-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qz+QPRWWurogSRgh/LGp93TNS2I/2Y6uDgbUfZpcNii/3zqbGMO5ctpyIwt25VoF HE3SKC/mKAl6ufXsCov+1Q== 0000898430-03-000387.txt : 20030205 0000898430-03-000387.hdr.sgml : 20030205 20030205163010 ACCESSION NUMBER: 0000898430-03-000387 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20030205 EFFECTIVENESS DATE: 20030205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISHARES INC CENTRAL INDEX KEY: 0000930667 IRS NUMBER: 510396525 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-97598 FILM NUMBER: 03540937 BUSINESS ADDRESS: STREET 1: 400 BELLEVUE PKWAY CITY: WILMINGTON STATE: DE ZIP: 19809 BUSINESS PHONE: 800-810-93 FORMER COMPANY: FORMER CONFORMED NAME: FOREIGN FUND INC DATE OF NAME CHANGE: 19950524 FORMER COMPANY: FORMER CONFORMED NAME: WEBS INDEX FUND INC DATE OF NAME CHANGE: 19970211 497 1 d497.txt ISHARES MSCI INDEX FUNDS iShares, Inc. iShares, Inc. consists of 22 separate investment portfolios called "Funds." Each Fund described herein seeks investment results similar to the performance of a single stock market or all of the stock markets in a geographic region compiled by Morgan Stanley Capital International Inc. ("MSCI"). Barclays Global Fund Advisors is the advisor to each Fund. iShares, Inc. is a registered investment company. The shares of the iShares MSCI Funds, called "iShares(R)," are listed and traded on national securities exchanges (each, a "Listing Exchange"). Market prices for iShares may be different from their net asset value ("NAV"). Each Fund has its own CUSIP number and exchange trading symbol. Each Fund issues and redeems iShares at NAV only in large blocks of 50,000 iShares or multiples thereof ("Creation Units"). These transactions are usually in exchange for a basket of securities and an amount of cash. As a practical matter, only institutions or large investors purchase or redeem Creation Units. Except when aggregated in Creation Units, iShares are not redeemable securities. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. Prospectus Dated January 1, 2003 (as revised February 7, 2003) Table of Contents Details on Investing in iShares Details on the Risks of Investing in iShares Details on Each iShares Fund Details on Management and Operations Overview................................... 1 Introduction............................... 1 Investment Objective....................... 1 Principal Investment Strategies............ 1 Replication................................ 2 Representative Sampling.................... 2 Correlation................................ 2 Industry Concentration Policy.............. 2 Principal Risk Factors Common to All Funds. 3 Market Risk................................ 3 Foreign Security Risk...................... 3 Management Risk............................ 3 Currency Risk.............................. 3 Emerging Market Risk....................... 3 Trading Risk............................... 3 Asset Class Risk........................... 4 Tracking Error Risk........................ 4 Market Trading Risk........................ 4 Passive Investments........................ 4 Lack of Governmental Insurance or Guarantee 4 Concentration.............................. 5 Derivatives................................ 5 Non-Diversification Risk................... 5 Description of iShares MSCI Index Funds.... 6 The iShares MSCI Index Funds............... 7 iShares MSCI Australia Fund................ 7 iShares MSCI Austria Fund.................. 10 iShares MSCI Belgium Fund.................. 13 iShares MSCI Brazil Fund................... 16 iShares MSCI Canada Fund................... 19 iShares MSCI EMU Fund...................... 22 iShares MSCI France Fund................... 25 iShares MSCI Germany Fund.................. 28 iShares MSCI Hong Kong Fund................ 31 iShares MSCI Italy Fund.................... 34 iShares MSCI Japan Fund.................... 37 iShares MSCI Malaysia Fund................. 40 iShares MSCI Mexico Fund................... 43 iShares MSCI Netherlands Fund.............. 46 iShares MSCI Pacific ex-Japan Fund......... 49 iShares MSCI Singapore Fund................ 51 iShares MSCI South Africa Fund............. 54 iShares MSCI South Korea Fund.............. 56 iShares MSCI Spain Fund.................... 59 iShares MSCI Sweden Fund................... 62 iShares MSCI Switzerland Fund.............. 65 iShares MSCI Taiwan Fund................... 68 iShares MSCI United Kingdom Fund........... 71 Management................................. 74 Investment Advisor......................... 74 Administrator, Custodian and Transfer Agent 74
i|Shares page i Details on Buying and Selling iShares Shareholder Information................. 74 Buying and Selling iShares.............. 75 Book Entry.............................. 75 iShares Prices.......................... 75 Determination of Net Asset Value........ 76 Dividends and Distributions............. 76 Taxes................................... 76 Taxes on Distributions.................. 76 Taxes When iShares are Sold............. 77 Creation and Redemptions................ 77 iShares Transaction Fees................ 78 Possible Claim.......................... 79 Distribution Arrangements............... 79 Financial Highlights.................... 81 Index Provider.......................... 103 Disclaimers............................. 104 Supplemental Information................ 107 Premium/Discount Information (Unaudited) 107 Total Return Information................ 120
i Shares Page ii Overview Introduction This Prospectus provides the information you need to make an informed decision about investing in iShares. It contains important facts about iShares, Inc. (the "Company") as a whole and each Fund in particular. An index is a group of securities that an Index Provider selects as representative of a market, market segment or specific industry sector. The Index Provider determines the relative weightings of the securities in the index and publishes information regarding the market value of the index. Each Fund is an "index fund" which seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of a particular index (its "Underlying Index") developed by the following Index Provider: MSCI is a leading provider of global indices and benchmark related products and services to investors worldwide. Morgan Stanley Dean Witter & Co., a global financial services firm and a market leader in securities, asset management, and credit services, is the majority shareholder of MSCI. Barclays Global Fund Advisors ("BGFA"), the advisor to each Fund, is a subsidiary of Barclays Global Investors, N.A. ("BGI"). BGFA and its affiliates are not affiliated with the Index Provider. The Principal Investment Strategies and the Principal Risk Factors Common to All Funds sections discuss the principal strategies and risks applicable to the Funds, while the Description of iShares Funds sections provide important information about each Fund, including a brief description of its Underlying Index and principal risks specific to that Fund. Investment Objective Each Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of a single stock market or all of the stock markets in a geographic region, as measured by the Fund's Underlying Index. Principal Investment Strategies BGFA uses a "passive" or indexing approach to try to achieve each Fund's investment objective. Unlike many investment companies, the Funds do not try to "beat" the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued. BGFA does not make any judgments about the investment merit of a particular security, nor does it attempt to apply any economic, financial or market analysis. Indexing may eliminate some of the risks of active management such as poor stock selection. Indexing may also help increase after-tax performance by keeping portfolio turnover low in comparison to actively managed investment companies. Each Fund has a policy to remain as fully invested as practicable in a pool of equity securities. Each Fund will normally invest at least 95% of its assets in securities that are represented in its Underlying Index or in American Depositary Receipts ("ADRs") based on securities in its Underlying Index. Each Fund, except those listed below, will at all times invest at least 90% of its assets in such securities except that in order to permit the investment advisor additional flexibility to comply with the requirements of the US Internal Revenue Code and other regulatory requirements and to manage future corporate actions and index changes in the smaller markets, each of the iShare MSCI Australia, Austria, Belgium, Brazil, Hong Kong, Italy, Mexico, Netherlands, Singapore, South Korea, Spain, Sweden, Switzerland and Taiwan i|Shares page 1 Funds will at all times invest at least 80% of its assets in such securities and at least half of the remaining 20% of its assets in such securities or in securities included in the relevant market, but not in its Underlying Index or in ADRs based on securities in its Underlying Index. Each Fund may also invest its other assets in futures contracts, options on futures contracts, options, and swaps related to its Underlying Index, as well as cash and cash equivalents, including shares of money market funds affiliated with BGFA. BGFA uses two basic indexing strategies -- Replication and Representative Sampling -- as described below. The Description of iShares Funds sections indicate the strategy of each Fund. Replication "Replication" is investing in substantially all of the securities in the relevant Underlying Index in approximately the same proportions as in the Underlying Index. Representative Sampling "Representative Sampling" is investing in a representative sample of securities in the Underlying Index, which have a similar investment profile as the Underlying Index. Securities selected have aggregate investment characteristics (based on market capitalization and industry weightings), fundamental characteristics (such as return variability, earnings valuation and yield) and liquidity measures similar to those of the relevant Underlying Index. Funds that use Representative Sampling generally do not hold all of the securities that are included in the relevant Underlying Index. Correlation An index is a theoretical financial calculation while a Fund is an actual investment portfolio. The performance of a Fund and its Underlying Index will vary somewhat due to transaction costs, market impact, corporate actions (such as mergers and spin-offs) and timing variances. BGFA expects that, over time, the correlation between each Fund's performance and that of its Underlying Index, before fees and expenses, will be 95% or better. A figure of 100% would indicate perfect correlation. Any correlation of less than 100% is called "tracking error." A Fund using Representative Sampling can be expected to have a greater tracking error than a Fund using Replication. Industry Concentration Policy Each of the iShares MSCI Mexico, Singapore and South Korea Index Funds has the following concentration policy: With respect to the two most heavily weighted industries or groups of industries in its Underlying Index, the Fund will invest in securities (consistent with its investment objective and other investment policies) so that the weighting of each such industry or group of industries in the Fund does not diverge by more than 10% from the respective weighting of such industry or group of industries in its Underlying Index. An exception to this policy is that if investment in the stock of a single issuer would account for more than 25% of the Fund, the Fund will invest less than 25% of its net assets in such stock and will reallocate the excess to stock(s) in the same industry or group of industries, and/or to stock(s) in another industry or group of industries, in its Underlying Index. Each Fund will evaluate these industry weightings at least weekly, and at the time of evaluation will adjust its portfolio composition to the extent necessary to maintain compliance with the above policy. Each of the iShares MSCI Austria, Australia, Belgium, Brazil, Canada, EMU, France, Germany, Hong Kong, Italy, Japan, Malaysia, Netherlands, Pacific ex-Japan, South Africa, Spain, Sweden, Switzerland, Taiwan and United Kingdom Index Funds will not concentrate its investments (i.e., hold 25% or more of its total assets in the stocks of a particular industry or group of industries), except that, to the extent practicable, the Fund will concentrate to approximately the same extent that its Underlying Index concentrates in the stocks of such particular industry or group of industries, provided that the Fund will comply with the diversification requirements applicable to regulated investment companies of the Internal Revenue Code, any underlying Treasury regulations or any successor provision. i Shares page 2 Principal Risk Factors Common to all Funds Each Fund is subject to the principal risks described below. Additional principal risks may be associated with a Fund and, in such cases, are