ISI
INTERNATIONAL STRATEGY & INVESTMENT
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A CLASS OF NORTH AMERICAN GOVERNMENT BOND FUND, INC.)
[GRAPHIC NORTH AMERICAN LOGO OMITTED]
ANNUAL REPORT
MARCH 31, 2000
<PAGE>
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the fiscal year
ended March 31, 2000.
The Fund seeks a high level of current income consistent with prudent
investment risk by using U.S., Canadian and Mexican government fixed-income
securities. The Fund's cumulative total return for the fiscal year ended March
31, 2000 was +4.82%; +27.34% for three years and + 55.23% for five years. Please
see the portfolio management section for more details. Since its inception on
January 15, 1993 the Fund has had a cumulative total return of +49.44%.
PORTFOLIO MANAGEMENT
Our investment approach is to actively manage the portfolio, adjusting the
Fund's average portfolio weightings as ISI anticipates changes in the markets.
Please see table for changes to portfolio structure since our last report.
COUNTRY WEIGHTING
(% OF INVESTMENTS)
9/30/99 12/31/99 3/31/00
-------- -------- --------
U.S. 82.9% 81.7% 84.9%
Canada 4.5% 4.6% 7.4%
Mexico 12.6% 13.7% 7.7%
During the last year, U.S. Treasuries were emphasized, but with the recent
Treasury buyback rally, Canadian issues denominated in U.S. dollars have been
increased. U.S. dollar denominated Canadian issues now have yields of 75 Basis
Points (bp's) above similar maturity U.S. Treasuries. Also, due to the
extraordinary performance of Mexican peso denominated issues caused by a run of
favorable reports on the Mexican economy, the portfolio's weighting has recently
been temporarily reduced. The Fund continues to avoid Canadian issues
denominated in Canadian dollars because their yields are lower than U.S.
Treasuries.
A major development in the U.S. bond market during the fiscal year was the
change in the shape of the Treasury yield curve. Please see the chart below.
Over the last year intermediate Treasuries rose by 150 bp's while long maturity
issues rose by only 20 bp's. The Fund's investment in long term Treasury issues
was helped by this "inversion" in the yield curve. The Treasury has begun a
major repurchase program. ISI plans to use this program to move from long
Treasuries to long Canadian issues. Currently, the Fund has 40.2% of its
portfolio in Treasury buyback issues.
[line graph omitted]
plot points as follows:
3/31/99 3/31/00
3 mos. 4.47 5.886
6 mos. 4.522 6.14
1 year 4.705 6.239
2 years 4.975 6.483
5 years 5.1 6.32
10 years 5.231 6.015
30 years 5.621 5.837
1
<PAGE>
INVESTMENT ADVISOR'S REPORT (CONCLUDED)
The idea underlying the Fund is that the three North American Trading
partners will draw closer together. Trade has boomed since the passage of NAFTA,
and beneficial economic events have resulted. For example, the U.S. and Canada
both now enjoy Federal government surpluses and Mexican inflation has been cut
to 25% of its rate of a year ago. These events have helped fixed income
investors and we expect that more benefits lie ahead.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/S/SIGNATURE R. ALAN MEDAUGH
R. Alan Medaugh
President
April 12, 2000
2
<PAGE>
OUTLOOK FOR NORTH AMERICA
THE U.S. ECONOMY AND MARKET
OVERVIEW
The U.S. expansion has just set a longevity record. At the same time, the
quarterly growth rate is also setting a record. This is a very unusual
combination and presents an inflation risk. Inflation has moved up a bit from a
0.9% annual rate to a 1.7% annual rate but is still historically low. Three "new
economy" phenomena -- technology, competition and growing international trade,
are cited as holding inflation in check. The extent of this beneficial influence
has limits, especially due to shrinkage in the available labor pool.
OUTLOOK FOR INTEREST RATES
The Federal Reserve is acutely aware of this "too much good news" risk and
has raised its Federal Funds rate by 125 BP. So far, these tightening moves have
not slowed the real economy and have only very recently dampened the enthusiasm
for speculative stocks. ISI expects the Federal Reserve will stay on its
tightening course until the real economy slows. The general beneficial result of
this painful exercise should be lower interest rates by the end of the year.
OUTLOOK FOR U.S. TREASURIES
For Treasury investors, the strong economy has produced an added benefit.
