<PAGE>
As Filed With the Securities and Exchange Commission on June 1, 1999
Registration No. 33-53598
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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. 8 [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
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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
1701 Market Street
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)
____ on August 1, 1999 pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
____ 75 days after filing pursuant to paragraph (a)(2)
_X__ on August 1, 1999 pursuant to paragraph (a) or Rule 485
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<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
This mutual fund (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.
The Fund offers shares through securities dealers and financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. (See "How to Buy Shares.") This Prospectus
describes the ISI class (the "Shares") of the Fund.
TABLE OF CONTENTS
Page
----
Investment Summary........................................................2
Fees and Expenses of the Fund.............................................4
Investment Program........................................................5
The Fund's Net Asset Value................................................7
How to Buy Shares.........................................................7
How to Redeem Shares......................................................8
Telephone Transactions....................................................9
Sales Charges............................................................10
Dividends and Taxes......................................................12
Investment Advisor.......................................................12
Administrator............................................................13
Financial Highlights.....................................................14
THE SECURITIES AND EXCHANGE COMMISSION HAS NEITHER APPROVED NOR DISAPPROVED
THESE SECURITIES NOR HAS IT PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 1, 1999.
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<PAGE>
INVESTMENT SUMMARY
OBJECTIVES AND STRATEGIES
The Fund is designed to provide a high level of current income,
consistent with prudent investment risk. The Fund seeks to achieve this goal by
investing primarily in a portfolio of bonds issued or guaranteed by the
governments of the United States, Canada and Mexico. The Fund's investment
advisor (the "Advisor") actively allocates investments among the United States,
Canada and Mexico. The Advisor will base this allocation on its analysis of
market conditions, relative yields, and changes in economic and political
conditions in the respective countries. In addition, the Advisor will consider
its own expectations regarding interest rate changes and changes in exchange
rates among United States, Canadian and Mexican currencies. The Advisor will
select bonds of varying maturities depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. It is expected that the Fund will have an
average maturity of approximately ten years during periods of stable interest
rates, but the Advisor may shorten or lengthen the Fund's average maturity based
on its forecasts for interest rates. The Fund will invest primarily in
investment grade bonds.
RISK PROFILE
The Fund is suited for you if you are willing to accept the increased
risks of investing in Mexican and Canadian government securities, in addition to
the risks of U.S. government securities, in the hope of achieving a high level
of current income and diversifying your investment portfolio. The value of your
investment in the Fund will vary from day to day based on changes in the prices
of the securities the Fund holds. These prices will, in turn, change in response
to economic and market factors and especially interest rates.
Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates.
Maturity and Credit Risk. The magnitude of increases and decreases in
the value of the Fund's shares in response to changes in interest rates will
generally be larger if the Fund holds securities with longer maturities or if
the Fund holds lower quality securities.
Political Risk. Foreign investing may entail different risks than
investing in the United States. The prices of foreign securities may be affected
by news or events unique to a country or region.
Foreign Currency Risk. Since some of the Fund's investment are
denominated in foreign currencies, any change in the value of those currencies
in relation to the U.S. dollar will result in a corresponding increase or
decrease in the value of the Fund's investments.
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Style Risk. There can be no assurances that the Advisor's economic
analysis will accurately predict interest rate or currency changes or that
portfolio strategies based on such analyses will be effective.
If you invest in the Fund, you could lose money. An investment in the
Fund is not a bank deposit and is not guaranteed by the FDIC or any other
government agency.
FUND PERFORMANCE
The following bar chart and table show the performance of the Shares
both year-by-year and as an average over different periods of time. The
variability of performance over time provides an indication of the risks of
investing in the Fund. This is an historical record and does not necessarily
indicate how the Fund will perform in the future.
ISI SHARES*
FOR YEARS ENDED DECEMBER 31,
20.00%
15.00% 15.64%
10.00% 11.99%
5.00% 6.18% 8.44%
0.00%
-5.00%
- -10.00% -12.66%
- -15.00%
1994 1995 1996 1997 1998
* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown.
During the 5-year period shown in the bar chart, the highest return for
a quarter was 9.14% (quarter ended 6/30/95) and the lowest return for a quarter
was -8.60% (quarter ended 12/31/94).
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<PAGE>
AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
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Lehman Brothers Intermediate
ISI Shares(1) Treasury Index(2)
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<S> <C> <C>
Past One Year............................................... 5.18% 8.62%
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Past Five Years............................................. 4.79% 6.46%
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Since Inception............................................. 5.80% (1/15/93) 6.51%(3)
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</TABLE>
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(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Lehman Brothers Intermediate Treasury Index does not factor in the costs
of buying, selling and holding securities -- costs which are reflected in
the Fund's results.
(3) For the period 1/31/93 through 12/31/98.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
Shares.
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)................. 3.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......................................... None
Maximum Deferred Sales Charge (Load)................................................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......................................... None
Redemption Fee ...................................................................................... None
Exchange Fee ........................................................................................ None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
Management Fees ..................................................................................... 0.40%
Distribution (12b-1) and/or Service Fees............................................................. 0.40%
Asset Based Sales Charge................................................................... 0.15%
Service Fee................................................................................ 0.25%
Other Expenses....................................................................................... 0.66%
Total Annual Fund Operating Expenses................................................................. 1.46%
-----
Less Fee Waivers and Expense Reimbursements.......................................................... (0.21)%*
-----
Net Expenses......................................................................................... 1.25%
=====
</TABLE>
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* The Advisor and the Fund's administrator have contractually agreed to limit
their fees and reimburse expenses to the extent necessary so that the Fund's
Total Annual Fund Operating Expenses do not exceed 1.25% of the Fund's average
daily net assets. This agreement will continue until at least July 31, 2000
and may be extended.
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EXAMPLE:
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$424* $729* $1,057* $1,991*
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* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 only.
Federal regulations require that the table above reflect the maximum
sales charge. However, you may qualify for reduced sales charges or no sales
charge at all. (Refer to the section on sales charges.) If you hold Shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund is designed to provide a high level of current income,
consistent with prudent investment risk. The Fund seeks to achieve this goal by
investing primarily in a portfolio of bonds issued or guaranteed by the
governments of the United States, Canada and Mexico.
The Advisor is responsible for managing the Fund's investments. (Refer
to the section on Investment Advisor). The Fund's Advisor actively allocates
investments among the United States, Canada and Mexico. The Advisor's allocation
will be based on its analysis of market conditions, relative yields, and changes
in economic and political conditions in the respective countries. In addition,
the Advisor will consider its own forecasts regarding interest rate changes and
changes in the exchange rates among United States, Canadian and Mexican
currencies. The Fund will limit its investments in either Canadian or Mexican
government securities to 25% of its total assets and in either Canadian or
Mexican securities in general to 33% of its total assets. It is possible that,
from time to time, none of the Fund's assets will be invested in either Canada
or Mexico.
The Advisor will select bonds of varying maturities depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future
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<PAGE>
changes in interest rates. It is expected that during periods of stable interest
rates, the Fund's portfolio will have an average maturity of ten years. The
Advisor may shorten the Fund's average maturity to less than 10 years when it
believes that interest rates are increasing. During periods of declining
interest rates, it is expected that the Fund's portfolio will have an average
maturity of over ten years. Under normal circumstances, the Fund will invest
primarily in investment grade bonds.