discussed under the description of the Fund. Some or all of these risks may adversely affect a Fund's NAV, trading price, yield, total return and/or its ability to meet its objectives. Market Risk Each Fund's NAV will react to securities markets movements. You could lose money over short periods due to fluctuation in a Fund's NAV in response to market movements, and over longer periods during market downturns. Foreign Security Risk Each Fund invests entirely within the equity markets of a single country or region. These markets are subject to special risks associated with foreign investment including, but not limited to: generally less liquid and less efficient securities markets; generally greater price volatility; exchange rate fluctuations and exchange controls; imposition of restrictions on the expatriation of funds or other assets; less publicly available information about issuers; the imposition of taxes; higher transaction and custody costs; settlement delays and risk of loss; difficulties in enforcing contracts; less liquidity and smaller market capitalizations; lesser regulation of securities markets; different accounting and disclosure standards; governmental interference; higher inflation; social, economic and political uncertainties; the risk of expropriation of assets; and the risk of war. Management Risk Because each Fund does not fully replicate its benchmark index and may hold non-index stocks, it is subject to management risk. This is the risk that the investment advisor's strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. Currency Risk Because each Fund's net asset value is determined on the basis of U.S. dollars, you may lose money if you invest in any Fund if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of a Fund's holdings goes up. Emerging Market Risk Some foreign markets in which the Funds invest are considered to be emerging market countries. Investment in these countries subjects a Fund to a greater risk of loss than investments in a developed country. This is due to, among other things, greater market volatility, lower trading volume, political and economic instability, greater risk of market shut down and more governmental limitations on foreign investment policy than those typically found in a developed market. The following Funds invest in emerging markets: the iShares MSCI Brazil, Malaysia, Mexico, South Africa, South Korea and Taiwan Funds. Trading Risk While the creation/redemption feature of iShares is designed to make it likely that iShares will trade close to their NAV, disruptions to creations and redemptions (as has occurred because of Malaysia's capital controls) may result in trading prices that differ significantly from their NAV. Also, there can be no assurance that an active trading market will exist for iShares of each Fund on the AMEX (or any other securities exchange on which iShares may trade). i|Shares page 3 Asset Class Risk The returns from the types of securities in which a Fund invests may underperform returns from the various general securities markets or different asset classes. Different types of securities tend to go through cycles of out-performance and underperformance in comparison to the general securities markets. Tracking Error Risk Factors such as the fees and expenses of a Fund, imperfect correlation between a Fund's securities and those in its Underlying Index, rounding of prices, changes to the Underlying Indices and regulatory policies may affect BGFA's ability to achieve close correlation with the Underlying Index of each Fund. Each Fund's returns may therefore deviate from those of its Underlying Index. Market Trading Risks Absence of Prior Active Market Although the iShares are listed for trading on either the American Stock Exchange LLC ("AMEX"), New York Stock Exchange, Inc. ("NYSE") or Chicago Board Options Exchange ("CBOE"), and are listed and traded on other U.S. and foreign exchanges, there can be no assurance that an active trading market for iShares will develop or be maintained. Lack of Market Liquidity Trading in iShares may be halted because of market conditions or for reasons that, in the view of the Listing Exchange, make trading in iShares inadvisable. In addition, trading in iShares is subject to trading halts caused by extraordinary market volatility pursuant to "circuit breaker" rules. There can be no assurance that the requirements necessary to maintain the listing of the iShares of any Fund will continue to be met or will remain unchanged. iShares May Trade at Prices Other than NAV iShares may trade at, above or below their NAV. The NAV of iShares will fluctuate with changes in the market value of a Fund's holdings. The trading prices of iShares will fluctuate in accordance with changes in their NAVs as well as market supply and demand. However, given that iShares can be created and redeemed only in Creation Units at NAV (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAVs), BGFA believes that large discounts or premiums to the NAVs of iShares should not be sustained. Additional principal risks associated with investing in iShares of a particular Fund are discussed in the Description of iShares Funds sections. Passive Investments The Funds are not actively managed. Each Fund may be affected by a general decline in the U.S. or foreign market segments relating to its Underlying Index. Each Fund invests in the securities included in its Underlying Index regardless of their investment merit. BGFA does not attempt to individually select securities or to take defensive positions in declining markets. Lack of Governmental Insurance or Guarantee An investment in the Funds is not a bank deposit nor is it insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. i Shares page 4 Concentration If the Underlying Index of a Fund concentrates in a particular industry, group of industries or sector, that Fund may be adversely affected by the performance of those securities and be subject to price volatility. In addition, a Fund that concentrates in a single industry or group of industries may be more susceptible to any single economic, market, political or regulatory occurrence. Derivatives A derivative is a financial contract the value of which depends on, or is derived from, the value of an underlying asset such as a security or an index. Each Fund may invest in stock index future contracts and other derivatives. Compared to conventional securities, derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus a Fund's losses may be greater if it invests in derivatives than if it invests only in conventional securities. Non-Diversification Risk Each Fund is classified as "non-diversified." This means that each Fund may invest most of its assets in securities issued by a small number of companies. As a result, each Fund may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence. i|Shares page 5 Description of iShares Funds iShares MSCI Index Funds . iShares MSCI Australia Index Fund . iShares MSCI Austria Index Fund . iShares MSCI Belgium Index Fund . iShares MSCI Brazil Index Fund . iShares MSCI Canada Index Fund . iShares MSCI EMU Index Fund . iShares MSCI France Index Fund . iShares MSCI Germany Index Fund . iShares MSCI Hong Kong Index Fund . iShares MSCI Italy Index Fund . iShares MSCI Japan Index Fund . iShares MSCI Malaysia Index Fund . iShares MSCI Mexico Index Fund . iShares MSCI Netherlands Index Fund . iShares MSCI Pacific ex-Japan Index Fund . iShares MSCI Singapore Index Fund . iShares MSCI South Africa Index Fund . iShares MSCI South Korea Index Fund . iShares MSCI Spain Index Fund . iShares MSCI Sweden Index Fund . iShares MSCI Switzerland Index Fund . iShares MSCI Taiwan Index Fund . iShares MSCI United Kingdom Index Fund MSCI is a registered trade mark of Morgan Stanley Capital International Inc. ("MSCI") and its affiliates and has been licensed for use for certain purposes by Barclays Global Investors, N.A. The Funds have not been passed on by MSCI as to its legality or suitability, and is not issued, sponsored, endorsed, sold or promoted by MSCI. MSCI makes no warranties and bears no liability with respect to the Funds. MSCI has no responsibility for and does not participate in the management of the Fund assets or sale of the Fund shares. The Prospectus contains a more detailed description of the limited relationship MSCI has with Barclays Global Investors, N.A. and the Funds. No purchaser, seller or holder of this security, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI's permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. i Shares page 6 The iShares MSCI Index Funds iShares MSCI Australia Index Fund CUSIP: 464286103 AMEX Trading Symbol: EWA Underlying Index: MSCI Australia Index Investment Objective The iShares MSCI Australia Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Australian market, as measured by the MSCI Australia Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Australian Stock Exchange. As of September 30, 2002, the Index's three largest stocks were National Australia Bank, Commonwealth Bank and BHP Billiton Ltd. (BHP) and its three largest industries were banks, materials and real estate. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 7 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 -10.19 1998 2.18 1999 19.24 2000 -11.52 2001/1/ 2.33
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -6.16%. The best calendar quarter return during the period shown above was 17.67% in the 4th quarter of 2001; the worst was -15.81% in the 3rd quarter of 2001. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------ ------ ----------- Fund: Return Before Taxes 2.33% -0.19% 1.86% Return After Taxes on Distributions/2/ 1.50% -0.94% 1.03% Return After Taxes on Distributions and Sale of Fund Shares/2/ 1.45% -0.50% 1.11% Index (Index returns do not reflect deductions for fees, expenses, or taxes) 1.87% 0.49% 2.38%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 8 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None --------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% ---------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 200,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $2,400 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,768,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $2,400 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,768,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $19,940 if the Creation Unit is redeemed after one year, $52,134 if the Creation Unit is redeemed after three years, $87,063 if the Creation Unit is redeemed after five years, and $187,921 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 9 iShares MSCI Austria Index Fund CUSIP: 464286202 AMEX Trading Symbol: EWO Underlying Index: MSCI Austria Index Investment Objective The iShares MSCI Austria Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Austrian market, as represented by the MSCI Austria Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Vienna Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Erste Bank Oester. Spk., OMV Ag and Telekom Austria and its three largest industries were materials, banks and energy. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. i Shares page 10 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 1.05 1998 -1.83 1999 -10.36 2000 -10.57 2001/1/ -2.57
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was 4.74%. The best calendar quarter return during the period shown above was 12.76% in the 1st quarter of 1998; the worst was -23.45% in the 3rd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------ ------ ----------- Fund: Return Before Taxes -2.57% -4.97% -4.75% Return After Taxes on Distributions/2/ -2.95% -5.33% -5.08% Return After Taxes on Distributions and Sale of Fund Shares/2/ -1.27% -3.82% -3.65% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -2.27% -4.44% -3.45%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 11 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 100,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $600 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $774,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $600 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $774,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $7,832 if the Creation Unit is redeemed after one year, $21,934 if the Creation Unit is redeemed after three years, $37,234 if the Creation Unit is redeemed after five years, and $81,414 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 12 iShares MSCI Belgium Index Fund CUSIP: 464286301 AMEX Trading Symbol: EWK Underlying Index: MSCI Belgium Index Investment Objective The iShares MSCI Belgium Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Belgian market, as measured by the MSCI Belgium Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Brussels Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Fortis Belgium, Dexia and Electrabel and its three largest industries were diversified financial, banks and utilities. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 13 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 11.84 1998 51.69 1999 -14.05 2000 -16.10 2001/1/ -12.99
