<PAGE>
As Filed With the Securities and Exchange Commission on July 28, 1998
Registration No. 33-53598
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 7 [X]
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
717 Fifth Avenue
New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 446-5600
Edward J. Veilleux
One South Street
Baltimore, MD 21202
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(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esq.
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
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It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b)
__X__ on August 1, 1998 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on [Date] pursuant to paragraph (a) or Rule 485
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<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
July 28, 1998
Cross Reference Sheet
<TABLE>
<CAPTION>
Items Required by Form N-1A
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<S> <C> <C>
Part A Information Required in Prospectus Registration Statement Heading
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Investment Objective,
Policies and Risk Factors;
Investment Restrictions;
General Information
Item 5. Management of the Fund Management of the Fund;
Investment Advisor;
Distributor; Custodian, Transfer
Agent and Accounting Services
Item 5A. Management's Discussion of Fund *
Performance
Item 6. Capital Stock and Other Securities Cover Page
Dividends and Taxes;
General Information
Item 7. Purchase of Securities Being Offered The Fund's Net Asset
Value; How to Buy Shares
Item 8. Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings **
Part B Information Required in a Statement
of Additional Information
-----------------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information
and History
Item 13. Investment Objectives and Policies Investment Objective,
Policies and Risk
Considerations
</TABLE>
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* Information required by Item 5A is contained in the Registrant's 1998 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Item 14. Management of the Fund Management of
the Fund
Item 15. Control Persons and Principal Holders Control Persons and
of Securities Principal Holders of
Securities
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services;
Custodian, Transfer Agent and
Accounting Services
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Capital Stock;
Semi-Annual Reports
Item 19. Purchase, Redemption and Pricing of Valuation of Shares
Securities Being Offered and Redemption
Item 20. Tax Status Federal Tax Treatment of
Dividends and
Distributions
Item 21. Underwriters Distribution of Fund
Shares
Item 22. Calculation of Performance Data Performance and Yield
Computations
Item 23. Financial Statements Financial Statements
Part C Other Information
Part C contains the information required by the items
contained therein under the items set forth in the form.
</TABLE>
<PAGE>
ISI NORTH AMERICAN
GOVERNMENT BOND FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175
North American Government Bond Fund, Inc. (the "Fund") is designed to
provide a high level of current income, consistent with prudent investment
risk, by investing primarily in a portfolio of fixed-income securities issued
or guaranteed by the governments of the United States, Canada and Mexico.
Shares of the ISI class of the Fund ("Shares") are available through
International Strategy & Investment Group Inc. (the "Distributor") as well as
your securities dealer or servicing agent. (See "How to Buy Shares.")
This Prospectus sets forth basic information that you should know about
the Fund prior to investing. You should retain it for future reference. A
Statement of Additional Information dated August 1, 1998 has been filed with
the Securities and Exchange Commission (the "SEC") and is hereby incorporated
by reference. It is available upon request and without charge by contacting the
Fund at the above address and telephone.
The Fund's Shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank. The Shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government
agency. Investment in the Shares involves risk, including possible loss of
principal.
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
The date of this Prospectus is August 1, 1998.
<PAGE>
1. Fee Table
Shareholder Transaction Expenses:
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends ........................ None
Maximum Deferred Sales Charge ............................................... None
Annual Fund Operating Expenses:
(as a percentage of average daily net assets)
Management Fees (net of fee waivers) ........................................ 0.38%*
12b-1 Fees .................................................................. 0.40%
Asset Based Sales Charge....... 0.15%
Service Fee ................... 0.25%
Other Expenses (net of fee waivers) ......................................... 0.47%*
-----
Total Fund Operating Expenses (net of fee waivers) .......................... 1.25%*
=====
</TABLE>
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*The Fund's advisor and the Fund's administrator have voluntarily agreed to
waive proportionate amounts of their respective fees, to the extent required,
so that the Fund's Total Operating Expenses do not exceed 1.25% of the Fund's
average daily net assets. Absent fee waivers, Management Fees would be 0.40%,
Other Expenses (including administration fees) would be 0.48% and Total Fund
Operating Expenses would be 1.28%, respectively, of the Fund's average daily
net assets.
Example:
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<CAPTION>
1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period:* $42 $68 $97 $177
</TABLE>
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*Absent fee waivers, expenses would be higher.
The Expenses and Example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above table is to describe the various costs and expenses
that you will bear directly or indirectly when you invest in shares. If you
purchase Shares through a financial institution, you may be charged separate
fees by that institution. The rules of the SEC require that the maximum sales
charge (in the Shares' case, 3.00% of the offering price) be reflected in the
above table. However, you may qualify for reduced sales charges or no sales
charge at all. (See "How to Buy Shares.") Due to the continuous nature of Rule
12b-1 fees, you may pay more than the equivalent of the maximum front-end sales
charges permitted by the Conduct Rules of the National Association of
Securities Dealers, Inc. if you hold your Shares for a long time.
2. Financial Highlights
The Fund has offered the Shares since January 15, 1993. The financial
highlights included in this table are a part of the Fund's financial statements
for the periods indicated and have been audited by PricewaterhouseCoopers LLP,
independent accountants. The financial statements and financial highlights for
the fiscal year ended March 31, 1998 and the report thereon of
PricewaterhouseCoopers LLP are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1998, which can be obtained
at no charge by calling the Fund at (800) 955-7175.
2
<PAGE>
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year
Ended For the Period
March 31, January 15, 1993(1)
---------------------------------------------------------------- through
1998 1997 1996 1995 1994 March 31, 1993
----------- ----------- ----------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share
Operating
Performance:
Net asset value at
beginning of
period .................. 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14 $ 10.00
----- ------ ------ ------- ------- -------
Income from Invest-
ment Operations:
Net investment
income .................. 0.61 0.75 0.81 0.63 0.89 0.10
Net realized and
unrealized
gain/(loss) on
investments ............. 0.56 (0.11) 0.22 (1.38) (0.58) 0.12
----- ------- ------ ------- ------- -------
Total from Invest-
ment Operations ......... 1.17 0.64 1.03 (0.75) 0.31 0.22
Less Distributions:
Dividends from net
investment income
and short-term
gains ................... (0.67) (0.26) -- (0.45) (0.92) (0.08)
Distribution in excess
of net investment
income .................. (0.05) -- -- -- -- --
Return of capital. ....... -- (0.46) (0.72) (0.27) -- --
------ ------- ------- ------- ------- -------
Total distributions ...... 0.72 (0.72) (0.72) (0.72) (0.92) (0.08)
------ ------- ------- ------- -------
Net asset value at
end of period ........... $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
======= ======= ======= ======= ======= =======
Total Return(2)............. 14.65% 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% 1.25%(4)
Net investment
income(5)................ 7.17 8.99% 9.49% 7.04% 7.04% 7.62%(4)
Supplemental Data:
Net assets at end
of period (000). ........ $52,018 $51,966 $60,860 $66,292 $93,622 $ 40,937
Portfolio turnover
rate .................... 125% 46% 125% 104% 219% 104%
</TABLE>
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(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.28%, 1.58%, 1.47%, 1.45%, 1.44% and 2.19%
(annualized) for the years ended March 31, 1998, 1997, 1996, 1995, 1994, and
for the period ended March 31, 1993, respectively.
(4) Annualized.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 7.14%, 8.66%, 9.27%, 6.84%, 6.85%
and 6.68% (annualized) for the years ended March 31, 1998, 1997, 1996, 1995,
1994 and for the period ended March 31, 1993, respectively.
<PAGE>
3. Investment Objective, Policies and Risk Factors
The Fund's investment objective is to provide a high level of current income,
consistent with prudent investment risk. There is no assurance that the Fund
will be able to achieve its investment objective.
The Fund seeks to achieve its investment objective by investing under normal
circumstances at least 65% of its total assets in the following bonds and
debentures: (i) U.S. Treasury Securities, which securities are direct
obligations of the United States Government (see "United States Government
Securities" below); and (ii) bonds or debentures issued or guaranteed by the
Canadian and Mexican governments or their subdivisions, agencies or
instrumentalities ("Government Securities") and denominated either in U.S.
dollars or in the local foreign currency. The Fund will invest no more than 25%
of its total assets in Canadian Government Securities (see "Canadian Government
Securities" below) and no more than 25% of its total assets in Mexican
Government Securities (see "Mexican Government Securities" below).
In addition, the Fund will invest no more than 33% of its total assets in
securities denominated or payable in each of Canadian dollars and Mexican
pesos. Subject to the foregoing currency denomination limits, the Fund may
invest in bankers acceptances and certificates of deposit denominated or
payable in the local foreign currency and issued by one of the five most highly
capitalized banks in Canada or Mexico.
Subject to the foregoing guidelines, the Fund's investment advisor (the
"Advisor") (See "Investment Advisor") will invest the Fund's assets and
allocate investments from time to time among U.S., Canadian and Mexican
Government Securities, based on its assessment of which fixed-income securities
best enable the Fund to achieve its investment objective. Subject to the
limitations described above, the percentage of assets invested in a particular
country or denominated in a particular currency, as well as the average
maturity of the securities held in the Fund's portfolio, will vary in
accordance with the Advisor's analysis of market conditions, relative yields,
and changes in general economic and political conditions in the United States,
Canada and Mexico, and the Advisor's expectations regarding interest rate
changes and changes in currency exchange rates among the U.S. dollar, the
Canadian dollar and the Mexican peso. Based on the Advisor's analysis of such
factors, it is possible that, from time to time, none of the Fund's assets will
be invested in Canada or Mexico or denominated or payable in Canadian dollars
or Mexican pesos.
3
<PAGE>
Under normal circumstances, the dollar weighted expected average maturity of
the Fund's portfolio will vary depending on the Advisor's assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. It is currently anticipated
that during periods of stable interest rates, the Fund's portfolio will have a
dollar weighted expected average maturity of approximately ten years; and
during periods of declining interest rates, the Fund's portfolio will have a
dollar weighted expected average maturity of over ten years. The Advisor may
shorten the dollar weighted average maturity substantially for temporary,
defensive purposes, such as, when the Advisor believes interest rates are or
will be increasing substantially. There can be no assurance that the Advisor's
economic analyses will accurately predict interest rate movements or that the
portfolio strategies based upon such analyses will be effective.
Under normal circumstances, the Canadian Government Securities held in the
Fund's portfolio will be rated, at the time of purchase, Aa or higher by
Moody's Investors Service, Inc. ("Moody's") or AA or higher by Standard &
Poor's Ratings Group ("S&P") or, if not rated by Moody's or S&P, determined to
be of comparable quality by the Advisor under criteria approved by the Fund's
Board of Directors ("Comparable Quality"). Except as provided below, the
Mexican Government Securities in which the Fund may invest will be rated, in
the case of long-term securities, Baa or higher by Moody's, or BBB or higher by
S&P, or Comparable Quality, or in the case of short-term securities, Prime-3 or
higher by Moody's, A-3 or higher by S&P, or Comparable Quality. Where deemed
appropriate by the Advisor, the Fund may invest up to 10% of its total assets
(measured at the time of the investment) in Mexican Government Securities or in
fixed-income securities issued by governments of other countries in Latin
America or elsewhere (and denominated in either U.S. dollars or the local
foreign currency), which securities are rated Ba by Moody's or BB by S&P, or
Comparable Quality. If a fixed-income security held by the Fund is rated Baa or
BBB, in the case of a long-term security, or Prime-3 or A-3 in the case of a
short-term security, and is subsequently downgraded by a rating agency, such
security will be included in the Fund's below investment grade holdings for
purposes of the foregoing 10% limit. In addition, the Fund will retain such
security in its portfolio only until the Advisor determines that it is
practicable to sell the security without undue market or tax consequences to
the Fund. Moreover, in the event that such downgraded securities constitute 5%
or more of the Fund's total assets, the Advisor will seek to sell immediately
sufficient securities to reduce the total to below 5%.
Securities rated either Baa by Moody's or BBB by S&P have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken their capacity to make principal and
interest payments than would be the case with investments in securities with
higher credit ratings.
Securities rated Ba or BB are considered to be below investment grade
securities and are known as "junk bonds." They are considered to be speculative
and involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. The future of such below investment grade securities
cannot be considered well assured and the issuer's ability to make timely
payments of principal and interest may be subject to material contingencies.
Investing in higher yield, high risk, lower rated bonds entails substantially
greater risk than investing in investment grade bonds including not only credit
risk, but potentially greater market volatility and lower liquidity. Yields and
market values of these securities will fluctuate over time, reflecting changing
interest rates and the market's perception of credit quality and the outlook
for economic growth. When economic conditions appear to be deteriorating, lower
rated securities may decline in value, regardless of prevailing interest rates.
Accordingly, adverse economic developments, including a recession or a
substantial period of rising interest rates, may disrupt the high yield
securities market, affecting both the value and liquidity of such securities.
The market prices of these securities may fluctuate more than those of higher
rated securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. An economic
downturn could adversely affect the ability of issuers of such securities to
make payments of principal and interest to a greater extent than issuers of
higher rated securities might be affected. A description of fixed-income
security ratings is contained in the Appendix to the Statement of Additional
Information. During the fiscal year ended March 31, 1998, the Fund held no
bonds rated below investment grade.
The Fund may also invest in repurchase agreements with respect to U.S. Treasury
Securities, Canadian Treasury
4
<PAGE>
Securities and Mexican Treasury Securities and in commercial paper rated
Prime-1 by Moody's, A-1 by S&P, or Comparable Quality. For temporary, defensive
purposes, the Fund may invest up to 100% of its assets in such instruments.
Investment of all or a substantial portion of the Fund's assets in such
instruments may cause a decrease in the Fund's yield.
Although the Fund reserves the right to invest up to 35% of its total assets in
fixed-income securities that are issued or guaranteed by the governments of
countries located in Latin America (other than Mexico) or other foreign
countries, or any of their political subdivisions, agencies, instrumentalities
and authorities, the Fund has no current intention to make such investments
during the coming year. Any investment in such fixed-income securities would be
rated, at the time of purchase, Baa or higher by Moody's, BBB or higher by S&P,
or Comparable Quality except that the Fund may invest in such fixed-income
securities rated at the time of purchase, Ba by Moody's or BB by S&P, or
Comparable Quality subject to the limitation of 10% of the Fund's total assets
discussed above.
The Fund may also engage in certain other investment practices, including
practices to protect against fluctuations in foreign currencies, which
practices are described more fully under the heading "Other Investment
Policies" below.
United States Government Securities
The Fund will invest in U.S. Treasury obligations (including Treasury bills,
Treasury notes, Treasury bonds and STRIPS) that are issued by the U.S.
Government and backed by the full faith and credit of the United States and
that differ only in their interest rates, maturities and times of issuance.
STRIPS are U.S. Treasury Securities that trade at a yield to maturity higher
than do comparable maturity U.S. Treasury obligations. STRIPS do not pay
interest currently, but are purchased at a discount and are payable in full at
maturity. However, the value of STRIPS may be subject to greater market
fluctuations including yield, from changing interest rates prior to maturity
than the value of other U.S. Treasury Securities of comparable maturities that
bear interest currently. Because STRIPS do not pay current income, the Fund
will not invest in them to a significant extent.
Canadian Government Securities
Canadian Government Securities include securities issued or guaranteed by the
Government of Canada, any of its provinces or by their respective political
subdivisions, agencies and instrumentalities.
Canadian Government Securities in which the Fund may invest include Government
of Canada bonds and Government of Canada Treasury bills. The Bank of Canada,
acting on behalf of the Canadian federal government, is responsible for the
distribution of Treasury bills and federal bond issues. Government of Canada
Treasury bills are debt obligations with maturities of less than one year.
Government of Canada issues of bonds frequently consist of several different
bonds with various maturity dates representing different segments of the yield
curve with maturities ranging from one to 30 years.
All Canadian provinces have outstanding bond issues and several provinces also
guarantee bond issues of provincial authorities, agencies and provincial Crown
corporations. Each new issue yield is based upon a spread from an outstanding
Government of Canada issue of comparable term and coupon. Spreads in the
marketplace are determined by various factors, including the relative supply
and the rating assigned by the rating agencies. Most provinces also issue
treasury bills.
Many municipalities and municipal financial authorities in Canada raise funds
through the bond market in order to finance capital expenditures. Unlike U.S.
municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the provincial bond market.
Mexican Government Securities
Mexican Government Securities in which the Fund may invest include those
securities that are issued or guaranteed in full by the Mexican federal
government or its instrumentalities.
Government of Mexico securities denominated and payable in the Mexican peso
include: (i) Cetes, book-entry securities sold directly by the Mexican
government on a discount basis and with maturities ranging from seven to 364
days; (ii) Bondes, long-term development bonds with a minimum
5
<PAGE>
term of 364 days issued directly by the Mexican government; and (iii)
Ajustabonos, adjustable bonds (face amount adjusted quarterly based on
quarterly inflation rate) with a minimum three-year term issued directly by the
Mexican government.
The Fund may also invest up to 10% of its assets in dollar-denominated,
collateralized "Brady Bonds," which are securities created through the exchange
of existing commercial bank loans to the Mexican government for new bonds under
a debt restructuring plan introduced by the former U.S. Secretary of the
Treasury. The Brady Bonds in which the Fund may invest may be fixed rate or
floating rate bonds that are collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds, and on which
the first 18 months of interest coupon payments are collateralized by funds
(cash or securities) held in escrow by an agent for the bondholders.
Risk Factors
Currency Risks. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Accordingly, the value of the
assets of the Fund as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In an attempt to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to and may occasionally use forward foreign currency exchange
contracts and futures contracts and may purchase and write (sell) options on
foreign currencies. (See "Other Investment Policies -- Forward Foreign Currency
Exchange Contracts.") The Fund may use such forward contracts and options when,
for example, it enters into a contract for the purchase or sale of a security
denominated in a foreign currency, and the Fund desires to "lock in" the U.S.
dollar price of the security. Also, when the Advisor believes that the currency
of a particular foreign country may suffer a substantial movement against the
U.S. dollar, the Fund may enter into forward contracts and options
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. (See "Other Investment Policies --
Futures Contracts and Options.")
Risks Of International Investing. Investments in foreign securities will
occasion risks relating to political and economic developments abroad,
including the possibility of expropriations or confiscatory taxation,
limitations on the use or transfer of Fund assets and any effects of foreign
social, economic or political instability. Foreign securities are not subject
to the regulatory requirements applicable to U.S. securities and, therefore,
there may be less publicly available information about such securities.
Moreover, foreign securities are not subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
securities.
Securities of foreign issuers, including foreign governments, may be less
liquid than comparable securities of U.S. issuers and, therefore, their price
changes may be more volatile. Furthermore, foreign exchanges and broker-dealers
are generally subject to less government and exchange scrutiny and regulation
than their United States counterparts. Brokerage commissions, dealer
concessions and other transaction costs may be higher on foreign markets,
including markets for foreign government securities, than in the United States.
In addition, differences in clearance and settlement procedures on foreign
markets may occasion delays in settlements of Fund trades effected in such
markets. Inability to dispose of portfolio securities due to settlement delays
could result in losses to the Fund due to subsequent declines in value of such
securities and the inability of the Fund to make intended security purchases
due to settlement problems could result in a failure of the Fund to make
potentially advantageous investments.
Canada. The Canadian government debt securities market is significantly smaller
than the U.S. debt securities market. Although continued growth is anticipated,
it is less well developed and less liquid than its U.S. counterpart. Recently,
Canadian real economic growth has picked up after several years of marginal
performance. A return to marginal growth could affect the Advisor's
determination of the appropriate allocation of the Fund's investments within
Canada and among the United States, Canada and Mexico.
Canadian dollars are fully exchangeable into U.S. dollars without foreign
exchange controls or other legal restriction. Since the major developed country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. dollar/Canadian dollar exchange rate has been narrower
than the range of fluctuation between the U.S. dollar and most other major
currencies. Between 1991 and 1995, Canada experienced a weakening of its
currency. In January 1995, the Canadian dollar fell to a nine-year low
6
<PAGE>
against the U.S. dollar, decreasing in value by approximately 25% from October
1991. During 1995 and 1996, the Canadian dollar increased in value by
approximately 5.9% against the U.S dollar. Subsequently, however, the Canadian
dollar depreciated, reaching record lows in 1998. The range of fluctuation that
occurred in the past is not necessarily indicative of the range of fluctuation
that will occur in the future. Future rates of exchange cannot be predicted.
Mexico. Because the Fund intends to invest in Mexican Government Securities,
investors in the Fund should be aware of certain special considerations
associated with investing in debt obligations of the Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could have a significant effect on market
conditions and prices and yields of Mexican Government Securities.
The value of the Fund's portfolio investments may be affected by changes in oil
prices, interest rates, taxation and other political or economic developments
in Mexico, including recent political and social problems and rates of
inflation that have exceeded the rates of inflation in the U.S. and Canada. The
Fund can provide no assurance that future developments in the Mexican economy,
in Mexican government policy or in the political landscape will not impair its
investment flexibility, operations or ability to achieve its investment
objective. Moreover, recent events in Latin America have shown that economic,
financial and political events in one country of the region can negatively
influence the economic, financial and political conditions of another country
of the region.
Over the past decade, the Mexican economy has experienced improvement in a
number of areas, including growth in domestic product and a substantial
reduction in the rate of inflation and in the public sector's financial
deficit. In 1994, Mexico experienced an economic crisis that led to the
devaluation of the Mexican peso in December 1994, high exchange rate
volatility, high inflation, high domestic interest rates, a potentially
unstable banking sector, high unemployment, a loss of consumer purchasing power
and a negative growth rate for the country. The current Mexican fiscal and
monetary policy appears to have brought the crisis under control. Inflation,
interest rates and unemployment are all down, exchange rate volatility has been
lessened. After experiencing a decrease in gross domestic product in 1995,
Mexico's economy registered gains in 1996 and 1997. For the first half of 1998,
Mexico's gross domestic product is expected to grow by 5.4%.
Over the last decade and notwithstanding the Mexican crisis, much of the past
improvement in the Mexican economy has been attributable to a series of
economic policy initiatives by the Mexican government over the past decade that
have sought to modernize and reform the Mexican economy, control inflation,
reduce the financial deficit, increase public revenues through the reform of
the tax system, establish a competitive and stable currency exchange rate,
liberalize trade restrictions and increase investment and productivity, while
reducing the government's role in the economy. In this regard, the Mexican
government has been proceeding with a program for privatizing certain state
owned enterprises, developing and modernizing the securities markets,
increasing investment in the private sector and permitting increased levels of
foreign investment. Recently, all of the satellite, railroad and port sectors
and most of the natural gas sector have been privatized. Current privatization
plans are moving forward in the airport and secondary petrochemical plant
sectors.
The successful implementation of the economic policy initiatives and the growth
of the Mexican economy involve significant structural changes to the Mexican
economy and will necessitate continued economic and fiscal discipline. In
addition, as a condition to receiving assistance from the United States and the
International Monetary Fund, Mexico has agreed to adhere to a program of strict
economic reform. Moreover, for the continued right to have access to additional
funds, it must continue with such austerity programs. An important aspect of
Mexico's economic policy is the ability of the government to be successful in
its continuing efforts to control its financial deficit, finance its current
account deficit, further reduce inflation and stabilize the Mexican peso. There
is no assurance that Mexico's economic policy initiatives will be successful or
that succeeding administrations will continue these initiatives.
In 1994 and 1995, Mexico's economy was undermined by a series of political
events such as high-level assassinations and an armed uprising in the state of
Chiapas that were outside the control of the government and which helped
provoke and fuel the December 1994 Mexican crisis. No assurance can be given
that similar political events will not occur or continue to exist that could
adversely affect the Fund.
7
<PAGE>
In 1982, Mexico imposed foreign exchange controls and maintained a dual foreign
exchange rate system, with a "controlled" rate and a "free market" rate. In
November 1991, Mexico abolished the controlled rate and now maintains only the
free exchange rate. Under economic policy initiatives implemented since
December 1987, the Mexican government introduced a schedule of gradual
devaluations of the Mexican peso against the U.S. dollar. These gradual
devaluations continued until December 1994. On December 22, 1994, the Mexican
government announced that it would permit the Mexican peso to float against
other currencies, resulting in a continued decline against the U.S. dollar. By
December 31, 1996, the Peso-Dollar exchange rate had decreased approximately
40% from that on December 22, 1994. In 1996, the average annual Peso-Dollar
exchange rate decreased approximately 15% from that in 1995, which itself had
decreased approximately 47% from that in 1994. In 1997, the peso continued to
decline in value against the dollar. The Fund's net asset value and its
computation and distribution of income to its shareholders will be adversely
affected by continued reductions in the value of the Mexican peso relative to
the U.S. dollar because all Fund assets must be converted to U.S. dollars prior
to any distributions to shareholders. (See the Statement of Additional
Information.)
Non-Diversified Status. The Fund is classified as a non-diversified investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and as such is not limited by the Investment Company Act in the
proportion of its assets that it may invest in the obligations of a single
issuer. However, the Fund intends to conduct its operations so as to qualify as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). (See "Dividends, Distributions and
Taxes.") In order to qualify under Subchapter M of the Code, among other
requirements, the Fund will limit its investments so that at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer
(other than U.S. Government securities) and (ii) with respect to 50% of the
market value of its total assets not more than 5% will be invested in the
securities of a single issuer (other than U.S. Government securities). To the
extent that a relatively high percentage of the Fund's assets may be invested
in the obligations of a limited number of issuers, the Fund's portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified investment
company. The limitations described in this paragraph are not fundamental
policies and may be revised to the extent applicable federal income tax
requirements are revised.
Securities issued or guaranteed by foreign governments, their political
subdivisions, agencies and instrumentalities are not treated like U.S.
Government securities for purposes of the diversification tests described in
the preceding paragraph, but instead are subject to these tests in the same
manner as the securities of non-governmental issuers. In this regard,
securities issued or guaranteed by a foreign government, its political
subdivisions, agencies or instrumentalities may in certain circumstances not be
treated as issued by a single issuer for purposes of these diversification
tests. Thus, in order to meet the diversification tests and thereby maintain
its status as a regulated investment company, the Fund may be required to
diversify its portfolio of Canadian Government Securities and Mexican
Government Securities in a manner which would not be necessary if the Fund
limited its investments to U.S. Government securities.
Other Investment Policies and Risk Considerations
The Fund may also engage in certain other investment practices described more
fully below.
Repurchase Agreements. The Fund may agree to purchase U.S. Treasury Securities,
Canadian Treasury Securities or Mexican Treasury Securities from creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Repurchase agreements related to Canadian or Mexican Treasury Securities
will be of a duration of no more than one day. Default by, or bankruptcy
proceedings with respect to, the seller may, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
There are several additional risks related to repurchase agreements with
respect to treasury securities issued by foreign governments. First, although
the Fund will only enter into repurchase agreements collateralized by Canadian
or Mexican Treasury securities that initially have a value at least equal to
the repurchase price, under certain circumstances it might be possible that the
value of the collateral being held with respect to any such repurchase
8
<PAGE>
agreement would be reduced to such an extent that the agreement would be
undercollateralized. Second, in the event of default or bankruptcy of the
selling institution, enforcement of the Fund's rights would be subject to
additional difficulties and delays due to legal considerations applicable in
such foreign country.
Currency and Interest Rate Hedging Transactions. To hedge against adverse price
movements in the currencies in which securities held in the Fund's portfolio
are denominated (as well as the denominated currencies of the securities it
might wish to purchase) the Fund may engage in transactions in forward foreign
currency contracts, options on currencies, and futures contracts and options on
futures contracts on currencies. (See "Risk Factors -- Currency Risks.") The
Fund will not engage in any such transactions if the consummation of such
transactions would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's securities and other assets denominated in
that currency.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. The Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates. Currently, only a limited market
exists for hedging transactions relating to the Mexican peso.
If deemed appropriate by the Advisor, the Fund will enter into forward
contracts to "lock in" the price of a security in the denominated foreign
currency. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency that is being used for
the security purchase and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received. In
addition, the Fund may enter into forward contracts with respect to currencies
in which certain of its portfolio securities are denominated and on which
options have been written. (See "Futures Contracts and Options" below.)