An investment in the Fund involves risk. The primary risk is interest
rate risk. The value of the Fund's shares can be expected to increase during
periods of falling interest rates and decrease during periods of rising interest
rates. The magnitude of these increases and decreases in the value of the Fund's
shares in response to changes in interest rates will generally be larger if the
Fund holds securities with longer maturities or if the Fund holds lower quality
securities. In addition, investing in Canadian and Mexican government securities
may have different risks than investing in U.S. government securities. An
investment in Canada or Mexico may be affected by developments unique to those
countries. These developments may not affect the U.S. economy or the prices of
U.S. government securities in the same manner. In addition, some of the Fund's
investments may be denominated in Canadian dollars or Mexican pesos. As a
result, the Fund may be affected by changes in the value of these currencies
relative to the U.S. dollar. There can be no assurances that the Advisor's
economic analysis will accurately predict interest rate or currency changes or
that portfolio strategies based on such analyses will be effective. There can be
no guarantee that the Fund will achieve its goals.
To reduce the Fund's risk under adverse market conditions, the Advisor
may make temporary defensive investments in repurchase agreements with respect
to U.S., Canadian and Mexican government securities and high quality commercial
paper. While engaged in a temporary defensive strategy, the Fund may not achieve
its investment objective. The Advisor would follow such a strategy only if it
believed that the risk of loss outweighed the opportunity for gain.
YEAR 2000 ISSUES
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 its service providers whether they expect to have their
computer systems adjusted for the year 2000 transition, and has 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.
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THE FUND'S NET ASSET VALUE
The price you pay when you buy shares or receive when you redeem shares
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 sales charges
for details on how and when this charge may or may not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time) on each day the Exchange is open for business. It is calculated by
subtracting the Fund's liabilities from its assets and dividing the result by
the Fund's outstanding shares.
In valuing its assets, the Fund's investments are priced at their
market value. When price quotes for a particular security are not readily
available, investments are priced at their "fair value" using procedures
approved by the Fund's Board of Directors.
You may buy or redeem Shares on any day 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.
The following sections describe how to buy and redeem Shares.
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. You may also buy Shares by sending your check (along with a completed
Application Form) directly to the Fund. The Application Form, which includes
instructions, is attached to this Prospectus.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.
INVESTMENT MINIMUMS
Your initial investment must be at least $5,000. Subsequent investments
must be at least $250. The following are exceptions to these minimums:
o If you are investing in an IRA account or a qualified retirement
plan, your initial investment may be as low as $1,000.
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<PAGE>
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.
INVESTING REGULARLY
You may make regular investments in the Fund through either of the
following methods. If you wish to enroll in any of these programs or if you need
any additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or the
Transfer Agent.
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.
Dividend Reinvestment Plan. 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.
HOW TO REDEEM SHARES
You may redeem all or part of your investment through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, 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.
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<PAGE>
2) If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
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.
OTHER REDEMPTION INFORMATION
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 to you in cash whether or not that is the payment option
you have selected.
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. The Fund reserves the right to redeem Shares in kind under certain
circumstances.
If you own Fund 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 and sales charge implications normally associated with Fund redemptions.
Contact your securities dealer, your servicing agent or the Transfer Agent for
information on this plan.
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 in another
ISI fund 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 when you
open your account and before you effect 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 telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
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<PAGE>
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.
SALES CHARGES
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 any sales charge included in your purchase price will be
according to the following schedule:
<TABLE>
<CAPTION>
Sales Charge as % of
- --------------------------------------------------------------------------------------------------------
Offering Net Amount
Amount of Purchase Price Invested
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
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</TABLE>
The sales charge you pay on your current purchase of Shares may be
reduced under the circumstances listed below.
Rights of Accumulation. If you are purchasing additional Shares of this
Fund or shares of any other mutual fund in the ISI family of funds, you may
combine the value of your purchases 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.
Letter of Intent. 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
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<PAGE>
the difference between the sales charges you paid and the sales charges
applicable to the amount you actually did purchase. Some of the Shares you own
will be redeemed to pay this difference.
Purchases at Net Asset Value. 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 description
of the conditions).
3) If you are a current or retired Fund Director, a director, employee or
a member of the immediate family of an employee of any of the following
or their respective affiliates: the Fund's administrator, the Advisor
or a broker-dealer authorized to sell Shares of the Fund.
4) If you purchase 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 securities dealer or servicing agent
if you buy shares in this manner.
5) If you pay for your purchase with the proceeds from a redemption of
shares of any other mutual fund on which you have paid a sales charge,
or from a sale of shares of any closed-end fund. In order to qualify
for this provision, you must purchase your Shares by February 29, 2000
and provide documentation of your redemption or sale.
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 above or any other 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 at least 24 months. If you have
owned them for less than 24 months, you will be charged the difference in sales
charges. You may enter both your redemption and purchase 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 a least $5,000. The Fund may modify or terminate
these offers of exchange upon 60 days' notice.
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
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<PAGE>
Transfer Agent, you may also request an exchange directly through the Transfer
Agent by mail or by telephone.
REDEMPTION PRICE
The price you receive when you redeem Shares will be the net asset
value per share.
DISTRIBUTION PLAN
The Fund has adopted a plan under Rule 12b-1 that allows the Fund to
pay your securities dealer or shareholder servicing agent distribution and other
fees for the sale of its Shares and for shareholder service. Shares pay an
annual distribution fee equal to 0.40% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of monthly dividends and to
distribute taxable net capital gains on an annual basis.
TAXES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local taxation, depending upon your tax situation. Distributions you receive
from the Fund may be taxable whether or not you reinvest them. Each sale or
exchange of the Fund's shares is a taxable event.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor regarding your specific questions
about federal, state and local income taxes.
INVESTMENT ADVISOR
International Strategy & Investment Inc. ("ISI" or the "Advisor") is
the Fund's investment advisor. ISI is also the investment advisor to ISI
Strategy Fund, Inc., Managed Municipal Fund, Inc. and Total Return U.S. Treasury
Fund, Inc. These funds together with the Fund, had approximately $___ million in
net assets as of June 30, 1999.
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<PAGE>
As compensation for its services for the fiscal year ended March 31,
1999, ISI received from the Fund a fee equal to 0.40% of the Fund's average
daily net assets.
The Advisor and the Fund's administrator, have contractually agreed to
reduce proportionately their respective annual fees if necessary, so that the
Fund's annual expenses do not exceed 1.25% of its average daily net assets. This
agreement will continue until at least July 31, 2000 and may be extended.
PORTFOLIO MANAGERS
The Fund's portfolio managers are Edward S. Hyman and R. Alan Medaugh
of ISI.
Mr. Hyman, Chairman of the Fund and ISI is responsible for developing
the economic analysis upon which the Fund's selection of investments is based
(see "Investment Program".) 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 research 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 19 years.
Mr. Medaugh, President of the Fund and ISI, 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 to that, Senior
Vice President and bond portfolio manager at Fiduciary Trust International.
While at Fiduciary Trust International, he 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.
ADMINISTRATOR
Investment Company Capital Corp. ("ICC") 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. ICC is also the Fund's
transfer and dividend disbursing agent and provides accounting services to the
Fund.
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information is part of the Fund's financial statements which have been audited
by PricewaterhouseCoopers LLP. These financial statements are included in the
Statement of Additional Information, which is available upon request.
(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 year............... $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)
Distributions 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 at end of year .................... $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 year (000) ................... $55,891 $52,018 $51,966 $60,860 $66,292
Portfolio turnover rate............................ 173% 125% 46% 125% 104%
</TABLE>
- ------------
(1) Total return excludes the effect of sales loads.
(2) Without the waiver of advisory and administration fees, 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, 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.
-14-
<PAGE>
<TABLE>
<CAPTION>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Make check payable to "ISI North American Government Bond Fund Shares" and mail with this Application to:
ISI Mutual Funds
P.O. Box 219426
Kansas City, MO 64121-9426
FOR ASSISTANCE IN COMPLETING THIS FORM, PLEASE CALL THE TRANSFER AGENT AT (800) 882-8585.