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -21.54%. The best calendar quarter return during the period shown above was 17.78% in the 4th quarter of 1998; the worst was -25.68% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -12.99% 1.26% 2.58% Return After Taxes on Distributions/2/ -13.63% -0.68% 0.68% Return After Taxes on Distributions and Sale of Fund Shares/2/ -7.66% 0.65% 1.70% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -12.61% 3.48% 4.91%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 14 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 40,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $700 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $349,600. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $700 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $349,600 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $4,392 if the Creation Unit is redeemed after one year, $10,754 if the Creation Unit is redeemed after three years, $17,656 if the Creation Unit is redeemed after five years, and $37,587 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 15 iShares MSCI Brazil Index Fund CUSIP: 464286400 AMEX Trading Symbol: EWZ Underlying Index: MSCI Brazil Index Investment Objective The iShares MSCI Brazil Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market, as measured by the MSCI Brazil Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Bolsa de Valores de Sao Paulo. As of September 30, 2002, the Index's three largest stocks were Petrobras Pn, Companhia Vale do Rio Doce and Companhia de Bedidas das Americas and its three largest industries were materials, energy and telecommunication services. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that Brazil has in recent history experienced substantial economic instability resulting from, among other things, periods of very high inflation and significant devaluations of the Brazilian currency. Brazil also has suffered from chronic structural public sector deficits. Such challenges have contributed to high price volatility in the Brazilian equity markets. i Shares page 16 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
2001/1/ -19.52
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -53.53%. The best calendar quarter return during the period shown above was 33.91% in the 4th quarter of 2001; the worst was -40.27% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year Inception/1/ ------- ----------- Fund: Return Before Taxes -19.52% -24.12% Return After Taxes on Distributions/2/ -20.67% -25.22% Return After Taxes on Distributions and Sale of Fund Shares/2/ -11.68% -19.42% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -17.99% -21.75%
- -------- 1 Inception date: 7/11/2000. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 17 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.74% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None ---------------------------------------------------------- Total Annual Fund Operating Expenses 0.99% ----------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $101 $315 $547 $1,213
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $2,400 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $290,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $2,400 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $290,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $7,704 if the Creation Unit is redeemed after one year, $13,867 if the Creation Unit is redeemed after three years, $20,534 if the Creation Unit is redeemed after five years, and $39,686 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 18 iShares MSCI Canada Index Fund CUSIP: 464286509 AMEX Trading Symbol: EWC Underlying Index: MSCI Canada Index Investment Objective The iShares MSCI Canada Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Canadian market, as measured by the MSCI Canada Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Toronto Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Royal Bank of Canada, PanCanadian Energy Corp and Bank Nova Scotia and its three largest industries were banks, energy and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 19 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 10.91 1998 -6.47 1999 46.13 2000 7.66 2001/1/ -17.86
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -19.63%. The best calendar quarter return during the period shown above was 21.44% in the 4th quarter of 1999; the worst was -24.40% in the 3rd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -17.86% 6.04% 8.71% Return After Taxes on Distributions/2/ -17.90% 4.26% 7.13% Return After Taxes on Distributions and Sale of Fund Shares/2/ -10.77% 5.05% 7.33% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -19.28% 6.72% 9.44%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 20 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 100,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,900 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $872,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,900 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $872,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $11,261 if the Creation Unit is redeemed after one year, $27,127 if the Creation Unit is redeemed after three years, $44,340 if the Creation Unit is redeemed after five years, and $94,043 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 21 iShares MSCI EMU Index Fund CUSIP: 464286608 AMEX Trading Symbol: EZU Underlying Index: MSCI EMU Index Investment Objective The iShares MSCI EMU Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the European Monetary Union ("EMU") markets, as measured by the MSCI EMU Index (the "Index"). Principal Investment Strategy The Index consists of stocks from the following eleven countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain. As of September 30, 2002, the Index's three largest stocks were Royal Dutch Petroleum Co., Total Fina Elf and Nokia Corp. and its three largest industries were energy, banks and telecommunication services. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that EMU was implemented only recently (January 1, 1999) and it is anticipated that additional countries will join the system over time. Also, it is possible that countries may withdraw from EMU or that EMU may be abandoned at some future time. Any change to EMU may adversely affect the investment performance of the Fund. If EMU were to be abandoned the Board of Directors would propose a change in the investment objective of the Series or cause its liquidation. i Shares page 22 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
2001 -22.96/1/
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -31.48%. The best calendar quarter return during the period shown above was 12.92% in the 4th quarter of 2001; the worst was -28.17% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year Inception/1/ ------- ----------- Fund: Return Before Taxes -22.96% -22.05% Return After Taxes on Distributions/2/ -23.10% -22.14% Return After Taxes on Distributions and Sale of Fund Shares/2/ -13.91% -17.44% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -22.81% -21.70%
- -------- 1 Inception date: 7/25/2000. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 23 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $8,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,911,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $8,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,911,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $32,318 if the Creation Unit is redeemed after one year, $67,018 if the Creation Unit is redeemed after three years, $104,665 if the Creation Unit is redeemed after five years, and $213,372 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 24 iShares MSCI France Index Fund CUSIP: 464286707 AMEX Trading Symbol: EWQ Underlying Index: MSCI France Index Investment Objective The iShares MSCI France Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the French market, as measured by the MSCI France Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Paris Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Total Fina Elf, Rhone-Poulenc and BNP Paribas and its three largest industries were energy, pharmaceuticals and biotechnology and banks. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 25 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 11.47 1998 40.78 1999 29.97 2000 -5.09 2001/1/ -23.99
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -30.03%. The best calendar quarter return during the period shown above was 23.51% in the 1st quarter of 1998; the worst was -27.88% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -23.99% 8.03% 10.18% Return After Taxes on Distributions/2/ -24.02% 7.44% 9.63% Return After Taxes on Distributions and Sale of Fund Shares/2/ -14.57% 6.58% 8.45% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -23.57% 8.42% 10.42%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 26 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 200,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $2,900 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $2,628,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $2,900 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $2,628,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $28,309 if the Creation Unit is redeemed after one year, $76,177 if the Creation Unit is redeemed after three years, $128,109 if the Creation Unit is redeemed after five years, and $278,065 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 27 iShares MSCI Germany Index Fund CUSIP: 464286806 AMEX Trading Symbol: EWG Underlying Index: MSCI Germany Index Investment Objective The iShares MSCI Germany Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the German market, as measured by the MSCI Germany Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Frankfurt Stock Exchange. As of September 30, 2002, the Index's three largest stocks were DaimlerChrysler, Veba and Siemens and its three largest industries were automobiles and components, utilities and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. i Shares page 28 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 22.75 1998 28.28 1999 20.87 2000 -15.97 2001/1/ -22.57
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -38.96%. The best calendar quarter return during the period shown above was 27.11% in the 4th quarter of 1999; the worst was -36.46% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -22.57% 4.37% 5.38% Return After Taxes on Distributions/2/ -22.82% 3.46% 4.58% Return After Taxes on Distributions and Sale of Fund Shares/2/ -13.63% 3.45% 4.31% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -22.33% 4.88% 6.01%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 29 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 300,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,500 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $2,745,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,500 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $2,745,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $26,525 if the Creation Unit is redeemed after one year, $76,551 if the Creation Unit is redeemed after three years, $130,826 if the Creation Unit is redeemed after five years, and $287,545 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 30 iShares MSCI Hong Kong Index Fund CUSIP: 464286871 AMEX Trading Symbol: EWH Underlying Index: MSCI Hong Kong Index Investment Objective The iShares MSCI Hong Kong Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Hong Kong market, as measured by the MSCI Hong Kong Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Stock Exchange of Hong Kong Limited (SEHK). As of September 30, 2002, the Index's three largest stocks were Hutchison Whampoa, Cheung Kong Holdings and Hang Seng Bank and its three largest industries were real estate, capital goods and utilities. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that in recent times, Hong Kong's economy has been adversely affected by the Asian economic crisis, contributing to the current recession. Issues and uncertainties linger regarding the integration of Hong Kong's economy with that of China, and the manner in which the Chinese government will honor and interpret the agreement pursuant to which Hong Kong was returned to China by the United Kingdom in 1998. The iShares MSCI Funds page 31 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 -26.74 1998 -9.21 1999 54.00 2000 -14.02 2001/1/ -18.99
