Dear Shareholder,
October 31, 1997 marked the end of S.I.S. Mercator Fund's second
year of operation. This was a year of contrasts, with sharp changes
in fortune for both equities and bonds through the year.
This was also a year of change for the Fund itself. The name
Mercator was contested by an investment management group with
a similar name. While the Fund's managers believe the Fund has a
rightful claim to the name, they did not wish to incur the additional
costs required to defend this position in court.
After investigation and discussion with legal counsel, it has been
decided to change the name of the Fund. While the name is being
changed, the management of the Fund will continue as before,
with the aim of providing a relatively low risk vehicle through
which to invest in world markets.
The performance of the two Portfolios is shown on page 4, both as
a percentage return and showing the return that would have been
received on a notional $100,000 investment. These returns are
shown in comparison with the leading, relevant, global indices.
For The Global Equity Portfolio (GEP) this is the Morgan Stanley
Capital International World Index, although this is not entirely
apposite since the Portfolio has generally adopted a more cautious
stance, and for The Global Income Portfolio (GIP) it is the
Salomon Brothers' World Government Bond Index.
For part of the year, the bond and equity markets were highly
synchronized, at other times they went their separate ways. The
background and highlights of each market are dealt with
separately below.
The Income Portfolio.
From the vantage point of a US investor, world bond markets were
subjected to considerable competing forces through the latest
fiscal year. Bonds in Europe and Japan generally benefited from
the weak economic news and continued low inflation, but then
lost out in dollar terms as the currencies depreciated against the
dollar. Later in the year, foreign currencies managed to recover a
little ground, but by then the stronger economic news was
unsettling the bond markets. However, bonds were able to hold
onto the majority of the market gains as inflation rates remained
extremely low. Late in the period, there was also the effect of the
crisis in S.E. Asia, which for bonds proved to be beneficial. The main
influence was still to come after the end of the 1997 fiscal year.
US bonds struggled early in the year due to the strength of the US
economy. The economy remained strong throughout the year, but
the strength of the dollar also resulted in exceptionally good
inflation numbers. In the end it was these inflation statistics that
carried the day and produced a favorable outcome for the US
bond market.
One of the more remarkable developments over the year was the
virtual elimination of the US Federal deficit. The outcome was
much better than had been expected, and much better than most
other countries in the world. The only other countries showing
similar dramatic improvement were Canada and Australia,
although the UK also made substantial progress in reducing its
budget deficit. We, therefore, had the unusual situation of the
English speaking countries leading the way in fiscal rectitude,
while many of their previous, hard-money, critics struggled to
bring large deficits under control.
In addition, it means that the UK is one of the few European
countries that easily meets the fiscal criteria for joining the EMU.
The irony being, of course, that the UK is not planning to join the
single currency - at least not in this century. While national pride
has won the battle, victory has gone to the continental Europeans
who will benefit from a more efficient means of payment.
The UK economy performed much better than the major
economies on the continent. This relative strength, and the
monetary authorities hard line on inflation, resulted in higher
short-term interest rates in the UK. Germany led most of Europe
into a small increase in the Fall, but rates remain far below those
in the UK. As a result, faster expansion is expected on the
continent in 1998, while growth should slow to some extent in the
UK.
The Income Portfolio was overweight in Canadian Bonds in 1997
through to the summer, both in terms of portfolio weight and
duration. This picked up the strong outperformance of the
Canadian bond market over this period. However, by the summer,
it had become clear that Canada was experiencing a strong
recovery and that the pace was accelerating, as a result the
overweight position was cut back sharply.
Signs of improving economic conditions in Europe also resulted in
cutting back weightings and duration late in the year. Reported
results through the year showed US strength and European
weakness, but the forecasts pointed towards at least some reversal
of this relative performance. And changes at the margin can make
a big difference to market movements. As a result, the fiscal year
ended with long duration bonds concentrated in US Treasuries.
