<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES (A Class of North American
Government Bond Fund, Inc.) 535 Madison Avenue, 30th Floor 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............................................................1
Fees and Expenses of the Fund.................................................3
Investment Program............................................................3
The Fund's Net Asset Value....................................................5
How to Buy Shares.............................................................5
How to Redeem Shares..........................................................6
Telephone Transactions........................................................6
Sales Charges.................................................................7
Dividends and Taxes...........................................................8
Investment Advisor............................................................8
Administrator.................................................................9
Financial Highlights..........................................................10
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, 2000.
<PAGE>
INVESTMENT SUMMARY
Objective 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. The Fund also
may invest some of its assets in high quality bonds issued by U.S. corporations
or international organizations such as the World Bank and the Asian Development
Bank.
Risk Profile
The Fund may be 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 investing in 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. Investing in foreign countries 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.
Style and Non-Diversification 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.
In addition, the Fund may invest in securities of a relatively limited number of
issuers. As a result, the performance of one or a small number of portfolio
holdings can affect overall performance more than if the Fund were diversified.
If you invest in the Fund, you could lose money. An investment in the
Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government agency.
-1-
<PAGE>
Fund Performance
The following bar chart and table show the performance of the Fund 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.
For years ended December 31*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
20.00%
15.00% 15.64%
10.00% 11.99%
5.00% 6.18% 8.44% (1.62%)
0.00%
-5.00%
-10.00% -12.66%
-15.00%
1994 1995 1996 1997 1998 1999
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------
* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown.
For the period December 31, 1999 through June 30, 2000, the Fund's
total return was 5.85%.
During the 6-year period shown in the bar chart, the highest return for
a quarter was 9.15% (quarter ended 6/30/95) and the lowest return for a
quarter was (8.60)% (quarter ended 12/31/94).
Average Annual Return (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
Lehman Brothers Intermediate
ISI Shares(1) Treasury Index(2)
------------- -----------------------------
<S> <C> <C>
Past One Year................................................. (4.57)% 0.40%
Past Five Years............................................... 7.31% 6.91%
Since Inception............................................... 4.70% (1/15/93) 5.60%(3)
</TABLE>
-------------------
(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 12/31/99.
-2-
<PAGE>
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold Shares.
Shareholder Transaction Expenses (fees paid directly from your investment):
<TABLE>
<CAPTION>
<S> <C>
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......................................................................................... 0.61%
-----
Total Annual Fund Operating Expenses................................................................... 1.41%
Less Fee Waivers and Expense Reimbursements............................................................ (0.16)%*
----
Net Expenses........................................................................................... 1.25%
====
</TABLE>
------------------
* The Advisor has contractually agreed to limit its fees 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, 2001 and may be extended.
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* $718* $1,033* $1,927*
----------------
* Based on Total Annual Fund Operating Expenses after fee waivers 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 Fund also may invest
some of its assets in high quality bonds issued by U.S. corporations or
international organizations such as the World Bank and the Asian Development
Bank.
-3-
<PAGE>
The Advisor is responsible for managing the Fund's investments. (Refer
to the section on the 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 each of Canadian and Mexican
government securities to 25% of its total assets. In addition, the Fund will
limit its investments in each of Canadian and 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 Fund may invest up to 10% of its total assets in high quality bonds
issued by U.S. corporations. The Fund will limit its investment in high quality
bonds issued by international organizations, such as the World Bank and Asian
Development Bank, together with investments in obligations of agencies or
instrumentalities of the U.S. Government ("Agency securities"), to 10% of the
Fund's total assets.
Under normal circumstances, the Fund will invest primarily in
investment grade bonds.
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 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.
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 will generally be larger
if the Fund holds securities with longer maturities or if the Fund holds lower
quality securities.
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. Investments in bonds issued by
international organizations and in Agency securities also pose additional
different risks than investing in U.S. government securities. The value of bonds
issued by international organizations may be affected by adverse international
political and economic developments that may not impact the value of U.S.
government securities. Unlike U.S. government securities, only certain Agency
securities are backed by the full faith and credit of the U.S. Government. The
remaining Agency securities are subject to greater credit risk.
Some of the Fund's investments may be denominated in Canadian dollars,
Mexican pesos or other currencies. 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. In addition, the Fund is
non-diversified. This means that it may invest in securities of a relatively
limited number of issuers. Thus, the performance of one or a small number of
portfolio holdings can affect overall performance more than if the Fund was
diversified. 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 in pursuing the Fund's primary investment
strategies outweighed the opportunity for gain.
