<PAGE>
ISI
North American
Government Bond Fund Shares
Directors and Officers
Edward S. Hyman
Chairman
Richard T. Hale
Vice Chairman
James J. Cunnane
Director
Joseph R. Hardiman
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
Amy M. Olmert
Secretary
Scott J. Liotta
Assistant Secretary
Margaret M. Beeler
Assistant Vice President
Keith C. Reilly
Assistant Vice President
Joseph A. Finelli
Treasurer
Investment Objective
An open-end mutual fund designed to provide a high level of current income,
consistent with prudent investment risk, by investing primarily in a portfolio
consisting of fixed-income securities issued or guaranteed by the governments of
the United States, Canada and Mexico.
Investment Advisor
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
Shareholder Servicing Agent
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
Distributor
ISI Mutual Funds
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
ISI
International Strategy & Investment
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American Government
Bond Fund, Inc.)
ANNUAL REPORT
March 31, 1999
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the fiscal year
ended March 31, 1999.
The Fund seeks a high level of current income consistent with prudent
investment risk by investing in U.S., Canadian and Mexican government
fixed-income securities. The Fund's total return for the fiscal year ended March
31, 1999 was 5.96%. Please see the portfolio management section for more
details. Since its inception, on January 15, 1993, the Fund has had a cumulative
total return of 42.59%.
Portfolio Management
Our investment approach is to actively manage the portfolio, adjusting the
Fund's average maturity and percentage weighting across the U.S., Canada and
Mexico as we anticipate changes in the market.
Portfolio Mix--Currency
(% of Investments)
1998 1999
---------------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S. 87.3% 85.3% 87.5% 87.3% 87.3%
Canada 12.7 -- -- -- --
Mexico 11.8 14.7 12.5 12.7 12.7
During the last year, currency mix management favored the U.S.
dollar-denominated market and the Mexican peso bond market. In the domestic peso
market, the performance was better than the U.S. because of very high local
interest rates (28% on average for the year). The Mexican government issues that
are U.S. dollar denominated underperformed the Treasury market due to the
financial crisis that was associated with the Russian default and the Long Term
Capital Management liquidity problems. The Fund was helped by its use of the
local market for Mexico. The Canadian market had a marginal influence on the
Fund's performance due to its small weighting. The Canadian dollar denominated
market underperformed versus the U.S. Treasury Market due to currency weakness.
The Canadian government issues that are U.S. dollar denominated have performed
similarly to U.S.Treasuries during the fiscal year.
Portfolio Maturity
(In Years)
1998 1999
--------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S.* 12.5 15.3 13.7 13.0 11.4
Canada 29.2 -- -- -- --
Mexico 0.1 1.4 1.2 1.1 1.0
*Including reserves.
At fiscal year end, the Fund's U.S. section had an average maturity of 11.4
years which is much longer than the Intermediate Treasury Index's 3.7 years.
Even though the Fund's maturity is longer than the Treasury Index, it is
somewhat shorter than over previous quarter ends. ISI anticipated the strong
U.S. economic growth and shortened the Fund's maturity. We are looking for the
opportunity to extend the fund's maturity as we see the economy slowing and will
be using our proprietary company surveys to identify the change. ISI is
optimistic that U.S. rates will decline over the next fiscal year, producing
capital gains for long maturity
1
<PAGE>
Investment Advisor's Report (concluded)
Treasuries. Please see the write-up on the three major markets that follow this
letter.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- ----------------------------
R. Alan Medaugh
R. Alan Medaugh
President
April 9, 1999
2
<PAGE>
Outlook for North America
Review of U.S.
Overview
The U.S. economy is performing at an unbelievably good level. Nominal
consumer spending was up 0.7% month-to-month (8.9% at an annual rate) in
February with the consumption price deflator unchanged (i.e. zero inflation).
The unemployment rate declined to a 29-year low, at the same time average hourly
earnings slowed to just 3.6% year-over-year (y/y). ISI expects the pace of
economic growth to slow to a 3% rate in the 2nd quarter. The Bureau of Labor
Statistics published a study acknowledging it was underestimating productivity.