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -20.50%. The best calendar quarter return during the period shown above was 26.95% in the 4th quarter of 1998; the worst was -30.12% in the 4th quarter of 1997. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -18.99% -6.53% -2.20% Return After Taxes on Distributions/2/ -19.77% -7.56% -3.25% Return After Taxes on Distributions and Sale of Fund Shares/2/ -11.58% -5.48% -2.17% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -19.35% -3.96% 0.30%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 32 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None ----------------------------------------------------- Total Annual Fund Operating Expenses 0.84% -----------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 75,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $2,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $552,750. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $2,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $552,750 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $8,723 if the Creation Unit is redeemed after one year, $18,765 if the Creation Unit is redeemed after three years, $29,661 if the Creation Unit is redeemed after five years, and $61,122 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 33 iShares MSCI Italy Index Fund CUSIP: 464286855 AMEX Trading Symbol: EWI Underlying Index: MSCI Italy Index Investment Objective The iShares MSCI Italy Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Italian market, as measured by the MSCI Italy Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Milan Stock Exchange. As of September 30, 2002, the Index's three largest stocks were ENI, Telecom Italia and Telecom Italia Mobile and its three largest industries were telecommunication services, energy and banks. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. i Shares page 34 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 35.77 1998 50.24 1999 0.53 2000 -1.17 2001/1/ -26.71
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -19.79%. The best calendar quarter return during the period shown above was 34.44% in the 1st quarter of 1998; the worst was -21.58% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -26.71% 8.23% 9.31% Return After Taxes on Distributions/2/ -26.99% 6.82% 7.95% Return After Taxes on Distributions and Sale of Fund Shares/2/ -16.01% 6.78% 7.66% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -26.64% 8.33% 9.27%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 35 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 150,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,400 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,951,500. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,400 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,951,500 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $19,522 if the Creation Unit is redeemed after one year, $55,080 if the Creation Unit is redeemed after three years, $93,659 if the Creation Unit is redeemed after five years, and $205,057 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 36 iShares MSCI Japan Index Fund CUSIP: 464286848 AMEX Trading Symbol: EWJ Underlying Index: MSCI Japan Index Investment Objective The iShares MSCI Japan Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Japanese market, as measured by the MSCI Japan Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Tokyo Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Toyota Motor Corp., Sony Corp and Takeda Chemical Ind. and its three largest industries were technology hardware and equipment, consumer durables and apparel and automobiles and components. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that the Japanese economy faces several concerns, including: a financial system with large levels of nonperforming loans; over-leveraged corporate balance sheets; an aging workforce; a labor market undergoing fundamental structural changes, as traditional lifetime employment clashes with the need for increased labor mobility; extensive cross-ownership by major corporations; a changing corporate governance structure; and large government deficits. Japan's economy is heavily dependent on international trade and has been adversely affected by trade tariffs and other protectionist measures. The iShares MSCI Funds page 37 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 -23.63 1998 3.53 1999 57.89 2000 -28.57 2001/1/ -29.9
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -5.24%. The best calendar quarter return during the period shown above was 26.25% in the 4th quarter of 1998; the worst was -19.80% in the 4th quarter of 1997. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -29.90% -8.97% -9.68% Return After Taxes on Distributions/2/ -29.84% -9.08% -9.76% Return After Taxes on Distributions and Sale of Fund Shares/2/ -18.15% -6.76% -7.22% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -29.49% -8.09% -8.85%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 38 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 600,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $5,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $4,452,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $5,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $4,452,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $48,132 if the Creation Unit is redeemed after one year, $129,220 if the Creation Unit is redeemed after three years, $217,195 if the Creation Unit is redeemed after five years, and $471,225 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 39 iShares MSCI Malaysia Index Fund CUSIP: 464286830 AMEX Trading Symbol: EWM Underlying Index: MSCI Malaysia Index Investment Objective The iShares MSCI Malaysia Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Malaysian market, as measured by the MSCI Malaysia Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Kuala Lumpur Stock Exchange. As of September 30, 2002 the Index's three largest stocks were Malayan Banking, Telekom Malaysia and Tenaga Nasional and its three largest industries were banks, hotel restaurants and leisure and food beverages and tobacco. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that Malaysian currency volatility and general economic deterioration led to the imposition of stringent capital controls in September 1998, including a one-year prohibition on repatriation of capital and an indefinite prohibition on free transfers of securities. The capital controls were subsequently amended in a number of respects. The Company suspended creations of the Fund's shares when the capital controls were implemented, and advised investors that it would, to the extent possible under the applicable Malaysian regulations, deliver Malaysian ringgits in satisfaction of redemption requests received. The disruption of the creation/redemption mechanism for the Fund adversely affected the trading market for iShares of the Fund, resulting in their trading at prices that differed materially from their net asset value on many days. In May 2000, the Company commenced offers and redemptions of Creation Units of the Fund for U.S. dollars. There can be no assurance that the Company will be able to offer and redeem such Creation Units on an in-kind basis at any time in the future. The Finance Ministry of Malaysia abolished, effective May 2, 2001, the exit levy of 10% that had previously applied to profits repatriated by foreign entities such as the Fund. However, as discussed below, there can be no assurance that this or some other levy will not be reinstated by Malaysian authorities in the future, to the possible detriment of the Fund and its shareholders. The Malaysian capital controls have been changed in significant ways since they were first adopted without warning on September 1, 1998. There can be no assurance that the Malaysian capital controls will not be changed in the future in ways that adversely affect the Fund and its shareholders. Since the capital controls were imposed, the iShares of the Fund have often traded at discounts or premiums to their net asset value. Since the Company's decision to permit offers and redemptions of Creation Units of the Fund's iShares for U.S. dollars, they have traded at prices that have generally been close to their net asset values. However, there can be no assurances that this will continue to be the case. i Shares page 40 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART] 1997 1998 1999 2000 2001 - -------- -------- ------ -------- ----- (66.93)% (29.31)% 92.98% (15.85)% 4.56% - -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -1.73%. The best calendar quarter return during the period shown above was 122.01% in the 2nd quarter of 1999; the worst was -46.01% in the 2nd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------ ------- ----------- Fund: Return Before Taxes 4.56% -16.87% -12.87% Return After Taxes on Distributions/2/ 3.94% -17.15% -13.09% Return After Taxes on Distributions and Sale of Fund Shares/2/ 2.76% -12.44% -9.58% Index (Index returns do not reflect deductions for fees, expenses, or taxes) 5.88% -15.83% -11.74%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 41 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 75,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $5,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $382,500. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $5,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $382,500 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $13,237 if the Creation Unit is redeemed after one year, $20,120 if the Creation Unit is redeemed after three years, $27,589 if the Creation Unit is redeemed after five years, and $49,153 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 42 iShares MSCI Mexico Index Fund CUSIP: 464286822 AMEX Trading Symbol: EWW Underlying Index: MSCI Mexico Index Investment Objective The iShares MSCI Mexico Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Mexican market, as measured by the MSCI Mexico Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Mexican Stock Exchange. As of September 30, 2002 the Index's three largest stocks were Telefonos Mexico L, America Movil L and Cemex Cpo. and its three largest industries were telecommunication services, food beverage and tobacco and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that the Mexican economy is heavily dependent on the health of the US economy, as the United States purchases most of Mexico's exports. Mexico also has suffered from severe currency devaluations in the past, and has been destabilized by local insurrections in certain regions, particularly the State of Chiapas. In addition, there is a risk of disruption following the recent election of a president who is not a member of the political party that has dominated Mexico for many decades. The iShares MSCI Funds page 43 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART] 1997 48.53 1998 -35.00 1999 76.12 2000 -22.78 2001/1/ 13.49 - -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -18.66%. The best calendar quarter return during the period shown above was 35.92% in the 4th quarter of 1999; the worst was -24.30% in the 3rd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------ ------ ----------- Fund: Return Before Taxes 13.49% 8.30% 9.80% Return After Taxes on Distributions/2/ 13.07% 7.60% 9.19% Return After Taxes on Distributions and Sale of Fund Shares/2/ 8.32% 6.57% 7.92% Index (Index returns do not reflect deductions for fees, expenses, or taxes) 18.48% 11.66% 13.11%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 44 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 100,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,400 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,229,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,400 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,229,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $13,326 if the Creation Unit is redeemed after one year, $35,711 if the Creation Unit is redeemed after three years, $59,997 if the Creation Unit is redeemed after five years, and $130,122 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 45 iShares MSCI Netherlands Index Fund CUSIP: 464286814 AMEX Trading Symbol: EWN Underlying Index: MSCI Netherlands Index Investment Objective The iShares MSCI Netherlands Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Dutch market, as measured by the MSCI Netherlands Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Amsterdam Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Royal Dutch Petroleum Co., Unilever NV Cert. and ING Groep and its three largest industries were energy, food beverage and tobacco and media. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. i Shares page 46 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 20.11 1998 24.09 1999 4.54 2000 -7.80 2001/1/ -23.96