The large budget surplus means the U.S. Treasury can buy back its older, higher
coupon issues. ISI sees the program extending at least through the end of 2001.
The market has discounted much of this but we think the program will continue
helping long Treasuries relative to other long bonds, at least over the next six
months.
THE MEXICAN ECONOMY AND MARKET
OVERVIEW
The Mexican economy has staged a major positive reversal of both growth and
inflation. International trade has long been the source of economic growth.
Domestic demand has finally become a positive factor. This second source of
growth is greatly needed because it indicates that the economy is broadening
out. Please see chart below.
[line graph omitted]
plot points as follows:
1/98 15.3
2/98 10.9
3/98 8.1
4/98 16.6
5/98 16.6
6/98 9.2
7/98 10.3
8/98 9.8
9/98 8.9
10/98 9.5
11/98 2.2
12/98 2.1
1/99 6.8
2/99 3.6
3/99 4.4
4/99 2.1
5/99 5.1
6/99 6
7/99 7.8
8/99 4.4
9/99 4.7
10/99 8.7
11/99 7.3
12/99 12.5
1/00 7.7
2/00 11.8
3/00 11.8
At the same time growth has accelerated, inflation has rolled over. Late in
1998, inflation peaked out at 2.5% per month. Since then, the monthly reports
have come in below 1%. A stable peso has helped inflation, and stronger oil
export prices have helped the peso. Careful fiscal and monetary policy have also
helped turn inflation lower. The outlook is for inflation to come in at 10% or
less for 2000.
3
<PAGE>
OUTLOOK FOR NORTH AMERICA (CONTINUED)
[line graph omitted] plot points as follows:
3/00 0.55
2/00 0.89
1/00 1.34
12/99 1
11/99 0.89
10/99 0.63
9/99 0.97
8/99 0.56
7/99 0.66
6/99 0.66
5/99 0.6
4/99 0.92
3/99 0.93
2/99 1.34
1/99 1.34
12/98 2.44
11/98 1.77
10/98 1.43
9/98 1.62
8/98 0.96
7/98 0.96
6/98 1.18
5/98 0.8
4/98 0.94
3/98 1.17
2/98 1.75
1/98 2.18
12/97 1.4
11/97 1.12
10/97 0.8
9/97 1.25
8/97 0.89
7/97 0.87
6/97 0.89
5/97 0.91
4/97 1.08
3/97 1.24
2/97 1.68
1/97 2.57
12/96 3.2
11/96 1.52
10/96 1.25
9/96 1.6
8/96 1.33
7/96 1.42
6/96 1.63
5/96 1.82
4/96 2.84
3/96 2.2
2/96 2.33
1/96 3.59
12/95 3.26
11/95 2.46
10/95 2.06
9/95 2.07
8/95 1.66
7/95 2.04
6/95 3.17
5/95 4.18
4/95 7.96
3/95 5.9
2/95 4.24
1/95 3.76
12/94 0.88
11/94 0.54
10/94 0.52
9/94 0.71
8/94 0.47
7/94 0.44
6/94 0.5
5/94 0.48
4/94 0.49
POLITICS
A once every six year presidential election is in its final campaign
stages. Mexico's presidential election comes at a time when the economy is in
singularly good shape. The economy favors the PRI, the ruling party, whose
Presidential candidate is Mr. Labastida. The ruling party is a pragmatic (some
would say opportunistic) "middle-of-the-road" party that has assumed many guises
in its 70+ years of dominance. Also helping Mr. Labastida is the lackluster
performance from Cuauhtemoc Cardenas, the maverick candidate of the
left-of-center coalition, the PRD party. So this campaign pits the
right-of-center PAN against the chameleon-like ruling party. The PAN's
candidate, Vicente Fox, emphasizes the shortfalls of the PRI government and its
thinking. He believes that Mexico needs to end the decades-old monopoly of the
PRI in order to ensure economic stability, democracy, job creation, and
opportunities for all. He claims that the country hasn't grown fast enough and
has a less equitable distribution of income. Mr. Fox has strong and persuasive
arguments against the evils of political monopoly, cronyism, corruption, and
representation without accountability. However, his focus on the PRI's past
economic mistakes may not resonate because of Mexico's recent stellar economic
performance. All this is summarized by Moody's recent upgrade of Mexican foreign
debt to an investment grade rating. The PRI is in good position to defend its
actions. The election is likely to be close, but result in a victory for Mr.