-4-
<PAGE>
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 on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 p.m. (Eastern
Time), it could be earlier on the day before a holiday. Contact the Transfer
Agent to determine whether the Fund will close early before a particular
holiday. The net asset value per share is calculated by subtracting the Fund's
liabilities from its assets and dividing the result by the number of the Fund's
outstanding shares.
In valuing the Fund's assets, its investments are priced at their
market value. When price quotes for a particular security are not readily
available or may be unreliable, the security is priced at its "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.
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 either 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 Fund 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.
-5-
<PAGE>
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.
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 7:00 p.m. (Eastern Time). You are automatically entitled to
telephone transaction privileges, but you may 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 either reasonably believes to be genuine.
Your telephone transaction request will be recorded.
During periods of economic or market volatility, 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.
-6-
<PAGE>
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:
Sales Charge as % of
--------------------
Offering Net Amount
Amount of Purchase Price Invested
------------------ ----- --------
Less than $ 100,000 ............ 3.00% 3.09%
$ 100,000 - $ 249,999 ............ 2.50% 2.56%
$ 250,000 - $ 499,999 ............ 2.00% 2.04%
$ 500,000 - $ 999,999 ............ 1.50% 1.52%
$1,000,000 - $1,999,999 ............ 0.75% 0.76%
$2,000,000 - $2,999,999 ............ 0.50% 0.50%
$3,000,000 - and over .............. None None
---- ----
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 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 Director of this or any affiliated Fund, 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 July 31, 2001 and provide
documentation of your redemption or sale.
-7-
<PAGE>
Purchases by Exchange
You may exchange shares of any other fund in the ISI family of funds with the
same or higher sales charge structure for an equal dollar amount of Shares
without payment of the sales charges described above or any other charge, up to
four times a year. 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 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 it 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 net investment income in the form of monthly dividends and to distribute net
capital gains at least annually.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive are subject to federal, state and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. Each sale or exchange of the Fund's shares is
generally a taxable event. For tax purposes, an exchange of your Fund shares for
shares of a different ISI fund is the same as a sale.
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 $452 million
in net assets as of June 30, 2000.
As compensation for its services for the fiscal year ended March 31,
2000, ISI received from the Fund a fee equal to 0.23% (net of fee waivers) of
the Fund's average daily net assets.
The Advisor has contractually agreed to reduce its annual fee, 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, 2001 and
may be extended.
-8-
<PAGE>
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 in 1991, 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 20 years.
Mr. Medaugh, President of the Fund and ISI, is responsible for
day-to-day portfolio management. Prior to joining ISI in 1991, 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. ("ICCC") provides administration
services to the Fund. ICCC 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. ICCC is also the Fund's
transfer and dividend disbursing agent and provides accounting services to the
Fund.
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). The
information for the year ended March 31, 2000 is part of the Fund's financial
statements which have been audited by Deloitte & Touche LLP and are included in
the Annual Report, which is available upon request. The information for the
years ended March 31, 1996 through March 31, 1999 has been audited by
PricewaterhouseCoopers LLP.
<PAGE>
<TABLE>
<CAPTION>
(For a share outstanding throughout each year)
------------------------------------------------------------------------------------------------------------------------------
For the Years Ended March 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year...... $8.42 $8.74 $8.29 $8.37 $8.06
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income..................... 0.49 0.60 0.61 0.75 0.81
------- ------- ------- ------- -------
Net realized and unrealized gain/(loss)
on investments.......................... (0.12) (0.09) 0.56 (0.11) 0.22
------- ------- ------- ------- -------
Total from Investment Operations.......... 0.37 0.51 1.17 0.64 1.03
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment income
and short-term gains.................... (0.49) (0.60) (0.67) (0.26) --
------- ------- ------- ------- -------
Distribution in excess of net
investment income....................... -- -- (0.05) -- --
------- ------- ------- ------- -------
Distribution from Long-Term Captital
Gains................................... -- (0.23) -- -- --
------- ------- ------- ------- -------
Return of capital......................... (0.23) -- -- (0.46) (0.72)
------- ------- ------- ------- -------
Total distributions....................... (0.72) (0.83) (0.72) (0.72) (0.72)
------- ------- ------- ------- -------
Net asset value, end of year.............. $8.07 $8.42 $8.74 $8.29 $8.37
------- ------- ------- ------- -------
Total Return(1)
Based on net asset value per share........ 4.82% 5.96% 14.65% 7.90% 12.97%
------- ------- ------- ------- -------
Ratios to Average Daily Net Assets:
Expenses(2)............................... 1.25% 1.25% 1.25% 1.25% 1.25%
------- ------- ------- ------- -------
Net investment income(3).................. 5.59% 5.79% 7.17% 8.99% 9.49%
------- ------- ------- ------- -------
Supplemental Data:
Net assets at end of period (000)......... $61,697 $55,891 $52,018 $51,966 $60,860
------- ------- ------- ------- -------
Portfolio turnover rate................... 32% 173% 125% 46% 125%
------- ------- ------- ------- -------
</TABLE>
(1) Total return excludes the effect of sales charges.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 1.41%, 1.42%, 1.28%, 1.58%, and 1.47% for the years ended
March 31, 2000, 1999, 1998, 1997 and 1996, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 5.43%, 5.62%, 7.14%, 8.66%, and 9.27% for the
years ended March 31, 2000, 1999, 1998, 1997, and 1996, respectively.