Futures Contracts and Options. The Fund may purchase and sell futures contracts
on debt securities and indices of debt securities (i.e., interest rate futures
contracts) as a hedge against or to minimize adverse principal fluctuations
resulting from anticipated interest rate changes. The Fund may also purchase
and sell currency futures contracts as a hedge to protect against anticipated
changes in currency rates or as an efficient means to adjust its exposure to
the currency market. The Fund may also write (sell) covered call options on
futures contracts, purchase put and call options on futures contracts and may
enter into closing transactions with respect to such options on futures
contracts purchased or sold. The Fund may also write covered put options on
futures contracts and may enter into closing transactions with respect to such
options on futures contracts. When the Fund purchases a futures contract, or
writes a put option or purchases a call option thereon, an amount of cash and
liquid assets will be deposited in a segregated account with the Fund's
custodian so that the segregated amount, plus the amount of initial margin
deposits held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of the futures contract is
unleveraged. The Fund will not enter into futures contracts for speculation and
will only enter into futures contracts that are traded on a recognized futures
exchange. The Fund will not enter into futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on the
Fund's open futures contracts and premiums paid for unexpired options on
futures contracts, excluding "bona fide hedging" transactions, would exceed 5%
of the value of the Fund's total assets; provided, however, that in the case of
an option that is "in-the-money" the amount may be excluded in calculating the
5% limitation.
The use of futures contracts by the Fund entails certain risks, including but
not limited to the following: no assurance that futures contracts transactions
can be offset at favorable prices; possible reduction of the Fund's income due
to the use of hedging; possible reduction in value of both the security or
currency hedged and the hedging instrument; possible lack of liquidity due to
daily limits on price fluctuations; imperfect correlation between the contract
and the security or currency being hedged; and potential losses in excess of
the amount initially invested in futures contracts themselves. If the
expectations of the Advisor regarding movements in securities prices, interest
rates or exchange rates are incorrect, the Fund might have
9
<PAGE>
experienced better investment results without hedging. The use of futures
contracts and options on futures contracts requires special skills in addition
to those needed to select portfolio securities.
Purchase of When-Issued Securities. From time to time, in the ordinary course
of business, the Fund may purchase securities, at the current market value of
the securities, on a forward commitment or "when-issued" basis. The Fund will
establish a segregated account with its custodian consisting of cash or other
liquid securities equal at all times to the amount of its when-issued
commitments. While the Fund will purchase securities on a forward commitment or
"when-issued" basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable. The value of securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are at all times
secured by cash or money market instruments, which are maintained in a
segregated account pursuant to applicable regulations and that are at least
equal to the market value, determined daily, of the loaned securities. As with
any extensions of credit, there are risks of delay in recovery and in some
cases even loss of rights in the collateral should the borrower of the
securities fail financially. In determining whether to lend securities to a
particular borrower, the Advisor (subject to review by the Fund's Board of
Directors) will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will not lend portfolio securities
in excess of 20% of the value of its total assets. The Board of Directors will
monitor the Fund's lending of portfolio securities.
4. Investment Restrictions
The Fund will not invest 25% or more of the value of its total assets in
securities of issuers in any one industry (for these purposes, the United
States Government, its agencies and instrumentalities are not considered to be
an industry). This restriction is a matter of fundamental policy and may not be
changed without the affirmative vote of a majority of the outstanding shares.
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
5. The Fund's Net Asset Value
The following sections describe how to buy and redeem Shares.
The price you pay or receive is based on the Fund's net asset value per share.
When you buy Shares, the price you pay may be increased by a sales charge. Read
the section on how to buy Shares for details on how and when a sales charge may
or may not be imposed.
The net asset value per share is determined on each business day as of the
close of trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time). It is calculated by subtracting the Fund's liabilities from its assets
and dividing the result by the outstanding number of shares.
In valuing the Fund's assets, its investments are priced at their market value
which is normally based on current prices but which may be determined according
to "fair value" procedures approved by the Fund's Board of Directors.
You may buy or redeem Shares on any day on which the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.
6. How To Buy Shares
You may buy Shares through your securities dealer or through any financial
institution that is authorized to act as a shareholder servicing agent. Contact
them for details on how to enter and pay for your order. You may also buy
Shares by sending your check (along with a completed Application form) directly
to the Fund.
Your initial investment must be at least $5,000. Subsequent investments must be
at least $250. The following are exceptions to these minimums:
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<PAGE>
o If you are investing in an IRA account, your initial investment may be as low
as $1,000.
o If you are a participant in the Fund's Automatic Investing Plan, your initial
investment may be as low as $250. If you participate in the monthly plan,
your subsequent investments may be as low as $100. If you participate in the
quarterly plan, your subsequent investments may be as low as $250. Refer to
the section on the Fund's Automatic Investing Plan for details.
Your purchase order may not be accepted if the sale of Shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders.
Purchase Price
The price you pay to buy Shares will be the Fund's offering price which is
calculated by adding any applicable sales charges to the net asset value per
share. The amount of the sales charge included in your purchase price will be
according to the following schedule.
Sales
Sales Charge as
Charge as Percentage
Percentage of Net
of Offering Amount
Amount of Purchase Price Invested
------------------ ------------- -----------
Less than $ 100,000 3.00% 3.09%
$100,000 - $ 249,999 2.50% 2.56%
$250,000 - $ 499,999 2.00% 2.04%
$500,000 - $ 999,999 1.50% 1.52%
$1,000,000 - $1,999,999 0.75% 0.76%
$2,000,000 - $2,999,999 0.50% 0.50%
$3,000,000 and over ....... none none
If you are purchasing shares of this or any other fund in the ISI family of
funds or if you already have investments in this Fund or another ISI fund, you
may combine the value of your purchase orders with the value of your existing
investments to determine whether you qualify for a reduced sales charge. (For
this purpose your existing investments will be valued at the higher of cost or
current value.) You may also combine your purchases and investments with those
of your spouse and your children under the age of 21 for this purpose. You must
be able to provide sufficient information to verify that you qualify for this
right of accumulation.
If you anticipate making additional purchases of Shares over the next 13
months, you may combine the value of your current purchase with the value of
your anticipated purchases to determine whether you qualify for a reduced sales
charge. You will be required to sign a letter of intent specifying the total
value of your anticipated purchases and to initially purchase at least 5% of
the total. When you make each purchase during the period, you will pay the
sales charge applicable to their combined value. If, at the end of the 13-month
period, the total value of your purchases is less than the amount you
indicated, you will be required to pay the difference between the sales charges
you paid and the sales charge applicable to the amount you actually did
purchase. Some of the Shares you own will be redeemed to pay this difference.
You may buy Shares without paying a sales charge under the following
circumstances:
1. If you are reinvesting some or all of the proceeds of a redemption of Shares
made within the last six months provided that the amount you are reinvesting
is at least $5,000.
2. If you are exchanging an investment in another ISI fund for an investment in
this Fund (see "Purchases by Exchange" for a full description of the
conditions).
3. If you are a current or retired Director of the Fund, a director, employee or
a member of the immediate family of an employee of any of the following or
their respective affiliates: the Advisor, the Fund's administrator and any
broker-dealer authorized to sell Shares.
4. If you are purchasing Shares in a fiduciary or advisory account with a bank,
bank trust department, registered investment advisory company, financial
planner or securities dealer purchasing Shares on your behalf. To qualify for
this provision, you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee by your
broker or agent if you purchase Shares in this manner.
<PAGE>
Purchases by Exchange
You may exchange shares of any other fund in the ISI family of funds with the
same or higher sales charge structure for an equal dollar amount of Shares
without payment of the sales charges described or any other sales charge. In
addition, you may exchange shares of any fund in the ISI family of funds
purchased through a special offer for an equal dollar amount of Shares if you
have owned the shares you are redeeming for 24 months. If you have owned them
for less than 24 months, you may exchange them for Shares if you pay the
difference in sales charges.
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<PAGE>
You may enter both your purchase and redemption orders on the same Business Day
or, if you have already redeemed the shares of the other fund, you may enter
your purchase order within six months of the redemption, provided the amount of
the purchase order is at least $5,000. The Fund may modify or terminate these
offers of exchange at any time upon 60 days' prior written notice.
Until February 28, 1999, you may exchange shares of any other mutual fund on
which you have paid a sales charge or shares of any closed end fund, for an
equal dollar amount of Shares by submitting to the Distributor or your
securities dealer, the proceeds of the redemption or sale of shares of such
funds, together with evidence of payment of a sales charge (for mutual funds
only) and the source of such proceeds. Shares issued pursuant to this offer
will not be subject to the sales charges described above or any other charge.
You may request an exchange through your securities dealer or servicing agent.
Contact them for details on how to enter your order. If your Shares are in an
account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
Purchases Through Automatic Investing Plan
You may elect to make a regular monthly or quarterly investment in Shares. The
amount you decide upon will be withdrawn from your checking account using a
pre-authorized check. When the money is received by the Transfer Agent, it will
be invested in Shares at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income and capital gains distributions will be
reinvested in additional Shares at net asset value. You may elect to receive
your distributions in cash or to have your distributions invested in shares of
other funds in the ISI family of funds. To make either of these elections or to
terminate automatic reinvestment, complete the appropriate section of the
attached Application Form or notify the Transfer Agent, your securities dealer
or your servicing agent at least five days before the date on which the next
dividend or distribution will be paid.
7. How To Redeem Shares
You may redeem Shares through your securities dealer or servicing agent.
Contact them for details on how to enter your order and information on how you
will be paid. If your Shares are in an account with the Fund, you may also
redeem Shares by contacting the Transfer Agent by mail or (if you are redeeming
less than $50,000) by telephone. The Transfer Agent will mail your redemption
check within seven days after it receives your order in proper form. Refer to
the section on telephone transactions for more information on this method of
redemption.
Your securities dealer, your servicing agent or the Transfer Agent may require
the following documents before they redeem your Shares:
1. A letter of instructions specifying your account number and the number of
Shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the Shares exactly as their names appear on the account.
2. If you are redeeming more than $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company, broker,
dealer, securities exchange or association, clearing agency, savings
association or (if authorized by state law) credit union.
3. Any stock certificates representing the Shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
4. Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.
If you own Shares having a value of at least $10,000, you may arrange to have
some of your shares redeemed monthly or quarterly under the Fund's Systematic
Withdrawal Plan. Each redemption under this plan involves all the tax
implications normally associated with redemptions. Contact your securities
dealer, your servicing agent or the Transfer Agent for information on this
plan.
Any dividends payable on Shares you redeem will be paid on the next dividend
payable date. If you have redeemed all of your Shares by that time, the
dividend will be paid by check, whether or not that is the option you have
selected.
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<PAGE>
If you redeem sufficient Shares to reduce your investment to $500 or less, the
Fund has the power to redeem the remaining shares after giving you 60 days'
notice.
8. Telephone Transactions
If your Shares are in an account with the Transfer Agent, you may redeem them
in any amount up to $50,000 or exchange them for shares of other funds in the
ISI family of funds by calling the Transfer Agent on any Business Day between
the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are automatically
entitled to telephone transaction privileges unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. You
may make this election when you complete the Application Form or at any time
thereafter by completing and returning documentation supplied by the Transfer
Agent.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that telephoned instructions are genuine. These procedures include requiring
you to provide certain personal identification information at the time your
account is opened and prior to effecting each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following instructions received by telephone that they reasonably believe to be
genuine. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
9. Dealer Compensation
Your securities dealer is paid a commission when you buy shares and is paid a
servicing fee for as long as you hold your shares.
Dealer Compensation as
Amount of Purchase a % of Offering Price
------------------ ----------------------
Less than $100,000........... 2.75%
$100,000 - $249,999........... 2.25%
$250,000 - $499,999........... 1.75%
$500,000 - $999,999........... 1.25%
$1,000,000 - $1,999,999......... 0.75%
$2,000,000 - $2,999,999......... 0.50%
$3,000,000 and over............. None
- ------------------------
* Your securities dealer may be paid up to 100% of the sales charge. Securities
dealers that receive a reallowance of 100% of the sales charge may be
considered underwriters for the purposes of federal securities laws.
In addition to the commissions shown above, your securities dealer may be paid
an annual fee equal to [0.25%] of the value of your Shares for as long as you
hold them. The annual fee will begin when you buy your shares.
10. Dividends and Taxes
The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income (including net
short-term capital gains) in the form of monthly dividends but such dividends
are not guaranteed. The Fund may distribute to shareholders any net capital
gains on an annual basis or, alternatively, may elect to retain net capital
gains and pay tax thereon.
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative,
judicial, or administrative action. No attempt has been made to present a
detailed explanation of the federal, state or local tax treatment of the Fund
or the shareholders, and the discussion here is not intended as a substitute
for careful tax planning. Accordingly, you are urged to consult with your tax
advisor regarding any specific questions. The Statement of Additional
Information sets forth further information concerning taxes.
The Fund has been and intends to continue to be taxed as a regulated investment
company under Subchapter M of the Code. As long as the Fund qualifies for this
tax treatment, it will be relieved of federal income tax on amounts distributed
to shareholders. You, unless otherwise exempt, will generally pay income taxes
on the amounts distributed to you. Reinvested dividends will be taxed as if
they had been distributed on the reinvestment date.
<PAGE>
Capital gains distributions from the Fund are classified as either short-term
or long-term depending upon how long the Fund held the securities it sold to
generate the gains. You will be taxed on the distributions according to the
category stipulated by the Fund regardless of how long you have held your
Shares. You will be taxed on all other income distributions as ordinary income,
whether such distributions are paid to you in cash or in additional Shares.
Fund distributions generally will not be eligible for the corporate dividends
received deduction.
Dividends declared payable to shareholders of record in December of one year,
but paid in January of the following year, will be deemed for tax purposes to
have been paid by the Fund and recieved by you in the year in which the
dividends were declared.
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<PAGE>
The Fund intends to make sufficient distributions of its ordinary income and
capital gains net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Shares is a taxable event to you.
11. Management of the Fund
The overall business affairs of the Fund are managed by its Board of Directors.
The Board approves all significant agreements between the Fund and persons or
companies furnishing services to the Fund, including the Fund's agreements with
its investment advisor, distributor, administrator, custodian and transfer
agent. A majority of the directors of the Fund have no affiliation with the
Distributor, the Advisor, or the Fund's administrator.
The Fund's Directors and officers are as follows:
Edward S. Hyman Chairman
Richard T. Hale Vice Chairman
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Rebecca W. Rimel Director
R. Alan Medaugh President
Nancy Lazar Vice President
Carrie L. Butler Vice President
Margaret M. Beeler Assistant Vice President
Keith C. Reilly Assistant Vice President
Joseph A. Finelli Treasurer
Amy M. Olmert Secretary
Scott J. Liotta Assistant Secrtary
12. Investment Advisor
International Strategy & Investment Inc. ("ISI" or the "Advisor"), a registered
investment advisor, serves as investment advisor to the Fund pursuant to an
Investment Advisory Agreement dated as of December 15, 1992 (the "Investment
Advisory Agreement"). ISI employs Messrs. Edward S. Hyman and R. Alan Medaugh.
Due to their stock ownership, Messrs. Hyman and Medaugh may be deemed to be
controlling persons of ISI. As of May 31, 1998, the Advisor had approximately
$500 million in fixed-income securities under management for clients both
within and outside of the United States. The Advisor also acts as investment
advisor to Total Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc.
and ISI Strategy Fund, Inc., U.S. open-end management investment companies with
approximately $425 million of aggregate net assets as of May 31, 1998.
Pursuant to the terms of the Investment Advisory Agreement, the Advisor is
responsible for decisions to buy and sell securities for the Fund, for
broker-dealer selection, and for negotiation of commission rates. In general,
purchases and sales of securities by the Fund will usually be principal
transactions, and therefore the Fund will not incur substantial brokerage
commission expense. However, the Advisor's primary consideration in effecting
securities transactions will be to obtain best price and execution. To the
extent that the execution and prices of more than one dealer are comparable,
the Advisor may, in its discretion, effect transactions with dealers that
furnish statistical or other information or services that may benefit the
Fund's investment program.
The Advisor and the Fund's administrator have agreed, on a voluntary basis, to
waive a proportionate amount of their fees to the extent required so that the
Fund's total operating expenses do not exceed 1.25% of the Fund's average daily
net assets. (See "Fee Table.") As compensation for its services for the fiscal
year ended March 31, 1998, the Advisor received from the Fund a fee (net of fee
waivers) equal to 0.38% of the Fund's average daily net assets.
Portfolio Managers
Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh, President
of the Fund and ISI, have shared direct portfolio management responsibility for
the Fund since its inception.
Mr. Hyman is responsible for developing the economic analysis upon which the
Fund's selection of investments is based. Before joining ISI, Mr. Hyman was a
vice chairman and member of the Board of C.J. Lawrence Inc. and prior thereto,
an economic consultant at Data Resources. He writes a variety of international
and domestic economic reports that follow trends that may determine the
direction of interest rates. These international and domestic reports are sent
to ISI's private institutional clients in the United States and overseas. The
periodical Institutional Investor, which rates analysts and economists on an
annual basis, has rated Mr. Hyman as its "first team" economist, which is its
highest rating, in each of the last eighteen years.
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<PAGE>
Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto, Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department, which managed $5 billion of
international fixed-income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam Management
Company and Fidelity Management and Research.
13. Administrator
Investment Company Capital Corp. ("ICC" or the "Administrator"), an indirect
subsidiary of Bankers Trust Corporation, provides administration services to
the Fund.
ICC supervises the day-to-day operations of the Fund, including the preparation
of registration statements, proxy materials, shareholder reports, compliance
with all requirements of securities laws in the states in which the Shares are
distributed and oversight of the relationship between the Fund and its other
service providers. As compensation for its services, for the fiscal year ended
March 31, 1998, ICC received a fee (net of fee waivers) equal to 0.19% of the
Fund's average daily net assets. ICC and the Advisor have agreed, on a
voluntary basis, to waive a proportionate amount of their fees, to the extent
required so that the Fund's total operating expenses do not exceed 1.25% of the
Fund's average daily net assets. (See "Fee Table.") .
ICC is also the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. An affiliate of ICC provides custody services
to the Fund. (See "Custodian, Transfer Agent and Accounting Services.")
14. Distributor
International Strategy & Investment Group Inc. ("ISI Group" or the
"Distributor") acts as distributor of the Shares pursuant to a Distribution
Agreement and related Plan of Distribution (the "Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended. ISI Group is a
broker-dealer that was formed in 1991 and is an affiliate of the Advisor. ISI
Group employs Mr. Edward S. Hyman and Ms. Nancy Lazar. Due to their stock
ownership, Mr. Hyman and Ms. Lazar may be deemed to be controlling persons of
ISI Group Inc. As compensation for its services, for the fiscal year ended
March 31, 1998, ISI Group received a fee equal to 0.40% of the Fund's average
daily net assets. The Distributor may allocate on a proportional basis up to
all of its fee to selected securities dealers as compensation for their ongoing
shareholder services, including processing purchase and redemption requests and
responding to your inquiries.
In addition, the Fund may enter into agreements with certain financial
institutions, such as banks, to provide shareholder services, pursuant to which
the Distributor may allocate all or a portion of its distribution fee as
compensation for such financial institutions' ongoing shareholder services.
Such financial institutions may charge you separately for these services.
Payments under the Plan are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services to the Fund is less than the payments received, the Distributor may
retain the unexpended portion of the distribution fee. The Distributor or its
associated persons may make payments from its own resources to securities
dealers and servicing agents. Payments by the Distributor may include
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise and travel).
15. Custodian, Transfer Agent and Accounting Services
Investment Company Capital Corp. is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services to the Fund for the fiscal year ended March 31,
1998, ICC received a fee equal to 0.10% of the Fund's average daily net assets.
Bankers Trust Company, a subsidiary of Bankers Trust Corporation, acts as
custodian of the Fund's assets. (See the Statement of Additional Information.)
16. Performance Information
From time to time, the Fund may quote total return and yield data in
advertisements or in reports to shareholders. Both total return and yield data
will be computed according to the standardized calculations required by the SEC
to provide consistency and comparability in investment company advertising.
15
<PAGE>
The yield of the Fund will be determined by dividing the net investment income
earned by the Fund during a 30-day period by the maximum offering price per
Share on the last day of the period and annualizing the result on a semi-annual
basis.
Advertisements or reports citing performance data will show the average annual
total return, net of the Fund's sales charge, over one-, five- and ten-year
periods or, if such periods have not yet elapsed, shorter periods corresponding
to the life of the Fund. Such return quotations will be computed by finding
average annual compounded rates of return over such periods that would equate
an assumed initial investment of $1,000 to the ending redeemable value, net of
all sales loads and other fees, according to the required standardized
calculation. The Fund's total return for a given period is based upon changes
in the Fund's net asset value and the Fund's yield for the period. If the Fund
compares its performance to other funds or to relevant indices, the Fund's
performance will be stated in the same terms in which such comparative data and
indices are stated, which is normally total return rather than yield. For these
purposes, the performance of the Fund, as well as the performance of such
investment companies or indices, may not reflect sales charges, which, if
reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index (or any of its sub-indices), the return on 90-day U.S.
Treasury bills, the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average. The Fund may also use total return performance data as
reported in the following national publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, the Fund's
current yield and any statement of performance will fluctuate from time to time
and are not necessarily representative of the Fund's future performance. Yield
and performance data should also be considered in light of the risks associated
with the Fund's investment objective and policies.
The Fund's annual portfolio turnover rate (the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the portfolio during the year, excluding securities with maturities of one year
or less) may vary from year-to-year, as well as within a year, depending on
market conditions. A high level of portfolio turnover may generate relatively
high transaction costs and may increase the amount of taxes payable by the
Fund's shareholders. For the fiscal years ended March 31, 1998 and March 31,
1997, the Fund's portfolio turnover rate was 125% and 46%, respectively. The
Fund paid no brokerage commissions during such periods.
17. General Information
Capital Shares
The Fund was incorporated under the laws of the State of Maryland on October
20, 1992, and is authorized to issue 25 million shares of capital stock with a
par value of $.001 per share. Shares of the Fund have equal rights with respect
to voting. Voting rights are not cumulative, so the holders of more than 50% of
the outstanding Shares voting together for election of Directors may elect all
the members of the Board of Directors of the Fund. The fiscal year end of the
Fund is March 31. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets after all debts and
expenses have been paid. The Board of Directors of the Fund is authorized to
establish additional series and classes of shares of capital stock. Each series
would evidence interests in a separate portfolio of securities, and each class
would evidence separate classes of each series of the Fund. The Board has no
present intention of establishing any additional series or classes of the Fund.
Annual Meetings
The Fund does not expect to hold annual meetings of shareholders unless
required by Maryland law. Shareholders of the Fund reserve the right, under
certain circumstances, to request that a meeting of shareholders be held for
the purpose of considering the removal of a Director from office, and if such a
request is made, the Fund will assist with shareholder communications in
connection with the meeting.
16
<PAGE>
Reports
You will be furnished with semi-annual reports containing information about the
Fund and its operations, including a list of investments held in the Fund's
portfolio and financial statements. The annual financial statements are audited
by the Fund's independent accountants, PricewaterhouseCoopers LLP.
Shareholder Inquiries
If you have questions concerning your Shares, contact the Transfer Agent at
(800) 882-8585, the Fund at (800) 955-7175 or your securities dealer or
servicing agent.
17
<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "ISI North American Government Bond Fund Shares" and mail
with this application to:
ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
For an IRA information kit, please call ISI at (800) 955-7175.
- --------------------------------------------------------------------------------
Your Account Registration (Please Print)
- -------------------------------------
Existing Account No., if any
Individual or Joint Tenant
- -------------------------------------
First Name Initial Last Name
- -------------------------------------
Social Security Number
- -------------------------------------
Joint Tenant Initial Last Name
- -------------------------------------
Social Security Number
Corporations, Trusts, Partnerships, etc.
- -------------------------------------
Name of Corporation, Trust or Partnership
- -------------------------------------
Tax ID Number
- -------------------------------------
Name of Trustees (If to be included in the Registration)
Gifts to Minors
- -------------------------------------
Custodian's Name (only one allowed by law)
- -------------------------------------
Minor's Name (only one)
- -------------------------------------
Social Security Number of Minor
- -------------------------------------
Minor's Date of Birth (Mo./Day/Yr.)
under the __________________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
- -------------------------------------
Street
- -------------------------------------
City State Zip
( )
- -------------------------------------
Daytime Phone
- --------------------------------------------------------------------------------
Statement of Intention (Optional)
[ ] I agree to the Letter of Intent and Escrow Arrangement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares of
ISI North American Government Bond Fund Shares in an aggregate amount at least
equal to:
__$100,000 __$250,000 __$500,000 __$1,000,000 __$2,000,000 __$3,000,000
- --------------------------------------------------------------------------------
Right of Accumulation (Optional)
[ ] I already own shares of the ISI Fund(s) set forth below to be applied for a
reduced sales charge. List the Account numbers of other ISI Funds that you or
your immediate family (spouse and children under 21) already own that qualify
for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Distribution Options
Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
- --------------------------------------------------------------------------------
<PAGE>
Automatic Investing Plan (Optional)
[ ] I authorize you as Agent for Automatic Investing to automatically invest
$___________ for me, on a monthly or quarterly basis, on or about the 20th
of each month or if quarterly, the 20th of January, April, July and October,
and to draw a bank draft in payment of the investment against my checking
account. (Bank drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):___ [ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
-----------------------------
Please attach a voided check.
-----------------------------
- -------------------------------------
Bank Name
- -------------------------------------
Depositor's Signature Date
- -------------------------------------
Existing ISI North American Government Bond Fund Account
No., if any
- -------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
- -------------------------------------------------------------------------------
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of ______________, 19__, please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $_____________,
from shares that I own, payable to the account registration address as shown
above. (Participation requires minimum account value of $10,000)
Frequency (check one): [ ] Monthly [ ] Quarterly (January, April, July
and October)
- --------------------------------------------------------------------------------
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other ISI Funds) unless I mark one or both of the boxes below.
No, I/We do not want: [ ] Telephone redemption privileges [ ] Telephone
exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: ________________________________ Bank Account No.: __________________
Address: ________________________________ Bank Account Name:__________________
- --------------------------------------------------------------------------------
Signature and Taxpayer Certification
- --------------------------------------------------------------------------------
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any taxable dividends, capital gains distributions and redemption proceeds
paid to any individual or certain other non-corporate shareholders who fail
to provide the information and/or certifications required below. This backup
withholding is not an additional tax, and any amounts withheld may be
credited against your ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury
that the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup withholding,
or (b) I have not been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above, I
have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish my
correct Social Security Number or Tax ID Number, I may be subject to a
penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-882-8585).
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:__________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
- --------------------------------------------------------------------------------
I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus.
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
- ----------------------------------- -------------------------------------
Signature Date Signature (if joint acct., both must sign)
<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
(A Class of North American Government Bond Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
1-800-955-7175
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY &
One South Street INVESTMENT GROUP INC.
Baltimore, Maryland 21202 717 Fifth Avenue
New York, New York 10022
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. PRICEWATERHOUSECOOPERS LLP
One South Street 250 West Pratt Street
Baltimore, Maryland 21202 Baltimore, Maryland 21201
1-800-882-8585
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
<PAGE>
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
TABLE OF CONTENTS
Page
----
1. Fee Table .......................... 2
2. Financial Highlights ............... 2
3. Investment Objective, Policies
and Risk Factors .................. 3
4. Investment Restrictions ............ 10
5. The Fund's Net Asset Value ......... 10
6. How to Buy Shares .................. 10
7. How to Redeem Shares ............... 12
8. Telephone Transactions ............. 13
9. Dealers Compensation ............... 13
10. Dividends and Taxes ................ 13
11. Management of the Fund ............. 14
12. Investment Advisor ................. 14
13. Administrator ...................... 15
14. Distributor ........................ 15
15. Custodian, Transfer Agent and
Accounting Services ............... 15
16. Performance Information ............ 15
17. General Information ................ 16
[GRAPHIC OMITTED]
ISI
INTERNATIONAL STRATEGY & INVESTMENT
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
An open-end mutual fund designed to provide a high level of current
income, consistent with prudent investment risk, by investing primarily in a
portfolio consisting of fixed-income securities issued or guaranteed by the
governments of the United States, Canada and Mexico.