TO OPEN AN IRA ACCOUNT, CALL ISI AT (800) 955-7175 TO REQUEST AN APPLICATION.
YOUR ACCOUNT REGISTRATION (PLEASE PRINT) --------------------------------------------------------------------
Existing Account No., if any
INDIVIDUAL OR JOINT TENANT GIFTS TO MINORS
- --------------------------------------------------------- --------------------------------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)
- --------------------------------------------------------- --------------------------------------------------------------------
Social Security Number Minor's Name (only one)
- --------------------------------------------------------- -------------------------------- -----------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)
- --------------------------------------------------------- under the Uniform Gifts to Minors Act
Social Security Number --------------------
State of Residence
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC. MAILING ADDRESS
- --------------------------------------------------------- --------------------------------------------------------------------
Name of Corporation, Trust or Partnership Street
- --------------------------------------------------------- --------------------------------------------------------------------
Tax ID Number City State Zip
( )
- --------------------------------------------------------- --------------------------------------------------------------------
Name of Trustees (If to be included in the Registration) Daytime Phone
STATEMENT OF INTENTION (OPTIONAL)
[ ] I intend to invest at least the amount indicated below in ISI Shares of North American Government Bond Fund, Inc. I
understand that if I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to the
applicable level of reduced sales charges on my purchases.
___$100,000 ___$250,000 ___$500,000 ___$1,000,000 ___$2,000,000 ___$3,000,000
RIGHT OF ACCUMULATION (OPTIONAL)
List the Account numbers of other ISI Funds that you or your immediate family already own that qualify you for reduced sales
charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OPTIONS
Please check appropriate boxes. There is no sales charge for reinvested dividends. 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as agent for the Automatic Investing Plan 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 Shares Depositor's Signature Date
Fund Account No., if any (If joint acct., both must sign)
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of ____________, ____(year), 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: ____________________________________
_____________________________ Bank Phone Number: ____________________________________
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 a joint account, both must sign) Date
- -----------------------------------------------------------------------------------------------------------------------------------
FOR DEALER USE ONLY
Dealer's Name: ________________________________________ Dealer Code: _________________________________________
Dealer's Address: ________________________________________ Branch Code: _________________________________________
________________________________________
Representative: ________________________________________ Rep. No.: _________________________________________
</TABLE>
<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
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY & INVESTMENT GROUP INC.
One South Street 717 Fifth Avenue
Baltimore, Maryland 21202 New York, New York 10022
1-800-955-7175
Transfer Agent Independent Accountants
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 1701 Market Street
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.)
You may obtain the following additional information about the Fund,
free of charge, from your securities dealer or servicing agent or by calling
(800) 955-7175:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual report containing detailed financial
information and a discussion of market conditions and investment
strategies that significantly affected the Fund's performance during
its last fiscal year.
In addition you may review information about the Fund (including the
SAI) at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. (Call 1-800-SEC-0330 to find out about the operation of the
Public Reference Room.) The Commission's Internet site at http://www.sec.gov has
reports and other information about the Fund. You may get copies of this
information by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-5009. You will be charged for duplicating fees.
For other shareholder inquiries, contact the Transfer Agent at (800)
882-8585. For Fund information, call (800) 955-7175 or your securities dealer or
servicing agent.
Investment Company Act File No. 811-7292
<PAGE>
[ISI LOGO]
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A CLASS OF NORTH AMERICAN
GOVERNMENT BOND FUND, INC.)
A mutual fund with the investment objective of 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, 1999
[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, 1999
Relating to Prospectus Dated: August 1, 1999
of
ISI North American Government Bond Fund Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
1. General Information and History.................................................................. 1
2. Investment Objective, Policies and
Risk Considerations............................................................................ 1
3. Additional Information About
Canada and Mexico...............................................................................11
4. Valuation of Shares and Redemption...............................................................26
5. Federal Tax Treatment of Dividends and
Distributions..................................................................................27
6. Management of the Fund...........................................................................29
7. Investment Advisory and Other Services...........................................................34
8. Administration...................................................................................35
9. Distribution of Fund Shares......................................................................36
10. Portfolio Transactions...........................................................................38
11. Capital Stock....................................................................................39
12. Semi-Annual Reports..............................................................................40
13. Custodian, Transfer Agent and
Accounting Services............................................................................40
14. Independent Accountants..........................................................................41
15. Legal Matters....................................................................................41
16. Control Persons and Principal Holders of
Securities.....................................................................................41
17. Performance and Yield Computations...............................................................41
18. Financial Statements ............................................................................43
19. APPENDIX - Moody's Investors Service and Standard & Poor's Ratings Definitions..................A-1
</TABLE>
<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 Fund's Registration Statement 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 began operations on
January 15, 1993.
2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS OF THE FUND
The Fund's investment objective is to achieve a high level of current
income by investing primarily in fixed-income securities issued or guaranteed by
the governments of the United States, Canada and Mexico. 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. Except as described below under "Investment Restrictions of the
Fund," the investment policies described in these documents are not fundamental,
and the Directors may change such policies without an affirmative vote of a
majority of the Fund's outstanding Shares (as defined under "Capital Stock"
below). The Fund's investment objective is fundamental, however, and may not be
changed without such a vote.
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).
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
1
<PAGE>
Mexico. The Fund will limit its investments in either Canadian or Mexican
securities in general to 33% of its total assets.
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 Fund's investment advisor (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 sell sufficient securities to reduce the total to below 5%.
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.
2
<PAGE>
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 including
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 term of 364 days
issued directly by the Mexican government; and (iii) Udibonos, securities issued
by the Mexican Government that pay a fixed rate of interest over inflation every
182 days.
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.
Below Investment Grade Bonds
The Fund may purchase bonds including debentures, that are rated BB by
S&P or Ba by Moody's, or that are unrated by S&P or Moody's if such bonds, in
the judgment of 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
3
<PAGE>
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 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.
During the fiscal year ended March 31, 1999, the Fund held no bonds
rated below investment grade.
4
<PAGE>
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 under collateralized. 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. The Fund may invest in repurchase agreements with
respect to U.S. Treasury securities, Canadian Treasury securities and Mexican
Treasury securities and in commercial paper rated Prime-1 by Moody's, A-1 by S&P
or of comparable quality as determined by the Advisor.
Currency and Interest Rate Hedging Transactions
To hedge against adverse price movements in the currencies underlying
the portfolio's securities (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.
Currently, only a limited market exists for hedging transactions
relating to the Mexican peso. This may limit the Fund's ability to effectively
hedge 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 hedged 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.
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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 Internal Revenue
Code of 1986, as amended (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 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 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.
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 contract for speculation and will only enter
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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 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.
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.
Other risks include, but are 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; failure to qualify as a Regulated Investment Company
under Subchapter M of the Code 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 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. 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.
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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.
Additional Risk Factors
Special Risks of Canadian and Mexican Treasury Securities. 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.
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.
For more information about Canada and Mexico, see "Additional
Information About Canada and Mexico" below.
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
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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.
Risk 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.
Non-Diversified Status. The Fund is classified as a non-diversified
investment company under 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 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.
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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 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:
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 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 an industry);
5. Invest in real estate or mortgages on real estate;
6. 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;
7. Act as an underwriter of securities within the meaning of
the federal securities laws;
8. 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;
9. 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;
10. Effect short sales of securities;
11. Purchase securities on margin (but the Fund may obtain
such short-term credits as may be necessary for the clearance of
transactions);
12. Purchase participations or other interests in oil, gas or
other mineral exploration or development programs;
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13. Purchase any securities of unseasoned issuers which have
been in operation directly or through predecessors for less than three
years;
14. Invest in shares of any other investment company
registered under the Investment Company Act;
15. 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;
16. Invest in companies for the purpose of exercising
management or control;
17. 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
18. 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
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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.