-9-
<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
NEW ACCOUNT APPLICATION
Make check payable to "ISI North American Government Bond Fund Shares" and mail
with this Application to:
ISI Mutual Funds
P.O. Box 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.
<TABLE>
<CAPTION>
<S> <C>
____________________________________________________
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
____________________________________________________ ____________________________________________________
Social Security Number Minor's Date of Birth (Mo./Day/Yr.)
under the____________________ Uniform Gifts to Minors Act
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
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
___$100,000 ___$250,000 ___$500,000 ___$1,000,000 ___$2,000,000 ___$3,000,000
</TABLE>
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.
<TABLE>
<CAPTION>
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
<S> <C> <C> <C>
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
</TABLE>
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
A-3
<PAGE>
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.)
<TABLE>
<CAPTION>
<S> <C> <C>
Minimum 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)
</TABLE>
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.)
<TABLE>
<CAPTION>
<S> <C> <C>
Frequency (Check One) [ ] Monthly [ ] Quarterly (January, April, July and October)
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
No, I/We do not want: [ ] Telephone redemption privileges [ ] Telephone exchange privileges
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Bank: _____________________________ Bank Account No.: ____________________________________
Address: _____________________________ Bank Account Name: ____________________________________
_____________________________ Bank Phone Number: ____________________________________
</TABLE>
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:________________________________
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
____________________________________________________ ______________________________________________________________
Signature Date Signature (if a joint account, both must sign) Date
</TABLE>
--------------------------------------------------------------------------------
For Dealer Use Only
<TABLE>
<CAPTION>
<S> <C>
Dealer's Name: ________________________________________ Dealer Code: _________________________________________
Dealer's Address: ________________________________________ Branch Code: _________________________________________
Representative: ________________________________________ Rep. No.: _________________________________________
</TABLE>
A-4
<PAGE>
ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
(A Class of North American Government Bond Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
535 Madison Avenue, 30th Floor
New York, New York 10022
<TABLE>
<CAPTION>
<S> <C>
Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY &
One South Street INVESTMENT GROUP INC.
Baltimore, Maryland 21202 535 Madison Avenue, 30th Floor
New York, New York 10022
1-800-955-7175
Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street Princeton Forrestal Village
Baltimore, Maryland 21202 116-300 Village Boulevard
1-800-882-8585 Princeton, New Jersey 08540
Custodian
BANKERS TRUST COMPANY Fund Counsel
130 Liberty Street KRAMER LEVIN NAFTALIS & FRANKEL LLP
New York, New York 10006 919 Third Avenue
New York, New York 10022
</TABLE>
A-5
<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 and semi-annual reports containing detailed
financial information and, in the case of the annual report, 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 202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102. 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
A-6
<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, 2000
[PROSPECTUS]
A-7
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
535 Madison Avenue, 30th Floor
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. THE AUDITED FINANCIAL STATEMENTS FOR THE FUND ARE INCLUDED
IN THE FUND'S ANNUAL REPORT WHICH HAS BEEN FILED ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. A COPY OF THE PROSPECTUS AND THE ANNUAL
REPORT MAY BE OBTAINED WITHOUT CHARGE FROM YOUR SECURITIES DEALER
OR BY WRITING OR CALLING INTERNATIONAL STRATEGY
& INVESTMENT GROUP INC., 535 MADISON AVENUE, 30TH FLOOR,
NEW YORK, NEW YORK 10022, (800) 955-7175.
Statement of Additional Information Dated: August 1, 2000
Relating to Prospectus Dated: August 1, 2000
of
ISI North American Government Bond Fund Shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. General Information and History...........................................................................1
2. Investment Objective, Policies and
Risk Considerations.....................................................................................1
4. Valuation of Shares and Redemption........................................................................9
5. Federal Tax Treatment of Dividends and
Distributions...........................................................................................9
6. Management of the Fund....................................................................................11
7. Investment Advisory and Other Services....................................................................16
8. Administration............................................................................................17
9. Distribution of Fund Shares...............................................................................17
10. Portfolio Transactions....................................................................................19
11. Capital Stock.............................................................................................20
12. Semi-Annual Reports.......................................................................................21
13. Custodian, Transfer Agent and
Accounting Services.....................................................................................21
14. Independent Accountants...................................................................................21
15. Legal Matters.............................................................................................21
16. Control Persons and Principal Holders of
Securities..............................................................................................21
17. Performance and Yield Computations........................................................................22
18. Financial Statements......................................................................................24
19. APPENDIX A - Moody's Investors Service and Standard & Poor's Ratings Definitions.........................A-1
</TABLE>
<PAGE>
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.