Japanese bonds offered very low yields, for good reason, and had
little attraction within a global portfolio. Yields of 1.5% provide
little room for further price appreciation, and a meager income. As
a result, the Portfolio held no Japanese bonds over this period, and
picked up relative performance as a result. A similar, but less
extreme argument was applicable to Swiss bonds.
Over the latest fiscal year the Income Portfolio returned 4.2%. The
total return on the Salomon Brothers World Government Bond
Index was 2.6% for the same period. This was, therefore, the
second year in which the Portfolio outperformed the World Index
by adopting a relatively cautious stance.
The Equity Portfolio.
The managers also adopted a cautious stance in the Equity
Portfolio, which, in this case, resulted in relative
underperformance. The Equity Portfolio retuned 13.6% over the
fiscal year, compared with 16.8% on the Morgan Stanley Capital
International Index.
The market conditions described above, provided a favorable
background for stocks in the US and Europe. Japan, however, was
left behind. After a strong start to the year, the decision to raise
taxes in April sapped all strength out of the economy. The net
result was far more devastating than would normally be expected,
with consumers giving paramount importance to this one event in
making purchasing decision.
The Japanese government made no allowance for consumer or
investor confidence when it came to making economic policy. As
a result, they caused what limited liquidity there had been to dry
up totally. It was this loss of confidence/liquidity that, more than
anything undermined the Japanese stock market.
Early in the year, Japanese stocks had turned in a relatively strong
performance, but this did not survive the April tax increase. From
that point, the performance deteriorated steadily, with each
apparent turn for the better ending up in another dead end.
Confidence was further hit by the effect of asset deflation and
sub-normal growth on the financial system, compounded by
revelations of gangster payoffs.
With the market staggering under the weight of all this bad news,
the S.E. Asian crisis came along to add even more pressure. What
started as a necessary market adjustment in Thailand, ended up
devastating the Korean markets and currency. Before reaching
that destination, the virus jumped from country to country testing
for inherent weakness. Malaysia and Indonesia fell under its
influence. Hong Kong was battered but survived the onslaught.
However, when it came to the turn of South Korea it was found
that the apparently strong defences were made of sand, and
crumbled away.
These effects extended beyond the end of the Fund's fiscal year,
causing great uncertainty in all world markets. Adjustments are
taking place, opening up markets that previously had been closed,
and this will greatly improve investment opportunities in the
future. In the near term, however, there are still difficulties to be
overcome.
European stocks generally did very well in 1997, but gave up part
of their gains in dollar terms because of the strength of the dollar
in the first half of the year. The Portfolio was close to the MSCI
weighting in Europe through this period, but with variations
within the countries.
The main deviation from a neutral weighting was the gradual,
defensive buildup in short-term assets. In addition, the Portfolio
held no stocks in the emerging markets of S.E. Asia. As a result,
risks were held under control, but exposure to Japan and larger
than normal cash holdings held down the return for the year.
Separating out the US equity portion of the Portfolio shows a
return of 28% over the year. The return on the international
portion on its own was 7% - above the EAFA Index return of
4.5%.
Long-term results of managing this type of portfolio have
produced returns that exceed the MSCI World Index over the
1990's, while, at the same time, subject to significantly lower
volatility/risk than average. Looking forward to 1998 we intend to
maintain a low risk, low volatility approach that should over the
long run provide above-average returns. This seems justified in an
environment in which the risks have increased substantially.