Labastida and the ruling party. From a social as well as investment point of
view, it will be of great importance to have the election results viewed as
fair.
THE MARKET
A good economy and slowing inflation are very important. The election is
likely to cause investors some discomfort prior to July. The real economic
picture should stay positive for 2000. The process of building an open political
process is still underway but has advanced enough to withstand a close election.
It should be noted that whether Mr. Labastida or Mr. Fox is elected, Economic
Policy is likely to stay on its present course. With interest rates around 16%
for one year and inflation likely to be around 10%, Mexican T-Bills seem a good
investment for the fund.
4
<PAGE>
OUTLOOK FOR NORTH AMERICA (CONCLUDED)
THE CANADIAN ECONOMY AND MARKET
OVERVIEW
The fundamental landscape in Canada remains one of firm growth momentum and
upward inflationary pressures. All indications are that the Canadian economy
started the year on a strong note. Real GDP rose 0.5% in January, and a 4%+ Q1
growth seems likely. Performance in the goods sector continues to impress, with
manufacturing output up 7.3% from year-ago levels. Commodity-based sectors of
the economy are also showing signs of life, with output in mining & oil up 5.1%
year over year. The consumer has been supported by the wealth effect due to
higher equity and home prices. According to last week's report, household net
worth rose 5.0% last year on the back of surprisingly strong gains in housing
assets. The advance in household wealth and low debt servicing costs has kept
the burden of rising debt relatively low. And even with the recent equity
retreat, the long rise in equity values should add to the momentum in wealth and
domestic demand. This story is very similar to that in the U.S. and extends into
the behavior of inflation.
Inflationary pressures seem surprisingly dormant. Finished-goods producer
prices, released recently, rose 0.7% in February and 2.5% year over year. So
far, the "new economy" factors of technology, competition and international
trade have held down consumer prices. On the wage front, average hourly earnings
held steady at 1.7% year over year in January, hardly a threatening growth rate.
Still, there seems little doubt that the risks to inflation are tilted to the
upside, For example, while the growth rate in worker earnings is benign, the
trend is pointing upward.
THE MARKET
The Bank of Canada has followed the U.S. Federal Reserve's lead on
increasing short rates to thwart the return of inflation. The bond market has
emphasized the idea that the Central Bank is ahead of the inflation curve. Long
rates are down 50 bp's so far this year. The rally has been similar to that of
the U.S. but Canada does not have a significant Treasury buy-back program. This
places the Canadian long bond rally on less firm ground than the U.S. ISI
expects a return to a positive yield spread between U.S. and Canadian yields. At
the end of March, the yield spread was negative by 10 bp's. In 2000, we expect
Canadian Government issues denominated in Canadian dollars will underperform
U.S. Treasuries and Canadian Governments denominated in U.S. dollars.
5
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception through
the most recent fiscal year-end and must reflect the impact of the Fund's total
expenses and its currently effective 3.0% maximum sales charge.
While this table is required by SEC rules, such comparisons are of limited
utility since the indices shown are not adjusted for sales charges and ongoing
management, distribution and operating expenses applicable to the Fund. An
investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate, an
investor's shares may be worth more or less than their original cost when
redeemed.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 3/31/00: Sales Charge 1
- --------------------------------------------------------------------------------
One Year 1.67%
- --------------------------------------------------------------------------------
Five Year 8.53%
Since Inception (1/15/93) 5.29%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
[line graph omitted]
plot points as follows:
1/93 9700 10000 10000 10000
3/93 9911 10186 10049 10322
3/94 10186 10425 10301 11097
3/95 9339 10867 10596 8616
3/96 10550 11856 10897 12590
3/97 11384 12407 11198 14940
3/98 13052 13573 11355 17910
3/99 13831 14470 11558 17818
3/00 14497 14842 11999 19997
ISI North American Governemnt Bond Fund
Lehman Brothers Intermediate Treasury Index
Consumer Price Index
Lehman Brothers Emerging Americas Index: Mexico Section
1 Assumes maximum sales charge of 3.0%.
2 Commencement of operations.
* These figures assume the reinvestment of dividends and capital gains
distributions and reflect the maximum sales charge. The indices listed above
are unmanaged and are widely recognized as indicators of performance in their
respective sectors. The Lehman Brothers Intermediate Treasury Index is a
performance indicator of the intermediate-term U.S. Treasury market, the CPI
is a general indicator of inflation and the Lehman Brothers Emerging Americas
Index: Mexico Section is an indicator of the interest rate structure of
Mexican government and private corporate debt. Management is not aware of any
single index that is truly representative of the Fund since the Fund's assets
are allocated across three different countries and each country's weighting is
periodically adjusted to reflect the advisor's outlook on current market
conditions. Past performance is not an indicator of future results.