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 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 Fund's investment advisor (the "Advisor") under
criteria approved by the Fund's Board of Directors ("Comparable Quality").
Except as provided below, the Mexican Government Securities in which the Fund
may invest will be rated, in the case of long-term securities, Baa or higher by
Moody's, or BBB or higher by S&P, or comparable quality, or in the case of
short-term securities, Prime-3 or higher by Moody's, A-3 or higher by S&P, or
comparable quality. Where deemed appropriate by the Advisor, the Fund may invest
up to 10% of its total assets (measured at the time of the investment) in
Mexican Government Securities or in fixed-income securities issued by
governments of other countries in Latin America or elsewhere (and denominated in
either U.S. dollars or the local foreign currency), which securities are rated
Ba by Moody's or BB by S&P, or Comparable Quality. If a fixed-income security
held by the Fund is rated Baa or BBB, in the case of a long-term security, or
Prime-3 or A-3 in the case of a short-term security, and is subsequently
downgraded by a rating agency, such security will be included in the Fund's
below investment grade holdings for purposes of the foregoing 10% limit. In
addition, the Fund will retain such security in its portfolio only until the
Advisor determines that it is practicable to sell the security without undue
market or tax consequences to the Fund. Moreover, in the event that such
downgraded securities constitute 5% or more of the Fund's total assets, the
Advisor will sell sufficient securities to reduce the total to below 5%.
1
<PAGE>
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.
The Fund also will invest in obligations of agencies or
instrumentalities of the U.S. Government ("Agency securities.") Agency
securities include obligations of the Government National Mortgage Association
("Ginnie Mae"), Fannie Mae, and the Federal Home Loan Mortgage Corporation
("Freddie Mac"), and similar entities. Unlike U.S. Government securities, Agency
securities may or may not be backed by the full faith and credit of the U.S.
Government. Agency securities issued by Ginnie Mae are backed by the full faith
and credit of the U.S. Government, which means that the U.S. Government
guarantees that the interest and principal will be paid when due. Agency
securities issued by Fannie Mae and Freddie Mac, however, are not backed by the
full faith and credit of the U.S. Government, and are supported only by the
credit of the agency or instrumentality itself. The Fund will limit its
investment in Agency securities, together with its investment in bonds issued by
international organizations (described below), to 10% of the Fund's total
assets.
Canadian Government Securities
Canadian Government securities include securities issued or guaranteed
by the Government of Canada, any of its provinces or by their respective
political subdivisions, agencies and instrumentalities.
Canadian Government securities in which the Fund may invest include
Government of Canada bonds and Government of Canada Treasury bills. The Bank of
Canada, acting on behalf of the Canadian federal government, is responsible for
the distribution of Treasury bills and federal bond issues. Government of Canada
Treasury bills are debt obligations with maturities of less than one year.
Government of Canada issues of bonds frequently consist of several different
bonds with various maturity dates representing different segments of the yield
curve with maturities ranging from one to 30 years.
All Canadian provinces have outstanding bond issues and several
provinces also guarantee bond issues of provincial authorities, agencies and
provincial Crown corporations. Each new issue yield is based upon a spread from
an outstanding Government of Canada issue of comparable term and coupon. Spreads
in the marketplace are determined by various factors, including the relative
supply and the rating assigned by the rating agencies. Most provinces also issue
treasury bills.
Many municipalities and municipal financial authorities in Canada raise
funds through the bond market in order to finance capital expenditures. Unlike
U.S. municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the provincial bond market.
Mexican Government Securities
Mexican Government securities in which the Fund may invest include
those securities that are issued or guaranteed in full by the Mexican federal
government or its instrumentalities.
<PAGE>
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.
2
<PAGE>
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.
Corporate Bonds
The Fund may invest up to 10% of its total assets in high quality bonds
issued by U.S. corporations rated, at the time of purchase, AA or higher by S&P
or of comparable quality. The market value of the Fund's corporate bonds will
change in response to interest rate changes and other factors, including changes
in general economic conditions and other specific developments that adversely
impact the issuer of a bond.