August 1, 1998
PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
717 Fifth Avenue
New York, New York 10022
----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD
BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS, WHICH MAY BE OBTAINED
FROM YOUR SECURITIES DEALER OR BY WRITING OR CALLING INTERNATIONAL
STRATEGY & INVESTMENT GROUP INC., 717 FIFTH AVENUE, NEW YORK, NEW YORK
10022, (800) 955-7175.
Statement of Additional Information Dated: August 1, 1998
Relating to Prospectus Dated: August 1, 1998
of
ISI North American Government Bond Fund Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History.......................................... 1
2. Investment Objective, Policies and
Risk Considerations.................................................... 1
3. Additional Information About
Canada and Mexico........................................................ 7
4. Valuation of Shares and Redemption....................................... 22
5. Federal Tax Treatment of Dividends and
Distributions.......................................................... 22
6. Management of the Fund................................................... 25
7. Investment Advisory and Other Services................................... 29
8. Administration........................................................... 31
9. Distribution of Fund Shares.............................................. 31
10. Portfolio Transactions.................................................. 34
11. Capital Stock............................................................ 35
12. Semi-Annual Reports...................................................... 35
13. Custodian, Transfer Agent and
Accounting Services.................................................... 36
14. Independent Accountants................................................. 36
15. Legal Matters........................................................... 36
16. Control Persons and Principal Holders of
Securities............................................................. 36
17. Performance and Yield Computations....................................... 37
18. Financial Statements .................................................... 38
19. APPENDIX - Moody's Investors Service and Standard & Poor's Ratings
Definitions..............................................................A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
North American Government Bond Fund, Inc. (the "Fund") is an open-end,
non-diversified management investment company. Under the rules and regulations
of the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The Fund
currently has one class of shares: ISI North American Government Bond Fund
Shares. The prospectus for such class of the Fund's shares contains important
information concerning the Fund, and may be obtained without charge from the
Fund's distributor (the "Distributor"), or from Participating Dealers that offer
shares of the Fund (the "Shares") to prospective investors. Prospectuses may
also be obtained from Shareholder Servicing Agents. Some of the information
required to be in this Statement of Additional Information is also included in
the Fund's current Prospectus. To avoid unnecessary repetition, references are
made to related sections of the Prospectus. In addition, the Prospectus and this
Statement of Additional Information omit certain information concerning the Fund
and its business that is contained in the Registration Statement respecting the
Fund and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.
The Fund was incorporated under the laws of the State of Maryland on
October 20, 1992. The Fund filed a registration statement with the SEC
registering itself as an open-end, non-diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933 and commenced operations
on January 15, 1993.
The Fund depends on the smooth functioning of computer systems in almost
every aspect of its business. The Fund could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Fund has asked it service providers whether they expect to have their
computer systems adjusted for the year 2000 transition and received assurances
from each that its system is expected to accommodate the year 2000 without
material adverse consequences to the Fund. The Fund and its shareholders may
experience losses if these assurances prove to be incorrect or if issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Fund does business, experience difficulties as a result
of year 2000 issues.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Investment Objective, Policies and Risk Considerations of the Fund
The Fund's investment objective and its general investment policies are
described in the Prospectus. Additional investment restrictions are set forth
below. This Statement of Additional Information also describes other investment
practices in which the Fund may engage. These practices include entering into
repurchase agreements and purchasing securities for future delivery. The Fund
may also engage in certain other investment practices as a means of protecting
against fluctuations in foreign currencies, which practices are described more
fully below.
Except as described below under "Investment Restrictions of the Fund," the
investment policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Directors may change such
policies without an affirmative vote of a majority of the Fund's outstanding
-1-
<PAGE>
Shares (as defined under "Capital Stock" below). The Fund's investment objective
is fundamental, however, and may not be changed without such a vote.
Below Investment Grade Bonds
The Fund may purchase bonds including debentures, that are rated BB by
Standard & Poor's Ratings Group ("S&P") or Ba by Moody's Investors Services,
Inc. ("Moody's"), or that are unrated by S&P or Moody's if such bonds, in the
judgment of the Fund's investment advisor (the "Advisor"), meet the quality
criteria established by the Board of Directors. These bonds are generally known
as "junk bonds." These securities may trade at substantial discounts from their
face values. Appendix A to this Statement of Additional Information sets forth a
description of the S&P and Moody's rating categories, which indicate the rating
agency's opinion as to the probability of timely payment of interest and
principal. Generally, securities which are rated lower than BBB by S&P or Baa by
Moody's are described as below investment grade. Securities rated lower than
investment grade are of a predominately speculative character and their future
cannot be considered well-assured. The issuer's ability to make timely payments
of principal and interest may be subject to material contingencies. Securities
in the lowest rating categories may be unable to make timely interest or
principal payments and may be in default and in arrears in interest and
principal payments.
Ratings of S&P and Moody's represent their opinions of the quality of bonds
and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, the Advisor does not rely
exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities but supplements such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high yield securities will be significantly affected not only by credit
quality, but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisor of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.
Investing in higher yield, high risk, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high yield bonds will fluctuate over
time, reflecting not only changing interest rates but also the bond market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing interest
rates. In addition, in adverse economic conditions, the liquidity of the
secondary market for junk bonds may be significantly reduced, and there may be
significant disparities in the prices quoted for high yield bonds by various
dealers. In addition, adverse economic developments could disrupt the high yield
market, affecting both price and liquidity, and could also affect the ability of
issuers to repay principal and interest, thereby leading to a default rate
higher than has been the case historically.
In adverse economic conditions, the liquidity of the secondary market for
high yield bonds may be significantly reduced. Even under normal conditions, the
market for high yield bonds may be less liquid than the market for investment
grade corporate bonds. There are fewer securities dealers in the high yield
market and purchasers of high yield bonds are concentrated among a smaller group
of securities dealers and institutional investors. In periods of reduced market
liquidity, the market for high yield bonds may
-2-
<PAGE>
become more volatile and there may be significant disparities in the prices
quoted for high yield securities by various dealers. Under conditions of
increased volatility and reduced liquidity, it would become more difficult for
the Fund to value its portfolio securities accurately because there might be
less reliable, objective data available.
Finally, prices for high yield bonds may be affected by legislative and
regulatory developments. In addition, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructuring such as takeovers, mergers or
leveraged buy outs. Such legislation may significantly depress the prices of
outstanding high yield bonds.
Repurchase Agreements
The Fund may agree to purchase U.S. Treasury securities, Canadian Treasury
securities or Mexican Treasury securities from financial institutions, such as
banks and broker-dealers, subject to the seller's agreement to repurchase the
securities at an established time and price. Repurchase agreements related to
Canadian Treasury securities and Mexican Treasury securities will be of a
duration of no more than one day. Repurchase agreements related to U.S. Treasury
Securities will be of a duration of no more than seven days from the date of
purchase. The collateral for such repurchase agreements will be held by the
Fund's custodian or a duly appointed sub-custodian. The Fund will enter into
repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. The seller under a repurchase
agreement would be required to maintain the value of the securities subject to
the repurchase agreement at not less than the repurchase price. The Fund does
not bear the risk of a decline in value of the underlying securities unless the
seller defaults under its repurchase obligation. Default by the seller would,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligation. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, the Fund may be delayed or limited in its ability to sell the
collateral. There are several additional risks related to repurchase agreements
with respect to treasury securities issued by foreign governments. First,
although the Fund will only enter into repurchase agreements collateralized by
Canadian or Mexican Treasury Securities that initially have a value at least
equal to the repurchase price, under certain circumstances, it might be possible
that the value of the collateral being held with respect to any such repurchase
agreement would be reduced to such an extent that the agreement would be
undercollateralized. Second, in the event of default or bankruptcy of the
selling institution, enforcement of the Fund's rights would be subject to
additional difficulties and delays due to legal considerations of the applicable
foreign country.
Currency and Interest Rate Hedging Transactions
To hedge against adverse price movements in the currencies in which
securities held in the Fund's portfolio are denominated (as well as the
denominated currencies of the securities it might wish to purchase), the Fund
may engage in transactions in forward foreign currency contracts, options on
currencies, and futures contracts and options on futures contracts on
currencies. The Fund will not engage in any such transactions in excess of the
value of the securities denominated or payable in the foreign currency which are
then held in the Fund's portfolio.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time of
the contract. The Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
-3-
<PAGE>
Currently, only a limited market exists for hedging transactions relating
to the Mexican peso. This may limit the Fund's ability to hedge effectively its
investments in Mexico. Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also limit
the opportunity for gain if the value of the hedge currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates.
The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. By entering into a forward contract
for the purchase or sale, for a fixed amount of dollars or other currency, of
the amount of foreign currency involved in the underlying security transactions,
the Fund will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase and the foreign currency in which
the security is denominated during the period between the date on which the
security is purchased or sold and the date on which payment is made or received.
In addition, the Fund may enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and on
which options have been written. (See "Futures Contracts and Options" below.)
If the currency in which the Fund's portfolio securities (or portfolio
securities that the Fund anticipates purchasing) are denominated rises in value
with respect to the currency which is being purchased (or sold), then the Fund
will have realized fewer gains than had the Fund not entered into the forward
contracts. Moreover, the precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible, because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Advisor. The Fund generally will not enter into a forward contract with a
term of greater than one year, although it may enter into forward contracts for
periods of up to five years. The Fund may be limited in its ability to enter
into hedging transactions involving forward contracts by the Code requirements
relating to qualifications as a regulated investment company. (See "Federal
Income Tax Treatment of Dividends and Distributions.")
Futures Contracts and Options. The Fund may purchase and sell futures
contracts that are currently traded, or may in the future be traded, on U.S. and
foreign commodity exchanges on such underlying fixed-income securities as U.S.
Treasury bonds, notes, and bills and/or any Canadian or Mexican currencies
("currency" futures) and on such indexes of U.S. or foreign fixed-income
securities as may exist or come into being, such as the Moody's Investment Grade
Corporate Bond Index ("index" futures). As a futures contract purchaser, the
Fund incurs an obligation to take delivery of a specified amount of the currency
underlying the contract at a specified time in the future for a specified price.
As a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying currency at a specified time in return for an
agreed upon price.
The Fund may purchase and write call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with respect
to such options to terminate an existing position.
-4-
<PAGE>
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Advisor could be incorrect in its expectations as to
the direction or extent of various interest rate or price movements or the time
span within which the movements take place. For example, if the Fund sold
futures contracts for the sale of securities in anticipation of an increase in
interest rates, and then interest rates went down instead, causing bond prices
to rise, the Fund would lose money on the sale.
Another risk which will arise in employing futures contracts to protect
against the price volatility of portfolio securities is that the prices of
securities, currencies and indexes subject to futures contracts (and thereby the
futures contract prices) may correlate imperfectly with the behavior of the U.S.
dollar cash prices of the Fund's portfolio securities and their denominated
currencies.
Purchase of When-Issued Securities
From time to time, in the ordinary course of business, the Fund may
purchase securities, at the current market value of the securities, on a forward
commitment or "when issued" basis. When such transactions are negotiated, the
price is fixed at the time of the commitment, but delivery and payment will take
place after the date of the commitment. The Fund will establish a segregated
account with its custodian consisting of cash, cash equivalents or U.S. Treasury
securities, or other high quality liquid debt securities equal at all times to
its when-issued commitments. Additional cash or liquid debt securities will be
added to the account when necessary. While the Fund purchases securities on a
forward commitment or "when issued" basis only with the intention of acquiring
the securities, the Fund may sell the securities before the settlement date. The
securities so purchased or sold are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time of delivery of
the securities, their value may be more or less than the purchase or sale price.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are at all times secured by cash or money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined daily,
of the loaned securities. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. In determining whether to lend
securities to a particular borrower, the Advisor (subject to review by the
Fund's Board of Directors) will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Fund any income earned thereon and the Fund may invest
any cash collateral in portfolio securities, thereby earning additional income.
The Fund will not lend portfolio securities in excess of 20% of the value of its
total assets. The Board of Directors will monitor the Fund's lending of
portfolio securities.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal regulatory
limitations. The investment restrictions recited below are in addition to those
described in the Fund's Prospectus, and are matters of fundamental policy and
may not be changed without the affirmative vote of a majority of the outstanding
Shares. The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Accordingly, the Fund will not:
-5-
<PAGE>
1. Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and in an amount not exceeding
10% of the value of the total assets of the Fund at the time of such
borrowing, provided that, while borrowings by the Fund equaling 5% or more
of the Fund's total assets are outstanding, the Fund will not purchase
securities for investment.
2. With respect to 50% of its net assets, invest more than 5% of its
total assets in the securities of any single issuer (the U.S. Government
and its agencies and instrumentalities are not considered an issuer for
this purpose);
3. With respect to 50% of its net assets, invest in the securities of
any single issuer if, as a result, the Fund would hold more than 10% of the
voting securities of such issuer (the U.S. Government and its agencies and
instrumentalities are not considered an issuer for this purpose);
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts or futures
contracts, except that the Fund may enter into forward foreign currency
exchange contracts, futures contracts and options in accordance with its
investment objective and policies;
6. Act as an underwriter of securities within the meaning of the
federal securities laws;
7. Issue senior securities, except that the Fund may enter into
forward foreign currency contracts and futures contracts in accordance with
its investment objective and policies;
8. Make loans, except that the Fund may purchase or hold debt
instruments and may lend its portfolio securities and enter into repurchase
agreements in accordance with its investment objective and policies;
9. Effect short sales of securities;
10. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
11. Purchase participations or other interests in oil, gas or other
mineral exploration or development programs;
12. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;
13. Invest in shares of any other investment company registered under
the Investment Company Act;
14. Purchase or retain the securities of any issuer, if to the
knowledge of the Fund, any officer or Director of the Fund or its Advisor
owns beneficially more than 5% of the outstanding securities of such
issuer and together they own beneficially more than 5% of the securities of
such issuer;
-6-
<PAGE>
15. Invest in companies for the purpose of exercising management or
control;
16. Invest in puts or calls, or any combination thereof, except that
the Fund may enter into options, forward foreign currency contracts and
futures contracts, in accordance with its investment objective and
policies; or
17. Purchase warrants, if by reason of such purchase more than 5% of
its net assets (taken at market value) will be invested in warrants, valued
at the lower of cost or market. Included within this amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are
not listed on the New York or American Stock Exchange. For the purpose of
the foregoing calculations, warrants acquired by the Fund in units or
attached to securities will be deemed to be without value and therefore not
included within the preceding limitations.
The following investment restriction may be changed by a vote of the
majority of the Fund's Board of Directors. The Fund will not:
1. Invest more than 10% of the value of its net assets in illiquid
securities
3. ADDITIONAL INFORMATION ABOUT CANADA AND MEXICO
The information in this section is based on material obtained by the Fund
from various Canadian and Mexican governmental and other economic sources
believed to be accurate but has not been independently verified by the Fund or
the Advisor. It is not intended to be a complete description of Canada or
Mexico, the Canadian and Mexican economies, or the consequences of investing in
Mexican and Canadian fixed-income securities.
Additional Information About Canada
Territory and Population
Canada is the second largest country in the world in terms of land mass
with an area of 9.22 million square kilometers (3.85 million square miles). It
is located north of the continental United States of America and east of Alaska.
Canada is comprised of ten provinces and two territories. Its population is
approximately 30 million.
Government
Canada is a constitutional monarchy with Queen Elizabeth II of the United
Kingdom its nominal head of state. The Queen is represented by the Canadian
governor-general, appointed on the recommendation of the Canadian prime
minister. Canada's government has a federal structure, with a federal government
and ten provincial governments. The legislative branch consists of a House of
Commons (Parliament) and the Senate. Members of the House of Commons are elected
by Canadian citizens over 18 years of age. Senators are appointed on a regional
basis by the Prime Minister. The federal government is headed by the Prime
Minister who is chosen from the party that has won the majority of seats in the
House of Commons. The provincial governments each have a Legislative Assembly
and a Premier. The Prime Minister has the privilege of appointing all judges
except those of the provincial courts.
-7-
<PAGE>
Provinces have extensive power with specific areas of jurisdiction. The
federal government has defined areas of jurisdiction and the power to act in
areas declared by the House of Commons to be for the general advantage of
Canada. This general power has been used to justify federal action in certain
areas of provincial jurisdiction. Concurrent federal and provincial jurisdiction
exists in certain matters, including agriculture, immigration and pensions. The
power-sharing issue between the federal government and provincial governments
has been contentious and has proven to be a central issue in the process of
constitutional reform.
Politics
Since World War II, the federal government has been formed by either the
Liberal Party or the Progressive Conservative Party. In October 1993, the
Liberal Party under the leadership of Mr. Jean Chretien, won 178 of the 295
seats in the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. The Liberal Party was re-elected for a second
term in the June 2, 1997 general election, but lost 20 seats in the House of
Commons. It has been reported that Mr. Chretien may step down in two years.
Canada has had three major developments regarding unity and constitutional
reform in recent years. The first two major developments were the rejection of
the Meech Lake Agreement in 1990 and the Charlottetown Accord in 1992. Those
reforms would have given Quebec constitutional recognition as a distinct
society, transferred powers from the federal to the provincial governments and
reformed the Senate by providing for more equal representation among the
provinces.
The third major development was the possibility of Quebec's independence.
On September 12, 1994, the Quebec separatist party, Parti Quebecois under the
leadership of Jacques Parizeau, won 77 seats in the provincial election with
44.7% of the vote. The Liberal Party won 47 seats with 44.3% of the vote. The
Parti Quebecois' agenda included a call for a referendum supporting
independence. On October 30, 1995, the referendum was defeated in a close
ballot, in which 50.6% voted against secession and 49.4% voted for secession. If
the referendum had been approved, Quebec would have become a separate country,
but would have retained formal political and economic links with Canada similar
to those that join members of the European Union. It is expected that the
closeness of the vote will result in federally-sponsored legislation or the
proposal of constitutional amendments with regard to the relationship between
the federal government and the provinces. In addition, the Parti Quebecois has
indicated that if it wins a second term in the provincial elections that must be
held by the end of 1999, it will call another referendum. In the meantime, the
federal government has initiated a legal action in Canada's Supreme Court to
determine the legality of Quebec's secession. Court hearings in that case were
held in mid-February 1998 and a decision is anticipated during the summer of
1998. Also, Canada's provincial leaders (other than Quebec's) met in September
1997 to formulate a seven-point framework for discussion on national unity. It
is expected that Quebec's position within Canada will continue to be a matter of
political debate.
Monetary and Banking System
The central bank of Canada is the Bank of Canada. Its main functions are
conducting monetary policy, supervising commercial banks, acting as a fiscal
agent to the federal government and managing the foreign exchange fund. The
currency unit of Canada is the Canadian dollar. Canada does not impose foreign
exchange controls on capital receipts or payments by residents or non-residents.
-8-
<PAGE>
North American Free Trade Agreement
Canada and the United States are each other's largest trading partners and,
as a result, there is a significant linkage between the two economies. Bilateral
trade between Canada and the United States in 1995 was larger than between any
other two countries in the world. On January 2, 1988, Canada and the United
States signed the Free Trade Agreement (the "FTA"), which was ratified by the
Canadian Parliament and the United States Senate. In the summer of 1991, the
United States, Canada and Mexico began negotiating the North American Free Trade
Agreement ("NAFTA"). NAFTA was signed on December 17, 1992 at separate
ceremonies in Washington D.C., Mexico City and Ottawa. On December 30, 1993,
after the Legislatures in the United States and Mexico had ratified NAFTA, the
Canadian Government announced that it had proclaimed NAFTA into law and had
exchanged the written notifications with the United States and Mexico needed to
bring NAFTA into force. As a result, NAFTA effectively replaced the FTA. In
November 1996, Canada and Chile entered into a trade agreement that became
effective on June 2, 1997. Initial talks with other South American countries are
under way for similar bilateral trade agreements that are expected eventually to
fall under the umbrella of a new form of NAFTA. When fully-implemented, NAFTA is
designed to create a North American Free Trade Area, expand the flow of goods,
services and investment and eventually eliminate tariff barriers, import quotas
and technical barriers among Canada, the United States, Mexico and future
parties to NAFTA.
Economic Information Regarding Canada
Canada experienced rapid economic expansion during most of the 1980's. In
the early 1990's, however, the economy experienced a deep recession. This
resulted from, among other things, high government debt and high interest rates.
The recession partly created and partly highlighted some difficulties which the
present government has taken steps to resolve. The relatively low level of
economic activity during this period reduced the growth of tax receipts with the
result that the already high levels of government debt increased.
Recent Developments
The deterioration in the government's fiscal position, which started during
the recession, in the early 1990's, was initially exacerbated by a reluctance to
decrease expenditures or increase taxes. However, in its 1995 budget, the
Liberal Party introduced new spending cuts, the largest in over thirty years, to
reduce Canada's budget deficit. Spending cuts, in combination with an economic
recovery, have boosted government revenue. This has resulted in significant
deficit reduction. For the fiscal years 1994- 95, 1995-96 and 1996-97, the
budget deficit was approximately 5%, 4.2% and 1.1%, respectively of gross
domestic product ("GDP"). On February 24, 1998 the government announced that the
1998 budget would be balanced and that the 1999 and 2000 budgets would be
balanced as well. It has been almost 50 years since Canada has had three
consecutive balanced budgets. While the government's budget deficit objectives
can be achieved, it will require continued economic growth, lower interest rates
and additional reductions in government spending.
In addition to the growth of the federal government deficit during the
recession of the early 1990's, provincial government debt also rose rapidly.
Developments, including increased spending on social services at the provincial
level, were responsible for a significant amount of the growth of public debt
from 1990-1992. In response to the increase in provincial debt, a number of
rating agencies downgraded some provincial debt ratings during this period. All
provinces initiated plans to balance their respective budgets and, with the
exception of Ontario and Quebec, the provinces have achieved, or are close to
achieving, their goals. On January 22, 1998, the government announced that the
federal transfer payments to the provinces, which had been reduced, will
increase by $236 million in March 1998.
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<PAGE>
Canada's real GDP growth rate slipped from 4.1% in 1994 to 2.3% in 1995 and
1.5% in 1996. In the first, second and third quarters of 1997, real GDP grew
0.9%, 5.4% and 4.1% at an annual rate, respectively, and is estimated to have
grown 3.5% overall in 1997. Canada is forecast to experience real GDP growth of
3.3% in 1998. The recent growth of the economy has been broadly based, unlike
earlier periods of recovery, when it was attributable almost entirely to a
growth in exports. The trade sector continues to be an important factor,
however, in the growth of the Canadian economy. In 1995, the trade surplus was
more than three times higher than the average surplus between 1990 and 1994. In
1996, the trade surplus was almost 25% higher than it was in 1995. Exports grew
by 16% in 1995 and by 6% in 1996. According to preliminary data, however, in the
first five months of 1997 the trade surplus was reduced as the rate of import
growth doubled the rate of export growth.
During 1994, despite growing output and low inflation, concern over the
country's deficit and the uncertainty associated with Quebec's status within
Canada lead to a weakening of its currency and higher interest rates. During the
first two quarters of 1995, however, in an attempt to increase domestic growth,
the Bank of Canada decreased interest rates. On January 20, 1995, the Canadian
dollar fell to .702, its lowest rate in almost nine years and close to its
record low of .692. The Bank of Canada responded by increasing rates on Treasury
bills and selling U.S. dollars. The Canadian dollar increased in value from .702
against the U.S. dollar on January 20, 1995 to .734 on February 21, 1997. The
renewed strength of the Canadian dollar during this period facilitated the
easing of monetary policy. Subsequently, however, the Canadian dollar
depreciated, reaching a record low of .683 against the U.S. dollar on January
29, 1998. In June 1997, with a real growth of 4% annualized during the first two
quarters of 1997 and signs of weakness in the Canadian dollar, the Bank of
Canada decided to raise its Bank Rate for the first time since 1995, by 25 basis
points to 3.5%. The Bank Rate was raised several more times, most recently on
January 30, 1998, to 5%.
The following provides certain statistical and related information
regarding historical rates of exchange between the U.S. dollar and the Canadian
dollar, information concerning inflation rates, historical information regarding
the Canadian gross domestic product and information concerning yields on certain
Canadian Government Securities. Historical figures are not necessarily
indicative of future fluctuations.
Currency Exchange Rates
The exchange rate between the U.S. dollar and the Canadian dollar is at any
moment related to the supply of and demand for the two currencies and changes in
the rate result over time from the interaction of many factors directly or
indirectly affecting economic conditions in the United States and Canada,
including economic and political developments in other countries and government
policy and intervention in the money markets.
The range of fluctuation in the U.S. dollar/Canadian dollar exchange rate
has been narrower than the range of fluctuation between the U.S. dollar and most
other major currencies. However, the range that occurred in the past is not
necessarily indicative of fluctuations in that rate that may occur over time
which may be wider or more confined than the range that occurred over an
historic period of comparable length. Future rates of exchange cannot be
accurately predicted, particularly over extended periods of time.
The following table sets forth, for each year indicated, the annual average
of the daily noon buying rates in New York for cable transfers in U.S. dollars
for one Canadian dollar as certified by the Federal Reserve Bank of New York:
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U.S. Dollars
------------
1981.......................................................... 0.83
1982.......................................................... 0.81
1983.......................................................... 0.81
1984.......................................................... 0.77
1985.......................................................... 0.73
1986.......................................................... 0.72
1987.......................................................... 0.75
1988.......................................................... 0.81
1989.......................................................... 0.84
1990.......................................................... 0.86
1991.......................................................... 0.87
1992.......................................................... 0.83
1993.......................................................... 0.78
1994.......................................................... 0.73
1995.......................................................... 0.73
1996.......................................................... 0.73
1997.......................................................... 0.72
- ---------
Source: Board of Governors of the Federal Reserve System, Federal Reserve
Bulletin.
Inflation Rate of the Canadian Consumer Price Index
Inflation, as measured by the national consumer price index, has remained
below 2.5% since 1991.
The following table sets forth for each year indicated the average change
in the Canadian consumer price index for the twelve months ended December 31 for
the years 1981 through 1996 (1986=100) and for the twelve months January -
December 1997.
National Consumer
Year Price Index
- ---- -----------------
(percent)
1981........................................................ 12.4
1982........................................................ 10.9
1983........................................................ 5.7
1984........................................................ 4.4
1985........................................................ 3.9
1986........................................................ 4.2
1987........................................................ 4.4
1988........................................................ 4.0
1989........................................................ 5.0
1990........................................................ 4.8
1991........................................................ 5.6
1992........................................................ 1.5
1993........................................................ 1.8
1994........................................................ 0.2
1995........................................................ 2.3
1996........................................................ 1.6
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1997
- ----
January..................................................... 2.2
February.................................................... 2.2
March....................................................... 2.0
April ...................................................... 1.7
May......................................................... 1.5
June........................................................ 1.8
July........................................................ 1.8
August...................................................... 1.8
September .................................................. 1.6
October..................................................... 1.5
November.................................................... 0.9
December.................................................... 0.7
Source: Bank of Canada Review, Winter 1996-1997; Bank of Canada Weekly Financial
Statistics, February 20, 1998.
Canadian Gross Domestic Product
The following table sets forth Canada's gross domestic product for the
years 1981 through the second quarter of 1997 at historical and constant prices.
Change from
Prior Year at
Year Constant Prices
- ---- ---------------
(percent)
1981....................................................... 3.7
1982....................................................... (3.2)
1983....................................................... 3.2
1984....................................................... 6.3
1985....................................................... 4.8
1986....................................................... 3.3
1987....................................................... 4.2
1988....................................................... 5.0
1989....................................................... 2.4
1990....................................................... (0.2)
1991....................................................... (1.8)
1992....................................................... 0.8
1993....................................................... 2.2
1994....................................................... 4.1
1995....................................................... 2.3
1996....................................................... 1.5
1997
- ----
first quarter............................................ 3.7
second quarter........................................... 4.9
- -------------
Source: Bank of Canada Review, Autumn 1997
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Yields on Canadian Government Treasury Bills
The following table sets forth the average monthly yield on 3-month and
6-month government of Canada Treasury bills and 5-year and 10-year Canada
Benchmark Bonds from January 1995 through September 1997.