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 ("PQ") 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 PQ's 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. The PQ, under the leadership
of Lucien Bouchard, was re-elected in the provincial election held on November
30, 1998, winning 75 of the 125 seats. However, the party's share of the popular
vote dropped 2% from the 1994 election to 43%. The Liberal Party won 48 seats.
It is unclear whether or not Mr. Bouchard will hold a second referendum. The PQ
previously indicated it would do so if it were re-elected, but only if the
referendum would stand a strong chance of success. Given current opinion polls,
it is believed unlikely that a referendum would have a strong chance of success.
In August 1998, Canada's Supreme Court rendered a unanimous opinion in a legal
action initiated by the federal government to determine the legality of Quebec's
secession. While the Court ruled that Quebec has no right to unilaterally leave
the Canadian federation, the Court also indicated that the federal government
would have to negotiate a separation if a clear majority of Quebec voters vote
for it. It is expected that Quebec's position within Canada will continue to be
a matter of political debate.
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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.
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 1997 was larger than
between any other two countries in the world. The North American Free Trade
Agreement ("NAFTA") took effect on December 30, 1993. 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. At
the April 1998 Summit of the Americas, an agreement was signed by the leaders of
34 governments across the Americas (including Canada) to begin trade
negotiations toward the creation of a free trade area across the Western
Hemisphere.
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 October 24, 1998, the government announced
that there was a budget surplus of C$3.5 billion for the 1997-1998 fiscal year,
the first time in 28 years the government had recorded a budget surplus.
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 Quebec which predicts small deficits until the fiscal year 2000-01,
the provinces have achieved their goals. While Ontario and Quebec have not yet
balanced their budgets, both have made significant progress and it is
anticipated that both provinces will achieve their plans to eliminate their
budget deficits by fiscal year 2000-01.
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Canada's real GDP growth rate slipped to 2.2% in 1995 and 1.2% in 1996
from 3.9 in 1994. In 1997, real GDP grew 3.7%. That growth was sustained in the
first quarter of 1998, when Canada's real GDP grew at an annual rate of 3.4%,
but it moderated to a rate of 1.8% in the second quarter of 1998 and 1.7% in the
third quarter of 1998. Canada is forecast to experience real GDP growth of 3.5%
through mid- 1999, but that forecast is under review. 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. In 1997, however, the trade surplus was reduced as the rate
of import growth almost doubled the rate of export growth. The trade surplus
continued to decrease in 1998 with exports growing by 5.6% during the first
three quarters as compared to a 9.3% increase in the growth of imports.
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 0.702, its lowest rate in almost nine years and close to its
record low of 0.692. The Bank of Canada responded by increasing rates on
Treasury bills and selling U.S. dollars. The Canadian dollar increased in value
from 0.702 against the U.S. dollar on January 20, 1995 to 0.734 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 0.633 against the U.S. dollar on August
27, 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
August 27, 1998, to 6%. The Bank Rate was subsequently lowered to 5.75% on
September 29, 1998, to 5.5% on October 16, 1998 and to 5.25% on November 18,
1998, following rate cuts by the U.S. Federal Reserve on those dates.
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:
14
<PAGE>
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
1998...................................... 0.67
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 1998.
National Consumer
Price Index
Year (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....................................... 2.1
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<PAGE>
1996....................................... 1.6
1997....................................... 1.6
1998....................................... 1.2
Source: Bank of Canada Review, Winter 1997-1998; Bank of
Canada Weekly Financial Statistics.
Canadian Gross Domestic Product
The following table sets forth Canada's gross domestic product for
the years 1981 through the third quarter of 1998 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 ................................................. 3.7
1998..................................................
first quarter....................................... 3.4
second quarter...................................... 1.8
third quarter....................................... 1.7
Source: Bank of Canada Review, Summer 1998
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 1996 through January 1999.
Treasury Bills Benchmark Bonds
---------------------- ----------------------
16
<PAGE>
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
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
October 3.59 3.82 4.99 5.49
November 3.67 4.11 5.17 5.56
December 3.99 4.56 5.34 5.61
Treasury Bills Benchmark Bonds
---------------------- ----------------------
1998 3 Months 6. Months 5 Years 10 Years
---- -------- --------- ------- --------
January 4.10 4.42 5.09 5.41
February 4.57 4.84 5.26 5.47
March 4.59 4.70 5.11 5.34
April 4.85 4.97 5.32 5.49
May 4.75 4.97 5.21 5.34
17
<PAGE>
1998 3 Months 6. Months 5 Years 10 Years
---- -------- --------- ------- --------
June 4.87 5.04 5.28 5.35
July 4.94 5.13 5.42 5.47
August 4.91 5.25 5.62 5.67
September 4.91 5.03 4.78 4.95
October 4.74 4.79 4.69 5.00
November 4.82 4.93 5.03 5.18
December 4.70 4.76 4.76 4.89
Treasury Bills Benchmark Bonds
---------------------- ----------------------
1999 3 Months 6. Months 5 Years 10 Years
---- -------- --------- ------- --------
January 4.66 4.77 4.76 4.89
Source: Bank of Canada Review
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
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<PAGE>
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 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.
On August 28, 1996, a newly formed group calling itself the Popular
Revolutionary Army attacked military and police targets in small cities of some
southern states of Mexico. It is generally believed that this group does not
enjoy popular support, and its terrorists attacks have been condemned by both
19
<PAGE>
Government and nongovernment representatives. The Government has announced the
apprehension of several alleged members of the group.
On December 22, 1997, a violent incident occurred in the municipality
of Chenalho, Chiapas that resulted in the death of 45 civilians, mostly women
and children. This incident strengthened the resolve of the Government to
negotiate peace in Chiapas and toward that end the Government adopted a new
peace plan. The goals of the new peace plan include (a) reinitiating an intense
dialogue among the federal and state governments, political parties and
insurgent groups, (b) formulating a legal framework that respects Mexico's
multicultural heritage and includes the indigenous population in the social and
economic development of Mexico, (c) achieving the disarmament of all
non-governmental groups, (d) continuing the investigation of the Chenalho
incident, and (e) restructuring the Chiapas state police. It is unclear whether
the government's new peace plan will achieve its desired effect. On October 4,
1998 there were elections in the State of Chiapas that, unlike recent elections,
were without violence and were relatively free of controversy.
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 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.
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.
20
<PAGE>
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 Costa Rica, El Salvador, Guatemala, Honduras and
Nicaragua and entered into definitive free trade agreements with Bolivia, Chile,
Colombia, Costa Rica, Nicaragua and Venezuela. In July 1998, Mexico began trade
negotiations with the European Union. A second round of talks occurred in
January 1999.
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. In December 1998, Mexico
lifted all remaining restrictions on foreign ownership of its largest banks,
which had been excluded from the liberalization measures that became effective
in 1994.
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
billion 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 0.80 Mexican pesos per day instead of one Mexican
peso per day. On November 12, 1990 this average was decreased to 0.40 Mexican
pesos per day and on November 11, 1991 the daily devaluation rate was lowered to
0.20 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 0.40
Mexican pesos per day.
21
<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.
22
<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 $624 million, down approximately 90% from 1996. In 1998, Mexico
registered a $7.7 billion deficit in its trade balance. During 1996 and 1997,
Mexico's current account balance registered a deficit of $1.923 billion and
$7.450 billion, respectively, as compared with a deficit of $1.576 billion in
1995. In the first three quarters of 1998, Mexico's current account balance
registered a deficit of $4.70 billion.