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -29.09%. The best calendar quarter return during the period shown above was 17.76% in the 4th quarter of 1998; the worst was -30.27% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -23.96% 1.79% 5.51% Return After Taxes on Distributions/2/ -24.27% 0.90% 4.65% Return After Taxes on Distributions and Sale of Fund Shares/2/ -14.37% 1.56% 4.60% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -22.60% 3.89% 7.42%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 47 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% -------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $607,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $607,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $7,196 if the Creation Unit is redeemed after one year, $18,246 if the Creation Unit is redeemed after three years, $30,235 if the Creation Unit is redeemed after five years, and $64,582 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 48 iShares MSCI Pacific ex-Japan Index Fund CUSIP: 464286665 AMEX Trading Symbol: EPP Underlying Index: Pacific Free ex-Japan Index Investment Objective The iShares MSCI Pacific ex-Japan Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Australia, Hong Kong, New Zealand and Singapore market, as measured by the MSCI Pacific Free ex-Japan Index (the "Index"). Principal Investment Strategy The Index consists of stocks from the following four countries: Australia, Hong Kong, New Zealand and Singapore. As of September 30, 2002, the Index's three largest stocks were National Australia Bank, Commonwealth Bank and Broken Hill Proprietary Co and its three largest industries were banks, materials and real estate. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that in recent times, Hong Kong's economy has been adversely affected by the Asian economic crisis, contributing to the current recession. Issues and uncertainties linger regarding the integration of Hong Kong's economy with that of China, and the manner in which the Chinese government will honor and interpret the agreement pursuant to which Hong Kong was returned to China by the United Kingdom in 1998. As a small open economy, Singapore is particularly vulnerable to external economic influences, including in recent times the Asian economic crisis. While Singapore has been a leading manufacturer of electronic goods, the extent to which other countries can successfully compete with Singapore in this and related industries, and adverse Asian economic influences generally, may adversely impact Singapore's economy. New Zealand has been a predominantly agricultural based country. However, since 1984, its government has been moving the country to become more industrialized. Its growth, however, remains dependent on the economic well-being of Asia, Europe and the U.S. In 1998, the economy fell into recession due to the Asian economic crisis and summer drought. Performance Information As of the date of this Prospectus, the Fund has been in operation for less than one full calendar year and therefore does not report its annual total returns in a bar chart and average annual total returns in a table. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. The iShares MSCI Funds page 49 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.50% Distribution and Service (12b-1) Fees None Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.50% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $51 $160 $280 $628
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 100,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $6,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $2,957,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $6,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $2,957,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $27,087 if the Creation Unit is redeemed after one year, $59,328 if the Creation Unit is redeemed after three years, $94,537 if the Creation Unit is redeemed after five years, and $197,392 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 50 iShares MSCI Singapore Index Fund CUSIP: 464286673 AMEX Trading Symbol: EWS Underlying Index: MSCI Singapore Index Investment Objective The iShares MSCI Singapore Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Singaporean market, as measured by the MSCI Singapore Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Singapore Stock Exchange. As of September 30, 2002 the Index's three largest stocks were DBS Group Holdings, United Overseas Bank and OCBC Bank and its three largest industries were banks, telecommunication services real estate. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that as a small open economy, Singapore is particularly vulnerable to external economic influences, including in recent times the Asian economic crisis. While Singapore has been a leading manufacturer of electronics goods, the extent to which other countries can successfully compete with Singapore in this and related industries, and adverse Asian economic influences generally, may adversely impact Singapore's economy. The iShares MSCI Funds page 51 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 -43.87 1998 -5.44 1999 55.35 2000 -25.06 2001/1/ -23.22
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -12.80%. The best calendar quarter return during the period shown above was 55.99% in the 4th quarter of 1998 the worst was -36.28% in the 2nd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------- ----------- Fund: Return Before Taxes -23.22% -13.86% -12.48% Return After Taxes on Distributions/2/ -23.54% -14.36% -12.94% Return After Taxes on Distributions and Sale of Fund Shares/2/ -14.14% -10.46% -9.37% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -23.69% -12.70% -11.69%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 52 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.23% Distribution and Service (12b-1) Fees 0.25% Other Expenses 0.36% - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 100,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $2,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $443,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $2,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $443,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $7,781 if the Creation Unit is redeemed after one year, $15,823 if the Creation Unit is redeemed after three years, $24,547 if the Creation Unit is redeemed after five years, and $49,739 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 53 iShares MSCI South Africa Index Fund CUSIP: 464286780 AMEX Trading Symbol: EZA Underlying Index: MSCI South Africa Index Investment Objective The iShares MSCI South Africa Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the South African market, as measured by the MSCI South Africa Index (the "Index"). The Fund's investment objective may be changed without shareholder approval. Principal Investment Strategy The Index consists of stocks traded primarily on the Johannesburg Stock Exchange. As of December 31, 2002, the Index's three largest stocks were Anglo American PLC, Sasol LTD and Gold Fields LTD and its three largest industries were diversified metals and mining, gold and life and health insurance. The Fund uses a Representative Sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risks factors referred to in this prospectus, you should know that in recent times, various external factors have impacted recent economic performance. While South Africa is a developing country with a strong supply of natural resources, unemployment and income disparity continue to cause economic concerns. Although economic reforms have been enacted to promote growth and foreign investments, there can be no assurance that these programs will achieve the desired results. Performance Information As of the date of this Prospectus, the Fund has been in operation for less than one full calendar year and therefore does not report its annual total returns in a bar chart and average annual total returns in a table. i Shares page 54 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.74% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.99% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years $101 $315
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,200 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of February 7, 2003 was $2,000,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,200 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $2,000,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $22,585 if the Creation Unit is redeemed after one year and $65,415 if the Creation Unit is redeemed after three years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 55 iShares MSCI South Korea Index Fund CUSIP: 464286772 AMEX Trading Symbol: EWY Underlying Index: MSCI Korea Index Investment Objective The iShares MSCI South Korea Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the South Korean market, as measured by the MSCI Korea Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the South Korean Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Samsung Electronics Co., SK Telecom Co. and Kookmin Bank and its three largest industries were technology hardware and equipment, telecommunication services and banks. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that while South Korea's relations with communist North Korea have improved somewhat in recent times, each has substantial military capabilities, and there is a risk of war between North and South Korea at any time. Any outbreak of hostilities between the two countries could have a severe adverse effect on the South Korean economy and securities markets. i Shares page 56 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
2001/1/ 46.74
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was 3.20%. The best calendar quarter return during the period shown above was 58.55% in the 4th quarter of 2001; the worst was -26.17% in the 3rd quarter of 2000. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year Inception/1/ ------ ----------- Fund: Return Before Taxes 46.74% -8.29% Return After Taxes on Distributions/2/ 46.76% -8.27% Return After Taxes on Distributions and Sale of Fund Shares/2/ 28.59% -6.56% Index (Index returns do not reflect deductions for fees, expenses, or taxes) 48.45% -10.76%
- -------- 1 Inception date: 5/9/2000. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 57 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.74% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.99% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $101 $315 $547 $1,213
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $4,000 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $904,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $4,000 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $904,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $17,089 if the Creation Unit is redeemed after one year, $36,374 if the Creation Unit is redeemed after three years, $57,237 if the Creation Unit is redeemed after five years, and $117,170 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 58 iShares MSCI Spain Index Fund CUSIP: 464286764 AMEX Trading Symbol: EWP Underlying Index: MSCI Spain Index Investment Objective The iShares MSCI Spain Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Spanish market, as measured by the MSCI Spain Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Madrid Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Telefonica, BBVA and BSCH BCO Santander Central and its three largest industries were banks, telecommunication services and utilities. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 59 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 23.9 1998 51.3 1999 -2.12 2000 -13.62 2001/1/ -10.21
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -26.85%. The best calendar quarter return during the period shown above was 38.58% in the 1st quarter of 1998; the worst was -21.78% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -10.21% 7.31% 12.00% Return After Taxes on Distributions/2/ -10.31% 6.51% 11.16% Return After Taxes on Distributions and Sale of Fund Shares/2/ -6.04% 5.98% 9.98% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -11.43% 7.99% 12.87%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 60 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 75,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,500 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,142,250. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,500 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,142,250 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $12,782 if the Creation Unit is redeemed after one year, $33,583 if the Creation Unit is redeemed after three years, $56,150 if the Creation Unit is redeemed after five years, and $121,314 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 61 iShares MSCI Sweden Index Fund CUSIP: 464286756 AMEX Trading Symbol: EWD Underlying Index: MSCI Sweden Index Investment Objective The iShares MSCI Sweden Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Swedish market, as measured by the MSCI Sweden Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Stockholm Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Nordic Baltic Holding, Hennes & Mauritz and Svenska Handelsbaken and its three largest industries were banks, capital goods, and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. i Shares page 62 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 11.00 1998 11.06 1999 63.93 2000 -23.74 2001/1/ -23.86