Sincerely,
Richard T. Coghlan
President and Chairman
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
COMMON STOCKS (77.3%)
SHARES U.S $ VALUE
NORTH AMERICA (40.7%)
United States (34.3%)
Adobe Systems Inc. 8,800 $420,200
Airtouch Communications Inc. (a) 10,800 417,150
AMR Corp. 5,650 657,872
Boeing 5,400 259,200
C-Cube Microsystem (a) 11,000 261,250
Compaq Computers 4,800 307,200
EMC Corp. (a) 6,850 383,600
Englehard Corp. 14,900 258,887
General Motors Corp. 6,400 410,800
Genzyme Corp. 11,500 314,813
Hercules Inc. 5,600 256,900
Home Depot Inc. 11,610 647,257
Intel Corp. 6,400 492,800
International Business Machines Corp. 4,200 413,700
Johnson Controls Inc. 7,000 314,125
Micron Technology Inc. 10,000 268,750
Motorola Inc. 5,200 322,400
Newmont Mining Corp. 1,622 56,770
Oxford Health Plan 11,000 283,937
Philip Morris 7,000 277,375
Quaker Oats Co. 9,700 464,387
Read-Rite Corp. (a) 14,600 290,175
Sybase Inc. (a) 17,000 277,313
United Healthcare Corp. 9400 435,338
US West Media Group (a) 18,000 454,500
8,946,699
Canada (6.4%)
Barrick Gold Corp. 25,000 514,062
BCE Inc. 21,800 607,675
Canadian Pacific Ltd. 18,700 557,494
1,679,231
GLOBAL EQUITY PORTFOLIO
Portfolio of Investments - CONTINUED
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
SHARES U.S. $ VALUE
EUROPE (18.7%)
Switzerland (1.1%)
Grands Magazines Jemoli-Bearer 320 278,957
278,957
Germany (6.4%)
Deutsche Bank AG 5,000 326,900
Deutsche Lufthansa 21,500 375,094
Deutsche Telecom - ADR 16,500 320,719
Metro Holdings AG 8,640 379,593
Volkswagen AG 470 277,592
1,679,898
Finland (2.1%)
Nokia Corp. - Sponsored ADR-A 6,100 538,325
France (3.9%)
AXA-UAP 3,365 229,068
CIE Generale Des Eaux 994 115,727
Club Mediterranee 3,810 276,827
Lagardere Group 14,063 403,607
1,025,229
Italy (4.0%)
Credito Italiano Spa 270,000 722,423
Fiat Spa 99,000 313,927
1,036,350
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
SHARES U.S. $ VALUE
United Kingdom (1.2%)
Williams Holdings PLC 50,000 299,557
299,557
ASIA (17.9%)
Japan (14.8%)
Bank of Tokyo-Mitsubishi Ltd. 14,000 182,558
Fanuc 7,500 302,741
Honda Motor Corp. 12,000 403,654
Kajima Corp. 18,000 80,581
Kyocera 10,000 572,259
Matsushita Electronic Industrial Co. 30,000 503,322
Mitsubishi Heavy Industries 58,000 284,701
Nintendo Corp. 4,100 354,152
Nippon Steel 96,000 197,741
Nomura Securities Co. Ltd. 25,000 290,698
Sony Corp. 4,800 398,272
Toyota Motor Corp. 10,000 278,239
3,848,918
Australia (3.1%)
Broken Hill Properties 25,000 246,402
CSR Ltd. 84,600 293,024
Pacific Dunlop Ltd. 126,500 269,311
808,737
TOTAL COMMON STOCK (Cost: $14,829,411) 20,141,901
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
FIXED INCOME SECURITIES (4.6%)
Principal Amt. (b) U.S. $ Value
United States (3.0%)
Argentina Gov. Bond 9.25% due 02/23/2001 500,000 $495,000
Credit Lyonnais Corp. 6.72% due 9/19/2049 300,000 299,063
794,063
South Africa (1.6%)
Toyota Corp. 15.75% due 02/25/1998 2,000,000 411,241
TOTAL DEBT SECURITIES (Cost: $1,247,552) 1,205,304
SHORT-TERM INVESTMENTS (10.8%)
U.S. Treasury Bills 4.79% due 11/06/97 2,100,000 2,098,628
Highmark Money Market Fund 204,046 204,046
Banco Rio Corp. 6.19% due 08/10/98 500,000 500,000
TOTAL SHORT-TERM INVESTMENT (Cost $2,802,674) 2,802,674
TOTAL INVESTMENT IN SECURITIES (Cost: $15,879,637) (Notes 2A
and 3) (92.7%) 24,149,879
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-NET (7.3%) 1,905,641
TOTAL NET ASSETS (100.0%) $26,055,520
(a) non-income producing security
(b) in local currency
GLOBAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
FIXED INCOME SECURITIES (80.1%)
Principal U.S.$ Value
Amt. (a)
NORTH AMERICA (62.9%)
United States (62.9%)
Credit Lyonnais 6.72% due 09/19/2049 400,000 $398,750
PDV America Inc. 7.25% due 08/01/1998 100,000 100,500