Banco de Mexico is currently disclosing reserve figures on a weekly
basis. On December 31, 1998, Mexico's international reserves amounted to $30.1
billion, as compared to $28 billion at December 31, 1997, $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. During 1998, real GDP grew 4.8%, according to
preliminary data. The Government has predicted a growth rate of 3% in 1999.
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 1998.
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
1998 ................ 9.901 9.152 N/A N/A
- -------
23
<PAGE>
* 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.
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, 1997 and 1998 (as measured by the increase in the National Consumer
Price Index), was 52.0%, 27.7%, 15.7% and 18.6% 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 1998.
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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
1998....................................................... 18.6
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 1998.
Period Yearly Variation (%)
------ --------------------
1988 1.3
1989 4.2
1990 5.1
1991 4.2
1992 3.6
1993 2.0
1994 4.5
1995 (6.2)
1996 5.2
1997* 7.0
1998* 4.8
Source: Banco de Mexico
* Preliminary
Interest Rates
25
<PAGE>
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 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% and the 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 (or the days on which they are observed): 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.
26
<PAGE>
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal
income 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. Shareholders are urged to consult with their tax
advisors with specific reference to their own tax situation, including their
state and local tax liabilities.
The following general discussion of certain federal income tax
consequences is based on the Code and the regulations issued thereunder as in
effect on the date of this Statement of Additional Information. New legislation,
as well as administrative changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends to qualify and elect to be treated as a
"regulated investment company" ("RIC") as defined under Subchapter M of the
Code. By following such a policy, the Fund expects to eliminate or reduce to a
nominal amount the federal taxes to which it may be subject.
In order to qualify as a RIC, the Fund must distribute at
least 90% of its net investment income (that generally includes dividends,
taxable interest, and the excess of net short-term capital gains over net
long-term capital losses less operating expenses) and at least 90% of its net
tax exempt interest income, for each tax year, if any, to its shareholders and
also must meet several additional requirements. Included among these
requirements are the following: (i) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, or certain other income; (ii) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with such other securities limited, in respect
to any one issuer, to an amount that does not exceed 5% of the value of the
Fund's assets and that does not represent more than 10% of the outstanding
voting securities of such issuer; and (iii) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar or related trades or
businesses.
The Fund may make investments in securities 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 Funds must distribute to satisfy the
Distribution Requirement. In some cases, the Funds may have to borrow money or
dispose of other investments in order to make sufficient cash distributions to
satisfy the Distribution Requirement.
Although the Fund intends to distribute substantially all of
its net investment income and may distribute its capital gains for any taxable
year, the Fund will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If the Fund fails to qualify for any taxable year as a RIC,
all of its taxable income will be subject to tax at regular corporate income tax
rates without any deduction for distributions to shareholders and such
distributions generally will be taxable to shareholders as ordinary dividends to
the extent of the
27
<PAGE>
Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
FUND DISTRIBUTIONS
Distributions of investment company taxable income will be
taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in additional Shares, to the
extent of the Fund's earnings and profits. The Fund anticipates that it will
distribute substantially all of its investment company taxable income for each
taxable year.
The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gains"). If such gains are distributed as a capital gains distribution,
they are taxable to shareholders who are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held the shares. If any
such gains are retained, the Fund will pay federal income tax thereon.
In the case of corporate shareholders, distributions (other
than capital gains distributions) from a RIC generally qualify for the
dividends-received deduction to the extent of the gross amount of qualifying
dividends received by a Fund for the year. Generally, and subject to certain
limitations, a dividend will be treated as a qualifying dividend if it has been
received from a domestic corporation. Accordingly, distributions from the Fund
generally will not qualify for the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income
in the year of payment. However, dividends declared payable to shareholders of
record in October, November, or December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Fund in the year in which the dividends were
declared.
The Fund will provide a statement annually to shareholders as
to the federal tax status of distributions paid (or deemed to be paid) by the
Fund during the year, including the amount of dividends eligible for the
corporate dividends-received deduction.
SALE OR EXCHANGE OF FUND SHARES
Generally, gain or loss on the sale or exchange of a Share
will be capital gain or loss that will be long-term if the Share has been held
for more than twelve months and otherwise will be short-term. For individuals,
long-term capital gains are currently taxed at a maximum rate of 20% and
short-term capital gains are currently taxed at ordinary income tax rates.
However, if a shareholder realizes a loss on the sale, exchange or redemption of
a Share held for six months or less and has previously received a capital gains
distribution with respect to the Share (or any undistributed net capital gains
of a Fund with respect to such Share are included in determining the
shareholder's long-term capital gains), the shareholder must treat the loss as a
long-term capital loss to the extent of the amount of the prior capital gains
distribution (or any undistributed net capital gains of a Fund that have been
included in determining such 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.
In certain cases, the Fund will be required to withhold, and
remit to the United States Treasury, 31% of any distributions paid to a
shareholder who (1) has failed to provide a correct taxpayer
28
<PAGE>
identification number, (2) is subject to backup withholding by the Internal
Revenue Service, or (3) has failed to certify to the Fund that such shareholder
is not subject to backup withholding.
FEDERAL EXCISE TAX
If the Fund fails to distribute in a calendar year at least
98% of its ordinary income for the year and 98% of its capital gain net income
(the excess of short and long term capital gains over short and long term
capital losses) for the one-year period ending October 31 of that year (and any
retained amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. The Fund
intends to make sufficient distributions to avoid imposition of this tax, or to
retain, at most its net capital gains and pay tax thereon.
STATE AND LOCAL TAXES
The Fund is not liable for any income or franchise tax in
Massachusetts if it qualifies as a RIC for federal income tax purposes.
Depending upon state and local law, distributions by the Fund to shareholders
and the ownership of shares may be subject to state and local taxes.
Shareholders are urged to consult their tax advisors as to the consequences of
these and other state and local tax rules affecting an investment in the Fund.
6. MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The overall business and affairs of the Fund are managed by its Board
of Directors.
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 & Investment Inc. (registered
investment advisor) and Chairman and President, International Strategy
& Investment Group Inc. (registered investment advisor and
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; Director, Net.World
(telecommunications), 1998-Present. Formerly, Senior Vice-President and
Chief Financial Officer, General Dynamics Corporation (defense),
1989-1993 and Director, The Arch Fund (registered investment company).
29
<PAGE>
JOSEPH R. HARDIMAN, DIRECTOR (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, The Nevis Fund (registered
investment company) and Circon Corp. (medical instruments). Formerly,
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now BT
Alex. Brown Incorporated) 1985-1987; General Partner, Alex. Brown &
Sons Incorporated (now BT Alex. Brown Incorporated) 1976 -1985.
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); Executive Vice Chairman and Director, Central Carolina
Bank & Trust (banking) and Director, Victory Funds (registered
investment companies). Formerly, Director AMBAC Treasurers Trust
(registered investment company) and DP Mann Holdings (insurance).
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.
CARL W. VOGT, ESQ., DIRECTOR (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking) and American Science &
Engineering (x-ray detection equipment); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).
R. ALAN MEDAUGH, PRESIDENT (8/20/43)
President, International Strategy & Investment Inc. and Director,
International Strategy & Investment Group, Inc., 1991 - Present.
NANCY LAZAR, VICE PRESIDENT (8/1/57)
Executive Vice President and Secretary, International Strategy &
Investment Inc. and Executive Vice President and Director,
International Strategy & Investment Group, Inc., 1991 - Present.
CARRIE L. BUTLER, VICE PRESIDENT (5/1/67)
Assistant Vice President, International Strategy & Investment Inc.,
1991- Present.
MARGARET M. BEELER, ASSISTANT VICE PRESIDENT (3/1/67)
Assistant Vice President, International Strategy & Investment Inc.,
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.