Bonds Issued by International Organizations
Bonds issued by international organizations are designated or supported
by governmental entities to promote economic reconstruction or development,
international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the "World
Bank"), the InterAmerican Development Bank, the European Investment Bank , the
Asian Development Bank and similar entities. Bonds issued by international
organizations may be denominated in currencies other than the U.S. dollar. The
Fund will invest only in bonds rated, at the time of purchase, AA or higher by
S&P or of comparable quality. The Fund will limit its investment in such bonds,
together with Agency securities (described above), to 10% of the Fund's total
assets.
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 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.
3
<PAGE>
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, 2000, the Fund held no bonds
rated below investment grade.
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.
4
<PAGE>
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 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.
<PAGE>
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.
5
<PAGE>
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 their current market value on a forward commitment or
"when issued" basis. When such transactions are negotiated, the price is fixed
at the time of the commitment, but delivery and payment will take place after
the date of the commitment. The Fund will establish a segregated account with
its custodian consisting of cash, cash equivalents or U.S. Treasury securities,
or other high quality liquid debt securities equal at all times to its
when-issued commitments. Additional cash or liquid debt securities will be added
to the account when necessary. While the Fund purchases securities on a forward
commitment or "when issued" basis only with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date. The
securities so purchased or sold are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time of delivery of
the securities, their value may be more or less than the purchase or sale price.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements, the Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are at all times secured by cash or money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined daily,
of the loaned securities. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. In determining whether to lend
securities to a particular borrower, the Advisor (subject to review by the
Fund's Board of Directors) will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Fund any income earned thereon and the Fund may invest
any cash collateral in portfolio securities, thereby earning additional income.
The Fund will not lend portfolio securities in excess of 20% of the value of its
total assets. The Board of Directors will monitor the Fund's lending of
portfolio securities.
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.
6
<PAGE>
Currency Risks. A change in the value of a foreign currency relative to
the U.S. dollar will result in a corresponding change in the U.S. dollar value
of the Fund's assets denominated in that currency. Accordingly, the value of the
assets of the Fund as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In an attempt to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to and may occasionally use forward foreign currency exchange
contracts and futures contracts and may purchase and write (sell) options on
foreign currencies. (See "Other Investment Policies - Forward Foreign Currency
Exchange Contracts.") The Fund may use such forward contracts and options when,
for example, it enters into a contract for the purchase or sale of a security
denominated in a foreign currency, and the Fund desires to "lock in" the U.S.
dollar price of the security. Also, when the Advisor believes that the currency
of a particular foreign country may suffer a substantial movement against the
U.S. dollar, the Fund may enter into forward contracts and options approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
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 U.S. 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.
7
<PAGE>
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;
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
<PAGE>
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.
8
<PAGE>
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
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, Good Friday, 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 in cash 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.
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.
9
<PAGE>
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that the Fund
controls and which are engaged in the same, similar, or related trades or
business. For purposes of the 90% gross income requirement described above,
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) may be excluded from income that qualifies under the 90%
requirement.
In addition to the requirements described previously, in order to
qualify as a RIC, the Fund must distribute at least 90% of its investment
company taxable 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, but determined without regard to the deduction for
dividends paid) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If the Fund meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
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, it
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 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 that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
10
<PAGE>
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.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxable on the
entire amount of the dividend or distribution received, even though some or all
of the amount distributed may have been realized by the Fund prior to the
investor's purchase.
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
The sale or exchange of a share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be a 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 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
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. 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.
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 535 Madison Avenue, 30th Floor, New York, New York 10022.
11
<PAGE>
*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.
JOSEPH R. HARDIMAN, DIRECTOR (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group
(registered broker dealer) and The Nevis Fund and the Flag Investors
Funds family (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments); 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 DB Alex. Brown LLC) 1985-1987;
General Partner, Alex. Brown & Sons Incorporated (now DB Alex. Brown
LLC) 1976-1985.
LOUIS E. LEVY, DIRECTOR (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (finance and banking) and the Flag Investors Funds
Family (registered investment companies); Formerly, Chairman of the
Quality Control Inquiry Committee, American Institute of Certified
Public Accountants; 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.
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), American
Science & Engineering (x-ray detection equipment), and President the
ISI Family of Funds (registered investment companies). Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration);
Interim President of Williams College; and Director, Flag Investors
Family of Funds (registered investment companies).
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.
EDWARD J. VEILLEUX, VICE PRESIDENT (8/26/43)
Director, Deutsche Asset Management, 1999-Present; Executive Vice
President, Investment Company Capital Corporation since 1996.
Trustee, Devcap Trust. (Registered Investment Company)
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.
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.
FELICIA A. EMRY, SECRETARY (12/19/69)
Assistant Vice President, Deutsche Asset Management, 1999-Present.