Republic of Argentina Bond 9.25% due 02/23/2001 600,000 594,000
Republic of Italy Bond 6.875% due 09/27/2023 500,000 503,271
US Treasury Bond 5.625% due 02/15/2006 500,000 490,781
US Treasury Bond 8.0% due 11/15/2021 500,000 608,828
US Treasury Bond 7.5% due 11/15/2024 300,000 349,687
US Treasury Bond 7.625% due 02/15/2025 300,000 354,937
US Treasury Bond 6.75% due 08/15/2026 500,000 536,875
US Treasury Note 8.00% due 08/15/1999 1,800,000 1,871,156
US Treasury Note 7.75% due 02/15/2001 400,000 423,875
US Treasury Note 8.0% due 05/15/2001 550,000 589,360
YPF Corp 8.0% due 02/15/2004 350,000 352,954
7,174,974
EUROPE (11.6%)
European CC (7.7%)
Council of Europe Bond 6.75% due 05/11/2004 300,000 363,143
United Kingdom Bond 9.125% due 02/21/2001 400,000 511,846
874,989
Italy (3.9%)
Republic of Italy Bond 9.5% due 12/01/1997 750,000,000 441,020
GLOBAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
Shares/ U.S.$ Value
Principal Amt.
OTHER COUNTRIES (5.6%)
Australia (2.0%)
First Australia Prime Income Fund 28,000 $227,500
South Africa (3.6%)
Toyota Motor Corp. 15.75% due 02/25/1998 2,000,000 411,241
TOTAL DEBT SECURITIES (Cost: $8,622,641) 9,129,724
COMMON STOCKS (3.8%)
BCE Inc. 10,000 278,750
Southern CO. 7,500 172,031
TOTAL COMMON STOCK (Cost: $338,525) 450,781
SHORT-TERM INVESTMENTS (9.0%)
U.S. Treasury Bills 4.76% due 11/06/1997 450,000 449,708
Highmark Money Market Fund 275,642 275,642
Banco Rio Corp 6.19% due 08/10/1998 300,000 300,000
TOTAL SHORT-TERM INVESTMENTS (Cost: $1,025,350) 1,025,350
TOTAL INVESTMENT IN SECURITIES (Cost: $9,986,516) (Notes 2A
and 3) (92.9%) 10,605,855
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-NET (7.1%) 804,878
TOTAL NET ASSETS (100.0%) $11,410,733
(a) in local currency
See notes to financial statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
Global Equity Global Income
Portfolio Portfolio
ASSETS
Investment in securities, at value
(identified cost $18,879,637 and
$9,986,516 respectively) (Notes 1 and 2A) $24,149,879 $10,605,855
Cash (including foreign currencies) 808,317 571,802
Receivables:
Interest and dividends 100,202 237,908
Investment securities sold 1,515,054 -
Tax reclaims - -
Prepaid expenses 2,683 1,341
Deferred organization expenses (Note 2G) 18,903 18,903
Total assets 26,595,038 11,435,809
LIABILITIES
Payable for securities purchased 482,190 -
Accrued expenses 57,328 25,076
Total liabilities 539,518 25,076
NET ASSETS (Note 4) $26,055,520 $11,410,733
Shares outstanding 2,291,581 1,211,611
Net asset value, offering and redemption
price per share $11.37 $9.42
At October 31, 1997, the components of
net assets were as follows:
Paid-in capital $20,741,480 $10,769,383
Unrealized appreciation of investments
and translation of foreign currency
denominated assets and liabilities 5,314,040 641,350
$26,055,520 $11,410,733
See notes to financial statements
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
GLOBAL EQUITY GLOBAL INCOME
PORTFOLIO PORTFOLIO
INVESTMENT INCOME
INCOME
Interest $260,277 $793,765
Dividends (net of foreign taxes withheld
of $26,622 and $1,378 respectively 271,830 43,905
Total income 532,107 837,670
EXPENSES
Investment management fees (Note 5) 250,734 106,170
Distribution expenses (Note 6) 5,210 708
Shareholder servicing fees (Note 6) 69,650 29,492
Administration (Note 5), accounting
and transfer agent 95,491 45,044
Professional fees 21,785 11,797
Custody fees 20,475 310
Amortization of organization expenses 6,190 6,190
Directors' fees and expenses 2,564 795
Other operating expenses 3,168 2,047
Total expenses 475,267 202,553
Net investment income 56,840 635,117
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain from investments 1,996,918 300,742
Net realized gain <loss> from foreign
currency transactions (76,360) (83,372)
Net change in unrealized appreciation