So annual productivity might be up 3.7% y/y versus the currently reported 2.7%
reading, and as a consequence, instead of the latest 12 month reading of 1%
inflation and 4% real growth year-over-year, the correct figures may be 0% and
5%! We expect U.S. rates to decline over the next fiscal year because of slower
economic growth and low inflation.
- --------------------------------------------------------------------------------
ISI ECONOMIC FORECAST
- --------------------------------------------------------------------------------
98:3Q 98:4Q 99:1Q 99:2Q 99:3Q 99:4Q
- --------------------------------------------------------------------------------
Nominal GDP 4.7% 6.8% 4.5% 3.5% 2.5% 3.0%
GDP Deflator 1.0% 0.7% 0.5% 0.5% 0.5% 0.0%
Real GDP 3.7% 6.1% 4.0% 3.0% 3.0% 3.0%
30 Year Bond Yields* 5.0% 5.2% 5.6% 5.2% 4.7% 4.3%
Fed Funds Rate* 5.2% 4.7% 4.7% 4.7% 4.5% 4.0%
- --------------------------------------------------------------------------------
*End of quarter.
The Economy
We have lifted our 1Q real GDP growth estimate from 4% to 5%. Real
construction spending, led by highway spending, probably increased at an 18%
annual rate. Real consumer spending probably increased at a 5% annual rate.
Hours worked increased at just a 1.9% annual rate, while real GDP growth of 5%
will produce another quarter of solid growth in productivity. This solid
productivity with average hourly earnings slowing, suggests another quarter of
modest unit labor costs inflation, and stronger corporate profits. ISI expects
real growth will slow to 3% in 2Q, but it's still faster than that right now.
Our company surveys hit a new high last week.
ISI expects a 2Q 1999 deceleration because of the seasonal record over the
last three years. For each of the past 3 years, the economy has tended to
accelerate in 1Q and slow in 2Q. At least 3 factors have shaped the 1Q
accelerations: earlier tax refunds, more bonus pay, and a pick up in home
mortgage refinancing activity (refi). In particular, interest rates have been on
the low side at the start of the past 3 years and were again low at the start of
1999. As a result, refi has been high. The combination of low rates and high
refi has boosted housing and retail sales. Simultaneously, tax refunds have
surged in 1Q and then declined in 2Q. This year, the increase in tax refunds has
been even stronger than it was in the previous 3 years, lifting consumer
spending even more. In each of the past 3 years, refi has declined during 1Q,
and tax refunds have declined during 2Q, both declines tending to slow 2Q
activity. Refi has already declined. Tax refunds are next.
3
<PAGE>
Outlook for North America (continued)
Inflation and Interest Rates
ISI expects virtually no U.S. inflation for the year 1999. A major element
in this low inflation story is reduced government spending. Government
downsizing has freed up resources from the less efficient government sector for
the more efficient private sector. Government downsizing tends to create faster
growth with less inflation, at the same time financial market crowding out is
reversed.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points.