30
<PAGE>
KEITH C. REILLY, ASSISTANT VICE PRESIDENT (6/22/66)
Assistant Vice President, International Strategy & Investment Inc.,
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), 1995-Present. Formerly, Vice President
and Treasurer, The Delaware Group of Funds (registered investment
companies) and Vice President, Delaware Management Company, Inc.
(investments), 1980-1995.
AMY M. OLMERT, SECRETARY (5/14/63)
One South Street, Baltimore, Maryland 21202. Vice President, BT Alex.
Brown Incorporated, 1997-Present. Formerly, Senior Manager, Coopers &
Lybrand L.L.P. (now PricewaterhouseCoopers LLP) 1988 -1997.
SCOTT J. LIOTTA, ASSISTANT SECRETARY (3/18/65)
One South Street, Baltimore, Maryland 21202. Assistant Vice President,
BT Alex. Brown Incorporated, 1996-Present; Formerly, Manager and
Foreign Markets Specialist, Putnam Investments Inc. (registered
investment companies), 1994-1996; Supervisor, Brown Brothers Harriman &
Co. (domestic and global custody), 1991-1994.
- -----------------------
*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 12 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 three funds and as a Director of seven funds in the
Fund Complex. Messrs. Cunnane, Hardiman, Levy, McDonald and Vogt 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 Chairmen of the Fund
Complex's Audit Committee and Executive Committee receive 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
31
<PAGE>
assets. For the fiscal year ended March 31, 1999, Independent Directors' fees
attributable to the assets of the Fund totaled approximately $1,284.
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, 1999.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Retirement Total Compensation from the Fund
Position for the Fiscal Year Ended Benefits Accrued as and Fund Complex Payable to
March 31, 1999 Part of Fund Expenses Directors for the Fiscal Year Ended
March 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
<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 $254(2) $ (3) $39,000 for service on 13(4)
Director Boards in the Fund Complex
Joseph H. Hardiman(5) $0 $ (3) $29,250 for service on 12 Boards
Director in the Fund Complex(6)
John F. Kroeger(7) $246 $ (3) $36,750 for service on 13(4)
Director Boards in the Fund Complex
Louis E. Levy $303(2) $ (3) $46,500 for service on 13(4)
Director Boards in the Fund Complex
Eugene J. McDonald $285(2) $ (3) $44,000 for service on 13(4)
Director Boards in the Fund Complex
Rebecca W. Rimel $258(2) $ (3) $39,000 for service on 12(4,6)
Director Boards in the Fund Complex
Carl W. Vogt(5) $0(2) $ (3) $39,000 for service on 13 Boards
Director in the Fund Complex(4,6)
</TABLE>
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Of amounts payable to Messrs. Cunnane, McDonald, Levy and Vogt and to
Ms. Rimel, $254, $285, $0, $0 and $258, 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, 1999 was approximately $1,405.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to the Fund's Board on October 23, 1998.
(6) Ms. Rimel receives and Messrs. Vogt and Hardiman, prior to their
appointment or election as Director to all 12 Funds in the Fund
complex, received proportionately higher compensation from each fund
for which they serve as a Director.
(7) Retired effective September 27, 1998; Deceased November 26, 1998.
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. 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
32
<PAGE>
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, 1998 are as follows: for Mr. Cunnane, 4 years; for Mr. Levy, 4
years; for Mr. McDonald, 6 years; for Mr. Vogt, 3 years; for Ms. Rimel, 3 years;
and for Mr. Hardiman, 0 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
Chairmen of Audit and Executive Other Participants
Committees
<S> <C> <C>
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
</TABLE>
Any Director who receives fees from the Fund is permitted to defer 50%
to 100% of his or her annual compensation pursuant to a Deferred Compensation
Plan. Messrs. Cunnane, Levy, McDonald and Vogt and Ms. Rimel have each executed
a Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors funds, 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 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
33
<PAGE>
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 "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 $____ million as of June 30, 1999.
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 0.40% of the average daily net assets of the Fund. The Advisor and the
Fund's administrator have contractually agreed to reduce proportionately their
respective annual fees or to reimburse the Fund, if necessary, so that the
Fund's total operating annual expenses do not exceed 1.25% of the Fund's average
daily net assets. ISI's compensation under the agreement for the three most
recent fiscal years was as follows:
Advisory Fees For the Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------
Contractual Fee $221,382 $208,693 $233,075
Less amount waived $(60,907) $(9,113) $(129,197)
34
<PAGE>
Fee after waivers $160,475* $199,580* $103,878*
- ---------------
* Absent fee waivers for the fiscal years ended March 31, 1999, March 31,
1998 and March 31, 1997, the Fund's Total Operating Expenses would have
been 1.42%, 1.28% and 1.58%, respectively, of the Fund's 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 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 0.20% of the Fund's average daily net assets. ICC and the
Advisor have contractually agreed to reduce proportionately their respective
fees, if necessary, so that the Fund's total annual operating expenses do not
exceed 1.25% of the Fund's average daily net assets. ICC's compensation under
the agreement for the three most recent fiscal years was as follows:
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------
Administration Fees $110,691 $104,346 $116,538
Administration Fees $ 30,454 $ 4,557 $ 64,599
Waived
ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. The services of ICC to the Fund
are not exclusive and ICC is free to render similar services to others. 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.
35
<PAGE>
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.
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 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 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 29, 1998. 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).
36
<PAGE>
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 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.
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 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 1999 1998 1997
---------------------------------------------------------------------------
12b-1 Fee $221,382(1) $208,693(1) $233,075(2)
- -----------
(1) Fees received by ISI Group.
(2) Fees received by Armata Financial Corp.
For the last three fiscal years, the Fund's distributor received the
following commissions, and from such commissions, the distributor retained the
following amounts:
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales $304,809(1) $0 $198,038(1) $0 $123,792(2) $44,533(2)
Commissions
</TABLE>
- -------------
(1) By ISI Group.
(2) By Armata Financial Corp.
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 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.
38
<PAGE>
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, 1999, March 31, 1998 and March 31,
1997, 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 recent fiscal year. As of March 31, 1999, the
Fund held a 4.8% repurchase agreement issued by Goldman Sachs & Co. valued at
$4,773,000; a 4.85% repurchase agreement issued by J.P. Morgan Securities, Inc.
valued at $4,772,000; and a 4.88% repurchase agreement issued by Morgan Stanley
& Co. valued at $4,772,000. Goldman Sachs & Co., J.P. Morgan Securities, Inc.
and Morgan Stanley & Co. are "regular brokers or dealers" of the Fund.
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.
39
<PAGE>
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.
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 fiscal year ended March 31, 1999, Bankers Trust was paid $12,872
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 $16.83 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, 1999, ICC received a fee of $38,924.
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.
40
<PAGE>
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, 1999, ICC received fees of $54,140.
14. INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland,
21201, are independent accountants to the Fund.
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 May 11, 1999.
As of such date, Directors and officers as a group owned less than 1%
of the Fund's total outstanding Shares.
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
41
<PAGE>
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
be 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, 1999 were as follows:
<TABLE>
<CAPTION>
Since Inception On
One-Year Period Ended Five-Year Period Ended January 15, 1993 Through
March 31, 1999 March 31, 1999 March 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Ending Total Ending Average Ending Average
Redeemable Return Redeemable Annual Total Redeemable Annual Total
Value Value Return Value Return
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1,028 2.78% $1,317 5.66% $1,383 5.37%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
42
<PAGE>
YIELD CALCULATIONS
The yield based on the 30-day period ended March 31, 1999 was 5.70% 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 annualizing 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
may be reasonably 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.
The Fund's annual portfolio turnover rate may vary from year to year,
as well as within a year, depending on market conditions. The Fund's portfolio
turnover rate in fiscal year 1999 was 173% and in fiscal year 1998 was 125%.