Treasury Bills Benchmark Bonds
--------------------- ---------------------
1995 3 Months 6 Months 5 Years 10 Years
---- -------- -------- ------- --------
January 8.10 8.47 9.18 9.34
February 8.11 8.15 8.46 8.76
March 8.29 8.35 8.23 8.57
April 7.87 7.87 7.93 8.31
May 7.40 7.36 7.41 7.88
June 6.73 6.65 7.33 7.81
July 6.65 6.87 7.79 8.27
August 6.34 6.62 7.58 8.00
September 6.58 6.80 7.54 7.89
October 7.16 7.21 7.54 7.86
November 5.83 5.87 6.74 7.19
December 5.54 5.64 6.64 7.11
Treasury Bills Benchmark Bonds
--------------------- ---------------------
1996 3 Months 6 Months 5 Years 10 Years
---- -------- -------- ------- --------
January 5.12 5.20 6.33 7.01
February 5.21 5.38 6.87 7.53
March 5.02 5.25 7.02 7.64
April 4.78 4.97 7.09 7.76
May 4.68 4.88 7.01 7.72
June 4.70 4.94 7.05 7.77
July 4.39 4.75 6.96 7.62
August 4.02 4.32 6.60 7.34
September 3.86 4.13 6.28 7.16
October 3.17 3.33 5.59 6.47
November 2.73 2.89 5.10 6.05
December 2.85 3.24 5.44 6.37
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Treasury Bills Benchmark Bonds
--------------------- ---------------------
1997 3 Months 6 Months 5 Years 10 Years
---- -------- -------- ------- --------
January 2.87 3.21 5.67 6.65
February 2.91 3.17 5.44 6.38
March 3.14 3.45 5.75 6.59
April 3.14 3.55 5.92 6.68
May 2.99 3.39 5.86 6.65
June 2.86 3.19 5.32 6.14
July 3.29 3.62 5.18 5.80
August 3.11 3.68 5.36 6.06
September 2.86 3.49 5.17 5.70
- --------------
Source: Bank of Canada Review, Autumn 1997
Additional Information About Mexico
Area and Population
The United Mexican States ("Mexico"), a nation formed by 31 states and a
Federal District (Mexico City), is the third largest nation in Latin America,
occupying a territory of 759,529 square miles. To the north, the country shares
a border with the United States of America and to the south, it has borders with
Guatemala and Belize. Its coastline extends over 6,304 miles along both the Gulf
of Mexico and the Pacific Ocean. Mexico is the second most populous nation in
Latin America, with an estimated population of 95.7 million. Mexico's three
largest cities are Mexico City, Guadalajara and Monterrey.
Government
The present form of government was established by the Constitution, which
took effect on May 1, 1917. The Constitution established Mexico as a Federal
Republic and provides for the separation of the executive, legislative and
judicial branches into federal, state and municipal authorities. Executive and
legislative authorities are elected by popular vote of Mexican citizens over 18
years of age.
Federal executive authority is vested in the President, who is elected for
a single six-year term. The executive branch consists of 17 Ministries and
administrative departments whose highest ranking officials are appointed by the
President and may be subject to ratification by the Senate.
Federal legislative authority is vested in the Congress, which is composed
of the Senate and the Chamber of Deputies. Senators serve a six-year term.
Deputies serve a three-year term and neither Senators nor Deputies may serve
consecutive terms in the same chamber. The Senate has 128 members, four for each
state and four for the Federal District. The Chamber of Deputies has 500
members, of whom 300 are elected by direct vote from the electoral districts,
and 200 are selected by a system of proportional representation. The
Constitution provides that the President may veto bills and that Congress may
override such vetoes with a two-thirds majority of each Chamber. Federal
judicial authority is vested in the Supreme Court of Justice, Circuit and
District courts and the Federal Judicial Board. The Supreme Court has 11
members, each of whom holds office for a maximum period of fifteen years except
for the current members of the Court, whose appointments range from
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<PAGE>
eight to 20 years. The members of the Supreme Court are selected by the Senate
from a pool of candidates nominated by the President.
Politics
The Partido Revolucionario Institucional ("PRI") has been the dominant
political party in Mexico and, since 1929, has won all presidential elections.
Most recently, in 1994 PRI candidate Ernesto Zedillo Ponce de Leon, was elected
president, garnering 48.77% of the votes. PRI formerly held a majority in both
chambers of the Mexican Congress and, until 1989, it had also won all of the
state governorships. However, in elections held July 6, 1997, other parties,
including Partido de la Revolucion Democratica ("PRD"), National Action Party
("PAN"), Labor Party ("PT") and the Green Ecological Mexican Party ("PVEM"),
eliminated the PRI majority in the Chamber of Deputies. In the Senate, the PRI
retained its overall majority, but lost the two thirds majority important with
respect to the passage of constitutional amendments. PRD, a central-left
political party also has gained control of the Mexico City government and the
state of Escatecos. PAN, the oldest opposition party in Mexico, has gained
control of several states.
These recent election results follow reforms initiated on January 17, 1995,
when the Mexican Government and leaders of the PRI signed an agreement with the
oppositions parties aimed at continuing the democratization process. On July 25,
1996, the Mexican Government announced certain proposed constitutional
amendments aimed at reforming the electoral law that were ratified on August 22,
1996. The amendments, which had been agreed to by the President and the leaders
of the four major political parties represented in Congress, among other things,
exclude the President from the Federal Electoral Institute, an autonomous agency
charged with organizing elections; replace the electoral Committee of the
Chamber of Deputies, which had been responsible for determining the validity of
presidential elections with a Federal Electoral Court as the highest body for
resolving electoral disputes; impose limits on expenditures on political
campaigns and controls on the source of and uses of funds contributed to a
political party; grant voting rights to Mexican citizens residing abroad; reduce
from 315 to 300 the maximum number of congressional representatives who may
belong to a single party, and establish an electoral procedure intended to
result in a more proportional representation in the Senate. The Mexican Supreme
Court is empowered to determine the constitutionality of electoral laws.
At the beginning of 1994 armed insurgents attacked several villages in the
state of Chiapas. Negotiations with the insurgents continued through the spring
of 1994 and then broke off. In the spring of 1995, the Government renewed its
efforts to resolve the situation in Chiapas by facilitating the insurgents'
participation in the political process. In March of 1995, Congress passed a law
granting amnesty to insurgents who participated in peace talks with the
Government as well as a law establishing a framework for such talks. A working
committee of Government and insurgent representatives reached agreement on a
number of issues and arranged for a plenary session that took place in January
of 1996. The attendees at the plenary session drafted an agreement on a series
of measures aimed at guaranteeing the rights of indigenous peoples. The
agreement was signed in February 1996, but further negotiations were
unsuccessful. In the face of continuing violence in Chiapas and other southern
states, the Government announced measures to alleviate some of the conditions
that have made Chiapas susceptible to violence and unrest. It is widely
believed, however, that violence and unrest will continue to plague Chiapas and
surrounding regions.
In addition to the civil unrest in Chiapas, certain national developments
have led to disillusionment among the electorate with the institutions of
government. These events include the assassination of Luis Donaldo Colosio,
former PRI presidential candidate and the murder of
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<PAGE>
Mr. Jose Francisco Ruiz Massieu, a high-ranking PRI official. Links between
Mexico's drug cartels and high government and military officials have also been
discovered. The links could jeopardize Mexico's status as an ally of the U.S. in
the war against narcotics smuggling. While Mexico is currently certified by
President Clinton as an ally, there is no assurance that the certification will
be maintained. A loss of certification could result in the termination of U.S.
economic assistance to Mexico.
Money and Banking
Banco de Mexico, chartered in 1925, is the central bank of Mexico. It is
the Federal Government's primary instrument for the execution of monetary policy
and the regulation of currency and credit. It is authorized by law to regulate
interest rates payable on time deposits, to establish minimum reserve
requirements for credit institutions and to provide discount facilities for
certain types of bank loans. The =currency unit of Mexico is the peso. Mexico
repealed its exchange control rules in 1991 and now maintains only a market
exchange rate.
A constitutional amendment relating to Banco de Mexico's activities and
role within the Mexican economy became effective on August 23, 1993. The
amendment's purpose was to reinforce the independence of Banco de Mexico, which
may in the future act as a counterbalance to the executive and legislative
branches in fiscal policy matters. The amendment significantly strengthens Banco
de Mexico's authority with respect to monetary policy and related activities and
the regulation of the financial services industry. On April 1, 1994, a new law
governing the activities of Banco de Mexico became effective. The new law was
intended to put into effect the greater degree of autonomy granted to Banco de
Mexico under the constitutional amendment described above and also established a
Foreign Exchange Commission, which is controlled by the Ministry of Finance,
charged with determining the nation's exchange rate policies.
To help stabilize the Mexican financial markets and allow investors to more
fully cover their positions, the Central Bank has recently approved the listing
of derivative products based on the IPC on the Chicago Board Options Exchange
and on the Chicago Mercantile Exchange. Further, futures and options contracts
based on Mexican Brady Bonds are now allowed to be traded. Finally, last year
the Central Bank approved a domestic futures market as well as the trading of
currency options. Thus, on April 25, 1995, the peso was listed on the Chicago
Mercantile Exchange allowing companies and individuals to have some certainty in
the value of the peso at a given time.
Although the Central Bank allows the peso to float freely, it does
occasionally intervene in the exchange markets when the peso comes under
speculative attack. The Bank was forced to adopt this policy after extreme
speculation in September 1995 set back the government's recovery programs by
months when the peso shot down in value and interest rates were thereby forced
upwards. However, except for certain options transactions which allow private
banks to sell foreign currency to Banco de Mexico, in 1996 Banco de Mexico did
not intervene in the exchange market.
Trade Reform -- NAFTA
Mexico has been a member of the General Agreement on Tariffs and Trade
("GATT") since 1986 and has been a member of the WTO since January 1, 1995, the
date on which the WTO superseded GATT, and has become a member of the
Organization for Economic Cooperation. Mexico has also entered into NAFTA with
the United States and Canada. In addition, Mexico signed a framework for a free
trade agreement in 1992 with El Salvador, Guatemala, Honduras and Nicaragua and
entered into definitive free trade agreements with Bolivia, Chile, Colombia,
Costa Rica and Venezuela. On December 8, 1997, Mexico signed a framework treaty
of economic association and political
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<PAGE>
cooperation with the European Union that includes free trade provisions.
Negotiations to enter into a definitive agreement started on July 13, 1998.
In connection with the implementation of NAFTA, amendments to several laws
relating to financial services (including the Banking Law and the Securities
Market Law) became effective on January 1, 1994. These measures permit
non-Mexican financial groups and financial intermediaries, through Mexican
subsidiaries, to engage in various activities in the Mexican financial system,
including banking and securities activities. Additional amendments published in
February and May of 1995 permit foreign investors, subject to certain individual
and/or aggregate limits and exceptions established in NAFTA and Mexican
financial regulations, to (i) acquire a majority position in holding affiliate
companies, (ii) directly hold up to 49% of the capital stock of bank holding
companies and full service banking institutions. In addition, other amendments
permit private industry to participate in certain industrial activities that
were previously reserved to the Mexican Government.
Economic Information Regarding Mexico
In February 1990, Mexico became the first Latin American country to
reach an agreement with external creditor banks and multinational agencies under
the U.S. Treasury's approach to debt reduction known as the "Brady Plan." As
part of the Brady Plan, commercial banks and Mexico agreed to debt reduction and
new financing in a set of agreements comprising the 1989-1992 Financing Package.
The implementation of this package resulted in a substantial reduction in
Mexico's foreign debt and debt service obligations. While at one time reaching
$161.13 billion, in June 1992, Mexico reduced its foreign public debt to a total
of approximately $73.5 billion. The total debt has since risen to $93.013 as of
May, 1997.
Currency Exchange Rates
The following provides some statistical and other related information
regarding historical rates of exchange between the U.S. dollar and the Mexican
peso along with information concerning interest rates on certain Mexican
Government securities. Historical figures are not necessarily indicative of
future fluctuations.
From late 1982 to November 11, 1991, Mexico maintained, a dual foreign
exchange rate system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports of goods,
advances and payments of registered foreign debt and funds used for payments of
royalties and technical assistance under registered agreements requiring such
payments. The free market rate was used for all other transactions not expressly
falling within the category of transactions which permit parties to have access
to U.S. dollars at the controlled rate. The dual system assisted in controlling
the value of the Mexican peso, particularly from 1983 to 1985. In later years
the difference between the two rates was not significant. Mexico has now
repealed the controlled rate.
A fixed exchange rate was maintained from February to December 1988.
Thereafter, the Mexican Government introduced a schedule of gradual devaluations
of the Mexican peso which initially amounted to an average depreciation of the
Mexican peso against the U.S. dollar of one Mexican peso per day. The extended
initiatives include an adjustment in the scheduled devaluation rate of the
Mexican peso against the U.S. dollar. On May 28, 1990, the Mexican peso began
devaluing by an average of .80 Mexican pesos per day instead of one Mexican peso
per day. On November 12, 1990 this average was decreased to .40 Mexican pesos
per day and on November 11, 1991 the daily devaluation rate was lowered to .20
Mexican pesos per day. On October 21, 1992, the maximum rate at which the
Mexican peso could devalue against the U.S. dollar was accelerated to .40
Mexican pesos per day.
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<PAGE>
Because the peso had deteriorated to such an extent over the previous 15
years, on January 1, 1993, the Mexican Government introduced a new currency, the
new peso, which eliminated 3 zeros from the peso. Thus, each new peso was worth
1,000 old Mexican pesos and the new peso was designated with the symbol "N$".
The change was not a devaluation but merely a move to simplify the math involved
in the use of Mexican currency. (The use of the word "new," which was always
intended to be temporary to aid the transition to the new currency, was removed
on January 1, 1996, and Mexico's currency is again simply known as the Mexican
peso -- though it remains with three zeros less.)
With regard to exchange controls, in 1982, Mexico imposed strict foreign
exchange controls which shortly thereafter were relaxed and were eliminated in
1991. There is no assurance that future regulatory actions in Mexico would not
affect the Fund's ability to acquire or hold U.S. dollar denominated securities
or otherwise obtain U.S. dollars.
Recent Developments
On December 20, 1994, the Mexican Government announced a new policy that
would allow a more substantial yet still controlled devaluation of the Mexican
peso. The Mexican Government attempted to devalue the peso by 15%, however, as a
result of investor reaction to the surprise devaluation, the Government was
unable to defend the peso and was forced to let the peso float freely, resulting
in a continued decline against the U.S. dollar. On December 23, 1994, the
exchange rate was 4.67 new pesos to the U.S. dollar, and on January 4, 1995, it
had fallen further to 5.57 new pesos to the U.S. dollar.
The attempted controlled devaluation by the government ignited an economic,
financial, social and political crisis, which was arguably the worst in Mexico's
history. Foreign investors started taking all of their money out of the country,
which prompted the government to offer interest rates that reached 80%. However,
no one was interested in the high rates because the Mexican Government had
approximately US$11 billion in short-term treasury certificates (Cetes) coming
due in the first quarter of 1995, but nearly zero foreign reserves and no funds
coming in. In short, there was the danger that the government would default on
its foreign obligations. In turn, the steep surge in interest rates, extreme
devaluation of the peso, racing inflation, resulting bankruptcy of companies
(due to a drop in consumer demand, an inability to buy imported machinery and
inputs to run business and an inability to pay debt at the new interest rates)
and skyrocketing unemployment (it is estimated some 2.5 million Mexicans lost
their jobs in 1995) provoked a crisis in Mexico's financial system as bank's
non-performing loan portfolios began to become unmanageable.
However, the Zedillo administration, with the help of the International
Monetary Fund (the "IMF") and the United States Government, controlled the
crisis. Since the outbreak of the crisis, the Zedillo administration, through
the implementation of, among others, a new economic program, several accords
among the government business and labor, fiscal measures, financial support
programs and measures to strengthen the banking system, has made progress at
stabilizing Mexico's economy and financial markets. The IMF and the United
States Government provided approximately US$38.5 billion in emergency funds to
help Mexico meet its short-term maturing obligations. With the immediate
liquidity crisis resolved, Zedillo implemented austerity measures by increasing
taxes, cutting government spending and removing price controls on basic goods.
The net effect has been a relative stabilizing of the exchange rate and other
economic indicators.
Another indication that Mexico is emerging from its crisis is that it has
regained access to foreign lenders. In 1996, the Mexican Government made normal
public debt refinancing transactions, but also took advantage of improved access
to international markets and arranged for prepayment of other more expensive
short-term liabilities with lower cost long-term financing. The government has
pre-paid the emergency loans received from the United States and the
International Monetary Fund.
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<PAGE>
The effects of the devaluation of the peso, as well as the Government's
response to that and related events, were apparent in the performance of the
Mexican economy during 1995 and 1996. Recent trade figures show a reversal of
Mexico's trade deficit during 1995. The value of imports decreased by 8.7%
between 1994 and 1995, to $72.5 billion in 1995. Although the value of imports
in 1996 increased approximately 23.4% from 1995, to $89.5 billion, exports
increased by almost the same amount. During 1995, Mexico registered a $7.089
billion trade surplus, its first annual trade surplus since 1989. Mexico
registered a surplus in its trade balance of $6.531 billion during 1996, down
approximately 7.9% from 1995, and in 1997 Mexico registered an estimated trade
surplus of $582 million, down approximately 90% from 1996. During 1996, Mexico's
current account balance registered a deficit of $1.922 billion, as compared with
a deficit of $1.577 billion in 1995.
As a result of the recent reduction in international oil prices and in
order to avoid a deficit in public accounts, the Mexican Government made several
budget cuts in the first quarter of 1998 to prevent additional public debt for
the 1998 fiscal year.
Banco de Mexico is currently disclosing reserve figures on a weekly basis.
On December 31, 1997, Mexico's international reserves amounted to $28 billion,
as compared to $17.5 billion at December 31, 1996, $15.7 billion at December 31,
1995, $6.1 billion at December 31, 1994 and $24.5 billion at December 31, 1993.
During 1995 real GDP decreased by 6.9%, as compared with a growth rate of
3.5% during 1994. This downward trend continued into the first quarter of 1996,
but turned around in the second quarter of 1996. The real GDP has continued to
grow since that time, resulting in an overall GDP growth rate of 5.1% for 1996
and 7.3% for 1997. The Government currently projects a 5.0% increase in the GDP
for 1998. Although the Mexican economy has stabilized, there can be no assurance
that the Government's plan will lead to a full recovery.
Statistical and Related Information Concerning Mexico
The following table sets forth the Mexican peso to U.S. dollar exchange
rates for each year from 1982 to 1997.
Free Market Rate *Controlled Rate
--------------------- ---------------------
End of End of
Period Average Period Average
------ ------- ------ -------
1982................ 148 57 96 57
1983................ 161 150 143 120
1984................ 210 185 192 167
1985................ 447 310 371 256
1986................ 915 637 923 611
1987................ 2.209 1.378 2.198 1.366
1988................ 2.281 2.273 2.257 2.250
1989................ 2.681 2.483 2.637 2.453
1990................ 2.943 2.838 2.939 2.807
1991................ 3.075 3.016 3.065 3.007
1992................ 3.119 3.094 N/A N/A
1993................ 3.192 3.155 N/A N/A
1994................ 5.325 3.222 N/A N/A
1995................ 7.643 6.419 N/A N/A
1996................ 7.851 7.598 N/A N/A
1997................ 8.070 7.918 N/A N/A
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* From late 1982 to November 11, 1991, Mexico maintained a dual foreign
exchange rate system, with a "controlled" rate and a "free market"
rate. Mexico has now repealed the controlled rate.
Source: Banco de Mexico/Banamex.
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<PAGE>
Wages and Prices
After relatively long periods of economic growth and stability lasting
until the early 1970s, Mexico's economy suffered the effects of high inflation.
The economy improved in the late 1970s as a result of government policies and
important discoveries of oil reserves. However, between 1977 and 1981, these
factors contributed to an increase in inflation to an average annual rate of
22.4% for that period compared to an average annual rate of 2.4% between 1960
and 1971, and 16.6% between 1972 and 1976.
The economy experienced a setback in 1981 because of the severe drop in oil
prices and high world interest rates which resulted in a substantial increase in
the country's external debt burden. With no new lending to be obtained from
international creditors, the balance of payments equilibrium could no longer be
sustained. The Mexican peso was devalued and inflation rose sharply. Through
much of the 1980s, the Mexican economy continued to be affected by high
inflation, low growth and excessive domestic and foreign indebtedness. The
inflation rate, as measured by the consumer price index, rose from 28.7% in
December 1981 to 159.2% in December 1987. In December 1987, the Mexican
Government agreed with labor and business to curb the economy's inflationary
pressures by freezing the surge in wages and prices.
Over the medium-term, the Government is committed to reversing the decline
in real wages experienced in the last decade though control of inflation, a
controlled gradual upward adjustment of wages and a reduction in income taxes
for the lower income brackets. Nonetheless, the effect of the devaluation of the
peso and the Government's response to that event and related developments caused
a significant increase in inflation in 1995, as well as a decline in real wages
for much of the population during 1995. Inflation during 1995, 1996 and 1997 (as
measured by the increase in the National Consumer Price Index), was 52.0%, 27.7%
and 15.7%, respectively.
This means that Mexican's purchasing power is significantly depressed and
that the recovery will be slow in taking off. To help release some of the
pressures, the government is currently providing Mexican citizens a subsidy in
the cost of electricity, housing and education by keeping their price increases
behind inflation. In October, 1996, the Alianza para el Crecimiento (Pact for
Economic Growth) was signed. This pact called for 8% increases in the prices of
gasoline and diesel fuel, a 10% increase in the price of industrial electricity
and a 17% increase in the minimum wage. As a result of the success of PRD in the
July, 1997 election, additional pressure may be put on the government to
increase real wages. Depending upon the size and success of the increase and the
means used to achieve it, a wage increase may have other, potentially negative
effects on government austerity measures, the level of inflation and the value
of the peso.
Consumer Price Index
The following table sets forth the changes in the Mexican consumer price
index for the years 1984 through 1997.
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<PAGE>
Annual Increases in
National Consumer
Price Index
-------------------
(percent)
1984.......................................... 59.2
1985.......................................... 63.7
1986.......................................... 105.7
1987.......................................... 159.2
1988.......................................... 51.7
1989.......................................... 19.7
1990.......................................... 29.9
1991.......................................... 18.8
1992.......................................... 11.9
1993.......................................... 8.0
1994.......................................... 7.1
1995.......................................... 52.0
1996.......................................... 27.7
1997.......................................... 15.7
- --------------
Source: Banco de Mexico/Thyssen Mexico, S.A. de C.V.
Mexican Gross Domestic Product
The following table sets forth Mexico's gross domestic product for the
years 1987 through 1997.
Period Yearly Variation (%)
------ --------------------
1988 1.3
1989 4.2
1990 5.1
1991 4.2
1992 3.6
1993 2.0
1994 4.4
1995 6.2
1996 5.1
1997 7.3
- ---------------
Source: Banco de Mexico
Interest Rates
During 1994, the rate on the 28-day Cetes (Mexican Treasury certificate)
increased from 10.52% in January to 20.07% in December and further increased to
37.73% in January 1995. During the same time period, the rate on the 91-day
Cetes increased from 10.75% in January 1994 to 39.26% in January 1995 and the
rate on the six-month Cetes increased from 10.78% in January 1994 to 35.02% in
January
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1995. During the height of the crisis, the 28-day Cetes reached rates as high as
120%, but by March 1996 began to descend to rates below 40%. As of May 1996, the
28-day Cetes rate stood at 28.45%, the 91-day Cetes rate stood at 31.07% and the
six-month Cetes rate stood at 32.67%. As of the end of 1996, the 28-day Cetes
rate stood at 27.25%, 91-day Cetes rate stood at 26.55%. As of May, 1998, the
28-day Cetes rate stood at 18.01% and the 91-day Cetes rate stood at 18.85%.
4. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) each day
on which the New York Stock Exchange is open for business (a "Business Day") if
there is sufficient trading in Fund portfolio securities to affect net asset
value materially, but may not be determined on days during which no Shares are
tendered for redemption and the Fund receives no order to sell Shares. The New
York Stock Exchange is open for business on all weekdays except for the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check as
described in the Prospectus. However, if the Board of Directors determines that
it would be in the best interests of the remaining shareholders of the Fund to
make payment of the redemption price in whole or in part by a distribution in
kind of readily marketable securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming shareholder
will incur brokerage costs in later converting the assets into cash. The method
of valuing portfolio securities is described under "Valuation," and such
valuation will be made as of the same time the redemption price is determined.
The Fund, however, has elected to be governed by Rule 18f-1 under the Investment
Company Act pursuant to which the Fund is obligated to redeem Shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. A corporate shareholder
requesting a redemption must have on file with the Fund's Transfer Agent, the
Distributor, a Participating Dealer or Shareholder Servicing Agent all required
resolutions and certificates, such as resolutions authorizing the redemption and
secretary's certificates.
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
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<PAGE>
The following general discussion of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. Future legislation or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Qualification as Regulated Investment Company
The Fund has been and expects to continue to be taxed as a regulated
investment company (a "RIC") under Subchapter M of the Code. As a RIC, the Fund
is exempt from federal income tax on its net investment income and capital gains
which it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (net investment income and the excess
of net short-term capital gains over net long-term capital losses) for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below. Distributions of investment company taxable
income made during the taxable year or, under certain specified circumstances,
within twelve months after the close of the taxable year will satisfy the
Distribution Requirement. The Distribution Requirement for any year may be
waived if a RIC establishes to the satisfaction of the Internal Revenue Service
that it is unable to satisfy the Distribution Requirement by reason of
distributions previously made for the purpose of avoiding liability for federal
excise tax (discussed below).
The Fund may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Fund must distribute to satisfy the
Distribution Requirement. In some cases, the Fund may have to borrow money or
dispose of investments in order to make sufficient cash distributions to satisfy
the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, in order to
qualify as a RIC, the Fund must, generally, (1) derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities,
loans and gains from the sale or other disposition of stock or securities, or
from other income derived with respect to its business of investing in stock or
securities; (2) at the close of each quarter of its taxable year, at least 50%
of the value of the Fund's assets must consist of cash and cash items, U.S.
Government securities, securities of other RICs, and securities of other issuers
(as to which the Fund has not invested more than 5% of the value of its total
assets in securities of such issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or two or more issuers which the Fund controls and which are engaged in the
same, similar, or related trades or businesses (the "Asset Diversification
Test"). The Fund will not lose its status as a RIC if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of portfolio
assets not attributable to a purchase. The Fund may curtail its investment in
certain securities where the application thereto of the Asset Diversification
Test is uncertain.
Fund Distributions
The Fund anticipates that it will distribute substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in Shares.
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<PAGE>
The Fund may either retain or distribute to shareholders the excess, if
any, of net long-term capital gains over net short-term capital losses ("net
capital gains") for each taxable year. If such gains are distributed as a
capital gains distribution, they are taxable to shareholders at a rate of 20% or
at a rate of 28% depending upon the holding period of the Fund in the underlying
asset generating the net capital gain and regardless of the length of time the
shareholder has held Shares, whether or not such gains were recognized by the
Fund prior to the date on which a shareholder acquired Shares and whether or not
the distribution was paid in cash or reinvested in Shares. The aggregate amount
of distributions designated by the Fund as capital gains distributions may not
exceed the net capital gains of the Fund for any taxable year, determined by
excluding any net capital losses or net long-term capital losses attributable to
transactions occurring after October 31 of such year and by treating any such
net capital gains or long-term capital losses as if they arose on the first day
of the following taxable year. Conversely, if the Fund elects to retain its net
capital gains, it will be taxed thereon (except to the extent of any available
capital loss carryovers) at the applicable corporate tax rate. In such event, it
is expected that the Fund also will elect to have shareholders treated as having
received a distribution of such gains, with the result that they will be
required to report such gains on their returns as long-term capital gains, will
receive a refundable tax credit for their allocable share of capital gains tax
paid by the Fund on the gains, and will increase the tax basis for their Shares
by an amount equal to 65 percent of the deemed distribution.