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -40.75%. The best calendar quarter return during the period shown above was 36.63% in the 4th quarter of 1999; the worst was -29.67% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -23.86% 3.25% 7.87% Return After Taxes on Distributions/2/ -23.82% 1.79% 6.39% Return After Taxes on Distributions and Sale of Fund Shares/2/ -14.39% 3.11% 6.87% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -27.34% 5.76% 9.91%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 63 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None ------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% -------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 75,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,300 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $615,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,300 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $615,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $7,862 if the Creation Unit is redeemed after one year, $19,053 if the Creation Unit is redeemed after three years, $31,194 if the Creation Unit is redeemed after five years, and $66,251 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 64 iShares MSCI Switzerland Index Fund CUSIP: 464286749 AMEX Trading Symbol: EWL Underlying Index: MSCI Switzerland Index Investment Objective The iShares MSCI Switzerland Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Swiss market, as measured by the MSCI Switzerland Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Zurich Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Novartis, Nestle and Roche Holding and its three largest industries were pharmaceuticals and biotechnology, food beverage and tobacco and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 65 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART] 1997 1998 1999 2000 2001 - ------ ------- ------- ----- -------- 35.23% 18.27% (3.25)% 5.87% (24.93%) - -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -14.32%. The best calendar quarter return during the period shown above was 24.63% in the 4th quarter of 1998; the worst was -22.09% in the 3rd quarter of 1998. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -24.93% 4.23% 3.54% Return After Taxes on Distributions/2/ -25.01% 3.49% 2.89% Return After Taxes on Distributions and Sale of Fund Shares/2/ -15.04% 3.39% 2.85% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -21.95% 6.48% 5.40%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 66 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 125,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $1,500 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $1,346,250. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $1,500 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $1,346,250 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $14,531 if the Creation Unit is redeemed after one year, $39,052 if the Creation Unit is redeemed after three years, $65,665 if the Creation Unit is redeemed after five years, and $142,472 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 67 iShares MSCI Taiwan Index Fund CUSIP: 464286731 AMEX Trading Symbol: EWT Underlying Index: MSCI Taiwan Index Investment Objective The iShares MSCI Taiwan Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the Taiwanese market, as measured by the MSCI Taiwan Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the Taiwan Stock Exchange. As of September 30, 2002, the Index's three largest stocks were Taiwan Semiconductor Mfg., United Microelectronics and Hon Hai Precision Industry Co and its three largest industries were technology hardware and equipment, banks and materials. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. Principal Risks Specific to the Fund In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that owing to Taiwan's size and geographic proximity to the People's Republic of China, and its history of political contention with China (which regards Taiwan as a renegade province), developments in Taiwan's ongoing relations with China, including the ongoing risk of invasion by or war with China and other factors, may materially impact the Taiwanese economy and securities markets. The recent election of a new government in Taiwan has resulted in increased tensions with China, which is concerned that the new government is in favor of independence for Taiwan. i Shares page 68 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
2001/1/ 5.00
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -30.13%. The best calendar quarter return during the period shown above was 52.27% in the 4th quarter of 2001; the worst was -29.25% in the 3rd quarter of 2001. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year Inception/1/ ------ ----------- Fund: Return Before Taxes 5.00% -30.34% Return After Taxes on Distributions/2/ 5.54% -30.49% Return After Taxes on Distributions and Sale of Fund Shares/2/ 3.55% -23.64% Index (Index returns do not reflect deductions for fees, expenses, or taxes) 7.02% -29.77%
- -------- 1 Inception date: 6/20/2000. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The iShares MSCI Funds page 69 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.74% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None ----------------------------------------------------- Total Annual Fund Operating Expenses 0.99% -----------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $101 $315 $547 $1,213
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 50,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $4,500 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $374,500. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $4,500 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $374,500 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $12,736 if the Creation Unit is redeemed after one year, $20,665 if the Creation Unit is redeemed after three years, $29,242 if the Creation Unit is redeemed after five years, and $53,881 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. i Shares page 70 iShares MSCI United Kingdom Index Fund CUSIP: 464286699 AMEX Trading Symbol: EWU Underlying Index: MSCI United Kingdom Index Investment Objective The iShares MSCI United Kingdom Index Fund (the "Fund") seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the British market, as measured by the MSCI United Kingdom Index (the "Index"). Principal Investment Strategy The Index consists of stocks traded primarily on the London Stock Exchange. As of September 30, 2002, the Index's three largest stocks were BP, GlaxoSmithKline and Vodafone Group and its three largest industries were banks, energy and pharmaceuticals and biotechnology. The Fund uses a representative sampling strategy to try to track the Index. The Fund's top portfolio holdings can be found at www.iShares.com. Fund fact sheets provide information regarding the Fund's top holdings and may be requested by calling 1-800-iShares. The iShares MSCI Funds page 71 Performance Information The bar chart and table that follow show how the Fund has performed in the past on a calendar year basis and provide an indication of the risks of investing in the Fund. Both assume that all dividends and distributions will be reinvested in the Fund. How the Fund has performed in the past (before and after taxes) does not necessarily show how it will perform in the future. Supplemental information about the Fund's performance is shown under the heading "Total Return Information" in the section "Supplemental Information" at the back of this Prospectus. Annual Total Returns as of December 31, 2001 [CHART]
1997 20.85 1998 18.42 1999 12.14 2000 -11.67 2001/1/ -15.94
- -------- 1 The Fund's total return for the nine months ended September 30, 2002 was -21.78%. The best calendar quarter return during the period shown above was 18.43% in the 1st quarter of 1998; the worst was -17.32% in the 3rd quarter of 2002. Average Annual Total Returns (for the periods ended December 31, 2001)
Since 1 Year 5 Year Inception/1/ ------- ------ ----------- Fund: Return Before Taxes -15.94% 3.57% 7.58% Return After Taxes on Distributions/2/ -16.84% 2.57% 6.57% Return After Taxes on Distributions and Sale of Fund Shares/2/ -9.56% 2.79% 6.11% Index (Index returns do not reflect deductions for fees, expenses, or taxes) -15.10% 4.06% 8.21%
- -------- 1 Inception date: 3/12/1996. 2 After-tax returns in the table above are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold iShares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. i Shares page 72 Fees and Expenses Most investors will buy and sell shares of the Fund through brokers. iShares are traded on the AMEX. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.* Shareholder Fees None (fees paid directly from your investment, but see the Creation Transaction Fees and Redemption Transaction Fees discussion below) Annual Fund Operating Expenses (expenses that are deducted from the Fund's assets)** Management Fees 0.59% Distribution and Service (12b-1) Fees 0.25% Other Expenses*** None - ----------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.84% - -----------------------------------------------------------------------------------------------
* You will incur customary brokerage commissions when buying or selling shares of the Fund. ** Expressed as a percentage of average net assets and reflect current fee arrangements. *** The Company's Investment Advisory Agreement provides that BGFA will pay the operating expenses of the Company, except interest expense and taxes (both expected to be de minimis), any future distribution fees or expenses and extraordinary expenses. Example This Example is intended to help you compare the cost of investing in iShares with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your iShares 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 the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years $86 $268 $466 $1,037
Creation Transaction Fees and Redemption Transaction Fees The Fund issues and redeems shares at NAV only in large blocks of 200,000 shares or multiples thereof. As a practical matter, only institutions or large investors purchase or redeem these Creation Units. A standard creation transaction fee of $3,500 is charged to each purchaser of Creation Units. The fee is a single charge and will be the same regardless of the number of Creation Units purchased by an investor on the same day. The approximate value of a Creation Unit as of September 30, 2002 was $2,292,000. An investor who holds Creation Units and wishes to redeem them at NAV would also pay a standard redemption fee of $3,500 on the date of such redemption(s), regardless of the number of Creation Units redeemed that day. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. Assuming an investment in a Creation Unit of $2,292,000 and a 5% return each year, and assuming that the Fund's operating expenses remain the same, the total costs would be $26,623 if the Creation Unit is redeemed after one year, $68,535 if the Creation Unit is redeemed after three years, $113,626 if the Creation Unit is redeemed after five years, and $244,354 if the Creation Unit is redeemed after ten years. - -------- * See Creations and Redemptions at the end of this Prospectus. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee will be charged of up to four times the standard creation or redemption transaction fee. The iShares MSCI Funds page 73 Management Investment Advisor As investment advisor, Barclays Global Fund Advisors ("BGFA") has overall responsibility for the general management and administration of the Company. BGFA provides an investment program for each Fund and manages the investment of its assets. BGFA uses teams of portfolio managers, investment strategists and other investment specialists. This team-approach brings together many disciplines and leverages BGFA's extensive resources. BGFA also arranges for transfer agency, custody, fund administration and all other non-distribution related services necessary for the Funds to operate. Under the current Investment Advisory Agreement with the Company which took effect December 28, 2001, BGFA is responsible for paying all expenses incurred by each Fund (other than the iShares MSCI Singapore Index Fund), except portfolio transaction expenses, Rule 12b-1 distribution expenses, litigation expenses, taxes, extraordinary expenses and the investment advisory fee itself. Under the prior advisory agreement and the current advisory agreement for the iShares MSCI Singapore Index Fund, the Funds paid their own expenses and BGFA received fees equal to the difference between such expenses and specified rates (subject to the exceptions noted above) or reimbursed expenses to the extent necessary to cause the expenses to be at such specified rates (again, subject to the same exceptions). For the fiscal year ended August 31, 2002, the investment advisor accrued, received or reimbursed the following fees as a percentage of the average daily net assets of each of the iShares MSCI Index Funds.