Associate, Hogan & Hartson L.L.P., 1997-1999; Associate, Winston &
Strawn, 1994-1997.
12
<PAGE>
CHARLES A. RIZZO, TREASURER (8/5/57)
Director, Deutsche Asset Management; Certified Public Accountant and
Certified Management Accountant. Formerly, Vice President and
Department Head, BT Alex. Brown Incorporated (now DB Alex. Brown
LLC), 1998-1999. Senior Manager, Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), 1993-1998.
AMY M. OLMERT, ASSISTANT SECRETARY (5/14/63)
Director, Deutsche Asset Management; Certified Public Accountant.
Formerly, Vice President, BT Alex. Brown Incorporated (now DB Alex.
Brown LLC), 1997-1999. Formerly, Senior Manager, Coopers & Lybrand
L.L.P. (now PricewaterhouseCoopers LLP), 1992-1997.
DANIEL O. HIRSCH, ASSISTANT SECRETARY (3/27/54)
Director, Deutsche Asset Management. Formerly, Principal, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1998-1999. Formerly,
Assistant General Counsel, United States Securities and Exchange
Commission, 1993-1998.
---------------
*A Director who is an "interested person" as defined by the Investment Company
Act.
13
<PAGE>
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 the Funds Advisor, International Strategy & Investment Inc. ("ISI" or the
"Advisor") or any of its affiliates. There are currently 4 funds in the ISI fund
complex (the "Fund Complex"). Mr. Hyman serves as Chairman of each fund in the
Fund Complex. Mr. Medaugh serves as President of each fund in the Fund Complex.
Messrs. Hardiman, Levy, and Vogt serve as Directors of each fund in the Fund
Complex. Ms. Lazar, Ms. Butler and Mr. Veilleux serve as Vice Presidents of each
fund in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms. Emry serves as
Secretary, and Ms. Olmert and Mr. Hirsch serve as Assistant Secretary of each of
the funds in the Fund Complex.
Some of the officers of the Fund are employees of Deutsche Asset
Management ("Deutsche Asset Management") which is an operating unit of Deutsche
Bank AG. ("Deutsche Bank"). Deutsche Asset Management consists of Investment
Company Capital Corp., the Fund's administrator, and other asset management
affiliates of Deutsche Bank.
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 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 attendance at Board and committee meetings) from
all ISI Funds for which he 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 assets. For
the fiscal year ended March 31, 2000, Independent Directors' fees attributable
to the assets of the Fund totaled approximately $2,939.
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively in the fiscal
year ended March 31, 2000.
14
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Total Compensation from
the Fund and Fund Complex
Aggregate Compensation for Pension or Retirement Payable to Directors for
Name of Person, the Fiscal Year Ended March Benefits Accrued as Part the Fiscal Year Ended
Position 31, 2000 of Fund Expenses March 31, 2000(1)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward S. Hyman(2) $0 $0 $0
Chairman and Director
Richard T. Hale(2,3) $0 $0 $0
Vice Chairman and Director
James J. Cunnane(3) $108(4) $0 $19,500 for service on 12
Director Boards in the Fund Complex
Joseph H. Hardiman $898 $0 $45,000 for service on 12
Director Boards in the Fund Complex
Louis E. Levy $926 $0 $55,000 for service on 12
Director Boards in the Fund Complex
Eugene J. McDonald(3) $136(4) $0 $49,000 for service on 12
Director Boards in the Fund Complex
Rebecca W. Rimel(3) $108(4) $0 $39,000 for service on 12
Director Boards in the Fund Complex
Carl W. Vogt $898(4) $0 $45,000 for service on 12
Director Boards in the Fund Complex
</TABLE>
--------------------------------
(1) Prior to September 28, 1999, the Fund Complex consisted of 12 funds and
included eight funds in the Flag Investors family of funds.
(2) A Director who is an "interested person" as defined in the Investment
Company Act.
(3) Resigned effective September 30, 1999.
(4) Of amounts payable to Ms. Rimel and to Messrs. Cunnane, McDonald and Vogt,
$108, $108, $136 and $108, respectively, was deferred pursuant to a deferred
compensation plan.
15
<PAGE>
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 Fund's Code of
Ethics permits access persons to trade securities that may be purchased or held
by the Fund for their own accounts, subject to compliance with requirements of
the Codes of Ethics of the Fund's advisor and distributor as described below.