U.S. Federal Outlays as a Percent of Nominal GDP 1965-1998Q4
31 MAR 65 13.804 31 MAR 77 19.798 31 MAR 89 20.607
30 JUN 65 13.627 30 JUN 77 19.649 30 JUN 89 20.582
30 SEP 65 13.551 30 SEP 77 19.540 30 SEP 89 20.770
31 DEC 65 13.559 31 DEC 77 19.832 31 DEC 89 20.866
31 MAR 66 13.702 31 MAR 78 20.018 31 MAR 90 20.876
30 JUN 66 13.715 30 JUN 78 19.319 30 JUN 90 21.300
30 SEP 66 14.426 30 SEP 78 19.372 30 SEP 90 21.652
31 DEC 66 14.630 31 DEC 78 19.188 31 DEC 90 22.258
31 MAR 67 14.931 31 MAR 79 19.171 31 MAR 91 22.112
30 JUN 67 15.270 30 JUN 79 19.199 30 JUN 91 21.890
30 SEP 67 16.292 30 SEP 79 19.129 30 SEP 91 22.325
31 DEC 67 17.337 31 DEC 79 19.210 31 DEC 91 22.107
31 MAR 68 18.450 31 MAR 80 19.401 31 MAR 92 22.277
30 JUN 68 19.779 30 JUN 80 20.347 30 JUN 92 22.373
30 SEP 68 19.586 30 SEP 80 20.762 30 SEP 92 21.905
31 DEC 68 19.757 31 DEC 80 20.580 31 DEC 92 21.727
31 MAR 69 19.412 31 MAR 81 20.604 31 MAR 93 21.710
30 JUN 69 18.918 30 JUN 81 21.035 30 JUN 93 21.483
30 SEP 69 18.961 30 SEP 81 20.898 30 SEP 93 21.437
31 DEC 69 19.037 31 DEC 81 21.465 31 SEP 93 21.395
31 MAR 70 18.941 31 MAR 82 21.884 31 MAR 94 20.967
30 JUN 70 19.102 30 JUN 82 21.956 30 JUN 94 20.803
30 SEP 70 19.148 30 SEP 82 22.392 30 SEP 94 20.817
31 DEC 70 19.216 31 DEC 82 22.710 31 DEC 94 20.595
31 MAR 71 18.817 31 MAR 83 22.983 31 MAR 95 20.768
30 JUN 71 18.924 30 JUN 83 22.696 30 JUN 95 20.838
30 SEP 71 18.791 30 SEP 83 22.331 30 SEP 95 20.662
31 DEC 71 19.025 31 DEC 83 21.931 31 DEC 95 20.566
31 MAR 72 18.822 31 MAR 84 21.286 31 MAR 96 20.446
30 JUN 72 18.858 30 JUN 84 21.218 30 JUN 96 20.315
30 SEP 72 18.649 30 SEP 84 21.393 30 SEP 96 20.416
31 DEC 72 18.581 31 DEC 84 21.711 31 DEC 96 20.251
31 MAR 73 18.321 31 MAR 85 21.894 31 MAR 97 20.149
30 JUN 73 18.023 30 JUN 85 22.149 30 JUN 97 19.831
30 SEP 73 18.371 30 SEP 85 22.167 30 SEP 97 19.621
31 DEC 73 18.035 31 DEC 85 22.183 31 DEC 97 19.575
31 MAR 74 18.105 31 MAR 86 22.083 31 MAR 98 19.360
30 JUN 74 18.162 30 JUN 86 22.196 30 JUN 98 19.458
30 SEP 74 18.393 30 SEP 86 22.313 30 SEP 98 19.350
31 DEC 74 18.836 31 DEC 86 22.069 31 DEC 98 19.212
31 MAR 75 19.675 31 MAR 87 22.010 31 MAR 99 NA
30 JUN 75 20.335 30 JUN 87 21.738 30 JUN 99 NA
30 SEP 75 20.620 30 SEP 87 21.258
31 DEC 75 20.853 31 DEC 87 20.949
31 MAR 76 20.479 31 MAR 88 20.900
30 JUN 76 20.309 30 JUN 88 20.782
30 SEP 76 20.168 30 SEP 88 20.705
31 DEC 76 19.824 31 DEC 88 20.761
U.S. rates also represent good relative value, so the Fund's U.S. sector
has a relatively long average maturity. Interest rates in the U.S. are high
compared to the major economies in Europe.
US & EUROPEAN
GOVERNMENT YIELDS
September April 9, Basis Point
1998 1999 Change
--------- -------- ----------
U.S. 10 year 4.41% 5.03% +62
Germany 10 year 3.84% 3.84% --
UK 10 year 4.82% 4.39% -43
Canada 10 year 5.04% 4.93% -11
ISI expects rates to decline as the economy shows signs of slowing, and
rates which are today 5.5% for long Treasuries are expected to fall below 5.0%
later this year. We are watching our weekly company surveys to judge if and when
the economy begins to slow.