of investments 1,577,025 (384,621)
Net change in unrealized
appreciation/depreciation of foreign
currency denominated assets and liabilities 59,734 (3,241)
Net gain <loss> on investments and foreign
currency denominated asset and liabilities 3,557,317 (170,492)
Net increase in net assets resulting
from operations $3,614,157 $464,625
See notes to financial statments
GLOBAL EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
S.I.S. MERCATOR FUND, INC.
Year ended November 8 1995*
October 31, 1997 to October 31, 1996
OPERATIONS
Net investment income $56,840 $108,299
Net realized gain on investments
and foreign currency transactions 1,920,558 2,099,673
Net change in unrealized appreciation
of investments and foreign currency
denominated assets and liabilities 1,636,759 97,013
Net increase in net assets resulting
from operations 3,614,157 2,304,985
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment
income ($0.04 and $0.07 per share,
respectively) (103,025) (164,442)
Distribution from realized gains
($0.84 per share) (1,931,165) -
CAPITAL SHARE TRANSACTION
Net increase (decrease) in net assets
from capital share transactions (a) (1,661,764) 23,896,774
Net increase (decrease) in net assets (81,797) 26,037,317
Net assets at the beginning of
the period 26,137,317 100,000
Net assets at the end of the period
(including undistributed net
investment income of $-0- and
$103,025 respectively) $26,055,520 $26,137,317
(a) A summary of capital share transactions is as follows:
Year ended November 8,1995*
October 31, 1997 to October 31, 1996
Shares Value Shares Value
Shares sold 46,525 $514,080 241,065 $2,541,747
Shares issued in tax-free
reorganization (Note 1 - - 2,555,558 25,555,585
Shares issued in reinvestment of
distributions to shareholders 182,905 2,034,170 16,023 164,442
229,430 2,548,250 2,812,646 28,261,774
Shares redeemed (353,430) (4,210,014) (407,065) (4,365,000)
Net increase (decrease) (124,000)($1,661,764) 2,405,581 $23,896,774
*Commencement of operations
See notes to financial statements
GLOBAL INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
S.I.S. MERCATOR FUND, INC.
Year ended November 8 1995*
October 31, 1997 to October 31, 1996
OPERATIONS
Net investment income $635,117 $609,044
Net realized gain on investments
and foreign currency transactions 217,370 355,025
Net change in unrealized appreciation
of investments and foreign currency
denominated assets and liabilities (387,862) (9,170)
Net increase in net assets resulting
from operations 464,625 954,899
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment
income ($0.90 and $0.28 per share,
respectively) (1,071,807) (356,834)
Distributions from realized gains
($0.57 per share) (676,413) -
CAPITAL SHARE TRANSACTION
Net increase (decrease) in net assets
from capital share transactions (a) (175,271) 12,221,534
Net increase (decrease) in net assets (1,458,866) 12,819,599
Net assets at the beginning of the
period 12,869,599 50,000
Net assets at the end of the period
(including undistributed net
investment income of $-0- and
$513,872 respectively) $11,410,733 $12,869,599
(a) A summary of capital share transactions is as follows:
Year ended November 8, 1995* to
October 31, 1997 October 31, 1996
Shares Value Shares Value
Shares sold - - 30,672 $300,000
Shares issued in tax-free
reorganization (Note 1) - - 1,298,970 12,989,700
Shares issued in reinvestment
of distributions to
shareholders 180,658 1,748,229 35,740 356,834
180,658 1,748,229 1,365,382 13,646,534
Shares redeemed (197,017)(1,923,500) (142,412) (1,425,000)
Net increase (decrease) (16,359) $(175,271) 1,222,970 $12,221,534
*Commencement of operations
See notes to financial statements
GLOBAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
S.I.S. MERCATOR FUND, INC.