Access persons of the Fund's advisor, International Strategy &
Investment Inc. ("ISI" or the "Advisor"), and ISI Group, Inc. (the distributor)
are subject to the same Code of Ethics. The Code permits access persons to trade
securities that may be purchased or held by the Fund for their own accounts,
subject to compliance with reporting requirements. In addition, the Code also
provides for trading "blackout periods" that prohibit trading by access persons
within periods of trading by the Fund in the same security, subject to certain
exceptions. The Code also prohibits short-term trading profits and personal
investment in initial public offerings. The Code requires prior approval with
respect to purchases of securities in private placements.
The Code of Ethics is on public file with, and is available from, the
SEC.
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 (the "Investment Advisory Agreement").
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 $452 million as of June 30, 2000.
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 has
contractually agreed to reduce its annual fee 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:
16
<PAGE>
Advisory Fees For the Fiscal Year Ended March 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Contractual Fee $239,248 $221,382 $208,693
Less amount waived $(96,671) $(60,907) $ (9,113)
Fee after waivers $142,577 $160,475* $199,580*
--------------
* Absent fee waivers for the fiscal years ended March 31, 2000, March 31, 1999
and March 31, 1998, the Fund's Total Operating Expenses would have been 1.41%,
1.42% and 1.28%, 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.
ADMINISTRATION
Investment Company Capital Corp. ("ICCC"), 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, ICCC is entitled to receive from the
Fund Complex a fee based on the combined assets in the Fund Complex at the
following annual rates .20% of the first 75 million, .15% of the next $75
million, .10% of the next $75 million, .05% of the next $275 million and .03% of
the amount over $500 million. Prior to June 1, 1999 the administrator was paid a
fee equal to 0.20% of the Fund's average daily net assets. ICCC's compensation
under the agreement for the three most recent fiscal years was as follows:
Fiscal Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
Administration Fees $68,536 $110,691 $104,346
Administration Fees Waived $0 $30,454 $4,557
ICCC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. The services of ICCC to the Fund
are not exclusive and ICCC is free to render similar services to others. An
affiliate of ICCC serves as the Fund's custodian (See "Custodian, Transfer Agent
and Accounting Services.") ICCC is an indirect subsidiary of Deutsche Bank AG.
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 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.
17
<PAGE>
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 and the Plan will remain in effect from year
to year as specifically approved (a) at least annually by the Fund's Board of
Directors and (b) by the affirmative vote of a majority of the Independent
Directors, by votes cast in person at a meeting called for such purpose.
In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed only
if the Directors make a similar determination in each subsequent year. The Plan
may not be amended to increase materially the fee to be paid pursuant to the
Distribution Agreement without the approval of the shareholders of the Fund. The
Plan may be terminated at any time, and the Distribution Agreement may be
terminated at any time upon sixty days' notice, without penalty, by a vote of a
majority of the Fund's Independent Directors or by a vote of a majority of the
outstanding Shares. Any Sub-Distribution Agreement may be terminated in the same
manner at any time. The Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment (as defined
in the Investment Company Act).
As compensation for providing distribution and related administrative
services as described above, the Fund will pay ISI Group, on a monthly basis, an
annual fee, equal to 0.40% of the average daily net assets of the Shares. ISI
Group expects to allocate on a proportional basis 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 their 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.
18
<PAGE>
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 2000 1999 1998
--- ---- ---- ----
12b-1 Fee $239,248 $221,382 $208,693
For the last three fiscal years, the Fund's distributor received the
following commissions, and from such commissions, the distributor retained the
following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Received Retained Received Retained Received Retained
Sales Commissions $344,845 $0 $304,809 $0 $198,038 $0
</TABLE>
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, ICCC or ISI Group.
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.
19
<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, 2000, March 31, 1999 and March 31,
1998, 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, 2000, the
Fund held a 6.08% repurchase agreement issued by Goldman Sachs & Co. valued at
$4,912,000; a 6.05% repurchase agreement issued by J.P. Morgan Securities, Inc.
valued at $4,912,000; and a 6.00% repurchase agreement issued by Morgan Stanley
& Co. valued at $4,912,000. Goldman Sachs & Co., J.P. Morgan Securities, Inc.
and Morgan Stanley & Co. are "regular brokers or dealers" of the Fund.
CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund may issue Shares
of its capital stock with a par value of $.001 per Share.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and one class of
Shares. All Shares of the Fund regardless of class have equal rights with
respect to voting, except that with respect to any matter affecting the rights
of the holders of a particular series or class, the holders of each series will
vote separately. Any such series will be a separately managed portfolio and
shareholders of each series will have an undivided interest in the net assets of
that series. For tax purposes, the series will be treated as separate entities.