Review of Mexico
Overview
ISI expects Mexico to have moderate growth in 1999 at a 2.5% to 3.0% real
rate. Inflation is likely to be slightly below last year's high 15.9% rate. The
Mexican economy slowed from a 1Q 98 annual pace of 7.5% to a 2.6% annual rate in
the 4Q 98. Mexico's NAFTA ties with the U.S. have made economic performance
better for Mexico than for other Latin American economies (Brazil's 4Q 98
- -12.4%; Chile -12.2% and Ecuador -27.2%). Looking ahead, even though Mexican
exports are U.S. dominated, a relatively strong peso should allow other Latin
American competitors to gain U.S. market share. As a result of competition, and
the recent strength in the Mexican peso, export growth should slow from a 10%
rate in 1998 to a 7% rate in 1999. Imports growth should be faster than exports
in 1999, causing an increase in the Current Account Deficit. Inflation last year
was 15.9%, in part due to a substantial 21% fall in the peso versus the U.S.
dollar. ISI expects inflation to be 14% to 15% for 1999. Interest rates should
retain a fairly high inflation premium with domestic rates staying in the 22% to
25% range during 1999. The peso should be cushioned by sizable direct investment
flows, especially from the U.S. to the border areas known as the Maquiladora
region. Direct investment, other equity investment and bond investments need to
be high in order to offset a deterioration in the Current Account. The peso is
likely to fall by 10% during 1999, helped by investment flows but hurt by high
inflation.
4
<PAGE>
Outlook for North America (continued)
Economic Growth
The economy slowed during 1998. Retail sales were growing at an 11.0%
annual rate at the start of 1998 but were growing at only a 2.7% pace by year
end. Corporate investment also slowed during 1998. There was little momentum as
1999 began, but a sharp increase in the stock market, the Bolsa, from 3,959 at
the end of 1998 to over 5,100 currently may give the economy a boost. ISI
expects that exports will slow, but consumer demand is likely to pick up. The
result should be a 2.5% to 3.0% growth rate for 1999 down from 1998's 4.8% rate.
Inflation and Interest Rates
Mexican inflation was lifted to 15.9% in 1998 by the peso's weakness.
Powerful capital inflows have buoyed the peso so far in 1999, despite the
financial storm clouds coming from the rest of Latin America. Inflation should
slow because of better peso performance but with money growth (base money)
targeted to grow at an 18.5% rate this year, inflation is likely to improve only
a bit (14%-15%).
The interest rate policy followed by the Bank of Mexico is to maintain high
real rates on Treasury Bills (cetes). A real rate of 12% was typical over the
last year. In 1999, ISI expects the real rate to be about 8% (22% to 24%
nominal). A high real rate has been a favorite way for the government to control
domestic demand and inflation. The depreciation of the peso by 21% in 1998
tested their system. The currency weakness was caused by the early stages of the
latest financial crisis. The Bank's policies contained the currency depreciation
before it became a major event. High monetary growth targets in 1999, however,
are working against lower inflation. The result is likely to be another year of
inflation above the Bank's 13% target. In this environment, Mexican Cetes should
produce a good total return in 1999.
Currency Outlook
The peso has rallied this year after the large fall in 1998. The financial
crisis atmosphere of 1998 took a toll on the peso but recently better than
expected performance especially by Brazil has improved the atmosphere. ISI
expects the Latin American economic performance ex-Mexico to be poor in 1999.
This is likely to put some pressure on the Mexican peso in the near term.
Mexico's strong NAFTA ties should help it weather much of the storm but ISI
expects the peso to decline by 10% over the next fiscal year. High inflation and
the approach of the 2000 Presidential Election along with the Latin American
recession are the main causes of the currency's decline. Over the fiscal year,
Mexican Cete investments should produce double digit total returns in U.S.
dollars, making them attractive investments overall.