6
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF NET ASSETS
MARCH 31, 2000
<TABLE>
<CAPTION>
INTEREST MATURITY PAR/NOMINAL MARKET
SECURITY RATE DATE VALUE 6 VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CANADIAN SECURITIES - 7.5%
Canadian Global Bond 6.750% 8/28/06 $ 4,750,000 $ 4,648,825
----------
TOTAL CANADIAN SECURITIES
(Cost $4,944,915) .......................................................... 4,648,825
----------
MEXICAN SECURITIES - 7.9%
Mexican Treasury Cete 1 15.34%3 7/13/00 P 841,403 869,533
Mexican Udibonos 2 6.000% 11/23/00 93,033 2,760,079
Mexican Udibonos 2 6.500% 5/24/01 42,196 1,258,253
----------
TOTAL MEXICAN SECURITIES
(Cost $4,090,839) .......................................................... 4,887,865
----------
U.S. SECURITIES - 63.1%
U.S. Treasury Bond 7.000% 7/15/06 $ 2,000,000 2,068,438
U.S. Treasury Bond 10.375% 11/15/12 4,500,000 5,542,735
U.S. Treasury Bond 8.875% 2/15/19 5,000,000 6,469,530
U.S. Treasury Bond 8.125% 8/15/19 8,550,000 10,394,928
U.S. Treasury Bond 7.875% 2/15/21 2,750,000 3,293,125
U.S. Treasury Bond 8.125% 8/15/21 1,700,000 2,090,735
U.S. Treasury STRIP 6.400% 5 2/15/05 3,000,000 2,207,661
U.S. Treasury STRIP 6.400% 5 8/15/05 6,000,000 4,278,408
U.S. Treasury STRIP 6.150% 5 5/15/17 7,250,000 2,570,937
----------
TOTAL U.S. SECURITIES
(Cost $40,884,445) ......................................................... 38,916,497
----------
REPURCHASE AGREEMENTS - 23.9%
GOLDMAN SACHS &CO., 6.08%
Dated 03/31/00, to be
repurchased on 04/03/00,
collateralized by U.S.
Treasury Bill with a par
value of $5,026,000, coupon
rate of 0%, due 04/18/00,
with a market value of $5,011,057
(Cost $4,912,000) 6.080% 4/3/00 $ 4,912,000 4,912,000
</TABLE>
7
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF NET ASSETS
MARCH 31, 2000
<TABLE>
<CAPTION>
INTEREST MATURITY PAR/NOMINAL MARKET
SECURITY RATE DATE VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J.P. MORGAN SECURITIES, INC., 6.05%
Dated 03/31/00, to be repurchased on
04/03/00, collateralized by U.S. Treasury
Note with a par value of $4,997,000,
coupon rate of 5.875%, due 11/15/04,
with a market value of $5,011,066
(Cost $4,912,000) 6.050% 4/3/00 $ 4,912,000 $ 4,912,000
MORGAN STANLEY &CO., 6.00%
Dated 03/31/2000, to be
repurchased on 04/03/00,
collateralized by U.S.
Treasury Bill with a par
value of $6,855,000,
coupon rate of 0%, due 02/15/05,
with a market value of $5,033,647
(Cost $4,912,000) 6.000% 4/3/00 4,912,000 4,912,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $14,736,000) ......................................................... 14,736,000
----------
TOTAL INVESTMENTS -- 102.4%
(Cost $64,656,199)4 ........................................................ 63,189,187
----------
LIABILITIES IN EXCESS OF OTHER ASSETS-- (2.4%) ................................... (1,491,887)
----------
NET ASSETS -- 100.0% ............................................................. $61,697,300
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($61,697,300 (DIVIDE) 7,648,554 shares outstanding) ........................... $8.07
=====
OFFERING PRICE PER SHARE
($8.07 (DIVIDE) .970) ......................................................... $8.32
=====
- --------------------------------------------------------------------------------
<FN>
1 Cetes are short-term Mexican government debt securities.
2 Udibonos are securities issued by the Mexican Government and are redeemed at
face value at maturity. Face value is adjusted for changes in the Mexican
ConsumerPriceIndex. Theinterest rate is fixed and payable every 182 days.