18. FINANCIAL STATEMENTS.
See next page.
43
<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>
44
<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.
45
<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.
46
<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>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
47
<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>
- --------------------------------------------------------------------------------
(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.
48
<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
49
<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.
50
<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
===========
51
<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.
- --------------------------------------------------------------------------------
52
<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
A-1
<PAGE>
securities or fluctuation of protective elements may be of greater amplitude or
there may be other 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.
A-2
<PAGE>
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
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 23. Exhibits
(a)(1) Articles of Incorporation incorporated by
reference to Exhibit (1)(a) 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 (Accession No.
950116-95-000311) on July 26,
1995.
(2) Articles of Amendment incorporated by reference
to Exhibit (1)(b) 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
(Accession No. 950116-95-000311) on July 26,
1995.
(3) Articles Supplementary dated December 27, 1993
incorporated by reference to Exhibit (1)(c) 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 (Accession No.
950116-95-000311) on July 26, 1995.
(b) By-Laws, as amended through December 18, 1996 incorporated
by reference to Exhibit 2 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 (Accession No.
950116-97-001363) on July 29, 1997.
(c) Instruments Defining Rights of Security Holders
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 (Accession No. 950116-
95-000311) on July 26, 1995, and Exhibit 2 (By-Laws), as
amended, to Post-Effective No. 5 to such Registration
Statement filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001363) on
July 29, 1997.
(d)(1) Investment Advisory Agreement dated December 15,
1992 between Registrant and International
Strategy & Investment Inc. incorporated by
reference to Exhibit 5 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 (Accession No.
950116-95-000311) on July 26, 1995.
(2) Form of Expense Limitation Agreement, filed
herewith.
(e)(1) Distribution Agreement dated April 1, 1997,
between Registrant and International Strategy &
Investment Group, Inc. incorporated by reference
to Exhibit (6)(a) 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
(Accession No. 950116-97-001363) on July 29,
1997.
C-1
<PAGE>
(2) Form of Agency Distribution Agreement between
International Strategy & Investment Group, Inc.
and Participating Broker-Dealers incorporated by
reference to Exhibit (6)(b) 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 (Accession No.
950116-97-001363) on July 29, 1997.
(3) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents
incorporated by reference to Exhibit (6)(c) 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 (Accession No.
950116-97-001363) on July 29, 1997.
(f) None.
(g) Custodian Agreement between Registrant and Bankers Trust
Company dated June 5, 1998 incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A
(Registration No. 33-53598), filed with the Securities and
Exchange Commission via EDGAR (Accession No. 950116-
98-001577) on July 28, 1998.
(h) Master Services Agreement (including Administration,
Transfer Agency and Accounting Services appendices)
between Registrant and Investment Company Capital Corp.
incorporated by reference to Exhibit 9 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 (Accession
No. 950116-96-000686) on July 29, 1996.
(i) Opinion of Counsel, filed herewith.
(j) Consent of PricewaterhouseCoopers LLP, filed herewith.
(k) None.
(l) Subscription Agreement re: initial $100,000 capital
incorporated by reference to Exhibit 13 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 (Accession
No. 950116-95-000311) on July 26, 1995.
(m) Distribution Plan incorporated by reference to Exhibit 15
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 (Accession No. 950116-97-001363) on
July 29, 1997.
C-2
<PAGE>
(n) Not applicable.
(o) Not applicable.
(p) Powers of Attorney, filed herewith.
Item 24. 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.
Item 25. 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 their official 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 (a) 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.
C-3
<PAGE>
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 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 26. 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. (Disclose the name and
principal business address of any company for which a
person listed above serves in the capacity of director,
officer, employee, partner or trustee, and the nature of
the relationship.)
During the past two fiscal 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 27. Principal Underwriters
(a) State the name of each investment company (other than the
Registrant) for which each principal underwriter currently
distributing securities of the Registrant also acts as a
principal underwriter, depositor or investment advisor.
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) Provide the information with respect to each director,
officer or partner of each principal underwriter named in
answer to Item 21.
C-4
<PAGE>
Position and
Offices Position and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
- ----------------- -------------- ------------
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
- ---------------------
* 717 Fifth Avenue
New York, New York 10022
(c) Not applicable.
Item 28. Location of Accounts and Records
State the names and address of each person maintaining
physical possession of 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] thereunder.
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 29. 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.
None.
C-5
<PAGE>
Item 30. 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-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this
Post-Effective Amendment No. 8 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 1st day of June, 1999.
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 June 1, 1999
- ----------------------- Director --------------------
Edward S. Hyman Date
* Director June 1, 1999
- ----------------------- --------------------
Richard T. Hale Date
* Director June 1, 1999
- ----------------------- --------------------
James J. Cunnane Date
* Director June 1, 1999
- ----------------------- --------------------
Joseph R. Hardiman Date
* Director June 1, 1999
- ----------------------- --------------------
Louis E. Levy Date
* Director June 1, 1999
- ----------------------- --------------------
Eugene J. McDonald Date
* Director June 1, 1999
- ----------------------- --------------------
Rebecca W. Rimel Date
* Director June 1, 1999
- ----------------------- --------------------
Carl W. Vogt Date
/s/ R. Alan Medaugh
- ----------------------- President June 1, 1999
R. Alan Medaugh --------------------
Date
/s/ Joseph A. Finelli
- ----------------------- Chief Financial June 1, 1999
Joseph A. Finelli and Accounting --------------------
Officer Date
* By: /s/Amy M. Olmert
-----------------
Amy M. Olmert
Attorney-In-Fact
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
INDEX OF EXHIBITS
EDGAR
Exhibit Document
Number
------------------------------------------------------------
(a) (1) Articles of Incorporation incorporated by
reference to Exhibit (1)(a) 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 (Accession No.
950116-95-000311) on July 26, 1995.
(2) Articles of Amendment incorporated by reference
to Exhibit (1)(b) 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 (Accession No. 950116-95-000311) on July
26, 1995.
(3) Articles Supplementary dated December 27, 1993
incorporated by reference to Exhibit (1)(c) 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
(Accession No. 950116-95-000311) on July 26,
1995.
(b) By-Laws, as amended through December 18, 1996 incorporated
by reference to Exhibit 2 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 (Accession No.
950116-97-001363) on July 29, 1997.
(c) Instruments Defining Rights of Security Holders 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 (Accession No. 950116-95-000311) on July 26,
1995, and Exhibit 2 (By-Laws), as amended, to Post-Effective
No. 5 to such Registration Statement filed with the
Securities and Exchange Commission via EDGAR (Accession No.
950116-97-001363) on July 29, 1997.
(d) (1) Investment Advisory Agreement dated December 15, 1992
between Registrant and International Strategy &
Investment Inc. incorporated by reference to Exhibit 5
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 (Accession No. 950116-95-000311) on
July 26, 1995.
EX-99.B (2) Form of Expense Limitation Agreement, filed herewith.
<PAGE>
EDGAR
Exhibit Document
Number
------------------------------------------------------------
(e) (1) Distribution Agreement dated April 1, 1997, between
Registrant and International Strategy & Investment
Group, Inc. incorporated by reference to Exhibit (6)(a)
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 (Accession No. 950116-97-001363) on
July 29, 1997.
(2) Form of Agency Distribution Agreement between
International Strategy & Investment Group, Inc. and
Participating Broker-Dealers incorporated by reference
to Exhibit (6)(b) 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 (Accession No.
950116-97-001363) on July 29, 1997.
(3) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents incorporated
by reference to Exhibit (6)(c) 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 (Accession
No. 950116-97-001363) on July 29, 1997.