Review of Canada
Overview
ISI sees Canadian growth slowing over the balance of 1999, inflation quiet,
the Canadian dollar weakening and Canadian rates following the U.S. lower. In
1998, Canada enjoyed solid growth, low inflation, a balanced government budget ,
and a trade surplus. Canada's close ties with the U.S. mean strong growth here
translates into good economic news for Canada. More than 80% of Canadian Exports
are to the U.S. The recessions in Asia and Latin America plus weak growth in
Europe are of secondary importance to Canada. For example, Canadian factory
exports roared ahead by a whopping 16.2% in
5
<PAGE>
Outlook for North America (concluded)
4Q 98. Job growth in Canada has been well above trend helped by a weak Canadian
dollar as well as strong U.S. growth. Inflation has been below 2.5% for more
than six years--a feat unprecedented in the last 35 years. The government is
increasing spending and adding new tax cuts so that the budget is roughly in
balance. The Canadian trade surplus was $19 billion for 1998. To a significant
degree, Canada's future performance depends on the U.S. But it also is
influenced by the level of the Canadian dollar, commodity prices, Canadian
domestic consumer spending and government fiscal policy.
Economic Growth
Trade has had a significant growth impact and is likely to produce a net
trade surplus of C$30 billion in 1999, up from C$19 billion in 1998. The
domestic side of the economy is currently producing job growth well above trend
and that is likely to slow as corporate profits get squeezed in 1999 by global
competition. Corporate restructuring will cause the unemployment rate to rise
and keep pressure on wage growth. The combination should produce softness in
consumer spending which is nearly 60% of the Canadian economy. Weaker consumer
spending offset by higher government spending and expanding exports should hold
real growth at a 3% rate in 1999. A slowing of the U.S. economy over the balance
of 1999 would produce poorer Canadian trade performance in 2000, reducing growth
to the 1% range for 2000.
Interest Rates and Inflation
Inflation is likely to remain in the 1%-2% range over 1999. There will be
some pressure on Canadian inflation from a weakening currency. The result could
be lower inflation in the U.S. than in Canada. Interest rate declines should
parallel the U.S. in the longer maturity range (10 years and longer). Canadian
rates however, are currently 20-30 basis points below U.S. rates, while Canadian
government issues denominated in the U.S. dollar are 30 basis points higher in
yield. This spread seems unsustainable especially if the Canadian government
budget continues to be roughly balanced while the U.S. enjoys a large surplus.
ISI expects U.S. Treasuries will outperform Canadian government bonds over the
next fiscal year.
Currency Outlook
The Canadian dollar has improved so far in 1999, but since the end of 1997
it has depreciated against the U.S. dollar. Please see chart below.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts the
following plot points:
[PLOT POINTS TO COME]
Part of the currency improvement so far in 1999 was due to reductions in
European short term rates and the resulting shift of international investment
flows into the Canadian market. A recent cut in Canadian short term rates has
limited the gain. Over the balance of 1999, three factors are likely to weaken
the Canadian currency by 2% to 5% versus the U.S.
dollar:
o Trade Competition
o Soft Commodity Prices
o Rising Political risks from Quebec Separatists
6
<PAGE>
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception through
the most recent fiscal year-end and must reflect the impact of the Fund's total
expenses and its currently effective 3.0% maximum sales charge.
While this table is required by SEC rules, such comparisons are of limited
utility since the indices shown are not adjusted for sales charges and ongoing
management, distribution and operating expenses applicable to the Fund. An
investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate, an
investor's shares may be worth more or less than their original cost when
redeemed.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 3/31/99: Sales Charge(1)
- --------------------------------------------------------------------------------
One Year 2.78%
- --------------------------------------------------------------------------------
Since Inception (1/15/93) 5.37%
- --------------------------------------------------------------------------------
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts the
following plot points:
ISI North American Governemnt Bond Fund
Lehman Bros Intermediate Treasury Index
Consumer Price Index
Lehman Brothers Emerging Americas Index: Mexico Section
1/93 9700 10000 10000 10000
3/93 9911 10186 10049 10322
3/94 10186 10425 10301 11097
3/95 9339 10867 10596 8616
3/96 10550 11856 10897 12590
3/97 11384 12407 11198 14940
3/98 13052 13573 11355 17910
3/99 13831 14470 11558 17818
(1) Assumes maximum sales charge of 3.0%.