Investors should be careful to consider the tax implications of buying
Shares of the Fund just prior to the ex-dividend date of an ordinary income
dividend or capital gains distribution. The price of Shares purchased at that
time may reflect the amount of the forthcoming ordinary income dividend or
capital gains distribution. Those purchasing just prior to an ordinary income
dividend or capital gains distribution will be taxable on the entire amount of
the dividend or distribution received even though the dividend or capital gains
distribution was earned by the Fund before the shareholder purchased the Shares.
Generally, a gain or loss on the sale of Shares will be a capital gain or
loss, which will be long-term capital gain or loss if the Shares have been held
for more than eighteen months, mid-term capital gain or loss if the Shares have
been held for more than twelve but not more than eighteen months, and otherwise
will be short-term capital gain or loss. However, investors should be aware that
any loss realized upon the sale, exchange or redemption of Shares held for six
months or less will be treated as a long-term capital loss to the extent any
capital gains distributions have been paid with respect to such Shares (or any
undistributed net capital gains of the Fund with respect to such Shares have
been included in determining the shareholder's long-term capital gains). In
addition, any loss realized on a sale or other disposition of Shares will be
disallowed to the extent an investor repurchases (or enters into a contract or
option to repurchase) Shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the Shares). This loss
disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
If for any taxable year the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders and such distributions will be
taxable to shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions will be
eligible for the dividends received deduction in the case of corporate
shareholders.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly or (3) who has
failed to certify to the Fund that he is not subject to backup withholding.
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<PAGE>
Excise Tax; Miscellaneous Considerations
The Code imposes a non-deductible 4% excise tax on RICs that do not
distribute in each calendar year an amount equal to 98% of their ordinary income
for the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. The excise tax is imposed on
the undistributed part of this required distribution. In addition, the balance
of such income must be distributed during the next calendar year to avoid
liability for the excise tax in that year. For the foregoing purposes, a company
is treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year. For purposes of the excise
tax, a RIC must reduce its capital gain net income by the amount of any net
ordinary loss for the calendar year (but only to the extent the capital gain net
income for the one-year period ending October 31 exceeds the net capital gains
for such period). Because the Fund intends to distribute all of its income
currently (or to retain, at most, its "net capital gains" and pay tax thereon),
the Fund does not anticipate incurring any liability for this excise tax.
However, the Fund may, in certain circumstances, be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability.
Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from the rules for federal income taxation
described above. For example, under certain specified circumstances, state
income tax laws may exempt from taxation distributions of a regulated investment
company to the extent that such distributions are derived from interest on
federal obligations. Shareholders are urged to consult their tax advisors as to
the consequences of state and local tax rules affecting an investment in the
Fund.
6. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their respective dates of
birth and their principal occupations during the last five years are set forth
below. Unless otherwise indicated, the address of each Director and executive
officer is 717 Fifth Avenue, New York, New York 10022.
*EDWARD S. HYMAN, Chairman and Director (4/8/45)
Chairman, International Strategy and Investment Inc. (registered
investment advisor); Chairman, ISI Inc. (investments) and Chairman and
President, International Strategy and Investment Group Inc. (registered
investment advisory and registered broker-dealer), 1991-Present.
*RICHARD T. HALE, Vice Chairman and Director (7/17/45)
One South Street, Baltimore, Maryland 21202. Managing Director, BT
Alex. Brown Incorporated; Director and President, Investment Company
Capital Corp. (registered investment advisor); and Chartered Financial
Analyst.
JAMES J. CUNNANE, Director (3/11/38)
60 Seagate Drive, Unit P106, Naples, Florida 34103. Managing Director,
CBC Capital (merchant banking), 1993-Present. Formerly, Senior
Vice-President and Chief Financial Officer, General Dynamics
Corporation (defense), 1989-1993 and Director, The Arch Fund
(registered investment company).
-25-
<PAGE>
JOHN F. KROEGER, Director (8/11/24)
37 Pippin Way, Morristown, New Jersey 07960. Formerly, Consultant,
Wendell & Stockel Associates, Inc. (consulting firm) and General
Manager, Shell Oil Company and Director/Trustee, AIM Funds (registered
investment companies).
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants.
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993,
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. McDONALD, Director (7/14/32)
Duke Management, Erwin Square, Suite 1000, 2200 W. Main Street, Durham,
North Carolina 27705. President, Duke Management Company (investments);
Executive Vice President, Duke University (education, research and
health care); Director, Central Carolina Bank & Trust (banking), Key
Funds (registered investment companies), and DP Mann Holdings
(insurance); Formerly, Director AMBAC Treasurers Trust (registered
investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania, 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts; Director and Executive
Vice President, The Glenmede Trust Company.
Formerly, Executive Director, The Pew Charitable Trusts.
R. ALAN MEDAUGH, President (8/20/43)
President, International Strategy and Investment Inc., 1991 - Present.
NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International Strategy and
Investment Inc., 1991 Present.
CARRIE L. BUTLER, Vice President (5/1/67)
Assistant Vice President, International Strategy and Investment Inc.,
1991- Present.
MARGARET M. BEELER, Assistant Vice President (3/1/67)
Assistant Vice President, International Strategy & Investment Inc., May
1996 - Present. Formerly, Marketing Representative, U.S. Healthcare,
Inc., 1995 -1996; Sales Manager, Donna Maione, Inc., 1994-1995; Sales
Manager, Deborah Wiley California, 1989-1994.
KEITH C. REILLY, Assistant Vice President (6/22/66)
Assistant Vice President, International Strategy & Investment Inc., May
1996-Present. Formerly, Select Private Banking Officer, Assistant
Manager, Chemical Bank, 1995-1996; Financial Consultant, Dreyfus
Corporation, 1989-1995.
JOSEPH A. FINELLI, Treasurer (1/24/57)
One South Street, Baltimore, Maryland 21202. Vice President, BT Alex.
Brown Incorporated and Vice President, Investment Company Capital Corp.
(registered investment advisor), September 1995-Present. Formerly, Vice
President and Treasurer, The Delaware Group of Funds (registered
investment companies) and Vice President, Delaware Management Company,
Inc., 1980-August 1995.
-26-
<PAGE>
AMY M. OLMERT, Secretary (5/14/63)
One South Street, Baltimore, Maryland 21202. Vice President, BT Alex.
Brown Incorporated, June 1997-Present. Formerly, Senior Manager,
Coopers & Lybrand L.L.P. September 1988 - June 1997.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
One South Street, Baltimore, Maryland 21202. Assistant Vice President,
BT Alex. Brown Incorporated, July 1996-Present; Formerly, Manager and
Foreign Markets Specialist, Putnam Investments Inc. (registered
investment companies), April 1994-July 1996; Supervisor, Brown Brothers
Harriman & Co. (domestic and global custody), August 1991-April 1994.
- -----------------------
*A Director who is an "interested person" as defined in the Investment Company
Act.
Directors and officers of the Fund are also directors and officers of some
or all of the other investment companies managed, administered or advised by BT
Alex Brown Incorporated ("BT Alex. Brown") or any of its affiliates. There are
currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman serves as
Chairman of four funds in the Fund Complex. Mr. Medaugh serves as President and
Director of two funds and as President of two funds in the Fund Complex. Mr.
Hale serves as Chairman of four funds and as a Director of eight funds in the
Fund Complex. Messrs. Cunnane, Kroeger, Levy, and McDonald serve as Directors of
each fund in the Fund Complex. Ms. Rimel serves as Director of 11 funds in the
Fund Complex. Ms. Lazar and Ms. Butler serve as Vice Presidents of four funds in
the Fund Complex. Mr. Finelli serves as Treasurer, Ms. Olmert serves as
Secretary and Mr. Liotta serves as Assistant Secretary of each of the funds in
the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, BT Alex. Brown in the ordinary course of business.
All such transactions were made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity from
the Fund. Officers and Directors of the Fund who are officers or directors of
the Fund's administrator, the Distributor or the Advisor may be considered to
have received remuneration indirectly. As compensation for his or her services
as Director, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (an "Independent Director") receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his or her attendance at Board and committee
meetings) from all Flag Investors/ISI Funds and BT Alex. Brown Cash Reserve
Fund, Inc. for which he or she serves. In addition, the Chairman of the Fund
Complex's Audit Committee receives an aggregate annual fee from the Fund
Complex. Payment of such fees and expenses is allocated among all such funds
described above in proportion to their relative net assets. For the fiscal year
ended March 31, 1998, Independent Directors' fees attributable to the assets of
the Fund totaled approximately $249.
The following table shows aggregate compensation and retirement benefits
payable to each of the Fund's Directors by the Fund and the Fund Complex,
respectively, and pension or retirement benefits accrued as part of Fund
expenses in the fiscal year ended March 31, 1998.
-27-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total Compensation from the Fund
Aggregate Compensation Pension or Retirement and Fund Complex Payable to
for the Fiscal Year Ended Benefits Accrued as Directors for the Fiscal Year Ended
Name of Person, Position March 31, 1998 Part of Fund Expenses March 31, 1998
- ---------------------------- -------------------------- ------------------------ -----------------------------------
<S> <C> <C> <C>
Edward S. Hyman(1) $0 $0 $0
Chairman and Director
Richard T. Hale(1) $0 $0 $0
Vice Chairman and
Director
James J. Cunnane $298(2) $ (3) $39,000 for service on 13
Director Boards in the Fund Complex
John F. Kroeger $375 $ (3) $49,000 for service on 13
Director Boards in the Fund Complex
Louis E. Levy $298 $ (3) $39,000 for service on 13
Director Boards in the Fund Complex
Eugene J. McDonald $298(2) $ (3) $39,000 for service on 13
Director Boards in the Fund Complex
Rebecca W. Rimel $304(2) $ (3) $39,000 for service on 11
Director Boards in the Fund Complex(4)
</TABLE>
- --------------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Of amounts payable to Messrs. Cunnane, McDonald, and to Ms. Rimel, $298,
$298, and $304, respectively, was deferred pursuant to a deferred
compensation plan.
(3) The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
year ended March 31, 1998 was approximately $1,405.
(4) Ms. Rimel receives proportionately higher compensation from each fund for
which she serves as a Director.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan") for
Directors who are not employees of the Fund, the Advisor or their respective
affiliates (the "Participants"). After completion of six years of service, each
Participant will be entitled to receive an annual retirement benefit equal to a
percentage of the fee earned in his or her last year of service. Upon
retirement, each Participant will receive annually 10% of such fee for each year
that was served after completion of the first five years, up to a maximum annual
benefit of 50% of the fee earned in his or her last year of service. The fee
will be paid quarterly, for life, by each Fund for which he or she serves. The
Retirement Plan is unfunded and unvested. Mr. Kroeger has qualified but has not
received benefits. The Fund has two Participants, a Director who retired
effective December 31, 1994 and a Director who retired effective December 31,
1996, who have qualified for the Retirement Plan by serving thirteen years and
fourteen years, respectively, as Directors in the Fund Complex and each of whom
will be paid a quarterly fee of $4,875 by the Fund Complex for the rest of his
life. Such fees are allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable to a
Participant upon retirement assuming various years of service and payment of a
percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger,
15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; and for Ms. Rimel,
2 years.
-28-
<PAGE>
Estimated Annual Benefits Payable
By Fund Complex Upon Retirement
-----------------------------------------------------
Years of Service Chairman of Audit Committee Other Participants
- ---------------- --------------------------- ------------------
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his or her annual compensation pursuant to a
Deferred Compensation Plan. Messrs. Cunnane, Levy, McDonald and Ms. Rimel have
each executed a Deferred Compensation Agreement. Currently, the deferring
Directors may select from among various Flag Investors funds and BT Alex. Brown
Cash Reserve Fund, Inc. and BT International Equity Fund in which all or part of
their deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in quarterly
installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act (the "Code of Ethics"). The Code of
Ethics applies to the personal investing activities of all the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisor and the Distributor. As described below, the Code of Ethics
imposes additional restrictions on the Advisor's investment personnel, including
the portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that any officer, director, or employee of the
Fund, International Strategy & Investment Group, Inc. or the Advisor preclear
personal securities investments (with certain exceptions, such as non-volitional
purchases or purchases that are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and special
preclearance of the acquisition of securities in private placements.
Furthermore, the Code of Ethics provides for trading "blackout periods" that
prohibit trading by investment personnel and certain other employees within
periods of trading by the Fund in the same security. Officers, directors and
employees of the Advisor and the Distributor may comply with codes instituted by
those entities so long as they contain similar requirements and restrictions.
7. INVESTMENT ADVISORY AND OTHER SERVICES
International Strategy & Investments, Inc. (the "Advisor" or "ISI") serves
as the Fund's investment advisor pursuant to an Investment Advisory Agreement
dated as of January 15, 1993 (the "Investment Advisory Agreement") that was
approved by the Board of Directors of the Fund (including a majority of the
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<PAGE>
"Independent Directors") on December 15, 1992 and by the sole shareholder of the
Fund on December 15, 1992.
ISI is a registered investment advisor that was formed in January, 1991.
ISI employs Messrs. Edward S. Hyman, the Fund's Chairman, and R. Alan Medaugh,
the Fund's President. Due to their stock ownership, Messrs. Hyman and Medaugh
may be deemed to be controlling persons of ISI. ISI is also investment advisor
to Total Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc. and ISI
Strategy Fund, Inc. open-end investment companies with net assets of
approximately $425 million as of May 31, 1998.
To supplement its investment analysis, the Advisor may, from time to time,
subscribe to research services located in Canada and Mexico, which research
services may include information about Canada or Mexico, respectively, such as:
statistical and background information on the economy, information on political
developments and general political stability forecasts and interpretation with
respect to money markets, and performance information.
As described in the Fund's Prospectus, the Advisor (a) formulates and
implements continuing programs for the purchases and sales of securities, (b)
determines what securities (and in what proportion) shall be represented in the
Fund's portfolio, (c) provides the Fund's Board of Directors with regular
financial reports and analyses with respect to the Fund's portfolio investments
and operations, and the operations of comparable investment companies, (d)
obtains and evaluates pertinent information about economic, statistical and
financial information pertinent to the Fund, (e) takes, on behalf of the Fund,
all actions which appear to the Advisor necessary to carry into effect its
purchase and sale programs. Any investment program undertaken by the Advisor
will at all times be subject to policies and control of the Fund's Board of
Directors. The Advisor shall not be liable to the Fund or its shareholders for
any act or omission by the Advisor or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
Pursuant to the terms of the Advisory Agreement, as compensation for its
services, the Advisor receives an annual fee, paid monthly, in an amount equal
to .40% of the average daily net assets of the Fund. The Advisor and the Fund's
administrator have agreed to waive, on a voluntary basis, a proportionate amount
of their respective fees or to reimburse the Fund to the extent required so that
the Fund's total operating annual expenses do not exceed 1.25% of the Fund's
average net assets. ISI's compensation under the agreement for the three most
recent fiscal years was as follows:
Fiscal Year Ended March 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
Advisory Fees Payable $208,693 $233,075 $261,577
Advisory Fees Waived $ 9,113 $129,197 $ 88,655
Total Operating Expenses* 1.28% 1.58% 1.47%
- ----------------
* Total operating expenses absent fee waivers as a percentage of average daily
net assets.
The Investment Advisory Agreement will continue in effect from year to year
if such continuance is specifically approved (a) at least annually by the Fund's
Board of Directors or by a vote of a majority of the outstanding Shares and (b)
by the affirmative vote of a majority of the Independent Directors by votes cast
in person at a meeting called for such purpose. The Fund or the Advisor may
terminate the
-30-
<PAGE>
Investment Advisory Agreement on sixty days' written notice without penalty. The
Investment Advisory Agreement will terminate automatically in the event of
assignment.
8. ADMINISTRATION
Investment Company Capital Corp. ("ICC"), One South Street, Baltimore,
Maryland 21202, provides administration services to the Fund. Such services
include: monitoring the Fund's regulatory compliance, supervising all aspects of
the Fund's service providers, arranging, but not paying for, the printing and
mailing of prospectuses, proxy materials and shareholder reports, preparing and
filing all documents required by the securities laws of any state in which the
Shares are sold, establishing the Fund's budgets, monitoring the Fund's
distribution plans, preparing the Fund's financial information and shareholder
reports, calculating dividend and distribution payments and arranging for the
preparation of state and federal tax returns.
As compensation for such services, ICC is entitled to receive from the Fund
a fee equal to .20% of the Fund's average daily net assets. ICC and the Advisor
have agreed to waive, on a voluntary basis, a proportionate amount of their
respective fees to the extent required so that the Fund's total annual operating
expenses do not exceed 1.25% of the Fund's average net assets. ICC's
compensation under the agreement for the three most recent fiscal years was as
follows:
Fiscal Year Ended March 31,
-------------------------------------------
1998 1997 1996
-------- -------- --------
Administration Fees $104,346 $116,538 $130,789
Payable
Administration Fees $ 4,557 $ 64,599 $ 44,327
Waived
ICC also serves as the Fund's transfer and dividend disbursing agent. (See
"Custodian, Transfer Agent and Accounting Services"). The services of ICC to the
Fund are not exclusive and ICC is free to render similar services to others. ICC
also provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian (See "Custodian, Transfer Agent and Accounting Services.") ICC
is an indirect subsidiary of Bankers Trust Corporation.
9. DISTRIBUTION OF FUND SHARES
International Strategy & Investment Group Inc. ("ISI Group" or the
"Distributor") serves as the distributor for the Shares pursuant to a
Distribution Agreement dated April 1, 1997 between ISI Group and the Fund. The
Distribution Agreement provides that ISI Group has the exclusive right to
distribute the Shares, either directly or through other broker-dealers. ISI
Group, a Delaware corporation, is a broker-dealer that was formed in 1991 and is
an affiliate of the Advisor. Prior to April 1, 1997, Armata Financial Corp.
("Armata") served as the Fund's distributor for the same rate of compensation
and on substantially the same terms as ISI Group.
The Distribution Agreement further provides that ISI Group will: solicit
and receive orders for the purchase of Shares; accept or reject such orders on
behalf of the Fund in accordance with the Fund's currently effective prospectus
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible; receive requests for redemption and transmit such
redemption requests to the Fund's transfer agent as promptly as possible;
respond to inquiries from the Fund's shareholders
-31-
<PAGE>
concerning the status of their accounts with the Fund; provide the Fund's Board
of Directors for their review with quarterly reports required by Rule 12b-1;
maintain such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors; and take all actions deemed
necessary to carry into effect the distribution of the Shares. ISI Group has not
undertaken to sell any specific number of Shares. The Distribution Agreement
further provides that, in connection with the distribution of Shares, ISI Group
will be responsible for all of its promotional expenses. The services of ISI
Group to the Fund are not exclusive, and ISI Group shall not be liable to the
Fund or its shareholders for any act or omission by ISI Group or any losses
sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Shares (the "Plan"). Under the Plan, the Fund pays a fee to ISI Group
for distribution and other shareholder servicing assistance as set forth in the
Distribution Agreement, and ISI Group is authorized to make payments out of its
fees to its investment representatives, to Participating Dealers and to
Shareholder Servicing Agents. Payments to Participating Dealers and Shareholder
Servicing Agents, if applicable, may not exceed fees payable to ISI Group under
the Plan.
The Distribution Agreement, form of Sub-Distribution Agreement and the Plan
were most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors (who have no direct or indirect financial
interest in the Plan or the Distribution Agreement or any Sub-Distribution
Agreement) on September 16, 1997. The Distribution Agreement and the Plan will
remain in effect from year to year as specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Independent Directors, by votes cast in person at a meeting
called for such purpose.
In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed only
if the Directors make a similar determination in each subsequent year. The Plan
may not be amended to increase materially the fee to be paid pursuant to the
Distribution Agreement without the approval of the shareholders of the Fund. The
Plan may be terminated at any time, and the Distribution Agreement may be
terminated at any time upon sixty days' notice, without penalty, by a vote of a
majority of the Fund's Independent Directors or by a vote of a majority of the
outstanding Shares. Any Sub-Distribution Agreement may be terminated in the same
manner at any time. The Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment (as defined
in the Investment Company Act).
As compensation for providing distribution and related administrative
services as described above, the Fund will pay ISI Group, on a monthly basis, an
annual fee, equal to 0.40% of the average daily net assets of the Shares. ISI
Group expects to allocate on a proportional basis a substantial portion of its
annual fees to its investment representatives or up to all of its fees to
broker-dealers who enter into Sub- Distribution Agreements with ISI Group under
which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning the
status of its accounts and the operations of the Fund.
During the continuance of the Plan, the Fund's Board of Directors will be
provided for their review, at least quarterly, a written report concerning the
payments made under the Plan to ISI Group pursuant to the Distribution
Agreement, to Participating Dealers pursuant to Sub-Distribution Agreements and
to Shareholder Servicing Agents pursuant to Shareholder Servicing Agreements.
Such reports shall be made by the persons authorized to make such payments. In
addition, during the continuance of the Plan, the selection and nomination of
the Fund's Independent Directors shall be committed to the discretion of the
Independent Directors then in office.
-32-
<PAGE>
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder Servicing
Agents, pursuant to which ISI Group will allocate a portion of its respective
distribution fees as compensation for such financial institutions' ongoing
shareholder services. Although banking laws and regulations prohibit banks from
distributing shares of open-end investment companies such as the Fund, according
to interpretations by various bank regulatory authorities, financial
institutions are not prohibited from acting in other capacities for investment
companies, such as the shareholder servicing capacities described above. Should
future legislative, judicial or administrative action prohibit or restrict the
activities of the Shareholder Servicing Agents in connection with the
Shareholder Servicing Agreements, the Fund may be required to alter materially
or discontinue its arrangements with the Shareholder Servicing Agents. Such
financial institutions may impose separate fees in connection with these
services and investors should review the applicable Prospectus and this
Statement of Additional Information in conjunction with any such institution's
fee schedule.
As compensation for providing distribution and shareholder services to the
Fund for the last three fiscal years, the Fund's distributor received fees in
the following amounts:
Fiscal Year Ended March 31,
-------------------------------------------------
Fee 1998 1997 1996
--- ---------- ---------- ----------
12b-1 Fee $208,693(1) $233,075(2) $261,577(2)
- -----------
(1) Fees received by ISI Group, the Fund's distributor for the fiscal year ended
March 31, 1998.
(2) Fees received by Armata, the Fund's distributor for the fiscal years ended
March 31, 1997 and March 31, 1996.
For the last three fiscal years, the Fund's distributor received the
following commissions, and from such commissions, the distributor retained the
following amounts:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -------------------------
Received Retained Received Retained Received Retained
<S> <C> <C> <C> <C> <C> <C>
Sales Commissions $198,038(1) $0 (1) $123,792(2) $44,533(2) $108,906(2) $43,539(2)
</TABLE>
- -------------
(1) By ISI Group, the Fund's distributor the fiscal year ended March 31,
1998,
(2) By Armata, the Fund's distributor for the fiscal years ended March 31, 1997
and March 31, 1996.
Except as described elsewhere, the Fund pays or causes to be paid all
organizational expenses and all continuing expenses of the Fund, including,
without limitation: investment advisory, administration and distribution fees;
the charges and expenses of any registrar, any custodian or depository appointed
by the Fund for the safekeeping of cash, portfolio securities and other
property, and any transfer, dividend or accounting agent or agents appointed by
the Fund; brokers' commissions, if any, chargeable to the Fund in connection
with portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and corporate fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the maintenance of registration of the Fund and
its Shares with the
-33-
<PAGE>
SEC and various states and other jurisdictions (including filing fees, legal
fees and disbursements of counsel); the costs and expenses of printing,
including typesetting and distributing prospectuses of the Fund and supplements
thereto to the shareholders; all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of Independent Directors and Independent
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel or independent auditors, in
connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by ISI, ICC or ISI Group.
10. PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities for the
Fund, selection of broker-dealers and negotiation of commission rates. Since
purchases and sales of portfolio securities by the Fund are usually principal
transactions, the Fund incurs little or no brokerage commissions. Portfolio
securities are normally purchased directly from the issuer or from a market
maker for the securities. The purchase price paid to broker-dealers serving as
market makers usually includes a mark-up over the bid to the broker-dealer based
on the spread between the bid and asked price for the security. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter.
The Advisor's primary consideration in effecting security transactions is
to obtain, on an overall basis, the best net price and the most favorable
execution of orders. To the extent that the execution and prices offered by more
than one broker-dealer are comparable, the Advisor may, in its discretion,
effect transactions with dealers that furnish statistical, research or other
information or services which the Advisor deems to be beneficial to the Fund's
investment program. Such research services supplement the Advisor's own
research. Research services may include the following: statistical and
background information on the U.S., Canadian and Mexican economy, industry
groups and individual companies; forecasts and interpretations with respect to
the U.S., Canadian and Mexican money markets; information on federal, state,
local and political developments in the United States, Canada and Mexico;
portfolio management strategies; performance information on securities, indices
and investment accounts; information concerning prices of securities; the
providing of equipment used to communicate research information; and the
providing of access to consultants who supply research information. Certain
research services furnished by broker-dealers may be useful to the Advisor with
clients other than the Fund. Similarly, any research services received by the
Advisor through placement of portfolio transactions of other clients may be of
value to the Advisor in fulfilling its obligations to the Fund. No specific
value can be determined for research and statistical services furnished without
cost to the Advisor by a broker-dealer. The Advisor is of the opinion that
because the material must be analyzed and reviewed by its staff, its receipt
does not tend to reduce expenses, but may be beneficial in supplementing the
Advisor's research and analysis. Therefore, it may tend to benefit the Fund by
improving the quality of the Advisor's investment advice.
For the fiscal years ended March 31, 1998, March 31, 1997 and March 31,
1996, no brokerage commissions were paid by the Fund.
The Fund is required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the Investment Company Act) which the Fund
has acquired during its most
-34-
<PAGE>
recent fiscal year. As of March 31, 1998, the Fund held a 5.75% repurchase
agreement issued by Goldman Sachs & Co. valued at $4,168,000. Goldman Sachs &
Co. is one of the Fund's "regular brokers or dealers."
11. CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund may issue up to
twenty-five million Shares of its capital stock with a par value of $.001 per
Share.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and one class of
Shares. All Shares of the Fund regardless of class have equal rights with
respect to voting, except that with respect to any matter affecting the rights
of the holders of a particular series or class, the holders of each series will
vote separately. Any such series will be a separately managed portfolio and
shareholders of each series will have an undivided interest in the net assets of
that series. For tax purposes, the series will be treated as separate entities.
Generally, each class of Shares issued by a particular series will be identical
to every other class and expenses of the Fund (other than 12b-1 fees) are
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively will be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and,
therefore, the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
The Fund's By-laws provide that any director of the Fund may be removed by
the shareholders by a vote of a majority of the votes entitled to be cast for
the election of Directors. A meeting to consider the removal of any Director or
Directors of the Fund will be called by the Secretary of the Fund upon the
written request of the holders of at least one-tenth of the outstanding Shares
of the Fund entitled to vote at such meeting.
There are no preemptive, conversion or exchange rights applicable to any of
the Shares. The Fund's issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information, the term "majority of
the outstanding Shares" means the vote of the lesser of (i) 67% or more of the
Shares present at a meeting, if the holders of more than 50% of the outstanding
Shares are present or represented by proxy, or (ii) more than 50% of the
outstanding Shares.
12. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
-35-
<PAGE>
13. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") serves as custodian of the Fund's
investments. Bankers Trust receives such compensation from the Fund for its
services as may be agreed to from time to time by Bankers Trust and the Fund.
For the period from September 22, 1997 to March 31, 1998, Bankers Trust was paid
$2,285 as compensation for providing custody services to the Fund. Investment
Company Capital Corp., the Fund's administrator, One South Street, Baltimore,
Maryland, 21202 (telephone: (800) 882-8585) has been retained to act as transfer
and dividend disbursing agent. As compensation for providing these services, ICC
receives up to [$15.00] per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For such services for
the fiscal year ended March 31, 1998, ICC received a fee of $30,638.
ICC also provides accounting services to the Fund. As compensation for
these services, ICC is entitled to receive an annual fee, calculated daily and
paid monthly, as shown below.
Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------
0 - $ 10,000,000 $25,000
$ 10,000,001 - $ 25,000,000 .080%
$ 25,000,001 - $ 50,000,000 .060%
$ 50,000,001 - $ 75,000,000 .040%
$ 75,000,001 - $ 100,000,000 .035%
$100,000,001 - $ 500,000,000 .017%
$500,000,001 - $1,000,000,000 .006%
over $1,000,000,000 .002%
In addition, the Fund will reimburse ICC for the following out-of-pocket
expenses incurred in connection with ICC's provision of accounting services:
express delivery service, independent pricing and storage. As compensation for
providing accounting services for the fiscal year ended March 31, 1998, ICC
received fees of $52,871.
14. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by the Fund's
independent accountants, PricewaterhouseCoopers LLP, 250 West Pratt Street,
Baltimore, Maryland, 21201.
15. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, no persons held beneficially or of record
5% or more of the Fund's outstanding shares, as of July 8, 1998:
As of such date, Directors and officers as a group owned less than 1% of
the Fund's total outstanding Shares.
-36-
<PAGE>
17. PERFORMANCE AND YIELD COMPUTATIONS
For purposes of quoting and comparing the performance of the Fund to that
of other open-end non-diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.
Total Return Calculation
The total return quotations, under the rules of the SEC, must be calculated
according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1-, 5- or 10-)
ERV = ending redeemable value at the end of the 1-, 5- or 10-year
periods (or fractional portion thereof)of a hypothetical $1,000
payment made at the beginning of the 1-, 5- or 10-year periods.
Under the foregoing formula, the time periods used in advertising will 0be
based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one-, five- and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement. During its first year of
operation the Fund may, in lieu of annualizing its total return, use an
aggregate total return calculated in the same manner. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the prospectus on the reinvestment
dates during the period. "T" in the formula above is calculated by finding the
average annual compounded rate of return over the period that would equate an
assumed initial payment of $1,000 to the ending redeemable value. Any sales
loads that might in the future be made applicable at the time to reinvestment
would be included as would any recurring account charges that might be imposed
by the Fund.
Calculated according to SEC rules, the ending redeemable value and average
annual total return of a hypothetical $1,000 payment for the periods ended March
31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Inception On
One-Year Period Ended Five-Year Period Ended January 15, 1993 Through
March 31, 1998 March 31, 1998 March 31, 1998
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Ending Average Ending Average Ending Average
Redeemable Annual Total Return Redeemable Annual Total Return Redeemable Annual Total Return
Value Value Value
$1,112 11.21% $1,277 5.02% $1,305 5.25%
- ----------------- --------------------- ---------------- --------------------- --------------- ---------------------
</TABLE>
-37-
<PAGE>
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges before
being invested in Shares). The Fund will, however, disclose the maximum sales
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Yield Calculations
The yield based on the 30-day period ended March 31, 1998 was 5.79% and was
computed in the manner described below. The yield of the Fund is calculated by
dividing the net investment income per Share earned by the Fund during a 30-day
(or one month) period by the maximum offering price per share on the last day of
the period and analyzing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. The Fund's yield calculations assume a maximum
sales charge of 3.00% for the Shares. The Fund's net investment income per Share
earned during the period is based on the average daily number of Shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
Except as noted below, for the purpose of determining net investment income
earned during the period, interest earned on debt obligations held by the Fund
is calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, based on the purchase price (plus actual
accrued interest), dividing the result by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued interest) in order
to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset value per
share. Undeclared earned income is net investment income which, at the end of
the base period, has not been declared as a dividend, but is reasonably expected
to be and is declared as a dividend shortly thereafter.
18. FINANCIAL STATEMENTS.
See next page.
-38-
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1998
<TABLE>
<CAPTION>
Interest Maturity Principal Market
Security Rate Date Value Value
- ---------------------------------------------------------------------------------------------------
<S><C>
CANADIAN SECURITIES -- 5.37%
Government of Canada, Deb. 8.00% 6/1/27 C$ 3,000,000 $ 2,794,080
-----------
Total Canadian Securities
(Cost $2,701,270) 2,794,080
-----------
MEXICAN SECURITIES(1) -- 11.84%
Mexican Treasury Cete 20.92* 4/30/98 P$ 42,362,120 4,893,663
Mexican Treasury Cete 21.27* 6/11/98 11,177,420 1,260,831
-----------
Total Mexican Securities
(Cost $6,273,274) 6,154,494
-----------
U.S. TREASURY SECURITIES -- 74.10%
U.S. Treasury Bond 10.375 11/15/09 $8,000,000 9,985,000
U.S. Treasury Bond 10.375 11/15/12 4,000,000 5,308,124
U.S. Treasury Bond 12.000 8/15/13 5,250,000 7,716,681
U.S. Treasury Bond 8.125 8/15/19 9,500,000 11,891,331
U.S. TREASURY BOND 8.750 8/15/20 1,000,000 1,333,750
U.S. Treasury Bond 7.250 8/15/22 2,000,000 2,311,562
-----------
Total U.S. Treasury Securities
(Cost $38,318,392) 38,546,448
-----------
REPURCHASE AGREEMENT -- 8.01%
Goldman Sachs & Co., 5.75%
Dated 3/31/98 to be repurchased on
4/1/98, collateralized by U.S. Treasury
Bonds with a market value of $4,252,089.
(Cost $4,168,000) $4,168,000 4,168,000
-----------
Total Investments in Securities -- 99.32%
(Cost $51,460,936) ** 51,663,022
Other Assets in Excess of Liabilities, Net-- 0.68% 355,381
-----------
Net Assets-- 100.00% $52,018,403
===========
Net Asset Value and Redemption Price Per Share
($52,018,403 / 5,949,881 SHARES OUTSTANDING) $8.74
=====
Offering Price Per Share
($8.74 / .970) $9.01
=====
</TABLE>
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
* Yields as of March 31, 1998.
** Also aggregate cost for federal tax purposes.
(dagger) Principal value is shown in local currency: Canadian dollars (C$),
Mexican new pesos (P$) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
39
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Year Ended March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
NET INVESTMENT INCOME:
INTEREST $4,393,354
----------
EXPENSES:
Investment advisory fee 208,693
Distribution fee 208,693
Administration fee 104,346
Accounting fee 52,871
Transfer agent fee 30,638
Printing and postage 51,964
Miscellaneous 8,381
Director's fees 249
----------
Total expenses 665,835
Less: Fees waived (13,670)
----------
Net expenses 652,165
----------
Net investment income 3,741,189
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 2,482,408
Net realized loss from foreign currency related transactions (706,976)
Change in net unrealized appreciation/depreciation of investments 1,644,223
Change in net unrealized appreciation/depreciation on translation
of assets and liabilities denominated in foreign currencies 2,956
----------
Net gain on investments 3,422,611
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,163,800
==========
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
40
<PAGE>
North American Government Bond Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,741,189 $ 5,251,856
Net realized gain (loss) from investment and
foreign currency related transactions 1,775,432 (1,197,393)
Change in unrealized appreciation/depreciation
of investments 1,644,223 540,125
Change in net unrealized appreciation/
depreciation on translation of assets and
liabilities denominated in foreign currencies 2,956 (3,190)
------------ ------------
Net increase in net assets resulting
from operations 7,163,800 4,591,398
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,741,189) (1,823,953)
Distribution in excess of net investment income (629,176) --
Return of capital-tax -- (3,191,763)
------------ ------------
Total distribution (4,370,365) (5,015,716)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 916,292 and 695,687
shares, respectively 7,908,494 5,848,278
Value of 231,643 and 306,356 shares issued in
reinvestment of dividends, respectively 1,980,041 2,564,081
Cost of 1,469,520 and 1,997,507 shares
repurchased, respectively (12,629,368) (16,882,467)
------------ ------------
Total decrease in net assets derived from capital
share transactions (2,740,833) (8,470,108)
------------ ------------
Total increase (decrease) in net assets 52,602 (8,894,426)
NET ASSETS:
Beginning of period 51,965,801 60,860,227
------------ ------------
End of period $ 52,018,403 $ 51,965,801
============ ============
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
41
<PAGE>
North American Government Bond Fund, Inc.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year Ended March 31,
-----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.61 0.75 0.81 0.63 0.89
Net realized and unrealized gain/(loss)
on investments 0.56 (0.11) 0.22 (1.38) (0.58)
------- ------- ------- -------- --------
Total from Investment Operations 1.17 0.64 1.03 (0.75) 0.31
Less Distributions:
Dividends from net investment income
and short-term gains (0.67) (0.26) -- (0.45) (0.92)
Distribution in excess of net investment
income (0.05) -- -- -- --
Return of capital -- (0.46) (0.72) (0.27) --
------- ------- ------- ------- -------
Total distributions (0.72) (0.72) (0.72) (0.72) (0.92)
------- ------- ------- ------- -------
Net asset value at end of period $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53
======= ======= ======= ======= =======
Total Return* 14.65% 7.90% 12.97% (8.31)% 2.77%
Ratios to Average Daily Net Assets:
Expenses** 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income*** 7.17% 8.99% 9.49% 7.04% 7.04%
Supplemental Data:
Net assets at end of the period (000) $52,018 $51,966 $60,860 $66,292 $93,622
Portfolio turnover rate 125% 46% 125% 104% 219%
- ------------------------------------------------------------------------------------------------
</TABLE>
*Total return excludes the effect of sales loads.
**Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.28%, 1.58%, 1.47%, 1.45% and 1.44%, for
the years ended March 31, 1998, 1997, 1996, 1995, and 1994, respectively.
***Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 7.14%, 8.66%, 6.84%, 6.85% and
6.68%, for the years ended March 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
See accompanying Notes to Financial Statements.
42
<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 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
43
<PAGE>
Notes to Financial Statements (continued)
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 determines its distributions according to income tax regulations,
which may be different from generally accepted accounting principles. As a
result, the Fund occasionally makes reclassifications within its capital
accounts to reflect income and gains that are available for distribution
under income tax regulations.
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.
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., a subsidiary of Bankers Trust
Corporation. ("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 $208,693 for advisory services
for the year ended March 31, 1998. 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 $104,346 for administrative services
for the year ended March 31, 1998.
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, 1998, ISI waived fees
of $9,113 and ICC waived fees of $4,557.
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 $52,871 for accounting services for the year ended
March 31, 1998.
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 $30,638
for transfer agent services for the year ended March 31, 1998.
As compensation for providing distribution services for the ISIClass of
shares, the Fund pays ISI Group, Inc. ("ISI Group"), which is affiliated
with ISI, an annual fee that is calculated daily and paid monthly. This fee
is paid at an annual rate equal to 0.40% of the ISI Class' average daily net
assets. For the year ended March 31, 1998, distribution fees aggregated
$208,693.
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, 1998 was approximately $1,405, and the accrued liability was
approximately $10,461.
Effective September 22, 1997, Bankers Trust Company, a subsidiary of Bankers
Trust Corporation, became the Fund's custodian. Prior to September 22, 1997,
PNC Bank served as the Fund's custodian.
C. Capital Share Transactions-- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
44
<PAGE>
Notes to Financial Statements (concluded)
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $3,605,028 and
sales of investment securities aggregated $7,563,098 for the year ended
March 31, 1998. Purchases of U.S. government obligations aggregated
$54,656,711 and sales of U.S. government obligations aggregated $49,026,420
for the period.
On March 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $552,986
and aggregate gross unrealized depreciation of all securities in which there
is an excess of tax cost over value was $350,900.
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, 1998.
F. Net Assets -- On March 31, 1998, net assets consisted of:
Paid-in capital $51,154,279
Accumulated net realized gain
from security and foreign
currency transactions 661,627
Unrealized appreciation of
investments 202,086
Unrealized gain on translation of
assets and liabilities
denominated in foreign
currencies 411
-----------
$52,018,403
===========
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.
45
<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, 1998, 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, 1998 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, 1998 and the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended 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 1, 1998
46
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and principal is extremely strong. Debt rated "AA" has a very strong
capacity to pay interest and principal and differs from the highest rated issues
only in small degree. Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories. Debt rated "BB", has less
near-term vulnerability to default than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB-" rating.
Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating. Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating. The rating "CC" typically is applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC" rating.
The rating "C" typically is applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating. The "C" rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued. The rating "CI" is reserved for income bonds on which no
interest is being paid.
Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Moody's Bond Ratings
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other
A-1
<PAGE>
elements present which make the long-term risk appear somewhat larger than Aaa
securities. Bonds rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future. Bonds rated Baa
are considered as medium grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Bonds rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class. Bonds rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small. Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest. Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Bonds rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa to B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic rating
category.
Standard & Poor's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by Standard &
Poor's, which uses the numbers 1, 2 and 3 to indicate relative degree of safety.
The designation A-1+ indicates there is an "overwhelming degree" of safety with
regard to the capacity for timely payment. The designation A-1 indicates that
the degree of safety regarding timely payment is strong. The designation A-2
indicates the capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1. Issues carrying the A-3 designation have an adequate
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated "B" are regarded as having only speculative capacity
for timely payment. The rating "C" is assigned to short-term debt obligations
with a doubtful capacity for repayment. An issue rated "D" is in payment
default. The "D" rating category is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
A-2
<PAGE>
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-3
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
List all financial statements and exhibits filed as part of the
Registration Statement.
(a) Financial statements:
(1) Included in Parts A and B of the Registration Statement:
- Financial Highlights for the fiscal
years ended March 31, 1998; March 31,
1997, March 31, 1996, and March 31,
1995, and for the period ended March
31, 1994.
- Statement of Net Assets at March 31, 1998.
- Statement of Operations for the fiscal year ended
March 31, 1998.
- Statement of Changes in Net Assets for the fiscal
years ended March 31, 1998; March 31, 1997, March
31, 1996 and March 31, 1995.
- Notes to Financial Statements.
- Report of Independent Accountants.
(2) All required financial statements are included in
Parts A and B hereof. All other financial
statements and schedules are inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation.(1)
(b) Articles of Amendment.(1)
(c) Articles Supplementary dated December 27, 1993.(1)
(2) By-Laws, as amended through December 18, 1996.(2)
(3) None.
(4) Specimen Security.(3)
(5) Investment Advisory Agreement dated December 15,
1992 between Registrant and International
Strategy & Investment Inc.(1)
(6) (a) Distribution Agreement dated April 1,
1997, between Registrant and International
Strategy & Investment Group, Inc.(2)
(b) Form of Agency Distribution Agreement between
International Strategy & Investment Group, Inc.
and Participating Broker-Dealers.(2)
(c) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents.(2)
(7) None.
(8) Custodian Agreement between Registrant and Bankers
Trust Company dated June 5, 1998, filed herewith.
C-1
<PAGE>
(9) Master Services Agreement (including
Administration, Transfer Agency and Accounting
Services appendices) between Registrant and
Investment Company Capital Corp.4
(10) (a) Opinion of Counsel.(1)
(b) Opinion of Counsel relating to net
redemptions for fiscal year ended March 31,
1997.(2)
(11) Consent of Independent Accountants, filed
herewith.
(12) None.
(13) Subscription Agreement re: initial $100,000
capital.(1)
(14) None.
(15) Distribution Plan.(2)
(16) Schedule of Computation of Performance
Information.(1)
(24) Powers of Attorney, filed herewith.
(27) Financial Data Schedule, filed herewith.
- ------------------
(1) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 26, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 29, 1997.
(3) Incorporated by reference to Exhibit 1 (Articles of Incorporation), as
amended, to Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A (Registration No. 33- 53598), filed with the
Securities and Exchange Commission via EDGAR on July 26, 1995, and Exhibit
2 (By-Laws), as amended, to Post-Effective Amendment No. 5 to such
Registration Statement filed with the Securities and Exchange Commission
via EDGAR on July 29, 1997.
(4) Incorporated by reference to Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 29, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
Furnish a list or diagram of all persons directly or
indirectly controlled by or under common control with the Registrant and as to
each such person indicate (1) if a company, the state or other sovereign power
under the laws of which it is organized, and (2) the percentage of voting
securities owned or other basis of control by the person, if any, immediately
controlling it.
None.
C-2
<PAGE>
Item 26. Number of Holders of Securities
State in substantially the tabular form indicated, as of a
specified date within 90 days prior to the date of filing, the number of record
holders of each class of securities of the Registrant.
The following information is given as of July 8, 1998:
Title of Class Number of Record Holders
-------------- ------------------------
Shares of Capital Stock 4,129
Item 27. Indemnification
State the general effect of any contract, arrangements or
statute under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified in any manner against any liability
which may be incurred in such capacity, other than insurance provided by any
director, officer, affiliated person or underwriter for their own protection.
Sections 1, 2, 3 and 4 of Article VIII of Registrant's
Articles of Incorporation, included as Exhibit 1 to this Registration Statement
and incorporated herein by reference, provide as follows:
Section 1. To the fullest extent that limitations on the
liability of directors and officers are permitted by the
Maryland General Corporation Law, no director or officer of
the Corporation shall have any liability to the Corporation or
its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a
director or officer of the Corporation whether or not such
person is a director or officer at the time of any proceeding
in which liability is asserted.
Section 2. The Corporation shall indemnify and advance
expenses to its currently acting and its former directors to
the fullest extent that indemnification of directors is
permitted by the Maryland General Corporation Law. The
Corporation shall indemnify and advance expenses to its
officers to the same extent as its directors and to such
further extent as is consistent with law. The Board of
Directors of the Corporation may make further provision for
indemnification of directors, officers, employees and agents
in the By-Laws of the Corporation or by resolution or
agreement to the fullest extent permitted by the Maryland
General Corporation law.
Section 3. No provision of this Article VIII shall be
effective to protect or purport to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Section 4. References to the Maryland General Corporation Law
in this Article VIII are to such law as from time to time
amended. No further amendment to the Charter of the
Corporation shall decrease, but may expand, any right of any
person under this Article VIII based on any event, omission or
proceeding prior to such amendment.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is
C-3
<PAGE>
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event of a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person in connection with the securities being
registered) the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue. In the absence of a determination by a court of competent
jurisdiction, the determinations that indemnification against such liabilities
is proper, and advances can be made, are made by a majority of a quorum of the
disinterested, non-party directors of the Fund, or an independent legal counsel
in a written opinion, based on review of readily available facts.
Item 28. Business and Other Connections of Investment Advisor
Describe any other business, profession, vocation or
employment of a substantial nature in which the investment
advisor of the Registrant, and each director, officer or
partner of any such investment advisor, is or has been, at any
time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, employee,
partner or trustee.
During the last two years, no director or officer of
International Strategy & Investment Inc., the Registrant's
investment advisor, has engaged in any other business,
profession, vocation or employment of a substantial nature
other than that of the business of investment management and,
through affiliates, investment banking.
Item 29. Principal Underwriters
(a) International Strategy & Investment Group, Inc. acts as
distributor for ISI Total Return U.S. Treasury Fund Shares
(a class of Total Return U.S. Treasury Fund, Inc.), ISI
Managed Municipal Fund Shares (a class of Managed
Municipal Fund, Inc.) and ISI Strategy Fund Shares (a
class of ISI Strategy Fund, Inc.).
(b)
<TABLE>
<CAPTION>
Position and
Offices Position and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
----------------- ----------- ----------
<S> <C> <C>
Edward S. Hyman Chairman and Chairman and
Director and Director
R. Alan Medaugh Director President
Nancy Lazar Executive Vice President
and Director Vice President
Joel Fein Chief Financial Officer None
</TABLE>
- ---------------------
* 717 Fifth Avenue
New York, New York 10022
(c) Not applicable.
C-4
<PAGE>
Item 30. Location of Accounts and Records
With respect to each account, book or other document required
to be maintained by Section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the
Rules [17 CFR 270.31a-1 to 31a-3] promulgated thereunder, furnish the names and
address of each person maintaining physical possession of each such account,
book or other document.
International Strategy & Investment Inc., 717 Fifth Avenue,
New York, New York 10022, maintains physical possession of each such
account, book or other document of the Fund, except for those
maintained by the Registrant's custodian, Bankers Trust Company, 130
Liberty Street, New York, New York, 10006, or by the Registrant's
administrator, transfer agent, dividend disbursing agent and accounting
services provider, ICC, One South Street, Baltimore, MD 21202.
In particular, with respect to the records required by Rule
31a-1(b)(1), ISI and ICC each maintains physical possession of all
journals containing itemized daily records of all purchases and sales
of securities, including sales and redemptions of Fund securities, and
Bankers Trust Company maintains physical possession of all receipts and
deliveries of securities (including certificate numbers if such detail
is not recorded by the custodian or transfer-agent), all receipts and
disbursements of cash, and all other debts and credits.
Item 31. Management Services
Furnish a summary of the substantive provisions of any
management-related service contract not discussed in Part A or Part B of this
Form (because the contract was not believed to be of interest to a purchaser of
securities of the Registrant) under which services are provided to the
Registrant, indicating the parties to the contract, the total dollars paid and
by whom, for the last three fiscal years.
See Exhibit 8.
Item 32. Undertakings
Furnish the following undertakings in substantially the
following form in all initial Registration Statements filed under the 1933 Act:
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each
prospective person to whom a prospectus will be
delivered with a copy of the Registrant's latest
annual report to shareholders containing information
called for by Item 5A of Form N-1A, upon request and
without charge by contacting Registrant at
(800) 955-7175.
C-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment No. 6 to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized in the City of Baltimore,
in the State of Maryland, on the 28th day of July, 1998.
NORTH AMERICAN GOVERNMENT
BOND FUND, INC.
By: /s/ R. Alan Medaugh
-----------------------
R. Alan Medaugh
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities on the date(s) indicated:
* Chairman and July 28, 1998
- ----------------------- Director ---------------
Edward S. Hyman Date
* Director July 28, 1998
- ----------------------- ---------------
Richard T. Hale Date
* Director July 28, 1998
- ----------------------- ---------------
James J. Cunnane Date
* Director July 28, 1998
- ----------------------- ---------------
John F. Kroeger Date
* Director July 28, 1998
- ----------------------- ---------------
Louis E. Levy Date
* Director July 28, 1998
- ----------------------- ---------------
Eugene J. McDonald Date
* Director July 28, 1998
- ----------------------- ---------------
Rebecca W. Rimel Date
/s/ R. Alan Medaugh President July 28, 1998
- ----------------------- ---------------
R. Alan Medaugh Date
/s/ Joseph A. Finelli Chief Financial July 28, 1998
- ----------------------- and Accounting ---------------
Joseph A. Finelli Officer Date
* By: /s/ Amy M. Olmert
-----------------------
Amy M. Olmert
Attorney-In-Fact
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EDGAR
Exhibit
Number Document
--------------------------------------------------------------------
<S> <C> <C>
(1) (a) Articles of Incorporation.(1)
(1) (b) Articles of Amendment.(1)
(1) (c) Articles Supplementary dated December 27, 1993.(1)
(2) Registrant's By-Laws, as amended through December 18, 1996.(2)
(4) Specimen Security.(3)
(5) Investment Advisory Agreement dated December 15, 1992 between
Registrant and International Strategy & Investment Inc.;(1)
(6) (a) Distribution Agreement dated April 1, 1997, between
Registrant and International Strategy & Investment Group Inc.(2)
(6) (b) Form of Agency Distribution Agreement between International
Strategy & Investment Group, Inc. and Participating Broker-Dealers.(2)
(6) (c) Form of Shareholder Servicing Agreement between Registrant and
Shareholder Servicing Agents.(2)
EX-99.B (8) Custodian Agreement between Registrant and Bankers Trust Company dated
June 5, 1998, filed herewith.
(9) Master Services Agreement (including Administration, Transfer
Agency and Accounting Services Appendices) between Registrant and
Investment Company Capital Corp.(4)
(10) (a) Opinion of Counsel.(1)
(10) (b) Opinion of Counsel relating to net redemptions for
fiscal year ended March 31, 1997.(2)
EX-99.B (11) Consent of PricewaterhouseCoopers LLP, filed herewith.
(13) Subscription Agreement with respect to the initial capitalization of the
Fund.(1)
(15) Registrant's Distribution Plan.(2)
(16) Schedule of Computation of Performance Information.(1)
EX-99.B (24) Powers of Attorney, filed herewith.
EX-27 (27) Financial Data Schedule, filed herewith.
</TABLE>
-----------------
(1) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 26, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 29, 1997.
(3) Incorporated by reference to Exhibit 1 (Articles of Incorporation), as
amended, to Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-53598), filed with the
Securities and Exchange Commission via EDGAR on July 26, 1995, and Exhibit
2 (By-Laws), as amended, to Post-Effective Amendment No. 5 to such
Registration Statement filed with the Securities and Exchange Commission
via EDGAR on July 29, 1997.
(4) Incorporated by reference to Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-53598), filed with
the Securities and Exchange Commission via EDGAR on July 29, 1996.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT dated as of June 5, 1998 between BANKERS TRUST COMPANY (the
"Custodian") and NORTH AMERICAN FUND, INC. (the "Customer").
WHEREAS, the Customer desires to appoint the Custodian as custodian on
behalf of the Customer under the terms and conditions set forth in this
Agreement, and the Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment of Custodian. The Customer hereby employs the Custodian
as custodian of all assets of the Customer which are delivered to and accepted
by the Custodian or any Subcustodian (as that term is defined in Section 4)
("Property") pursuant to the terms and conditions set forth herein. For purposes
of this Agreement, "delivery" of Property shall include the acquisition of a
security entitlement (as that term is defined in the New York Uniform Commercial
Code ("UCC")) with respect thereto. Without limitation, such Property shall
include stocks and other equity interests of every type, evidences of
indebtedness, other instruments representing same or rights or obligations to
receive, purchase, deliver or sell same and other non-cash investment property
of the Customer ("Securities") and cash from any source and in any currency
("Cash"), provided that the Custodian shall have the right, in its sole
discretion, to refuse to accept as Property any property of a Customer that the
Custodian considers not to be appropriate or in proper form for deposit for any
reason. The Custodian shall not be responsible for any property of the Customer
held or received by the Customer or others and not delivered to the Custodian or
any Subcustodian.
2. Maintenance of Property at Custodian and Subcustodian Locations.
Pursuant to Instructions, the Customer shall direct the Custodian to (a) settle
Securities transactions and maintain cash in the country or other jurisdiction
in which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are acquired
and (b) maintain Cash and Cash equivalents in such countries in amounts
reasonably necessary to effect the Customer's transactions in such Securities.
Instructions to settle Securities transactions in any country shall be deemed to
authorize the holding of such Property in that country.
3. Custody Account. The Custodian agrees to establish and maintain a
custody account or accounts on its books in the name of the Customer (the
"Account") for any and all Property received and accepted by the Custodian or
any Subcustodian for the account of the Customer. The Customer acknowledges its
responsibility as a principal for all of its obligations to the Custodian
arising under or in connection with this Agreement, warrants its authority to
deposit in the Account any Property received therefor by the Custodian or a
Subcustodian and to give, and authorize others to give, instructions relative
thereto. The Custodian may deliver securities of the same class in place of
those deposited in the Account.