Year ended November 8, 1995+ to
October 31, 1997 October 31, 1996
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.82 $10.00
Net income from investment operations
Net investment income 0.02 0.05
Net realized and unrealized gain
on investments and foreign
currency transactions 1.41 0.84
Total from investment operations 1.43 0.89
Less distributions
Distributions from net investment income (0.04) (0.07)
Distributions from realized gains (0.84) -
Total distributions (0.88) (0.07)
Net asset value, end of period $11.37 $10.82
TOTAL RETURN 13.57% 8.89% *
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $26,056 $26,137
Ratio to average net assets
Expenses 1.71% 1.82% **
Net investment income 0.20% 0.40%**
Portfolio turnover rate 25% 42%
Average commission rate paid $0.0544 $0.0317
+ Commencement of operations
* Total return has not been annualized
** Annualized
See notes to financial statements
GLOBAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
S.I.S. MERCATOR FUND, INC.
Year ended November 8, 1995+ to
October 31, 1997 October 31, 1996
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.48 $10.00
Net income from investment operations
Net investment income 0.47 0.50
Net realized and unrealized gain
<loss> on investments and
foreign currency transactions (0.06) 0.26
Total from investment operations (0.41) 0.76
Less distributions
Distributions from net
investment income (0.90) (0.28)
Distributions from net realized gains (0.57) -
Total distributions (1.47) (0.28)
Net asset value, end of period $9.42 $10.48
TOTAL RETURN 4.19% 7.79% *
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in thousands) $11,411 $12,870
Ratio to average net assets
Expenses 1.72% 1.84% **
Net investment income 5.39% 4.88% **
Portfolio turnover rate 22% 29%
Average commission rate paid n/a n/a
+ Commencement of operations
* Total return has not been annualized
** Annualized
See notes to financial statments
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
S.I.S. MERCATOR FUND, INC.
(1) ORGANIZATION
S.I.S. MERCATOR FUND, INC. (FORMERLY
NAVIGATOR FUND, INC.) (THE "Fund"), is registered
under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company
and is authorized to issue shares in separate series. The Fund
currently offers shares in two diversified series, the Global Equity
Portfolio and the Global Income Portfolio (the "Portfolios").
The Fund was incorporated on July 6, 1995, and between that date
and November 8, 1995 the Fund had no operations other than
those relating to organizational matters and the registration of its
shares under applicable securities laws. On November 8, 1995 the
Fund sold 10,000 shares of the Global Equity Portfolio for
$100,000 and 5,000 shares of the Global Income Portfolio for
$50,000 to an Officer and Director of the Fund and principal
shareholder of East Coast Consultants, Inc. ("East Coast"), the
Fund's principal underwriter, and Strategic Investment Services,
Inc. ("Strategic"), the Fund's investment advisor.
On November 10, 1995, 2,555,558 shares of the Global Equity
Portfolio, having a value of $25,555,585, were issued to a
partnership in an exchange which qualified as a tax-free
reorganization under the Internal Revenue Code. The net assets of
the partnership, consisting principally of marketable securities,
were $25,555,585, including unrealized appreciation of
investments and translation of assets and liabilities denominated in
foreign currencies of $3,580,267 and undistributed net investment
income of $145,866.