(2) Commencement of operations.
* These figures assume the reinvestment of dividends and capital gains
distributions. The indices listed above are unmanaged and are widely
recognized as indicators of performance in their respective sectors. The
Lehman Brothers Intermediate Treasury Index is a performance indicator of
the intermediate-term U.S. Treasury market, the CPI is a general indicator
of inflation and the Lehman Brothers Emerging Americas Index: Mexico
Section is an indicator of the interest rate structure of Mexican
government and private corporate debt. Management is not aware of any
single index that is truly representative of the Fund since the Fund's
assets are allocated across three different countries and each country's
weighting is periodically adjusted to reflect the advisor's outlook on
current market conditions. Past performance is not an indicator of future
results.
7
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1999
<TABLE>
<CAPTION>
Interest Maturity Par/Nominal Market
Security Rate Date Value(6) Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CANADIAN SECURITIES - 5.2%
Canadian Global Bond 6.750% 8/28/06 $ 2,750,000 $ 2,916,622
------------
Total Canadian Securities
(Cost $3,009,692) 2,916,622
------------
MEXICAN SECURITIES - 12.7%
Mexican Treasury Cete(1) 22.170%(3) 7/08/99 P$30,000,000 2,974,398
Mexican Treasury Cete(1) 22.475%(3) 8/12/99 P$ 6,751,680 655,938
Mexican Udibonos(2) 6.000% 11/23/00 9,303,300 2,369,288
Mexican Udibonos(2) 6.500% 5/24/01 4,219,600 1,075,919
------------
Total Mexican Securities
(Cost $6,649,684) 7,075,543
------------
U.S. SECURITIES - 60.9%
U.S. Treasury Bond 10.370% 11/15/12 $ 6,000,000 7,923,750
U.S. Treasury Bond 8.870% 2/15/19 5,000,000 6,720,315
U.S. Treasury Bond 8.120% 8/15/19 4,800,000 6,044,251
U.S. Treasury Bond 7.870% 2/15/21 2,750,000 3,404,415
U.S. Treasury Bond 8.120% 8/15/21 1,700,000 2,162,188
U.S. Treasury STRIP 6.094%(5) 5/15/17 14,500,000 4,884,862
------------
Total U.S. Securities
(Cost $32,694,901) 31,139,781
------------
REPURCHASE AGREEMENTS - 25.6%
Goldman Sachs & Co., 4.80%
Dated 03/31/99, to be repurchased on
4/01/99, collateralized by U.S.
Treasury Bond with a par value of
$3,745,000, coupon rate of 10.75%,
due 8/15/05, with a market value of
$4,820,369 (Cost $4,773,000) 4.800% 4/1/99 $ 4,773,000 4,773,000
</TABLE>
8
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1999
<TABLE>
<CAPTION>
Interest Maturity Par/Nominal Market
Security Rate Date Value Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J.P. Morgan Securities Inc., 4.85%
Dated 03/31/99, to be repurchased on
4/01/99, collateralized by U.S. Treasury
Bond with a par value of $4,811,000,
coupon rate of 5.50%, due 3/31/03,
with a market value of $4,868,030
(Cost $4,772,000) 4.85 04/1/99 $ 4,772,000 $ 4,772,000
Morgan Stanley & Co., 4.88%
Dated 03/31/99, to be repurchased on
4/1/99, collateralized by U.S. Treasury
Bond with a par value of $4,825,000,
coupon rate of 6.875%, due 8/31/99,
with a market value of $4,866,944
(Cost $4,772,000) 4.88 04/1/99 $ 4,772,000 $ 4,772,000
-----------
Total Repurchase Agreements
(Cost $14,317,000) 14,317,000
-----------
Total Investment in Securities -- 99.2%
(Cost $56,671,277)4 55,448,946
Other Assets Less Liabilities, Net-- 0.8% 441,631
-----------
Net Assets-- 100.0% 55,890,577
===========
Net Asset Value and Redemption Price Per Share
($55,890,577 / 6,636,361 shares outstanding) $8.42
=====
Offering Price Per Share($8.42 / .970) $8.68
=====
</TABLE>
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
(2) Udibonos are securities issued by the Mexican Government with a nominal
face value of $100 Investment Units (UDIs) per security. The Udibonos are
redeemed at face value at maturity. Face value is adjusted for changes in
the Mexican Consumer Price Index. The interest rate is fixed and payable
every 182 days.