The Custodian shall hold, keep safe and protect as custodian for
Account, on behalf of the Customer, all Property in such Account and, to the
extent such Property constitutes financial assets for purposes of the New York
UCC, shall maintain those financial assets in such Account as security
transactions, involving the
- 1 -
<PAGE>
Property shall be executed or settled solely in accordance with Instructions,
except that until the Custodian receives Instructions to the contrary, the
Custodian will:
(a) collect all interest and dividends and all other income and
payments, whether paid in cash or in kind, on the Property, as the same become
payable and credit the same to the Account;
(b) present for payment all Securities held in the Account which are
called, redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation to the extent that
the Custodian or Subcustodian is actually aware of such opportunities and hold
the cash received in the Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely ministerial
(including, without limitation, the exchange of temporary securities for those
in definitive form and the exchange of warrants, or other documents of
entitlement to securities, for the Securities themselves) and (ii) when
notification of a tender or exchange offer (other than ministerial exchanges
described in (i) above) is received for the Account, endeavor to receive
Instructions, provided that if such Instructions are not received in time for
the Custodian to take timely action, no action shall be taken with respect
thereto;
(d) whenever notification of a rights entitlement or a fractional
interest resulting from a rights issue, stock dividend or stock split is
received for the Account and such rights entitlement or fractional interest
bears an expiration date, if after endeavoring to obtain Instructions such
Instructions are not received in time for the Custodian to take timely action or
if actual notice of such actions was received too late to seek Instructions,
sell in the discretion of the Custodian (which sale the Customer hereby
authorizes the Custodian to make) such rights entitlement or fractional interest
and credit the Account with the net proceeds of such sale;
(e) execute in the Customer's name for the Account, whenever the
Custodian deems it appropriate, such ownership and other certificates as may be
required to obtain the payment of income from the Property in the Account;
(f) pay for the Account, any and all taxes and levies in the nature of
taxes imposed on interest, dividends or other similar income on the Property in
the Account by any governmental authority. In the event there is insufficient
Cash available in the Account to pay such taxes and levies, the Custodian shall
notify the Customer of the amount of the shortfall and the Customer, at its
option, may deposit additional Cash in the Account or take steps to have
sufficient Cash available. The Customer agrees, when and if requested by the
Custodian and required in connection with the payment of any such taxes to
cooperate with the Custodian in furnishing information, executing documents or
otherwise; and
(g) appoint brokers and agents for any of the ministerial transactions
involving the Securities described in (a) - (f), including, without limitation,
affiliates of the Custodian or any Subcustodian.
4. Subcustodians and Securities Systems. The Customer authorizes and
instructs the Custodian to maintain the Property in the Account directly in one
of its U.S. branches or indirectly through custody accounts which have been
established by the Custodian with the following other securities intermediaries:
(a) one of its U.S. branches or another U.S. bank or trust company or branch
thereof located in the U.S. which is itself qualified under the Investment
Company Act of 1940, as amended ("1940 Act"), to act as
- 2 -
<PAGE>
custodian (individually, a "U.S. Subcustodian"), or a U.S. securities depository
or clearing agency or system in which the Custodian or a U.S. Subcustodian
participates (individually, a "U.S. Securities System") or (b) one of its
non-U.S. branches or majority-owned non-U.S. subsidiaries, a non-U.S. branch or
majority-owned subsidiary of a U.S. bank or a non-U.S. bank or trust company,
acting as custodian (individually, a "non-U.S. Subcustodian"; U.S. Subcustodians
and non-U.S. Subcustodians, collectively, "Subcustodians"), or a non-U.S.
depository or clearing agency or system in which the Custodian or any
Subcustodian participates (individually, a "non-U.S. Securities System"; U.S.
Securities System and non-U.S. Securities System, collectively, "Securities
System"), provided that in each case in which a U.S. Subcustodian or U.S.
Securities System is employed, each such Subcustodian or Securities System shall
have been approved by Instructions; provided further that in each case in which
a non-U.S. Subcustodian or non-U.S. Securities System is employed, (a) such
Subcustodian or Securities System either is (i) a "qualified U.S. bank" as
defined by Rule 17f-5 under the 1940 Act ("Rule 17f-5") or (ii) an "eligible
foreign custodian" within the meaning of Rule 17f-5 or such Subcustodian or
Securities System is the subject of an order granted by the U.S. Securities and
Exchange Commission ("SEC") exempting such agent or the subcustody arrangements
thereto from all or part of the provisions of Rule 17f-5 and (b) the agreement
between the Custodian and such non-U.S. Subcustodian has been approved by
Instructions; it being understood that the Custodian shall have no liability or
responsibility for determining whether the approval of any Subcustodian or
Securities System has been proper under the 1940 Act or any rule or regulation
thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the
employment of any Subcustodian or Securities System with respect to the
Customer, and if desirable and practicable, appoint a replacement subcustodian
or securities system in accordance with the provisions of this Section. In
addition, the Custodian may, at any time in its discretion, upon written
notification to the Customer, terminate the employment of any Subcustodian or
Securities System.
Upon request of the Customer, the Custodian shall deliver to the
Customer annually a certificate stating: (a) the identity of each non-U.S.
Subcustodian and non-U.S. Securities System then acting on behalf of the
Custodian and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such non-U.S Subcustodian and
non-U.S. Securities System; (b) the countries in which each non-U.S.
Subcustodian or non-U.S. Securities System is located; and (c) so long as Rule
17f-5 requires the Customer's Board of Directors to directly approve its foreign
custody arrangements, such other information relating to such non-U.S.
Subcustodians and non-U.S. Securities Systems as may reasonably be requested by
the Customer to ensure compliance with Rule 17f-5. So long as Rule 17f-5
requires the Customer's Board of Directors to directly approve its foreign
custody arrangements, the Custodian also shall furnish annually to the Customer
information concerning such non-U.S. Subcustodians and non-U.S. Securities
Systems similar in kind and scope as that furnished to the Customer in
connection with the initial approval of this Agreement. Custodian agrees to
promptly notify the Customer if, in the normal course of its custodial
activities, the Custodian has reason to believe that any non-U.S. Subcustodian
or non-U.S. Securities System has ceased to be a qualified U.S. bank or an
eligible foreign custodian each within the meaning of Rule 17f-5 or has ceased
to be subject to an exemptive order from the SEC.
5. Use of Subcustodian. With respect to Property in the Account which
is maintained by the Custodian through a Subcustodian employed pursuant to
Section 4:
(a) The Custodian will identify on its books as belonging to the
Customer, any Property maintained through such Subcustodian.
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(b) Any Property in the Account held by a Subcustodian will be subject
only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a Subcustodian
with respect to maintaining Property shall require that (i) the Account will be
adequately indemnified or its losses adequately insured; (ii) the Securities so
maintained will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of such Subcustodian or its creditors except a claim
for payment in accordance with such agreement for their safe custody or
administration and expenses related thereto, (iii) beneficial ownership of such
Securities will be freely transferable without the payment of money or value
other than for safe custody or administration and expenses related thereto; and
(iv) adequate records will be maintained identifying the Property maintained
pursuant to such agreement as belonging to the Custodian, on behalf of its
customers and (v) to the extent permitted by applicable law, officers of or
auditors employed by, or other representatives of or designated by, the
Custodian, including the independent public accountants of or designated by, the
Customer be given access to the books and records of such Subcustodian relating
to its actions under its agreement pertaining to any Property held by it
thereunder or confirmation of or pertinent information contained in such books
and records be furnished to such persons designated by the Custodian.
6. Use of Securities System. With respect to Property in the Account
which is maintained by the Custodian or any Subcustodian through a Securities
System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian shall be required by its
agreement with the Custodian to, identify on its books such Property as being
maintained for the account of the Custodian or Subcustodian for its customers.
(b) Any Property maintained through a Securities System for the account
of the Custodian or a Subcustodian will be subject only to the instructions of
the Custodian or such Subcustodian, as the case may be.
(c) Property deposited with a Securities System will be maintained in
an account holding only assets for customers of the Custodian or Subcustodian,
as the case may be, unless precluded by applicable law, rule, or regulation.
(d) The Custodian shall provide the Customer with any report obtained
by the Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
7. Agents. The Custodian may at any time or times in its sole
discretion appoint (or remove) any other U.S. bank or trust company which is
itself qualified under the 1940 Act to act as custodian, as its agent to carry
out such of the provisions of this Agreement as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
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8. Records, Ownership of Property, Statements, Opinions of Independent
Certified Public Accountants.
(a)The ownership of the Property whether maintained directly by the
Custodian or indirectly through a Subcustodian or a Securities System as
authorized herein, shall be clearly recorded on the Custodian's books as
belonging to the Account and not for the Custodian's own interest. The Custodian
shall keep accurate and detailed accounts of all investments, receipts,
disbursements and other transactions for the Account. All accounts, books and
records of the Custodian relating thereto shall be open to inspection and audit
at all reasonable times during normal business hours by any person designated by
the Customer. All such accounts shall be maintained and preserved in the form
reasonably requested by the Customer. The Custodian will supply to the Customer
from time to time, as mutually agreed upon, a statement in respect to any
Property in the Account maintained by the Custodian or by a Subcustodian. In the
absence of the filing in writing with the Custodian by the Customer of
exceptions or objections to any such statement within sixty (60) days of the
mailing thereof, the Customer shall be deemed to have approved such statement
and in such case or upon written approval of the Customer of any such statement,
such statement shall be presumed to be for all purposes correct with respect to
all information set forth therein.
(b) The Custodian shall take all reasonable action as the Customer may
request to obtain from year to year favorable opinions from the Customer's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Customer's Form
N-1A and the Customer's Form N-SAR or other periodic reports to the SEC and with
respect to any other requirements of the SEC.
(c) At the request of the Customer, the Custodian shall deliver to the
Customer a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the Custodian under
this Agreement, including, without limitation, the Custodian's accounting
system, internal accounting control and procedures for safeguarding Property,
including Property deposited and/or maintained in a securities system or with a
Subcustodian. Such report shall be of sufficient scope and in sufficient detail
as may reasonably be required by the Customer and as may reasonably be obtained
by the Custodian.
(d) The Customer may elect to participate in any of the electronic
on-line service and communications systems offered by the Custodian which can
provide the Customer, on a daily basis, with the ability to view on-line or to
print on a hard copy various reports of Account activity and of Property being
held in the Account. To the extent that such service shall include market values
of Securities in the Account, the Customer hereby acknowledges that the
Custodian now obtains and may in the future obtain information on such values
from outside sources that the Custodian considers to be reliable and the
Customer agrees that the Custodian (i) does not verify or represent or warrant
either the reliability of such service nor the accuracy or completeness of any
such information furnished or obtained by or through such service and (ii) shall
be without liability in selecting and utilizing such service or furnishing any
information derived therefrom.
9. Holding of Securities, Nominees, etc. Securities in the Account
which are maintained by the Custodian or any Subcustodian may be held directly
by such entity in the name of the Customer or in bearer form or maintained in
the Custodian's or Subcustodian's name, or in the name of the Custodian's or
Subcustodian's nominee. Securities that are maintained through a Subcustodian or
which are eligible for deposit in a Securities System as provided above may be
maintained with the Subcustodian or the Securities
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<PAGE>
System in an account for the Custodian's or Subcustodian's customers, unless
prohibited by law, rule, or regulation. The Custodian or Subcustodian, as the
case may be, may combine certificates representing Securities held in the
Account with certificates of the same issue held by it as fiduciary or as a
custodian. In the event that any Securities in the name of the Custodian or its
nominee or held by a Subcustodian and registered in the name of such
Subcustodian or its nominee are called for partial redemption by the issuer of
such Security, the Custodian may, subject to the rules or regulations pertaining
to allocation of any Securities System in which such Securities have been
deposited, allot, or cause to be allotted, the called portion of the respective
beneficial holders of such class of Security in any manner the Custodian deems
to be fair and equitable. Securities maintained with a Securities System shall
be maintained subject to the rules of that Securities System governing the
rights and obligations among the Securities System and its participants.
10. Proxies, etc. With respect to any proxies, notices, reports or
other communications relative to any of the Securities in the Account, the
Custodian shall perform such services and only such services relative thereto as
are (i) set forth in Section 3 of this Agreement, (ii) described in Exhibit A
attached hereto (as such service therein described may be in effect from time to
time) (the "Proxy Service") or (iii) as may otherwise be agreed upon between the
Custodian and the Customer. The liability and responsibility of the Custodian in
connection with the Proxy Service referred to in (ii) of the immediately
preceding sentence and in connection with any additional services which the
Custodian and the Customer may agree upon as provided in (iii) of the
immediately preceding sentence shall be as set forth in the description of the
Proxy Service and as may be agreed upon by the Custodian and the Customer in
connection with the furnishing of any such additional service and shall not be
affected by any other term of this Agreement. Neither the Custodian nor its
nominees or agents shall vote upon or in respect of any of the Securities in the
Account, execute any form of proxy to vote thereon, or give any consent or take
any action (except as provided in Section 3) with respect thereto except upon
the receipt of Instructions relative thereto.
11. Segregated Account. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations thereunder, the
Custodian shall, upon receipt of Instructions, establish and maintain a
segregated account or accounts on its books for and on behalf of the Customer.
12. Settlement Procedures. Securities will be transferred, exchanged or
delivered by the Custodian or a Subcustodian upon receipt by the Custodian of
Instructions which include all information required by the Custodian. Settlement
and payment for Securities received for the Account and delivery of Securities
out of the Account may be effected in accordance with the customary or
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering Securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such Securities from such
purchaser or dealer, as such practices and procedures may be modified or
supplemented in accordance with the standard operating procedures of the
Custodian in effect from time to time for that jurisdiction or market. The
Custodian shall not be liable for any loss which results from effecting
transactions in accordance with the customary or established securities trading
or securities processing practices and procedures in the applicable jurisdiction
or market.
Notwithstanding that the Custodian may settle purchases and sales
against, or credit income to, the Account, on a contractual basis, as outlined
in the applicable Service Standards as defined below and provided to the
Customer by the Custodian, the Custodian may, at its sole option, reverse such
credits or
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debits to the Account in the event that the transaction does not settle, or the
income is not received in a timely manner, and the Customer agrees to hold the
Custodian harmless from any losses which may result therefrom.
The applicable Service Standards shall be defined as the Global Guide,
the Policies and Standards Manual, and any other documents issued by the
Custodian from time to time specifying the procedures for communicating with the
Customer, the terms of any additional services to be provided to the Customer,
and such other matters as may be agreed between the Customer and the Custodian
from time to time.
13. Conditional Credits.
(a) Notwithstanding any other provision of this Agreement, the
Custodian shall not be required to comply with any Instructions to settle the
purchase of any securities for the Account, unless there are sufficient
immediately available funds in the relevant currency in the Account, provided
that, if, after all expenses, debits and withdrawals of Cash in the relevant
currency ("Debits") applicable to the Account have been made and if after all
Conditional Credits, as defined below, applicable to the Account have been made
final entries as set forth in (c) below, the amount of immediately available
funds in the relevant currency in such Account is at least equal to the
aggregate purchase price of all Securities for which the Custodian has received
Instructions to settle on that date ("Settlement Date"), the Custodian, upon
settlement, shall credit the Securities to the Account by making a final entry
on its books and records.
(b) Notwithstanding the foregoing, if after all Debits applicable to
the Account have been made, there remains outstanding any Conditional Credit (as
defined below) applicable to the Account or the amount of immediately available
funds in a given currency in such Account are less than the aggregate purchase
price in such currency of all securities for which the Custodian has received
Instructions to settle on the Settlement Date, the Custodian, upon settlement,
may provisionally credit the Securities to the Account by making a conditional
entry on its books and records ("Conditional Credit"), pending receipt of
sufficient immediately available funds in the relevant currency in the Account.
(c) If, within a reasonable time after the posting of a Conditional
Credit and after all Debits applicable to the Account have been made,
immediately available funds in the relevant currency at least equal to the
aggregate purchase price in such currency of all securities subject to a
Conditional Credit on a Settlement Date are deposited into the Account, the
Custodian shall make the Conditional Credit a final entry on its books and
records. In such case, the Customer shall be liable to the Custodian only for
late charges at a rate which the Custodian customarily charges for similar
extensions of credit.
(d) If (i) within a reasonable time from the posting of a Conditional
Credit, immediately available funds at least equal to the resultant Debit on a
Settlement Date are not on deposit in the Account, or (ii) any Proceeding shall
occur, the Custodian may sell such of the Securities subject to the Conditional
Credit as it selects in its sole discretion and shall apply the net proceeds of
such sale to cover such Debit, including related late charges, and any remaining
proceeds shall be credited to the Account. If such proceeds are insufficient to
satisfy such debt in full, the Customer shall continue to be liable to the
Custodian for any shortfall. The Custodian shall make the Conditional Credit a
final entry on its books as to the Securities not required to be sold to satisfy
such Debit. Pending payment in full by the Customer of the purchase price for
Securities subject to a Conditional Credit, and the Custodian's making a
Conditional Credit a final entry on its books, and unless consented to by the
Custodian, the Customer shall have no right to give further
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<PAGE>
Instructions in respect of Securities subject to a Conditional Credit. The
Custodian shall have the sole discretion to determine which Securities shall be
deemed to have been paid for by the Customer out of funds available in the
Account. Any such Conditional Credit may be reversed (and any corresponding
Debit shall be canceled) by the Custodian unless and until the Custodian makes a
final entry on its books crediting such Securities to the Account. The term
"Proceeding" shall mean any insolvency, bankruptcy, receivership, reorganization
or similar proceeding relating to the Customer, whether voluntary or
involuntary.
(e) The Customer agrees that it will not intentionally use the Account
to facilitate the purchase of securities without sufficient funds in the Account
(which funds shall not include the expected proceeds of the sale of the
purchased securities).
14. Permitted Transactions. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon Instructions in
accordance Section 15 and only for the purposes listed below.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed or in order
to satisfy requirements for additional or substitute collateral.
(h) In connection with any loans, but only against receipt of
collateral as specified in Instructions which shall reflect any restrictions
applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Custodian, a Subcustodian or the
Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Portfolio's investment advisor and a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc., relating to compliance with
the rules of The Options Clearing Corporation, the Commodities Futures Trading
Commission or of any registered
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national securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to the Custodian of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or at
expiration, the Custodian will receive the Securities previously deposited from
broker. The Custodian will act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly when due other
than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading or receipt of income from Securities related transactions.
(n) Upon the termination of this Agreement as set forth in Section 21.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to
verify the purpose for which a transaction is being effected.
15. Instructions. The term "Instructions" means instructions from the
Customer in respect of any of the Custodian's duties hereunder which have been
received by the Custodian in accordance with Section 22 below (i) in writing
(including, without limitation, facsimile transmission) or by tested telex
signed or given by such one or more person or persons as the Customer shall have
from time to time authorized in writing to give the particular class of
Instructions in question and whose name and (if applicable) signature and office
address have been filed with the Custodian, or (ii) which have been transmitted
electronically through an electronic on-line service and communications system
offered by the Custodian or other electronic instruction system acceptable to
the Custodian, or (iii) a telephonic or oral communication by one or more
persons as the Customer shall have from time to time authorized to give the
particular class of Instructions in question and whose name has been filed with
the Custodian; or (iv) upon receipt of such other form of instructions as the
Customer may from time to time authorize in writing and which the Custodian has
agreed in writing to accept. Instructions in the form of oral communications
shall be confirmed by the Customer by tested telex or writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall in no way
affect any action taken by the Custodian in reliance upon such oral instructions
prior to the Custodian's receipt of such confirmation. Instructions may relate
to specific transactions or to types or classes of transactions, and may be in
the form of standing instructions.
The Custodian shall have the right to assume in the absence of notice
to the contrary from the Customer that any person whose name is on file with the
Custodian pursuant to this Section has been authorized by the Customer to give
the Instructions in question and that such authorization has not been revoked.
The Custodian may act upon and conclusively rely on, without any liability to
the Customer or any other person or entity for any losses resulting therefrom,
any Instructions reasonably believed by it to be furnished by the proper person
or persons as provided above.
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16. Standard of Care. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained in
Instructions given to the Custodian which are not contrary to the provisions of
this Agreement. The Custodian will use reasonable care with respect to the
safekeeping of Property in the Account and, except as otherwise expressly
provided herein, in carrying out its obligations under this Agreement. So long
as and to the extent that it has exercised reasonable care, the Custodian shall
not be responsible for the title, validity or genuineness of any Property or
other property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon, and may
conclusively rely on, without liability for any loss resulting therefrom, any
notice, request, consent, certificate or other instrument reasonably believed by
it to be genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified by the
Customer for any losses, damages, costs and expenses (including, without
limitation, the fees and expenses of counsel) incurred by the Custodian and
arising out of action taken or omitted with reasonable care by the Custodian
hereunder or under any Instructions. The Custodian shall be liable to the
Customer for any act or omission to act of any Subcustodian to the same extent
as if the Custodian committed such act itself. With respect to a Securities
System, the Custodian shall only be responsible or liable for losses arising
from employment of such Securities System caused by the Custodian's own failure
to exercise reasonable care. In the event of any loss to the Customer by reason
of the failure of the Custodian or a Subcustodian to utilize reasonable care,
the Custodian shall be liable to the Customer to the extent of the Customer's
actual damages at the time such loss was discovered without reference to any
special conditions or circumstances. In no event shall the Custodian be liable
for any consequential or special damages. The Custodian shall be entitled to
rely, and may act, on advice of counsel (who may be counsel for the Customer) on
all matters and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
In the event the Customer subscribes to an electronic on-line service
and communications system offered by the Custodian, the Customer shall be fully
responsible for the security of the Customer's connecting terminal, access
thereto and the proper and authorized use thereof and the initiation and
application of continuing effective safeguards with respect thereto and agree to
defend and indemnify the Custodian and hold the Custodian harmless from and
against any and all losses, damages, costs and expenses (including the fees and
expenses of counsel) incurred by the Custodian as a result of any improper or
unauthorized use of such terminal by the Customer or by any others.
All collections of funds or other property paid or distributed in
respect of Securities in the Account, including funds involved in third-party
foreign exchange transactions, shall be made at the risk of the Customer.
Subject to the exercise of reasonable care, the Custodian shall have no
liability for any loss occasioned by delay in the actual receipt of notice by
the Custodian or by a Subcustodian of any payment, redemption or other
transaction regarding Securities in the Account in respect of which the
Custodian has agreed to take action as provided in Section 3 hereof. The
Custodian shall not be liable for any loss resulting from, or caused by, or
resulting from acts of governmental authorities (whether de jure or de facto),
including, without limitation, nationalization, expropriation, and the
imposition of currency restrictions; devaluations of or fluctuations in the
value of currencies; changes in laws and regulations applicable to the banking
or securities industry; market conditions that prevent the orderly execution of
securities transactions or affect the value of Property; acts of war, terrorism,
insurrection or revolution; strikes or work stoppages; the inability of a local
clearing and settlement system to settle transactions for reasons beyond the
control of the Custodian or hurricane, cyclone, earthquake, volcanic eruption,
nuclear fusion, fission or radioactivity,
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or other acts of God.
The Custodian shall have no liability in respect of any loss, damage or
expense suffered by the Customer, insofar as such loss, damage or expense arises
from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Customer by
entities other than the Custodian prior to the Custodian's employment under this
Agreement.
The provisions of this Section shall survive termination of this
Agreement.
17. Investment Limitations and Legal or Contractual Restrictions or
Regulations. The Custodian shall not be liable to the Customer and the Customer
agrees to indemnify the Custodian and its nominees, for any loss, damage or
expense suffered or incurred by the Custodian or its nominees arising out of any
violation of any investment restriction or other restriction or limitation
applicable to the Customer pursuant to any contract or any law or regulation.
The provisions of this Section shall survive termination of this Agreement.
18. Fees and Expenses. The Customer agrees to pay to the Custodian such
compensation for its services pursuant to this Agreement as may be mutually
agreed upon in writing from time to time and the Custodian's reasonable
out-of-pocket or incidental expenses in connection with the performance of this
Agreement, including (but without limitation) legal fees as described herein
and/or deemed necessary in the judgment of the Custodian to keep safe or protect
the Property in the Account. The initial fee schedule is attached hereto as
Exhibit B. Such fees will not be abated by, nor shall the Custodian be required
to account for, any profits or commissions received by the Custodian in
connection with its provision of custody services under this Agreement. The
Customer hereby agrees to hold the Custodian harmless from any liability or loss
resulting from any taxes or other governmental charges, and any expense related
thereto, which may be imposed, or assessed with respect to any Property in the
Account and also agrees to hold the Custodian, its Subcustodians, and their
respective nominees harmless from any liability as a record holder of Property
in the Account. The Custodian is authorized to charge the Account for such items
and the Custodian shall have a lien on the Property in the Account for any
amount payable to the Custodian under this Agreement, including but not limited
to amounts payable pursuant to Section 13 and pursuant to indemnities granted by
the Customer under this Agreement. The provisions of this Section shall survive
the termination of this Agreement.
19. Tax Reclaims. With respect to withholding taxes deducted and which
may be deducted from any income received from any Property in the Account, the
Custodian shall perform such services with respect thereto as are described in
Exhibit C attached hereto and shall in connection therewith be subject to the
standard of care set forth in such Exhibit C. Such standard of care shall not be
affected by any other term of this Agreement.
20. Amendment, Modifications, etc. No provision of this Agreement may
be amended, modified or waived except in a writing signed by the parties hereto.
No waiver of any provision hereto shall be deemed a continuing waiver unless it
is so designated. No failure or delay on the part of either party in exercising
any power or right under this Agreement operates as a waiver, nor does any
single or partial exercise of any power or right preclude any other or further
exercise thereof or the exercise of any other power or right.
- 11 -
<PAGE>
21. Termination. This Agreement may be terminated by the Customer or
the Custodian by ninety (90) days' written notice to the other; provided that
notice by the Customer shall specify the names of the persons to whom the
Custodian shall deliver the Securities in the Account and to whom the Cash in
the Account shall be paid. If notice of termination is given by the Custodian,
the Customer shall, within ninety (90) days following the giving of such notice,
deliver to the Custodian a written notice specifying the names of the persons to
whom the Custodian shall deliver the Securities in the Account and to whom the
Cash in the Account shall be paid. In either case, the Custodian will deliver
such Property to the persons so specified, after deducting therefrom any amounts
which the Custodian determines to be owed to it hereunder. In addition, the
Custodian may in its discretion withhold from such delivery such Property as may
be necessary to settle transactions pending at the time of such delivery. The
Customer grants to the Custodian a lien and right of setoff against the Account
and all Property held therein from time to time in the full amount of the
foregoing obligations. If within ninety (90) days following the giving of a
notice of termination by the Custodian, the Custodian does not receive from the
Customer a written notice specifying the names of the persons to whom the
Custodian shall deliver the Securities in the Account and to whom the Cash in
the Account shall be paid, the Custodian, at its election, may deliver such
Securities and pay such Cash to a bank or trust company doing business in the
State of New York to be held and disposed of pursuant to the provisions of this
Agreement, or may continue to hold such Securities and Cash until a written
notice as aforesaid is delivered to the Custodian, provided that the Custodian's
obligations shall be limited to safekeeping.
22. Notices. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or notices in
connection herewith (a) shall be in writing, hand delivered or sent by
registered mail, telex or facsimile addressed to such other address as shall
have been furnished by the receiving party pursuant to the provisions hereof and
(b) shall be deemed effective when received, or, in the case of a telex, when
sent to the proper number and acknowledged by a proper answerback.
23. Security for Payment. To secure payment of all obligations due
hereunder, the Customer hereby grants to the Custodian a continuing security
interest in and right of setoff against the Account and all Property held
therein from time to time in the full amount of such obligations. Should the
Customer fail to pay promptly any amounts owed hereunder, the Custodian shall be
entitled to use available Cash in the Account, and to dispose of Securities in
the Account as is necessary. In any such case and without limiting the
foregoing, the Custodian shall be entitled to take such other actions or
exercise such other options, powers and rights as the Custodian now or hereafter
has as a secured creditor under the New York UCC or any other applicable law.
24. Representations and Warranties.
(a) The Customer hereby represents and warrants to the Custodian that:
(i) the employment of the Custodian and the allocation of
fees, expenses and other charges to the Account as herein provided, is not
prohibited by law or any governing documents or contracts to which it is
subject;
(ii) the terms of this Agreement do not violate any obligation
by which it is bound, whether arising by contract, operation of law or
otherwise;
- 12 -
<PAGE>
(iii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon it in accordance
with its terms; and
(iv) it will deliver to the Custodian a duly executed
Secretary's Certificate in the form of Exhibit D attached hereto or such other
evidence of such authorization as the Custodian may reasonably require, whether
by way of a certified resolution or otherwise.
(b) The Custodian hereby represents and warrants to the Customer that:
(i) the terms of this Agreement do not violate any obligation
by which it is bound, whether arising by contract, operation of law or
otherwise;
(ii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon it in accordance
with its terms;
(iii) it will deliver to the Customer such evidence of such
authorization as the Customer may reasonably require, whether by way of a
certified resolution or otherwise; and
(iv) Custodian is qualified as a custodian under Section 26(a)
of the 1940 Act and warrants that it will remain so qualified or upon ceasing to
be so qualified shall promptly notify the Customer in writing.
