
performance is not an indicator of future results.
6
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Principal Value
Security Rate Date Amount+ (Note A)
- ---------------------------------------------------------------------------------------------------
<S><C>
CANADIAN SECURITIES -- 10.99%
Government of Canada, Deb. 9.750% 6/1/21 C$ 2,000,000 $ 1,837,212
Government of Canada, Deb. 9.000 6/1/25 4,500,000 3,877,078
-----------
Total Canadian Securities
(Cost $5,597,185)............................................................. 5,714,290
-----------
MEXICAN SECURITIES(1) -- 12.77%
Mexican Treasury Cete 21.710* 4/30/97 Ps 11,600,740 1,441,732
Mexican Treasury Cete 21.980* 6/12/97 42,862,310 5,194,859
-----------
Total Mexican Securities
(Cost $6,672,976)............................................................. 6,636,591
-----------
U.S. TREASURY SECURITIES -- 56.21%
U.S. Treasury Bond 10.375 11/15/09 $8,000,000 9,562,504
U.S. Treasury Bond 10.375 11/15/12 4,000,000 4,962,500
U.S. Treasury Bond 8.750 5/15/17 6,000,000 6,965,628
U.S. Treasury Bond 7.250 8/15/22 2,000,000 2,003,750
U.S. Treasury Bond 7.125 2/15/23 5,750,000 5,714,063
-----------
Total U.S. Treasury Securities
(Cost $30,731,302)............................................................ $29,208,445
-----------
- ---------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets (concluded)
March 31, 1997
<TABLE>
<CAPTION>
Principal Value
Amount+ (Note A)
- ---------------------------------------------------------------------------------------------------
<S><C>
REPURCHASE AGREEMENTS -- 19.04%
Goldman Sachs & Co., 6.25%
Dated 3/31/97, to be repurchased on
4/1/97, collateralized by U.S. Treasury
Bonds with a market value of $10,092,041.
(Cost $9,894,000).............................................. $9,894,000 $ 9,894,000
-----------
Total Investments in Securities -- 99.01%
(Cost $52,895,463) ** ......................................... 51,453,326
Other Assets in Excess of Liabilities, Net-- 0.99%............... 512,475
-----------
Net Assets-- 100.00%............................................. $51,965,801
===========
Net Asset Value and Redemption Price Per Share
($51,965,801 / 6,271,466 shares outstanding)................... $8.29
=====
Offering Price Per Share
($8.29 / .970)................................................. $8.55
=====
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Cetes are short-term Mexican government debt securities.
* Yields as of March 31, 1997.
** Also aggregate cost for federal tax purposes.
+ Principal amount is shown in local currency: Canadian dollars (C$), Mexican
pesos (Ps) and U.S. dollars ($).
See Notes to Financial Statements.
8
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Year Ended March 31, 1997
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S><C>
NET INVESTMENT INCOME (NOTE A):
Interest....................................................................... $ 5,980,207
-----------
EXPENSES:
Investment advisory fee (Note B)............................................... 233,075
Distribution fee (Note B)...................................................... 233,075
Administration fee (Note B).................................................... 116,538
Transfer agent fee............................................................. 71,408
Accounting fee (Note B)........................................................ 55,309
Custodian fee.................................................................. 51,310
Legal.......................................................................... 36,898
Audit.......................................................................... 33,353
Registration fees.............................................................. 32,305
Printing and postage........................................................... 29,919
Miscellaneous.................................................................. 11,532
Organizational expense (Note A)................................................ 10,497
Directors' fees................................................................ 4,986
Insurance...................................................................... 1,942
-----------
Total expenses............................................................... 922,147
Less: Fees waived (Note B)..................................................... (193,796)
-----------
Net expenses................................................................. 728,351
-----------
Net investment income.......................................................... 5,251,856
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments............................................... 130,031
Net realized foreign exchange loss............................................. (1,327,424)
Change in net unrealized appreciation or depreciation of investments........... 540,125
Change in net unrealized appreciation or depreciation on translation
of assets and liabilities denominated in foreign currencies.................. (3,190)
-----------
Net loss on investments........................................................ (660,458)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 4,591,398
===========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