(3) Yield as of March 31, 1999
(4) Also aggregate cost for federal tax purposes.
(5) Zero Coupon, Security Yield as of March 31, 1999
(6) Par value is shown in local currency: Mexican pesos (P$) and U.S. dollars
($).
See accompanying Notes to Financial Statements.
9
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Year Ended March 31, 1999
NET INVESTMENT INCOME:
Interest $ 3,893,995
-----------
EXPENSES:
Investment advisory fee 221,382
Distribution fee 221,382
Administration fee 110,691
Professional fees 82,194
Accounting fee 54,140
Transfer agent fee 38,924
Printing and postage 28,110
Miscellaneous 12,169
Custodian fees 12,872
Directors' fees 1,284
-----------
Total expenses 783,148
Less: Fees waived (91,361)
-----------
Net expenses 691,787
-----------
Net investment income 3,202,208
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 2,311,781
Net realized loss from foreign currency transactions (905,237)
Change in unrealized depreciation of investments (1,424,417)
Change in unrealized depreciation on translation
of other assets and liabilities denominated in
foreign currencies (1,266)
-----------
Net realized and unrealized loss on investments (19,139)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,183,069
===========
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
10
<PAGE>
North American Government Bond Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended March 31,
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 3,202,208 $ 3,741,189
Net realized gain from investments and
foreign currency transactions 1,406,544 1,775,432
Change in unrealized appreciation/depreciation
of investments (1,424,417) 1,644,223
Change in net unrealized appreciation/
depreciation on translation of other assets and
liabilities denominated in foreign currencies (1,266) 2,956
------------ ------------
Net increase in net assets resulting
from operations 3,183,069 7,163,800
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,202,208) (3,741,189)
Distribution in excess of net investment income 0 (629,176)
Short-term capital gains (552,530) --
Long-term capital gains (1,533,918) --
------------ ------------
Total distributions (5,288,656) (4,370,365)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 1,527,556 and 916,292
shares, respectively 13,255,729 7,908,494
Value of 224,638 and 231,643 shares issued in
reinvestment of dividends, respectively 1,948,979 1,980,041
Cost of 1,065,714 and 1,469,520 shares
repurchased, respectively (9,226,947) (12,629,368)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions 5,977,761 (2,740,833)
------------ ------------
Total increase in net assets 3,872,174 52,602
NET ASSETS:
Beginning of year 52,018,403 51,965,801
------------ ------------
End of year $ 55,890,577 $ 52,018,403
============ ============
</TABLE>
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See accompanying Notes to Financial Statements.