On November 10, 1995, 1,298,970 shares of the Global Income
Portfolio, having a value of $12,989,700, were issued to a
foundation in an exchange which qualified as a tax-free
reorganization under the Internal Revenue Code. The net assets of
the foundation, consisting principally of marketable securities,
were $12,989,700, including unrealized appreciation of
investments and translation of assets and liabilities denominated in
foreign currencies of $1,038,381 and undistributed net investment
income of $276,228.
(2) Significant Accounting Policies
The Global Equity Portfolio's investment objective is to achieve a
high rate of return, with emphasis on capital appreciation, by
investing principally in equity securities of companies located
anywhere in the world, but predominately in the developed
countries. The Global Income Portfolio's investment objective is
to achieve a relatively stable rate of total return with emphasis on
yield, by investing principally in fixed income securities and, to a
lesser extent, in equity securities of high quality companies
located predominately in the developed countries with, at most,
very limited exposure to less developed countries. The price of
each Portfolio's shares will fluctuate daily and there can be no
assurance that the Portfolios will be successful in achieving their
stated investment objectives.
The following is a summary of the significant accounting policies
followed by the Portfolios in the preparation of their financial
statements. These policies are in accordance with generally
accepted accounting principles.
A. Security Valuation. The securities held by the Portfolios are
valued as of the close of the New York Stock Exchange (the
"NYSE"). Listed securities are valued at the last quoted sales price
on the exchange were the security is principally traded. Securities
listed on foreign exchanges are valued at the latest quoted market
price available prior to the close of the NYSE. Debt securities
may be valued on the basis of prices provided by a pricing service
using methods approved by the Fund's Board of Directors. Other
assets and securities for which no quotations are readily available
are valued in good faith by, or under the direction of, the Fund's
Board of Directors.
B. Currency Translation. The market values of all assets and
liabilities denominated in foreign currencies are recorded in the
financial statements after translation to the U.S. dollar based upon
the bid price of such currencies against the U.S. dollar last quoted
by a major bank or broker. The cost basis of such assets and
liabilities is determined based upon historical exchange rates.
Income and expenses are translated at average exchange rates in
effect as accrued or incurred.
The Portfolios do not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with the
net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, sales of foreign
currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between
the amounts of dividends, interest, and foreign withholding taxes
recorded on the Portfolios' books, and the U.S. dollar equivalent
of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
C. Forward Currency Contracts. The Portfolios may enter into
forward purchases or sales of foreign currencies to hedge certain
foreign currency denominated assets and liabilities against
declines in market value relative to the U.S. dollar. Forward
currency contracts are marked-to-market daily and the change in
market value is recorded by the Portfolios as an unrealized gain or
loss. When the forward currency contract is closed, the Portfolios
record a realized gain or loss equal to the difference between the
value of the forward currency contract at the time it was opened
and the value at the time it was closed.
Investments in forward currency contracts may expose the
Portfolios to risks resulting from unanticipated movements in
foreign currency exchange rates or failure of the counterparty to
the agreement to perform in accordance with the terms of the
contract.
D. Federal Income Taxes. The Portfolios intend to comply with
the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of their
taxable income to their shareholders. Therefore, no federal income
tax provision is required.
E. Security Transactions, Interest and Dividends. As is common
in the industry, security transactions are recorded on the trade
date. Interest income is accrued as earned. Discounts and
premiums are amortized in accordance with Federal income tax
requirements. Dividends are recorded on the ex-dividend date.
F. Distributions to Shareholders. Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions
paid to shareholders is determined by reference to income as
determined for income tax purposes, after giving effect to
temporary differences between the financial reporting and tax
basis of assets and liabilities, rather than income as determined for
financial reporting purposes.
G. Deferred Organization Expenses. All of the expenses incurred
by the Fund in connection with the organization and the
registration of the Portfolios' shares were borne equally by each
Portfolio and are being amortized to expense on a straight-line
basis over a period of five years.