North American Government Bond Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income................................... $ 5,251,856 $ 6,142,465
Net realized loss from security and
foreign currency transactions......................... (1,197,393) (2,882,627)
Change in unrealized appreciation or depreciation
of investments and foreign currency translation....... 540,125 4,860,869
Change in net unrealized appreciation or
depreciation on translation of assets and
liabilities denominated in foreign currencies......... (3,190) 77,092
------------ ------------
Net increase in net assets resulting
from operations....................................... 4,591,398 8,197,799
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income................................... (1,823,953) --
Return of capital-tax................................... (3,191,763) (5,474,647)
------------ ------------
Total distributions..................................... (5,015,716) (5,474,647)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 695,687 and 762,541
shares, respectively.................................. 5,848,278 6,579,788
Value of 306,356 and 335,134 shares issued in
reinvestment of dividends, respectively............... 2,564,081 2,852,645
Cost of 1,997,507 and 2,056,598 shares
repurchased, respectively............................. (16,882,467) (17,587,616)
------------ ------------
Total decrease in net assets derived from capital
share transactions.................................... (8,470,108) (8,155,183)
------------ ------------
Total decrease in net assets............................ (8,894,426) (5,432,031)
NET ASSETS:
Beginning of year....................................... 60,860,227 66,292,258
------------ ------------
End of year............................................. $ 51,965,801 $ 60,860,227
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<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(1)
------------------------------------- through
1997 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...................... 0.75 0.81 0.63 0.89 0.10
Net realized and unrealized gain/(loss)
on investments and foreign currency
translation.............................. (0.11) 0.22 (1.38) (0.58) 0.12
------- ------- ------- ------- -------
Total from Investment Operations........... 0.64 1.03 (0.75) 0.31 0.22
Less Distributions:
Dividends from net investment income
and short-term gains..................... (0.26) -- (0.45) (0.92) (0.08)
Return of capital.......................... (0.46) (0.72) (0.27) -- --
------- ------- ------- ------- -------
Total distributions........................ (0.72) (0.72) (0.72) (0.92) (0.08)
------- ------- ------- ------- -------
Net asset value at end of period........... $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
======= ======= ======= ======= =======
Total Return(2).............................. 7.90% 12.97% (8.31)% 2.77% 2.18%
Ratios to Average Daily Net Assets:
Expenses(3)................................ 1.25% 1.25% 1.25% 1.25% 1.25%(5)
Net investment income(4)................... 8.99% 9.49% 7.04% 7.04% 7.62%(5)
Supplemental Data:
Net assets at end of the period (000)...... $51,966 $60,860 $66,292 $93,622 $40,937
Portfolio turnover rate.................... 46% 125% 104% 219% 104%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 1.58%, 1.47%, 1.45%, 1.44%
and 2.19% (annualized) for the years ended March 31, 1997, 1996, 1995, 1994
and the period ended March 31, 1993, respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily net assets would have been 8.66%, 9.27%, 6.84%,
6.85% and 6.68% (annualized) for the years ended March 31, 1997, 1996, 1995,
1994 and the period ended March 31, 1993, respectively.
(5) Annualized.
See Notes to Financial Statements.
11
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies -- North American Government Bond Fund,
Inc. ("the Fund"), which was organized as a Maryland Corporation on October
19, 1992, commenced operations January 15, 1993. The Fund is
registered under the Investment Company Act of 1940 as a diversified,
open-end Investment Management Company. It is designed to provide a high
level of 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.
The Fund consists of one share class, the ISI Shares, which are subject to a
3.00% maximum front-end sales charge and a 0.40% distribution fee.
When preparing the Fund's financial statements, management has to make
estimates and assumptions to comply with generally accepted accounting
principles. These estimates affect 1) the assets and liabilities that we
report at the date of the financial statements; 2) the contingent assets and
liabilities that we disclose at the date of the financial statements; and 3)
the revenues and expenses that we report for the period. Our estimates could
be different from the actual results. The Fund's significant accounting
policies are:
Security Valuation -- Debt securities are generally traded in the
over-the-counter market. When there is an available market quotation, the
Fund values a debt security by using the most recent price provided by an
investment dealer. The Fund may also value a debt security by using a price
from an independent pricing service that the Investment Advisor has
determined reflects the obligation's fair market value. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less at
amortized cost.
Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement is
a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
Foreign Currency Translation -- The Fund separates realized gains or losses
resulting from foreign exchange rate changes and realized gains or losses
resulting from market price changes.
Net realized foreign exchange rate gains or losses occur due to 1) sales of
portfolio securities; 2) sales and maturities of short-term securities; 3)
sales of foreign currencies; 4) currency gains or losses realized between
the trade and settlement dates on securities transactions; and 5)
differences between interest recorded on the Fund's books and the U.S.
dollar equivalent of interest that the Fund actually receives or pays.
The Fund does not separate its unrealized appreciation or depreciation
resulting from foreign exchange rate changes and its unrealized appreciation
or depreciation resulting from market price changes.
Federal Income Tax -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the
12
<PAGE>
Notes to Financial Statements (continued)
Fund occasionally makes reclassifications within its capital accounts to
reflect income and gains that are available for distribution under income
tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains, it
will be exempt from most, if not all, federal income and excise taxes. As a
result, the Fund has made no provisions for federal income taxes.
The Fund has a $1,031,544 capital loss carryforward that may be carried
forward to offset any taxable capital gains if necessary. This capital loss
carryforward begins to expire in the year 2004 if it is not used.
Security Transactions, Investment Income, Distributions and Other -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Income and
expenses are recorded on an accrual basis. Income includes scientific
amortization of premiums and accretion of discounts when appropriate.
Dividend distributions to shareholders are recorded on the ex-dividend date.
The Fund has deferred the costs incurred by its organization and the initial
public offering of shares. These costs are being amortized on the
straight-line method over a five-year period, which began when the Fund
commenced investment activities.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC") is the Fund's
administrator. As compensation for its advisory services, the Fund pays ISI
an annual fee. This fee is based on the Fund's average daily net assets and
is calculated daily and paid monthly at the annual rate of 0.40%. The Fund
paid ISI $233,075 for advisory services for the year ended March 31, 1997.
As compensation for its administrative services, the Fund pays ICC an annual
fee. This fee is based on the Fund's average daily net assets and is
calculated daily and paid monthly at the annual rate of 0.20%. The Fund
paid ICC $116,538 for administrative services for the year ended March 31,
1997.
ISI and ICC have agreed to reduce their fees proportionately when necessary
so that the Fund's annual expenses are no more than 1.25% of the Fund's
average daily net assets. For the year ended March 31, 1997, ISI waived fees
of $129,197 and ICC waived fees of $64,599.
As compensation for its accounting services, the Fund pays ICC an annual fee
that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $55,309 for accounting services for the year ended
March 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $71,408
for transfer agent services for the year ended March 31, 1997.
As compensation for providing distribution services, the Fund pays Armata
Financial Corp., an affiliate of ICC, an annual fee that is 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, 1997, distribution fees were
$233,075. As of April 1, 1997, ISI Group Inc. will serve as the Fund's
distributor.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year
ended March 31, 1997 was approximately $4,900, and the accrued liability was
approximately $9,300.
13
<PAGE>
Notes to Financial Statements (concluded)
C. Capital Share Transactions -- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $2,170,926
and sales of investment securities aggregated $4,821,151 for the year
ended March 31, 1997. Purchases of U.S. government obligations aggregated
$17,693,008 and sales of U.S. government obligations aggregated $20,322,904
for the period.
On March 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $158,350
and aggregate gross unrealized depreciation of all securities in which there
is an excess of tax cost over value was $1,600,487.
E. Forward Currency Exchange Contracts -- Forward currency exchange
contracts carry certain risks. These risks include the counterparties'
possible inability to meet the contract terms and the movements in currency
values. There were no outstanding contracts as of March 31, 1997.
F. Net Assets -- On March 31, 1997, net assets consisted of:
Paid-in capital................... $ 54,545,689
Accumulated net realized loss
from security and foreign
currency transactions........... (1,135,206)
Unrealized depreciation of
investments..................... (1,442,137)
Unrealized translation loss....... (2,545)
------------
$ 51,965,801
============
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.
14
<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, 1997, 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, 1997 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, 1997 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.
Philadelphia, Pennsylvania
May 2, 1997
15