3 Yield as of March 31, 2000.
4 Also aggregate cost for federal tax purposes.
5 Zero Coupon, Security Yield as of March 31, 2000.
6 Par value is shown in local currency: Mexican pesos (P) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
8
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
Interest ...................................................................... $4,086,438
----------
EXPENSES:
Investment advisory fee ....................................................... 239,248
Distribution fee .............................................................. 239,248
Administration fee ............................................................ 68,536
Custodian fees ................................................................ 67,442
Transfer agent fee ............................................................ 66,196
Accounting fee ................................................................ 55,995
Professional fee .............................................................. 46,608
Printing and postage .......................................................... 33,798
Director's fees ............................................................... 2,939
Miscellaneous ................................................................. 24,760
----------
Total expenses ............................................................. 844,770
Less: Fees waived ............................................................. (96,671)
----------
Net expenses ............................................................... 748,099
----------
Net investment income ......................................................... 3,338,339
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions .................................. (502,454)
Net realized gain from foreign currency transactions .......................... 262,431
Change in unrealized appreciation/depreciation of investments ................. (244,681)
Change in unrealized appreciation/depreciation on translation
of other assets and liabilities denominated in foreign currencies ........... 855
----------
Net realized and unrealized loss on investments ............................... (483,849)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $2,854,490
==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
9
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income $ 3,338,339 $ 3,202,208
Net realized gain (loss) from investments and
foreign currency transactions (240,023) 1,406,544
Change in unrealized appreciation/depreciation
of investments (244,681) (1,424,417)
Change in net unrealized appreciation/
depreciation on translation of other assets and
liabilities denominated in foreign currencies 855 (1,266)
------------ -----------
Net increase in net assets resulting
from operations 2,854,490 3,183,069
------------ -----------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,338,339) (3,202,208)
Return of Capital (1,722,666) --
Short-term capital gains (261,956) (552,530)
Long-term capital gains -- (1,533,918)
------------ -----------
Total distributions (5,322,961) (5,288,656)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 2,445,221 and 1,527,556
shares, respectively 19,725,696 13,255,729
Value of 284,345 and 224,638 shares issued in
reinvestment of dividends, respectively 2,275,602 1,948,979
Cost of 1,717,373 and 1,065,714 shares
repurchased, respectively (13,726,104) (9,226,947)
------------ -----------
Increase in net assets derived from
capital share transactions 8,275,194 5,977,761
------------ -----------
Total increase in net assets 5,806,723 3,872,174
NET ASSETS:
Beginning of year 55,890,577 52,018,403
------------ -----------
End of year $ 61,697,300 $55,890,577
============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
10
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
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 capital gains (0.49) (0.60) (0.67) (0.26) --
Distribution in excess of net investment
income -- -- (0.05) -- --
Distribution from long-term capital 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 year (000) $61,697 $55,891 $52,018 $51,966 $60,860
Portfolio turnover rate 32% 173% 125% 46% 125%
<FN>
- --------------------------------------------------------------------------------
1Total return excludes the effect of sales charges.
2Without the waiver of advisory fees (Note B), 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 (Note B), 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.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES -- North American Government Bond Fund,
Inc. ("the Fund"), which was organized as a Maryland Corporation on October
19, 1992, began operations January 15, 1993. The Fund is registered under
the Investment Company Act of 1940 as a diversified, open-end Investment
Management Company. It is designed to provide a high level of current
income, consistent with prudent investment risk, by investing primarily in
a portfolio consisting of fixed-income securities issued or guaranteed by
the governments of the United States, Canada and Mexico.
The Fund consists of one share class, the ISI Shares, which are subject to
a 3.00% maximum front-end sales charge and a 0.40% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the
date of the financial statements; 2) the contingent assets and liabilities
that we disclose at the date of the financial statements; and 3) the income
and expenses that we report for the period. Our estimates could be
different from the actual results. The Fund's significant accounting
policies are:
SECURITY VALUATION -- Debt securities are generally traded in the
over-the-counter market. When there is an available market quotation, the
Fund values a debt security by using the most recent price provided by an
investment dealer. The Fund may also value a debt security by using a price
from an independent pricing service that the Investment Advisor has
determined reflects the obligation's fair market value. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less at
amortized cost.