25. Governing Law and Successors and Assigns. This Agreement shall be
governed by the law of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Custodian.
26. Publicity. Customer shall furnish to Custodian in accordance with
Section 22 above, prior to any distribution thereof, copies of any material
prepared for distribution to any persons who are not parties hereto that refer
in any way to the Custodian. Customer shall not distribute or permit the
distribution of such materials if Custodian reasonably objects in writing within
ten (10) business days of receipt thereof (or such other time as may be mutually
agreed) after receipt thereof. The provisions of this Section shall survive the
termination of this Agreement.
27. Submission to Jurisdiction. Any suit, action or proceeding arising
out of this Agreement may be instituted in any State or Federal court sitting in
the City of New York, State of New York, United States of America, and the
Customer irrevocably submits to the non-exclusive jurisdiction of any such court
in any such suit, action or proceeding and waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any such suit, action or proceeding brought in such a court and any
claim that such suit, action or proceeding was brought in an inconvenient forum.
28. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties hereto.
29. Confidentiality. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all information
provided by each party to the other regarding its business
- 13 -
<PAGE>
and operations. All confidential information provided by a party hereto shall be
used by any other party hereto solely for the purpose of rendering services
pursuant to this Agreement and, except as may be required in carrying out this
Agreement, shall not be disclosed to any third party without the prior consent
of such providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter becomes
publicly available other than through a breach of this Agreement, or that is
required or requested to be disclosed by any bank or other regulatory examiner
of the Custodian, Customer, or any Subcustodian, any auditor of the parties
hereto, by judicial or administrative process or otherwise by applicable law or
regulation. The provisions of this Section shall survive the termination of this
Agreement.
30. Severability. If any provision of this Agreement is determined to
be invalid or unenforceable, such determination shall not affect the validity or
enforceability of any other provision of this Agreement.
31. Entire Agreement. This Agreement together with any Exhibits
attached hereto, contains the entire agreement between the parties relating to
the subject matter hereof and supersedes any oral statements and prior writings
with respect thereto.
32. Headings. The headings of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
33. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties hereto.
IN WITNESS WHEREOF, each of the parties has caused its duly authorized
signatories to execute this Agreement as of the date first written above.
NORTH AMERICAN FUND, INC.
By: /s/ Amy M. Olmert
--------------------
Name: Amy M. Olmert
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ Richard Fogarty
--------------------
Name: Richard Fogarty
Title: Vice President
- 14 -
<PAGE>
EXHIBIT A
To Custodian Agreement dated as of June 5, 1998 between Bankers Trust
Company and North American Fund, Inc.
PROXY SERVICE
The following is a description of the Proxy Service referred to in
Section 10 of the above referred to Custodian Agreement. Terms used herein as
defined terms shall have the meanings ascribed to them therein unless otherwise
defined below.
The Custodian provides a service, described below, for the transmission
of corporate communications in connection with shareholder meetings relating to
Securities held in the countries specified in the applicable Service Standards.
For the United States and Canada, the term "corporate communications" means the
proxy statements or meeting agenda, proxy cards, annual reports and any other
meeting materials received by the Custodian. For countries other than the United
States and Canada, the term "corporate communications" means the meeting agenda
only and does not include any meeting circulars, proxy statements or any other
corporate communications furnished by the issuer in connection with such
meeting. Non-meeting related corporate communications are not included in the
transmission service to be provided by the Custodian except upon request as
provided below.
The Custodian's process for transmitting and translating meeting
agendas will be as follows:
1) If the meeting agenda is not provided by the issuer in the English
language, and if the language of such agenda is in the official language of the
country in which the related security is held, the Custodian will as soon as
practicable after receipt of the original meeting agenda by a Subcustodian
provide an English translation prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished, the
local language agenda will not be furnished unless requested.
Translations will be free translations and neither the Custodian nor
any Subcustodian will be liable or held responsible for the accuracy thereof or
any direct or indirect consequences arising therefrom, including without
limitation arising out of any action taken or omitted to be taken based thereon.
If requested, the Custodian will, on a reasonable efforts basis,
endeavor to obtain any additional corporate communication such as annual or
interim reports, proxy statements, meeting circulars, or local language agendas,
and provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon
receipt by the Custodian of notice from a Subcustodian, the Custodian will
provide a notice to the Customer indicating the deadline for receipt of its
instructions to enable the voting process to take place effectively and
efficiently. As voting procedures will vary from market to market, attention to
any required procedures will be very important. Upon timely receipt of voting
instructions, the Custodian will promptly forward such instructions to the
applicable Subcustodian. If voting instructions are not timely received, the
Custodian shall have no liability or obligation to take any action.
<PAGE>
For Securities held in markets other than those set forth in the first
paragraph, the Custodian will not furnish the material described above or seek
voting instructions. However, if requested to exercise voting rights at a
specific meeting, the Custodian will endeavor to do so on a reasonable efforts
basis without any assurance that such rights will be so exercised at such
meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to appropriate
instructions or direction (e.g., by way of illustration only and not by way of
limitation, physical presence is required at a meeting and/or travel expenses
are incurred), such expenses will be reimbursed out of the Account unless other
arrangements have been made for such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to
include jurisdictions which are not currently included as set forth in the
applicable Service Standards. The Custodian will notify the Customer as to the
inclusion of additional countries or deletion of existing countries after their
inclusion or deletion and this Exhibit A will be deemed to be automatically
amended to include or delete such countries as the case may be.
<PAGE>
EXHIBIT B
To Custodian Agreement dated as of June 5, 1998 between Bankers Trust
Company and North American Fund, Inc.
BANKERS TRUST CUSTODY FEE SCHEDULE
FOR
BT ALEX. BROWN MUTUAL FUNDS
(FLAG INVESTORS FUNDS AND ISI FUNDS)
Effective October 1, 1997
CUSTODY FEES
1. DOMESTIC SAFEKEEPING FEES
ANNUAL ASSET FEE (BY FUND-EXCEPT CASH RESERVE)
Market Value Basis Point
$0 - $100 million 1.00
Over $100 million 0.75
ANNUAL ASSET FEE (CASH RESERVE FUND)
Market Value Basis Point
$0 - $1 billion 1.00
$1 billion - $3 billion 0.75
Over $3 billion 0.50
2. DOMESTIC TRANSACTION FEES
TRANSACTION TYPE $USD
AUTOMATED DEPOSITORY: DTC/PTC/FED 10.00
MANUAL DEPOSITORY: DTC/PTC/ FED 15.00
PHYSICAL AUTOMATED 15.00
PHYSICAL MANUAL 20.00
P&I PAYMENTS 5.00
<PAGE>
REDEMPTIONS 10.00
REORGANIZATIONS Included in safekeeping charge
============================== ===========================================
3. GLOBAL SAFEKEEPING AND ASSET FEES
Annual Receive and
Asset Fee Deliver
Transactions
Country
Argentina 35 Basis $100
Points
Australia 3 Basis Points $50
Austria 5 Basis Points $75
Bangladesh 40 Basis $150
Points
Belgium 4 Basis Points $60
Botswana 50 Basis $150
Points
Brazil 30 Basis $70
Points
Canada 2 Basis Points $20
Cedel/Euroclear 3 Basis Points $20
Chile 30 Basis $80
Points
China 30 Basis $75
Points
Columbia 35 Basis $100
Points
Czech Republic 20 Basis $70
Points
Denmark 4 Basis Points $50
Ecuador 45 Basis $100
Points
Egypt 45 Basis $80
Points
<PAGE>
Finland 10 Basis $75
Points
France 5 Basis Points $50
Germany 3 Basis Points $30
Ghana 50 Basis $150
Points
Greece 35 Basis $120
Points
Hong Kong 5 Basis Points $30
Hungary 45 Basis $150
Points
India (Physical) 60 Basis $200
Points
India (Dematerialized) 25 Basis $140
Points
Indonesia 8 Basis Points $35
Ireland 5 Basis Points $50
Israel 40 Basis $50
Points
Italy 3 Basis Points $50
Japan 3 Basis Points $35
Jordan 30 Basis $100
Points
Kenya 50 Basis $150
Points
Luxembourg 4 Basis Points $60
Malaysia 7 Basis Points $50
Mauritius 50 Basis $140
Points
Mexico 5 Basis Points $30
Morocco 30 Basis $130
Points
Netherlands 4 Basis Points $45
<PAGE>
New Zealand 4 Basis Points $50
Norway 5 Basis Points $50
Pakistan 30 Basis $150
Points
Peru 50 Basis $100
Points
Philippines 8 Basis Points $30
Poland 45 Basis $100
Points
Portugal 4 Basis Points $75
Russia 50 Basis $300
Points
Singapore 7 Basis Points $50
Slovakia 25 Basis $100
Points
South Africa 5 Basis Points $30
South Korea 15 Basis $50
Points
Spain 6 Basis Points $50
Sri Lanka 12 Basis $60
Points
Sweden 4 Basis Points $50
Switzerland 3 Basis Points $50
Taiwan 15 Basis $100
Points
Thailand 7 Basis Points $100
Tunisia 45 Basis $50
Points
Turkey 15 Basis $50
Points
United Kingdom 2 Basis Points $15
Venezuela 35 Basis $100
Points
<PAGE>
Zambia 50 Basis $150
Points
Zimbabwe 50 Basis $150
Points
4. DDA RELATED CHARGES
Cash Connector Services $25 per month per account
(MTC, MTD, EBR, BTC Reporting)
Statement Rendition (CDS) Services
Account Maintenance $50 per month per account
Debit Postings $0.35 per posting
Credit Postings $0.35 per posting
Money Transfer Charges*
Outgoing Payments $6.00
Incoming Payments No Charge
Book to Book Transfers No Charge
*Above Money Transfer Charges assume electronic instruction via bank-provided
software. Manual instructions received via facsimile, etc. will incur a charge
of $25 per transaction.
Overdraft Rate: Prime + 1.00%
NOTES
o Market Values will be provided by the Fund Accountant at month-end
to determine monthly assets for billing purposes.
o A manual transaction is an instruction that is received in writing, i.e.
facsimile
o The standard Global Custody Service includes: asset safekeeping, trade
settlement, income collection, corporate action processing including proxy
voting and tax reclaims where appropriate.
<PAGE>
o Third party FX transactions and other cash movements with no associated
security transaction (e.g. free payments/receipts) are charged at $10 per
U.S. wire and $25 per non-U.S. wire. No fee is levied for FX transactions
executed with Bankers Trust.
o Fees are billed monthly in arrears.
This Exhibit B shall be amended upon delivery by the Custodian of a new Exhibit
B to the Customer and acceptance thereof by the Customer and shall be effective
as of the date of acceptance by the Customer or a date agreed upon between the
Custodian and the Customer.
<PAGE>
EXHIBIT C
To Custodian Agreement dated as of June 5, 1998 between Bankers Trust
Company and North American Fund, Inc.
TAX RECLAIMS
Pursuant to Section 18 of the above referred to Custodian Agreement, the
Custodian shall perform the following services with respect to withholding taxes
imposed or which may be imposed on income from Property in the Account in the
countries specified in the applicable Service Standards. Terms used herein as
defined terms shall unless otherwise defined have the meanings ascribed to them
in the above referred to Custodian Agreement.
When withholding tax has been deducted with respect to income from any
Property in an Account, the Custodian will actively pursue on a reasonable
efforts basis the reclaim process, provided that the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by the
Custodian or its designee. In all cases of withholding, the Custodian will
provide full details to the Customer. If exemption from withholding at the
source can be obtained in the future, the Custodian will notify the Customer and
advise what documentation, if any, is required to obtain the exemption. Upon
receipt of such documentation from the Customer, the Custodian will file for
exemption on the Customer's behalf and notify the Customer when it has been
obtained.
In connection with providing the foregoing service, the Custodian shall be
entitled to apply categorical treatment of the Customer according to the
Customer's nationality, the particulars of its organization and other relevant
details that shall be supplied by the Customer. It shall be the duty of the
Customer to inform the Custodian of any change in the organization, domicile or
other relevant fact concerning tax treatment of the Customer and further to
inform the Custodian if the Customer is or becomes the beneficiary of any
special ruling or treatment not applicable to the general nationality and
category or entity of which the Customer is a part under general laws and treaty
provisions. The Custodian may rely on any such information provided by the
Customer.
In connection with providing the foregoing service, the Custodian may also
rely on professional tax services published by a major international accounting
firm and/or advice received from a Subcustodian in the jurisdictions in
question. In addition, the Custodian may seek the advice of counsel or other
professional tax advisers in such jurisdictions. The Custodian is entitled to
rely, and may act, on information set forth in such services and on advice
received from a Subcustodian, counsel or other professional tax advisers and
shall be without liability to the Customer for any action reasonably taken or
omitted pursuant to information contained in such services or such advice.
<PAGE>
EXHIBIT D
[Name of Entity]
Certificate of the Secretary
I, _____________________ [Name of Secretary], hereby certify that
I am the Secretary of [Name of Entity], a ______________________[type of entity]
organized under the laws of ________________________[jurisdiction] (the
"Customer"), and as such I am duly authorized to, and do hereby, certify that:
1. Good Standing. The Customer's organizational documents, and
all amendments thereto, have been filed with the appropriate governmental
officials of _____________________[jurisdiction], the Customer continues to be
in existence and is in good standing, and no action has been taken to repeal
such organizational documents, the same being in full force and effect on the
date hereof.
2. Organizational Documents. The Customer's [name of
organizational documents - i.e., Bylaws, Articles of Incorporation, etc.] have
been duly adopted and no action has been taken to repeal such [name of
organizational documents], the same being in full force and effect.
3. Resolutions. Resolutions have been duly adopted on behalf of
the Customer, which resolutions (i) have not in any way been revoked or
rescinded, (ii) have been in full force and effect since their adoption, to and
including the date hereof, and are now in full force and effect, and (iii) are
the only corporate proceedings of the Customer now in force relating to or
affecting the matters referred to therein, including, without limitation,
confirming that the Customer is duly authorized to appoint Bankers Trust Company
as Custodian of assets delivered to it by the Customer and enter into a certain
custody agreement with Bankers Trust Company (the "Agreement") setting forth the
terms and conditions of such appointment, and that certain designated officers,
including those identified in paragraph 4 of this Certificate, are authorized to
(a) execute said Agreement in such form as the officers executing the same have
approved, such approval to be conclusively evidenced by their execution and
delivery thereof, and (b) execute any instructions in connection with the
Agreement, in conformity with the requirements of the Customer's [name of
organizational documents], and other pertinent documents to which the Customer
may be bound.
4. Incumbency. The following named individuals are duly elected
(or appointed), qualified and acting officers of the Customer holding those
offices set forth opposite their respective names as of the date hereof, each
having full authority, acting individually, to bind the Customer, as a legal
matter, with respect to all matters pertaining to the Agreement, and to execute
and deliver said Agreement on behalf of the Customer, and the signatures set
forth opposite the respective names and titles of said officers are their true,
authentic signatures:
Name Title Signature
---- ----- ---------
- -------------------- -------------------- --------------------
- -------------------- -------------------- --------------------
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of
_______________[Date], 1997.
By: __________________________________
Name: __________________________________
Title: Secretary
I, __________________________[Name of Confirming Officer],
__________________[Title] of the Customer, hereby certify that on this ___ day
of _______________[Date], 19__, _____________________[NAME OF SECRETARY] is the
duly elected Secretary of the Customer and that the signature above is his/her
genuine signature.
By: _________________________________
Name: _________________________________
Title: _________________________________
<PAGE>
EXHIBIT E
CASH MANAGEMENT ADDENDUM (this "Addendum") to the CUSTODIAN
AGREEMENT (the "Agreement") between BANKERS TRUST COMPANY (the "Custodian") and
NORTH AMERICAN FUND, INC. (the "Customer").
WHEREAS, the Custodian will provide cash management services to
the Customer, and the Custodian and the Customer desire to confirm their
understanding with respect to such services;
NOW, THEREFORE, the Custodian and the Customer agree as follows:
1. Until the Custodian receives Instructions to the contrary, the
Custodian will hold all Cash received for the Account in deposit accounts
maintained with Subcustodians for the benefit of the Custodian's clients, will
credit to the Account interest on such Cash at rates and times the Custodian
shall from time to time determine and will receive compensation therefor out of
any amounts paid by Subcustodians in respect of such Cash.
2. To the extent the Custodian may from time to time inform the
Customer with respect to one or more currencies, the Custodian will sweep Cash
in such currencies to deposit accounts maintained with one or more Subcustodians
until the Custodian notifies the Customer otherwise or receives Instructions to
the contrary.
3. The Customer acknowledges that it has received and reviewed
the current policies of the Custodian regarding cash management services, which
are attached to this Addendum.
4. Capitalized terms used but not defined in this Addendum are
used with the respective meanings assigned to them in the Agreement.
IN WITNESS WHEREOF, this Addendum has been executed as of the
date of the Agreement.
BANKERS TRUST COMPANY
By: /s/ Richard Fogarty
-----------------------------
NORTH AMERICAN FUND, INC.
By: /s/ Amy M. Olmert
-----------------------------
<PAGE>
Global Custody Cash Management Program
In the Global Custody cash management program, currencies on
which Bankers Trust pays interest are divided into two categories: (1)
currencies on which we pay interest based on a market benchmark rate for
overnight deposits, and (2) currencies on which we pay interest based on a rate
paid by the London branch of Bankers Trust Company or the local subcustodian.
Currencies on which we pay interest based on a market
benchmark rate for overnight deposits (which we call "Benchmark Rate
Currencies"):
o For each of these currencies, the interest rate we pay is based on a
specific market benchmark (such as Effective Fed Funds) and is calculated
by taking an average of the benchmark rate and subtracting a spread. (See
Schedule A)
o Currently, the only Benchmark Rate Currency is the U.S. Dollar. Over time
we will be considering additional currencies to include in this category.
o Operationally, most balances in Benchmark Rate Currencies are swept
overnight into deposits at the London branch of Bankers Trust Company.
Where you have selected a short-term investment fund, your U.S. Dollar
balances in the U.S. will be swept overnight in accordance with your
instructions.
Currencies on which we pay interest based on a rate paid by
the London branch of Bankers Trust Company or the local subcustodian (which we
call "Base Rate Currencies"):
o For each of these currencies, the interest rate we pay is based on the rate
paid by the London branch or the local subcustodian on overnight deposits
in the currency. In either case, interest is calculated by using the
overnight rate (which will be the actual overnight, a weekly average, or
monthly average rate, depending on the currency) and subtracting a spread.
(See Schedule A)
o Currencies that are part of the sweep program will earn interest based on
the base rate, which will be the higher of the rate offered by the London
branch of Bankers Trust Company or the local subcustodian.
o Currencies that are not part of the sweep program will generally earn
interest based on the rate paid by the local subcustodian. We may at times
be able to sweep certain currency balances into deposits of Bankers Trust
Company's London branch in order to be able to earn a higher rate for you.
On those days, any such currency will be treated as part of the sweep
program, and you will earn interest on all of your balances in that
currency at the higher rate for that day.
o Currently, there are 39 Base Rate Currencies, 21 of which are included in
our sweep program to the London branch.
o Operationally, most balances in Base Rate Currencies that are part of our
sweep program are swept overnight into deposits at the London branch, while
balances in Base Rate Currencies that are not part of our sweep program
remain with the local subcustodian.
<PAGE>
For each currency on which we pay interest:
o We will notify you periodically in writing of changes in spreads and
updates to the cash management program. These program updates also will be
available through Global Custody Flash Notices.
o You earn interest at the calculated rate on your entire contractual balance
without any action on your part and without any minimum balance
requirements. This is the case regardless of whether we are able to invest
your balances at or near the applicable benchmark or base rate and
regardless of whether your contractual balance may exceed your actual
balance.
o Our program generally requires that overnight balances in each currency
remain with (or are swept to) a subcustodian we designate for that
currency. Nevertheless, we pay our stated rate of interest on any balances
that, because of transactions in your account, are held overnight with an
alternate subcustodian if we receive interest on that currency from that
subcustodian. If the alternate subcustodian does not pay interest, however,
these balances are excluded from our program.
o The minimum rate paid is 0.50%, except for the Japanese Yen (for which it
is 0.05%) and the Singapore Dollar (for which it is 0.25%). Please note
that this is also subject to change as appropriate for any currency.
o You will have continuous access through Globe*View, BTWorld, or Globe*Link
or other agreed electronic on-line system to the interest rate earned
during the previous "rate averaging period". Because we may use weekly or
monthly average rates to calculate the interest you earn, we do not know
the actual interest rate until the weekly or monthly period is completed.
o For swept currencies, from time to time we may not be able to sweep the
full amount of your balances to the London branch because of operational
constraints or because your balance on a contractual basis temporarily
exceeds your actual balance. You will, however, always receive credit for
interest based on your entire contractual balance. To the extent you would
have earned a lower rate on balances not swept, we will make up the
difference. To the extent that actual balances are higher than
contractually posted balances due to purchase fails or otherwise, we will
retain the interest earned as compensation.
o The effective rate we pay on overnight balances will generally differ from
the effective rate we receive (whether from the London branch or the local
subcustodian). Any difference between the effective rate we receive and the
effective rate we pay (which may be positive or negative, but is generally
positive) is kept by us and covers our fee for running the cash management
program and the related costs we absorb.
Obviously, there will be currencies on which we will not pay
interest because of local regulations, insufficient scale, or other reasons.
However, we hope to identify additional currencies where we can begin paying
interest and we will announce those to you as soon as practical.
Although currently most cash balances in our overnight sweep
program are swept into deposits at the London branch of Bankers Trust Company,
we reserve the right to utilize other branches or affiliates for the overnight
sweep program.
As you know, overdrafts are not permitted in the normal course
of business in any currency. Should they occur in any currency, your account
will be charged a fee to settle transactions in advance of
<PAGE>
receipt of funds. If the overdraft is not promptly cured (and in any event upon
the expiration of 30 days) after the investment manager has been notified of the
outstanding overdraft, the account's home currency will be used to cure the
overdraft and the associated foreign exchange will be done by Bankers Trust at
market rates. (Other currencies may be utilized to the extent the home currency
is insufficient.) Investment managers that have not cured overdrafts within such
period will be deemed to have directed such foreign exchange transaction.
Accounts subject to ERISA will be deemed to have engaged in the transaction
under the authority of the class exemptions available to qualified professional
asset managers and in-house investment managers. To the extent that the
overdraft is less than the U.S. dollar equivalent of $50,000, Bankers Trust's
foreign exchange desk will bundle the transaction with other small amounts for
other clients.
<PAGE>
Schedule A
New Cash Management Program - Global Custody
Overnight Uninvested Cash Balances
(* - Denotes currencies in sweep program)
Currencies Rates
- ---------- -----
Argentine Peso Base Rate less 100
Australian Dollar* Base Rate less 130
Austrian Schilling* Base Rate less 125
Belgian Franc* Base Rate less 225
British Pound Sterling* Base Rate less 165
Canadian Dollar* Base Rate less 150
Czech Koruna Base Rate less 75
Danish Krone* Base Rate less 100
Deutsche Mark* Base Rate less 150
Dutch Guilder* Base Rate less 175
European Currency Unit* Base Rate less 125
Finnish Markka* Base Rate less 150
French Franc* Base Rate less 110
Greek Drachma Base Rate less 75
Hong Kong Dollar* Base Rate less 225
Hungarian Forint Base Rate less 75
Indonesian Rupiah Base Rate less 100
Irish Punt* Base Rate less 100
Israeli Shekel Base Rate less 75
Italian Lira* Base Rate less 125
Japanese Yen Base Rate less 75
Jordanian Dinar Base Rate less 150
Korean Won Base Rate less 75
Malaysian Ringgit Base Rate less 150
Mexican Peso Base Rate less 150
New Taiwan Dollar Base Rate less 75
New Zealand Dollar* Base Rate less 100
Norwegian Krone* Base Rate less 150
Philippine Peso Base Rate less 100
Polish Zloty Base Rate less 150
Portuguese Escudo* Base Rate less 125
Singapore Dollar Base Rate less 150
Slovak Koruna Base Rate less 100
South African Rand* Base Rate less 200
Spanish Peseta* Base Rate less 200
Swedish Krona* Base Rate less 200
Swiss Franc* Base Rate less 100
Thai Baht Base Rate less 150
Turkish Lira Base Rate less 75
U.S. Dollar* Effective Fed Funds less 100(1)
<PAGE>
We reserve the right, in our sole discretion, to adjust the base rates and
benchmark rates used and the spreads charged at any time and for any reason. We
will notify you periodically in writing of changes in spreads and updates to the
cash management program. These program updates also will be available through
Global Custody Flash Notices.
(1) Not applicable if U.S. Dollars are swept to a short-term investment fund.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated May 1, 1998 on our
audit of the financial statements and financial highlights of North American
Government Bond Fund, Inc. in the Statement of Additional Information with
respect to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A (No. 33-53598) under the Securities Act of 1933 of North American
Government Bond Fund, Inc. We also consent to the references to our Firm under
the headings "Financial Highlights" and "General Information" in the Prospectus
and "Independent Accountants" in the Statement of Additional Information.
/s/ PRICEWATERHOUSECOOPERS L.L.P.
- ----------------------------------
PRICEWATERHOUSECOOPERS L.L.P.
250 West Pratt Street
Baltimore, Maryland
July 27, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Edward S. Hyman, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as Chairman and a director of the Fund
such Registration Statement and any and all such pre- and post-effective
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or either of them or their substitute or substitutes, shall lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Edward S. Hyman
-------------------
Edward S. Hyman
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Richard T. Hale, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Richard T. Hale
-------------------
Richard T. Hale
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Eugene J. McDonald, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Eugene J. McDonald
----------------------
Eugene J. McDonald
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, John F. Kroeger, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ John F. Kroeger
-------------------
John F. Kroeger
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Louis E. Levy, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Louis E. Levy
-----------------
Louis E. Levy
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, James J. Cunnane, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in his name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s James J. Cunnane
-------------------
James J. Cunnane
Date: July 28, 1998
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Rebecca W. Rimel, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Amy M. Olmert, and each of them singly, her true and lawful attorney-in-fact
and agent, with full power of substitution or resubstitution, to do any and all
acts and things and to execute any and all instruments, in her name, place and
stead, which said attorney-in-fact and agent may deem necessary or advisable or
which may be required to enable North American Government Bond Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal
as of the date set forth below.
/s/ Rebecca W. Rimel
--------------------
Rebecca W. Rimel
Date: July 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000893566
<NAME> NORTH AMERICAN GOVERNMENT BOND FUND
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 51,460,936
<INVESTMENTS-AT-VALUE> 51,663,022
<RECEIVABLES> 5,831,103
<ASSETS-OTHER> 19,410
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,513,535
<PAYABLE-FOR-SECURITIES> 4,882,210
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 612,922
<TOTAL-LIABILITIES> 5,495,132
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,154,279
<SHARES-COMMON-STOCK> 5,949,881
<SHARES-COMMON-PRIOR> 6,271,466
<ACCUMULATED-NII-CURRENT> 3,741,189
<OVERDISTRIBUTION-NII> 629,176
<ACCUMULATED-NET-GAINS> 661,627
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 202,497
<NET-ASSETS> 52,018,403
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,393,354
<OTHER-INCOME> 0
<EXPENSES-NET> 652,165
<NET-INVESTMENT-INCOME> 3,741,189
<REALIZED-GAINS-CURRENT> 1,775,432
<APPREC-INCREASE-CURRENT> 1,647,179
<NET-CHANGE-FROM-OPS> 7,163,800
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,370,365
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 916,292
<NUMBER-OF-SHARES-REDEEMED> 1,469,520
<SHARES-REINVESTED> 231,643
<NET-CHANGE-IN-ASSETS> 52,602
<ACCUMULATED-NII-PRIOR> (1,823,953)
<ACCUMULATED-GAINS-PRIOR> (1,135,206)
<OVERDISTRIB-NII-PRIOR> (3,191,763)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 208,693
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 665,835
<AVERAGE-NET-ASSETS> 52,198,016
<PER-SHARE-NAV-BEGIN> 8.29
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.56
<PER-SHARE-DIVIDEND> (0.67)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.74
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