11
<PAGE>
North American Government Bond Fund, Inc.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Years Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53
------ ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.60 0.61 0.75 0.81 0.63
Net realized and unrealized gain/(loss)
on investments (0.09) 0.56 (0.11) 0.22 (1.38)
------ ------- ------- ------- -------
Total from Investment Operations 0.51 1.17 0.64 1.03 (0.75)
------ ------- ------- ------- -------
Less Distributions:
Dividends from net investment income
and short-term gains (0.60) (0.67) (0.26) -- (0.45)
Distribution in excess of net investment --
income (0.05) -- -- --
Distribution from Long-Term Capital gains (0.23) -- -- -- --
Return of capital -- -- (0.46) (0.72) (0.27)
------ ------- ------- ------- -------
Total distributions (0.83) (0.72) (0.72) (0.72) (0.72)
------ ------- ------- ------- -------
Net asset value, end of period $ 8.42 $ 8.74 $ 8.29 $ 8.37 $ 8.06
====== ======= ======= ======= =======
Total Return(1)
Based on net asset value per share 5.96% 14.65% 7.90% 12.97% (8.31)%
Ratios to Average Daily Net Assets:
Expenses(2) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income(3) 5.79% 7.17% 8.99% 9.49% 7.04%
Supplemental Data:
Net assets at end of period (000) $55,891 $52,018 $51,966 $60,860 $66,292
Portfolio turnover rate 173% 125% 46% 125% 104%
</TABLE>
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(1) Total return excludes the effect of sales loads
(2) Without the waiver of advisory and administration fees (Note B), the ratio
of expenses to average net assets would have been 1.42%,1.28%, 1.58%,
1.47%, and 1.45% for the years ended March 31, 1999, 1998, 1997, 1996, and
1995, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 5.62%, 7.14%, 8.66%, 9.27%,
and 6.84% for the years ended March 31, 1999, 1998, 1997, 1996, and 1995,
respectively.
See accompanying Notes to Financial Statements.
12
<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 Transaction and 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 income and net
realized capital gains, it
13
<PAGE>
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 exdividend 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 a fee. Based on the Fund's average
daily net assets this fee is calculated daily and paid monthly at the
annual rate of 0.40%. The Fund paid ISI $221,382 for advisory services for
the year ended March 31, 1999 of which $3,887 was payable at the end of the
period. As compensation for its administrative services, the Fund pays ICC
a fee. Based on the Fund's average daily net assets this fee is calculated
daily and paid monthly at the annual rate of 0.20%. The Fund paid ICC
$110,691 for administrative services for the year ended March 31,1999 of
which $1,944 was payable at the end of the period.
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 31,1999, ISI waived fees
of $60,907 and ICC waived fees of $30,454.
As compensation for its accounting services, the Fund pays ICC a fee that
is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $54,140 for accounting services for the year
ended March 31,1999 of which $4,615 was payable at the end of the period.
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 $38,924
for transfer agent services for the year ended March 31,1999 of which
$5,153 was payable at the end of the period.
As compensation for providing distribution services for the ISI Class of
shares, the Fund pays ISI Group, Inc. ("ISI Group"), which is affiliated
with ISI, a 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, 1999, distribution fees aggregated
$221,382, of which $18,967 was payable at the end of the period.
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, 1999 was approximately $1,405, and the accrued liability
was approximately $11,611.
C. Capital Share Transactions-- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
14
<PAGE>
Notes to Financial Statements (concluded)
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $14,847,161 and
sales of investment securities aggregated $15,134,279 for the year ended
March 31, 1999. Purchases of U.S. government obligations aggregated
$68,438,527 and sales of U.S. government obligations aggregated $73,850,061
for the period.
At March 31, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $425,859
and aggregate gross unrealized depreciation of all securities in which
there is an excess of tax cost over value was $1,648,190.
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, 1999.
F. Net Assets -- On March 31, 1999, net assets consisted of
Paid-in capital ................... $57,119,681
Distribution in excess
of net investment income ........ (5,918)
Unrealized depreciation of
investments ..................... (1,222,331)
Unrealized loss on translation of
other assets and liabilities
denominated in foreign
currencies ..................... (855)
-----------
$55,890,577
===========
15
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
North American Government Bond Fund, Inc.:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
North American Government Bond Fund, Inc. (the "Fund") at March 31, 1999, and
the results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (thereafter referred to as "financial statements") are the
responsibility of the Fund's management: our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
April 30, 1999
Tax Information
Tax Information (unaudited) for the Tax Year Ended March 31, 1999
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $1,533,918 from long-term
capital gains; of which $1,533,918 was subject to the 20% rate gains category.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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