FOREIGN SECURITIES -- Beyond the risks common to all Bond investing, an
investment in the Fund could also lose money or underperform alternative
investments as a result of risks in the foreign countries in which the Fund
invests: adverse political, economic or social developments could undermine
the value of the Fund's investments or prevent the Fund from realizing
their full value; accounting and financial reporting standards differ from
those in the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies; or the currency of a
country in which the Fund invests may decrease in value relative to the
U.S. dollar, which could affect the value of the investment to U.S.
investors.
REPURCHASE AGREEMENTS -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement
is a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
FOREIGN CURRENCY TRANSACTION AND TRANSLATION -- The Fund separates realized
gains or losses resulting from foreign exchange rate changes and realized
gains or losses resulting from market price changes.
Net realized foreign exchange rate gains or losses occur due to 1) sales of
portfolio securities; 2) sales and maturities of short-term securities; 3)
sales of foreign currencies; 4) currency gains or losses realized between
the trade and settlement dates on securities transactions; and 5)
differences between interest recorded on the
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund's books and the U.S. dollar equivalent of interest that the Fund
actually receives or pays.
The Fund does not separate its unrealized appreciation or depreciation
resulting from foreign exchange rate changes and its unrealized
appreciation or depreciation resulting from market price changes.
FEDERAL INCOME TAX -- The Fund is organized as a regulated investment
company. As long as it maintains this status and distributes to its
shareholders substantially all of its taxable net investment income and net
realized capital gains, it will be exempt from most, if not all, federal
income and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
The Fund determines its distributions according to income tax regulations,
which may be different from generally accepted accounting principles. As a
result, the Fund occasionally makes reclassifications within its capital
accounts to reflect income and gains that are available for distribution
under income tax regulations.
SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Income and
expenses are recorded on an accrual basis. Income includes scientific
amortization of premiums and accretion of discounts when appropriate.
Dividend distributions to shareholders are recorded on the ex-dividend
date.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES --
International Strategy and Investment Inc. ("ISI") is the Fund's investment
advisor. As compensation for its advisory services, the Fund pays ISI an
annual fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the annual rate of 0.40%. ISI has
agreed to waive a portion of its fee and reimburse expenses so that the
Fund's total operating expenses for any fiscal year do not exceed 1.25% of
the Fund's average daily net assets. For the year ended March 31, 2000, the
Fund paid ISI $142,577 (net of fee waivers of $96,671) of which $20,843 was
payable at the end of the period.
Investment Company Capital Corp. ("ICCC") is the Fund's administrator. As
compensation for its administrative services, the Fund pays ICCC an annual
fee based on the combined average daily net assets of the ISIFunds. This
fee is calculated daily and paid monthly at the following annual rates:
0.20% of the first $75 million, 0.15% of the next $75 million, 0.10% of the
next $75 million, 0.05% of the next $275 million, and 0.03% of the amount
over $500 million. For the year ended March 31, 2000, ICCC's fee was
$68,536 of which $5,233 was payable at the end of the period.
Certain officers and directors of the Fund are also officers or directors
of ISI or ICCC.
ICCC also provides accounting services, to the Fund for which the Fund pays
ICCC an annual fee that is calculated daily and paid monthly based on the
Fund's average daily net assets. For the year ended March 31, 2000, ICCC's
fee was $55,995 of which $4,795 was payable at the end of the period.
ICCC also provides transfer agent services to the Fund for which the Fund
pays ICCC a per account fee that is calculated and paid monthly. For the
year ended March 31, 2000, ICCC's fee was $66,196, of which $14,360 was
payable at the end of the period. ISI Group, Inc., an affiliate of ISI,
provides distribution services to the Fund for which the Fund pays ISI
Group Inc., an annual fee that is calculated daily and paid monthly at an
annual rate equal to 0.40% of the Fund's average daily net
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
assets. For the year ended March 31, 2000, ISI Group's fee was $239,248, of
which $20,843 was payable at the end of the period.