(f) None
(g) Custodian Agreement between Registrant and Bankers Trust
Company dated June 5, 1998 incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A (Registration No.
33-53598), filed with the Securities and Exchange Commission
via EDGAR (Accession No. 950116-98-001577) on July 28,
1998.
(h) Master Services Agreement (including Administration,
Transfer Agency and Accounting Services appendices) between
Registrant and Investment Company Capital Corp. incorporated
by reference to Exhibit 9 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 (Accession No. 950116-96-
000686) on July 29, 1996.
EX-99.B (i) Opinion of Counsel, filed herewith.
EX-99.B (j) Consent of PricewaterhouseCoopers LLP, filed herewith.
(k) None.
(l) Subscription Agreement re: initial $100,000 capital
incorporated by reference to Exhibit 13 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 (Accession No.
950116-95-000311) on July 26, 1995.
<PAGE>
EDGAR
Exhibit Document
Number
------------------------------------------------------------
(m) Distribution Plan incorporated by reference to Exhibit 15
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 (Accession No. 950116-97-001363) on July 29,
1997.
(n) Not applicable.
(o) Not applicable.
EX-99.B (p) Powers of Attorney, filed herewith.
<PAGE>
FORM OF
EXPENSE LIMITATION AGREEMENT
THIS EXPENSE LIMITATION AGREEMENT is made as of the 1st day of August,
1999 by and among NORTH AMERICAN GOVERNMENT BOND FUND, INC., a Maryland
corporation (the "Fund"), INTERNATIONAL STRATEGY & INVESTMENT INC., a Delaware
corporation ("ISI" or the "Advisor"), and INVESTMENT COMPANY CAPITAL CORP., a
Maryland corporation ("ICC" or the "Administrator"), with respect to the
following:
WHEREAS, ISI serves as the Fund's investment advisor pursuant to an
Investment Advisory Agreement dated December 15, 1992 and ICC serves as the
Fund's administrator pursuant to a Master Services Agreement dated January 1,
1994; and
WHEREAS, ICC and ISI have voluntarily agreed to waive their fees and
reimburse expenses proportionately so that the Fund's total annual operating
expenses do not exceed 1.25% of its average daily net assets; and
WHEREAS, the Fund, ISI and ICC desire to formalize these voluntary fee
waiver and expense reimbursement arrangements for a one year period beginning on
August 1, 1999 and ending on July 31, 2000.
NOW THERETOFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. ISI and ICC agree to waive their respective fees and reimburse
expenses for a period from August 1, 1999 to July 31, 2000 to the extent
necessary, and in the proportion described in Appendix A attached hereto or such
other proportion as they may from time to time agree upon, so that the Fund's
total annual operating expenses do not exceed 1.25% of its average daily net
assets.
2. Upon the termination of the Investment Advisory Agreement, or the
Master Services Agreement, this Agreement shall automatically terminate.
3. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the 1940 Act shall be resolved by reference to such term or provision of the
1940 Act and to interpretations thereof, if any, by the United States Courts or
in the absence of any controlling decision of any such court, by rules,
regulations or orders of the SEC issued pursuant to said Act. In addition, where
the effect of a requirement of the 1940 Act reflected in any provision of this
Agreement is revised by rule, regulation or order of the SEC, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
Otherwise the provisions of this Agreement shall be interpreted in accordance
with the laws of Maryland.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers as of the day and year first above
written.
[SEAL]
NORTH AMERICAN GOVERNMENT
BOND FUND, INC.
Attest:/s/ by:/s/
---------------- ------------------
By: R. Alan Medaugh
Title: President
INTERNATIONAL STRATEGY &
INVESTMENT INC.
Attest:/s/ by:/s/
---------------- --------------
By: Nancy Lazar
Title: Executive Vice President
INVESTMENT COMPANY CAPITAL
CORP.
Attest:/s/ by:/s/
---------------- ---------------------
By: Edward J. Veilleux
Title: Executive Vice President
<PAGE>
APPENDIX A
The Advisor and the Administrator agree to waive their respective fees
and reimburse expenses in the following proportion:
International Strategy & Investment Inc. _____%
Investment Company Capital Corp. _____%
<PAGE>
1701 Market Street MORGAN, LEWIS
Philadelphia, PA 19103 & BOCKIUS L L P
(215)963-5000 C O U N S E L O R S A T L A W
Fax: (215)963-5299
May 28, 1999
North American Government Bond Fund, Inc.
717 Fifth Avenue
New York, NY 10022
Re: Opinion of Counsel regarding Post-Effective Amendment No. 8 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-53598)
---------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to North American Government Bond Fund, Inc.,
(the "Fund") a Maryland corporation, in connection with the above-referenced
Registration Statement which relates to the Fund's shares of common stock, par
value $.001 per share (the "Shares"). This opinion is being delivered to you in
connection with the Fund's filing of Post-Effective Amendment No. 8 to the
Registration Statement (the "Amendment") to be filed with the Securities and
Exchange Commission pursuant to Rule 485(a) under the Securities Act of 1933.
With your permission, all assumptions and statements of reliance herein have
been made without any independent investigation or verification on our part,
except to the extent otherwise expressly stated, and we express no opinion with
respect to the subject matter or accuracy of such assumptions or items relied
upon.
In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:
(a) a certificate of the State of Maryland to the existence and
good standing of the Fund dated May 11, 1999;
(b) the Articles of Incorporation of the Fund and all amendments
and supplements thereto (the "Articles of Incorporation");
(c) a certificate executed by Amy M. Olmert, the Secretary of the
Fund, certifying as to the Fund's Articles of Incorporation
and By-Laws and certain resolutions adopted by the Board of
Directors of the Fund authorizing the issuance of the shares;
and
(d) a printer's proof of the Amendment.
<PAGE>
In our capacity as counsel to the Fund, we have examined the originals,
or certified, conformed or reproduced copies, of all records, agreements,
instruments and documents as we have deemed relevant or necessary as the basis
for the opinion hereinafter expressed. In all such examinations, we have assumed
the legal capacity of all natural persons executing documents, the genuineness
of all signatures, the authenticity of all original or certified copies, and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduced copies. As to various questions of fact relevant to such
opinion, we have relied upon, and assume the accuracy of, certificates and oral
or written statements of public officials and officers or representatives of the
Fund. We have assumed that the Amendment, as filed with the Securities and
Exchange Commission, will be in substantially the form of the printer's proof
referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the
Articles of Incorporation and By-Laws, and for the consideration described in
the Registration Statement, will be legally issued, fully paid and non-
assessable under the laws of the State of Maryland.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/Morgan, Lewis and Bockius LLP
- --------------------------------
Morgan, Lewis and Bockius LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective
Amendment No. 8 to the Registration Statement of North American Government Bond
Fund, Inc. on Form N-1A (File Number 33-53598 and 811-7292) of our report dated
April 30, 1999, on our audit of the financial statements and financial
highlights of the Portfolios, which report is included in the Annual Report to
Shareholders for the year ended March 31, 1999, which is incorporated by
reference in the Registration Statement. We also consent to the reference of our
firm under the caption "Financial Highlights" in the Prospectus and "Independent
Accountants" in the Statement of Additional Information.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
May 28, 1999
<PAGE>
EXHIBIT 99.B(o)
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: May 28, 1999
<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: May 28, 1999
<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: May 28, 1999
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Joseph R. Hardiman, 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/ Joseph R. Hardiman
--------------------------
Joseph R. Hardiman
Date: May 28, 1999
<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: May 28, 1999
<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: May 28, 1999
<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: May 28, 1999
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Carl W. Vogt, 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/ Carl W. Vogt
------------------------
Carl W. Vogt
Date: May 28, 1999