H. Use of Estimates. In preparing financial statements in
accordance with generally accepted accounting principles,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) Investments
For the year ended October 31, 1997, the cost of securities
purchased and the proceeds from securities sold, excluding short
- -term notes, was $6,171,312 and $10,286,780, respectively, for the
Global Equity Portfolio, and $2,357,495 and $3,668,841,
respectively, for the Global Income Portfolio.
At October 31, 1997 net unrealized appreciation of investment
securities consisted of gross unrealized appreciation and gross
unrealized depreciation of $5,794,702 and $(524,460),
respectively, for the Global Equity Portfolio and $674,592 and
$(55,253) respectively, for the Global Income Portfolio.
(4) Capital Stock
At October 31, 1997, the authorized capital of the Fund consisted
of one billion shares of $.01 par value common stock with 100
million shares designated and classified the Global Equity
Portfolio and 100 million shares designated and classified the
Global Income Portfolio.
(5) Investment Management Fee and Administration Fee
Investment Advisory Agreement. Strategic provides investment
management services to each of the Portfolios under an
Investment Advisory Agreement. Strategic provides the Portfolios
with continuous investment programs, a trading department, and
selects brokers and dealers to effect securities transactions. As
compensation for its services Strategic is paid a monthly fee
which is equal to the annual rate of 0.90% of each Portfolio's
average daily net assets.
Administration Agreement. Strategic also serves as the
Administrator of the Fund under an Administration Agreement.
The services include the administration of the Fund's business
affairs, supervision of services provided by other organizations
providing services to the Fund, including the custodian, dividend
disbursing agent, legal counsel and independent accountants,
preparation of certain Fund records and documents, record
keeping and accounting services. As compensation for these
services Strategic is paid a monthly fee which is equal to the
annual rate of 0.25% of each Portfolio's average daily net assets.
(6) Distribution Plans
Distribution Plan. The Portfolios have adopted Distribution Plans
pursuant to rule 12b-1 under the '40 Act, whereby each Portfolio
may make monthly payments at the annual rate of 0.25% of each
Portfolio's average net assets to East Coast for providing certain
distribution services. These services can include: promotion of the
sale of Portfolio shares, preparation of advertising and
promotional materials, payment of compensation to persons who
have been instrumental in the sale of Portfolio shares, and for
other services and materials, including the cost of printing Fund
prospectuses, reports and advertising material provided to
investors, and to defray overhead expenses of East Coast incurred
in connection with the promotion and sale of Fund shares.
Shareholder Services Plan. The Portfolios have also adopted
Shareholder Services Plans (the "Plans") which are designed to
promote the retention of shareholder accounts. Under these Plans,
the Portfolios are authorized to pay East Coast a monthly fee
which, on an annual basis, may not exceed 0.25% of the average
net assets of each Portfolio. Payments under the Plans would be
used, among other things, to compensate persons and/or
organizations that provide services to shareholders that are
designed to encourage them to maintain their investments in the
Portfolios.
(7) Other Transactions with Affiliates
Certain officers and directors of the Fund are also officers and/or
directors of Strategic and East Coast.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
S.I.S. Mercator Fund, Inc.
Shareholders and Board of Directors
S.I.S. Mercator Fund, Inc.
Bryn Mawr, Pennsylvania
We have audited the accompanying statement of assets and
liabilities of S.I.S. Mercator Fund, Inc. (comprising, respectively,
the Global Equity Portfolio and the Global Income Portfolio),
including the portfolios of investments, as of October 31, 1997,
and the related statements of operations and changes in net assets,
and the 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 statement of changes in net assets and the
financial highlights of S.I.S. Mercator Fund, Inc. for the period
November 8,1995 (commencement of operations) to October 31,
1996 were audited by other auditors whose report dated
November 18, 1996, expressed an unqualified opinion on the
statement and financial highlights.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of October 31, 1997 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 the Global Equity Portfolio and the Global
Income Portfolio as of October 31, 1997, the results of their
operations, the changes in their net assets, and the financial
highlights for the year then ended in conformity with generally
accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
November 14, 1997