C. CAPITAL SHARE TRANSACTIONS -- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
D. INVESTMENT TRANSACTIONS -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $15,547,810 and
sales of investment securities aggregated $7,601,273 for the year ended
March 31, 2000. Purchases of U.S. government obligations aggregated
$5,090,527 and sales of U.S. government obligations aggregated $6,093,259
for the period.
At March 31, 2000, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $930,650
and aggregate gross unrealized depreciation of all securities in which
there is an excess of tax cost over value was $2,397,662.
E. FORWARD CURRENCY EXCHANGE CONTRACTS -- Forward currency exchange contracts
carry certain risks. These risks include the counterparties' possible
inability to meet the contract terms and the movements in currency values.
There were no outstanding contracts as of March 31, 2000.
F. NET ASSETS -- On March 31, 2000, net assets consisted of
Paid-in capital $63,661,323
Accumulated net realized loss
from security and foreign
currency transactions (502,454)
Undistributed net investment
income 5,443
Unrealized depreciation of
investments (1,467,012)
-----------
$61,697,300
===========
FEDERAL INCOME TAX INFORMATION -- At March 31, 2000, there was a capital
loss carryforward of $78,105, which expires in 2008. This carryforward will
be used to offset future net capital gains, if any. In addition, the Fund
has deferred post-October capital losses of $424,349 to next year.
G. CHANGE IN INDEPENDENT AUDITORS (UNAUDITED) -- On December 15, 1999, the
Audit and Compliance Committee and the Board of Directors of the Fund
participated in and approved the decision to change the Fund's independent
auditors from PricewaterhouseCoopers LLP to Deloitte & Touche LLP for the
Fund's fiscal year ended March 31, 2000.
The reports of PricewaterhouseCoopers LLP on the financial statements of
the Fund for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. In connection with the Fund's audits
for the two most recent fiscal years and through December 15, 1999, there
were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such
years.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of North American Government
Bond Fund, Inc.
We have audited the accompanying statement of net assets of North American
Government Bond Fund, Inc. (the "Fund) as of March 31, 2000 and the related
statements of operations, changes in net assets and financial highlights for the
year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial statements of North American Government Bond Fund, Inc. for
the year ended March 31, 1999 were audited by other auditors whose report, dated
April 30, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
North American Government Bond Fund, Inc. as of March 31, 2000, the results of
its operations, changes in its net assets, and the financial highlights for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America. DELOITTE & TOUCHE LLP Princeton, New Jersey
April 27, 2000
TAX INFORMATION
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED MARCH 31, 2000
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements of the Net
Investment Income distributions made during the year ended March 31, 2000,
51.10% has been derived from investments in U.S. Government and Agency
Obligations.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
15
<PAGE>
ISI
NORTH AMERICAN
GOVERNMENT BOND FUND SHARES
DIRECTORS AND OFFICERS
Edward S. Hyman
CHAIRMAN
Joseph R. Hardiman
DIRECTOR
Louis E. Levy
DIRECTOR
Carl W. Vogt, Esq.
DIRECTOR
R. Alan Medaugh
PRESIDENT
Nancy Lazar
VICE PRESIDENT
Edward J. Veilleux
VICE PRESIDENT
Carrie L. Butler
VICE PRESIDENT
Felicia A. Emry
SECRETARY
Amy M. Olmert
ASSISTANT SECRETARY
Daniel O. Hirsch
ASSISTANT SECRETARY
Margaret M. Beeler
ASSISTANT VICE PRESIDENT
Keith C. Reilly
ASSISTANT VICE PRESIDENT
Suzanne H. Ughetta
ASSISTANT VICE PRESIDENT
Charles A. Rizzo
TREASURER
INVESTMENT OBJECTIVE
An open-end mutual fund designed to provide a high level of current income,
consistent with prudent investment risk, by investing primarily in a portfolio
consisting of fixed-income securities issued or guaranteed by the governments of
the United States, Canada and Mexico.
INVESTMENT ADVISOR
ISI Inc.
535 Madison Avenue, 30th Floor
New York, NY 10022
(800) 955-7175
SHAREHOLDER SERVICING AGENT
Investment Company Capital Corp.
P.O. Box 219426
Kansas City, MO 64141-6426
(800) 882-8585
DISTRIBUTOR
ISI Group, Inc.
535 Madison Avenue, 30th Floor
New York, NY 10022
(800) 955-7175