Generally, each class of Shares issued by a particular series will be identical
to every other class and expenses of the Fund (other than 12b-1 fees) are
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively will be voted on by the
holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and,
therefore, the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
The Fund's By-laws provide that any director of the Fund may be removed
by the shareholders by a vote of a majority of the votes entitled to be cast for
the election of Directors. A meeting to consider the removal of any Director or
Directors of the Fund will be called by the Secretary of the Fund upon the
written request of the holders of at least one-tenth of the outstanding Shares
of the Fund entitled to vote at such meeting.
There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The Fund's issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
20
<PAGE>
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 auditors.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives compensation from the Fund for its
services as may be agreed to upon from time to time by Bankers Trust and the
Fund. For the fiscal year ended March 31, 2000, Bankers Trust was paid $67,442
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, ICCC
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, 2000, ICCC received a fee of $68,536.
ICCC also provides accounting services to the Fund. As compensation for
these services, ICCC is entitled to receive an annual fee, calculated daily and
paid monthly, as shown below.
Average Net Assets Incremental Annual Accounting Fee
0 - $10,000,000 $25,000
$10,000,001 - $25,000,000 .080%
$25,000,001 - $50,000,000 .060%
$50,000,001 - $75,000,000 .040%
$75,000,001 - $100,000,000 .035%
$100,000,001 - $500,000,000 .017%
$500,000,001 - $1,000,000,000 .006%
over $1,000,000,000 .002%
In addition, the Fund will reimburse ICCC for the following
out-of-pocket expenses incurred in connection with ICCC'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, 2000, ICCC received fees of $55,995.
INDEPENDENT AUDITORS
The independent auditor for the Fund is Deloitte & Touche LLP, located
at Princeton Forrestal Village, 116-300 Village Boulevard, Princeton, New Jersey
08540. For the period ended March 31, 1993 and for the fiscal years ended March
31, 1994 through March 31, 1999, the annual financial statements of the Fund
were audited by PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore,
Maryland, 21201.
LEGAL MATTERS
Kramer Levin Naftalis & Frankel LLP serves as counsel to the Fund.
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 June 15, 2000.
As of such date, Directors and officers as a group owned less than 1%
of the Fund's total outstanding Shares.
21
<PAGE>
PERFORMANCE AND YIELD COMPUTATIONS
For purposes of quoting and comparing the performance of the Fund to
that of other open-end non-diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.
Total Return Calculation
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1-, 5- or 10-)
ERV = ending redeemable value at the end of the 1-, 5- or 10- year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1-, 5- or 10-year
periods.
Under the foregoing formula, the time periods used in advertising will
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
1-, 5- and 10-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, 2000 March 31, 2000 March 31, 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Ending Ending Average Ending Average
Redeemable Total Redeemable Annual Total Redeemable Annual Total
Value Return Value Return Value Return
----- ------ ----- ------ ----- ------
$1,017 1.67% $1,506 8.53% $1,450 5.29%
</TABLE>
22
<PAGE>
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges before
being invested in Shares). The Fund will, however, disclose the maximum sales
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Yield Calculations
The yield based on the 30-day period ended March 31, 2000 was 5.24%
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 2000 was 32% and in fiscal year 1999 was 173%.
23
<PAGE>
FINANCIAL STATEMENTS
The Fund furnishes shareholders with semi-annual and 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 financial statements for the Fund for the period ended March 31,
2000, are incorporated herein by reference to the Fund's Annual Report dated
March 31, 2000. The annual financial statements are audited by the Fund's
independent auditors.
24
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Bond Rating
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and principal and differs from the highest rated
issues only in small degree. Debt rated "A" has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Debt
rated "BB", has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating. Debt rated "B" has a greater vulnerability to
default but currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating. Debt rated "CCC" has a
currently identifiable vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely payment of interest
and repayment of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating. The rating
"CC" typically is applied to debt subordinated to senior debt that is assigned
an actual or implied "CCC" rating. The rating "C" typically is applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating
"CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The ratings from "AA" to "B" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
Moody's Bond Ratings
Bonds which are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other 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
A-1
<PAGE>
1, 2 and 3 in each generic rating classification from Aa to B in its
corporate bond rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
Standard & Poor's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by STANDARD
& POOR'S, which uses the numbers 1, 2 and 3 to indicate relative degree of
safety. The designation A-1+ indicates there is an "overwhelming degree" of
safety with regard to the capacity for timely payment. The designation A-1
indicates that the degree of safety regarding timely payment is strong. The
designation A-2 indicates the capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1. Issues carrying the A-3 designation have an
adequate capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated "B" are regarded as having only
speculative capacity for timely payment. The rating "C" is assigned to
short-term debt obligations with a doubtful capacity for repayment. An issue
rated "D" is in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
Moody's Commercial Paper Ratings
Issuers rated PRIME-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. PRIME-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
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-2