Percentage of Percentage of Average Daily Average Daily iShares MSCI Index Fund Net Assets iShares MSCI Index Fund Net Assets ----------------------- ---------- ----------------------- ---------- Australia....... 0.49% Mexico.............. 0.52% Austria......... 0.41% Netherlands......... 0.44% Belgium......... 0.39% Pacific ex-Japan.... 0.37% Brazil.......... 0.70% Singapore........... 0.30% Canada.......... 0.49% South Africa........ N/A* EMU............. 0.49% South Korea......... 0.64% France.......... 0.47% Spain............... 0.42% Germany......... 0.48% Sweden.............. 0.37% Hong Kong....... 0.50% Switzerland......... 0.46% Italy........... 0.45% Taiwan.............. 0.62% Japan........... 0.50% United Kingdom...... 0.49% Malaysia........ 0.48%
- -------- * The Fund had not commenced operations as of August 31, 2002. BGFA is located at 45 Fremont Street, San Francisco, CA 94105. It is a wholly-owned subsidiary of BGI, which in turn is an indirect subsidiary of Barclays Bank PLC. BGI, together with its affiliates, is the world's largest investment advisor of institutional investment assets. As of September 30, 2002, BGI and its affiliates, including BGFA, provided investment advisory services for assets in excess of $690 billion. BGI, BGFA, Barclays Global Investor Services, Barclays Bank and their affiliates deal, trade and invest for their own accounts in the types of securities in which the Funds' portfolios may also invest. Administrator, Custodian and Transfer Agent Investors Bank & Trust Company ("Investors Bank") is the administrator, custodian and transfer agent for each Fund. Shareholder Information Additional shareholder information, including how to buy and sell iShares of any Fund, is available free of charge by calling toll-free: 1-800-iShares or visiting our website www.iShares.com. i Shares page 74 Buying and Selling iShares iShares trade on the Listing Exchange during the trading day and can be bought and sold throughout the trading day like other shares of publicly traded securities. iShares may trade on a Listing Exchange until 4:15 (Eastern time) every day the Listing Exchange is open. There is no minimum investment. When buying or selling iShares through a broker, you will incur customary brokerage commissions and charges. iShares may be acquired or redeemed directly from the Fund only in Creation Units or multiples thereof, as discussed in the Creations and Redemptions section. iShares trade under the ticker symbols listed in this Prospectus. The Listing Exchange generally is open Monday through Friday and is closed on weekends and the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Section 12(d)(1) of the Investment Company Act of 1940 restricts investments by registered investment companies in the securities of other investment companies, including iShares. Book Entry iShares are held in book-entry form, which means that no stock certificates are issued. Depository Trust Company ("DTC") or its nominee, is the record owner of all outstanding iShares of each Fund and is recognized as the owner of all iShares for all purposes. Investors owning iShares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all iShares. Participants include DTC, securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of iShares, you are not entitled to receive physical delivery of stock certificates or to have iShares registered in your name, and you are not considered a registered owner of iShares. Therefore, to exercise any right as an owner of iShares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any securities that you hold in book entry or "street name" form. iShares Prices The trading prices of iShares on the Listing Exchange may differ in varying degrees from their daily NAVs and can be affected by market forces such as supply and demand, economic conditions and other factors. In addition, in the case of a fund that invests in securities that primarily trade on a foreign exchange, since such foreign exchange may be open on days when the Fund or a Listing Exchange is closed, shareholders may not be able to purchase or redeem iShares from the Fund or buy or sell iShares on the Listing Exchange on days when the NAV of the Fund is significantly affected by events in foreign markets. The approximate value of iShares of each Fund will be disseminated by the Listing Exchange (except the iShares MSCI EAFE Index Fund) every fifteen seconds. The approximate values of iShares of the iShares MSCI EAFE Index Fund will be provided by Bloomberg. This approximate value should not be viewed as a "real-time" update of the NAV per iShare of any Fund, because the approximate value may not be calculated in the same manner as the NAV, which is computed once a day. The Funds are not involved in, or responsible for, the calculation or dissemination of such amount and make no warranty as to its accuracy. Shareholder Information page 75 Determination of Net Asset Value The net asset value per iShares for each Fund is computed by dividing the value of the net assets of a Fund (i.e., the value of its total assets less total liabilities) by the total number of iShares outstanding, rounded to the nearest cent. Expenses and fees, including the management, administration and distribution fees, are accrued daily and taken into account for purposes of determining net asset value. Except for the Funds named below, the net asset value of each Fund, except the iShares MSCI Malaysia, South Korea and Taiwan Funds, is determined as of the close of the regular trading session on the AMEX (ordinarily 4:00 p.m., Eastern time) on each day that the AMEX is open. The net asset values of the iShares MSCI Malaysia, South Korea and Taiwan Funds are determined as of 8:30 a.m. (Eastern time) on each day that the New York Stock Exchange, Inc. is open. The Company may commence determining the net asset value of certain Funds more frequently than once a day or may publish intra-day estimated NAVs for certain Funds. The price at which a purchase or redemption of Creation Units of iShares is made is based on the next calculation of net asset value. In the case of Funds that effect creations and/or redemptions only for cash (i.e., the iShares MSCI Brazil, Malaysia, South Korea and Taiwan Funds), it is possible that portfolio securities transactions by the Company in the relevant local markets of those Funds could affect the prices of those portfolio securities at the time those Funds' net asset values are calculated. Currency values are generally converted into U.S. dollars using the same exchange rates used by MSCI in the calculation of the relevant Underlying Indices (currently exchange rates as of 4:00 p.m. London time). However, the Company may use a different rate from the rate used by MSCI if the investment advisor concludes that a different rate is more appropriate. Any use of a different rate from MSCI may adversely affect a Fund's ability to track its Underlying Index. Dividends and Distributions Dividends from net investment income, including any net foreign currency gains, are declared and paid at least annually and any net realized securities gains are distributed at least annually. In order to improve tracking error or comply with the distribution requirements of the Internal Revenue Code of 1986, dividends may be declared and paid more frequently than annually for certain Funds. Dividends and securities gains distributions are distributed in US dollars and cannot be automatically reinvested in additional iShares. The Company will inform shareholders within 60 days after the close of a Fund's taxable year of the amount and nature of all distributions made to them. Taxes As with any investment, you should consider how your investment in iShares will be taxed. The tax information in this prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in iShares. Unless your investment in a Fund is through a tax-exempt entity or taxed-deferred retirement account, such as an IRA plan, you need to be aware of the possible tax consequences when: .. Each Fund makes distributions, and .. You sell iShares on the AMEX. Taxes on Distributions Each Fund will distribute annually any net investment income, and any net realized long-term or short-term capital gains. Each Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements. In general, your distributions are subject to federal income tax when they are paid. Dividends paid out of a Fund's income and net short-term gains, if any, are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess of net short-term capital losses are taxable as long-term capital gains, regardless of how long you have held the iShares. i Shares page 76 Distributions in excess of a Fund's current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in iShares, and as capital gain thereafter. A distribution may be taxable to you as ordinary income or capital gain even though, from an investment standpoint, it may constitute a return of capital. Dividends and interest received by each Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Since more than 50% of each Fund's total assets at the end of its taxable year will consist of foreign stocks or securities, each Fund will "pass through" to you any foreign income taxes (including withholding taxes) paid by a Fund, if you held the Fund, and the Fund held the security, on the dividend entitlement date and for at least fifteen additional days immediately before and/or after. Subject to certain limitations, the foreign income taxes passed through may qualify as a deduction in calculating US taxable income or as a credit in calculating US federal income tax. You will be notified of your portion of the foreign income taxes paid to each country and the portion of dividends that represents income derived from sources within each country. Taxes other than foreign income taxes, including any profits levy payable by the iShares MSCI Malaysia Fund, are not passed through to you in this way. If you are neither a lawful permanent resident nor a citizen of the United States or if you are a foreign entity, each Fund's ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% US withholding tax, unless a lower treaty rate applies. In addition iShares may be subject to U.S. estate tax. You should consult your personal tax advisor as to this matter. If you are a lawful permanent resident or a citizen of the United States, by law, back-up withholding will apply to your distributions and proceeds if you have not provided a taxpayer identification number or social security number and made other required certifications. Taxes When iShares Are Sold Currently, any capital gain or loss realized upon a sale of iShares is generally treated as long-term capital gain or loss if the iShares have been held for more than one year and as short-term capital gain or loss if the iShares have been held for one year or less. The foregoing discussion summarizes some of the consequences under current federal tax law of an investment in a Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in an Index Series under all applicable tax laws. Creations and Redemptions The iShares that trade on a Listing Exchange are "created" at their NAV by market makers, large investors and institutions in block-size Creation Units generally of 50,000 iShares or more. Each "creator" enters into an authorized participant agreement with SEI Investment Distribution Co., the Funds' distributor, and deposits into the applicable Fund a portfolio of securities closely approximating the holdings of the Fund and a specified amount of cash in exchange for a specified number of Creation Units, generally 50,000 iShares. Similarly, iShares can only be redeemed in a specified number of Creation Units, generally 50,000 iShares, principally in-kind for a portfolio of securities held by the Fund and a specified amount of cash. Except when aggregated in Creation Units, iShares are not redeemable. The prices at which creations and redemptions occur are based on the next calculation of NAV after an order is received in a form proscribed in the authorized participant agreement. Creations and redemptions must be made through a firm that is either a member of the Continuous Net Settlement System of the National Securities Clearing Corporation or a DTC Participant, and in each Shareholder Information page 77 case, must have executed an agreement with the Distributor with respect to creations and redemptions of Creation Unit aggregations ("Participant Agreement"). Information about the procedures regarding creation and redemption of Creation Units is included in the Statement of Additional Information. Because new iShares may created and issued on an ongoing basis, at any point during the life of a Fund a "distribution," as such term is used in the Securities Act of 1933 (the "Securities Act"), may be occurring. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters and subject to the prospectus-delivery and liability provisions of the Securities Act. Nonetheless, any determination of whether one is an underwriter must take into account all the relevant facts and circumstances of each particular case. Broker-dealers should also note that dealers who are not "underwriters," but are participating in a distribution (as contrasted to ordinary secondary transactions), and thus dealing with iShares that are part of an "unsold allotment" within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. iShares Transaction Fees Each Fund will impose a purchase transaction fee and a redemption transaction fee to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units of iShares. Purchasers and redeemers of Creation Units of iShares for cash are required to pay an additional variable charge to compensate for brokerage and market impact expenses. The creation and redemption transaction fees for creations and redemptions in kind for each Fund are listed below. The standard creation transaction fee is charged to each purchaser on the day such purchaser creates a Creation Unit. The fee is a single charge and will be the amount indicated below regardless of the number of Creation Units purchased by an investor on the same day. BGFA may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units, and other financial institutions for administrative or marketing services. Similarly, the standard redemption transaction fee will be the amount indicated regardless of the number of Creation Units redeemed that day. The creation and redemption transaction fees for creations and redemptions for Funds made for cash (when cash creations and redemptions are available or specified) will also be subject to an additional variable charge of up to a maximum of four times the amount shown below under "Maximum Creation/Redemption Transaction Fee." In addition, purchasers of iShares in Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust. Redeemers of iShares in Creation Units are responsible for the costs of transferring the Fund Securities from the Trust to their accounts or on their order. Investors who use the services of a broker or other such intermediary may pay fees for such services. The following table also shows, as of September 30, 2002, the approximate cost of one Creation Unit per Fund, including the creation transaction fee and the number of shares per Creation Unit. i Shares page 78
Maximum Additional Maximum Additional In-kind and Cash Variable Charge Variable Charge Number of Purchases and for Cash for Cash Shares Per iShares MSCI Funds Redemptions Purchases* Redemptions* Creation Unit - ------------------ ---------------- ------------------ ------------------ ------------- Australia........... $2,400 0.60% 0.60% 200,000 Austria............. $ 600 0.67% 0.67% 100,000 Belgium............. $ 700 0.30% 0.30% 40,000 Brazil.............. $2,400 ** *** 50,000 Canada.............. $1,900 0.30% 0.30% 100,000 EMU................. $8,000 1.05% 1.05% 50,000 France.............. $2,900 0.25% 0.25% 200,000 Germany............. $1,500 0.25% 0.25% 300,000 Hong Kong........... $2,000 0.60% 0.60% 75,000 Italy............... $1,400 0.30% 0.30% 150,000 Japan............... $5,000 0.15% 0.40% 600,000 Malaysia............ $5,000 ** *** 75,000 Mexico.............. $1,400 0.50% 0.50% 100,000 Netherlands......... $1,000 0.25% 0.25% 50,000 Pacific ex-Japan.... $6,000 1.80% 1.50% 100,000 Singapore........... $2,000 1.60% 1.30% 100,000 South Africa........ $1,200 0.75% 0.75% 50,000 South Korea......... $4,000 ** *** 50,000 Spain............... $1,500 0.25% 0.45% 75,000 Sweden.............. $1,300 0.30% 0.30% 75,000 Switzerland......... $1,500 0.40% 0.40% 125,000 Taiwan.............. $4,500 ** *** 50,000 United Kingdom...... $3,500 0.25% 0.75% 200,000
- -------- * As a percentage of amount invested. ** This percentage, when aggregated with the basic in-kind transaction fee, will not exceed 3.00%. *** This percentage, when aggregated with the basic in-kind transaction fee, will not exceed 2.00% Possible Claim In April 2002, the judge overseeing an ongoing action in the U.S. District Court for the Northern District of Illinois granted leave for a United States patentholder named Mopex, Inc. to amend its complaint to add the Company, along with seven other parties, as a defendant. There are now a total of twenty defendants, including the Company's investment advisor, other exchange traded funds, various fund service providers and market makers, and the Chicago Stock Exchange, Inc. In the action, the plaintiff alleges that the actions of the parties, now including the Company, infringed the patent. In addition, the plaintiff alleges that the parties engaged in a "conspiracy" amongst themselves to infringe the patent. Although this is the only case to which the Company has been named a party, this action is one of three involving related issues. The Company believes it has valid defenses to all claims raised by the patentholder. However, a resolution of this case may impose increased costs on the Company and thus raise the expense ratios of the Funds, adversely affecting performance. Distribution Arrangements The Company has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows the Company to pay distribution fees for the sale and distribution of iShares. Because these fees are paid out of a Fund's assets on an ongoing basis, over time the fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The fees paid under the Rule 12b-1 Plan are calculated and paid monthly with respect to each Fund (other than the iShares MSCI Pacific ex-Japan Fund, which does not pay Rule 12b-1 fees) at a rate set from time to time by the Board, provided that the annual rate may not exceed 0.25% of the average daily net assets of such Fund. These fees are currently Shareholder Information page 79 being paid at the maximum rate. The distribution fees payable under the 12b-1 Plan are used to pay distributions-related expenses, including: compensation to the distributor at a rate fixed by the Company's Board of Directors from time to time (currently 0.02% of the Company's average daily net assets, subject to an annual minimum of $845,000); compensation to a sales and marketing consultant retained by the Company at a rate of 0.035% of the Company's average daily net assets; and reimbursements of expenses incurred by the distributor and other persons (principally the investment advisor in connection with marketing and the distribution of the Company's shares). In addition, the distributor has entered into sales and investor services agreements with broker-dealers or other persons that are DTC Participants to provide distribution assistance, including broker-dealer and shareholder support and educational and promotional services. Under the terms of each sales and investor services agreement, the distributor will pay broker-dealers or other persons, out of Rule 12b-1 fees received from the Fund to which such fees apply, at the annual rate of up to 0.25 of 1% of the average daily net asset value of iShares held through DTC for the account of such DTC Participant. The amounts of the fees paid to the distributor and the sales and marketing consultant are not dependent on the amount of distribution expenses actually incurred by them. The distributor has no role in determining the investment policies of any Fund or which securities are to be purchased or sold by any Fund. i Shares page 80 Financial Highlights The financial highlights table is intended to help you understand the financial performance since inception of the following Funds that have commenced investment operations: the iShares MSCI Australia, Austria, Belgium, Brazil, Canada, EMU, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Netherlands, Pacific ex-Japan, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan and United Kingdom Funds. The financial highlights of the iShares MSCI South Africa Index Fund are not presented as the Fund had not been in existence for a suitable reporting period as of the date of this Prospectus. Certain information reflects financial results for a single iShare of a Fund. The total returns in the table represent the rate that a shareholder would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). Information for the fiscal years ended August 31, 2001 and 2002 has been audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of those Funds that have commenced operations, is included in the Annual Report, which is incorporated by reference in the SAI and available without charge upon request. Information for the fiscal years ended August 31, 1998, 1999 and 2000 was audited by the former auditor. Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Australia Index Fund --------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...................... $ 9.24 $ 9.93 $ 9.99 $ 7.75 $ 10.35 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/.... 0.23 0.24 0.23 0.20 0.23 Net realized and unrealized gain (loss)................. (0.07) (0.71) (0.04) 2.29 (2.60) ------- ------- ------- ------- ------- Total from investment operations... 0.16 (0.47) 0.19 2.49 (2.37) ------- ------- ------- ------- ------- Less distributions from: Net investment income......... (0.04) (0.20) (0.22) (0.19) (0.23) In excess of net investment income........... - - (0.01) (0.00)/(3)/ (0.00)/(3)/ Return of capital............. - (0.02) (0.02) (0.06) - ------- ------- ------- ------- ------- Total distributions....... (0.04) (0.22) (0.25) (0.25) (0.23) ------- ------- ------- ------- ------- Net asset value, end of year... $ 9.36 $ 9.24 $ 9.93 $ 9.99 $ 7.75 ======= ======= ======= ======= ======= Total return................... 1.74 % (4.77)% 1.84 % 32.09 % (23.11)% ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s) $76,731 $57,312 $61,574 $53,957 $34,099 Ratio of expenses to average net assets.................. 0.84 % 0.84 % 0.95 % 1.00 % 1.05 % Ratio of net investment income to average net assets....... 2.47 % 2.54 % 2.22 % 2.03 % 2.38 % Portfolio turnover rate/(2)/.. 5 % 23 % 36 % 14 % 1 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. Financial Highlights page 81 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Austria Index Fund ----------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...... $ 8.18 $ 7.67 $ 9.13 $ 10.11 $10.51 ------- ------- ------- ------- ------ Income from investment operations: Net investment income/(3)/............ 0.13 0.13 0.04 0.10 0.06 Net realized and unrealized gain (loss)............................... (0.12) 0.52 (1.46) (0.98) 0.20 ------- ------- ------- ------- ------ Total from investment operations... 0.01 0.65 (1.42) (0.88) 0.26 ------- ------- ------- ------- ------ Less distributions from: Net investment income................. - (0.13) (0.04) (0.07) (0.04) In excess of net investment income.... - (0.01) (0.00)(5) (0.01) (0.01) Net realized gain..................... - - - - (0.61) In excess of net realized gain........ - - - - (0.00)/(5)/ Return of capital..................... - (0.00)/(5)/ - (0.02) (0.00)/(5)/ ------- ------- ------- ------- ------ Total distributions................ - (0.14) (0.04) (0.10) (0.66) ------- ------- ------- ------- ------ Net asset value, end of year............ $ 8.19 $ 8.18 $ 7.67 $ 9.13 $10.11 ======= ======= ======= ======= ====== Total return............................ 0.12 % 8.41 % (15.51)% (8.69)% 2.16 % ======= ======= ======= ======= ====== Ratios/Supplemental data: Net assets, end of year (000s)........ $14,740 $11,447 $10,741 $12,776 $8,085 Ratio of expenses to average net assets............................... 0.84 % 0.84%/(1)/ 1.16%/(1)/ 1.31 % 1.41 % Ratio of net investment income to average net assets................... 1.57 % 1.69%/(2)/ 0.51%/(2)/ 1.04 % 0.51 % Portfolio turnover rate/(4)/.......... 32 % 66 % 34 % 50 % 36 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 0.97% and 1.20%, respectively. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the years ended August 31, 2001 and August 31, 2000 were 1.55% and 0.47%, respectively. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Rounds to less than $0.01. i Shares page 82 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Belgium Index Fund ---------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...................... $ 11.81 $13.23 $ 16.07 $ 18.40 $ 15.64 ------- ------ ------- ------- ------- Income from investment operations: Net investment income/(3)/.... 0.25 0.19 0.19 0.08 0.24 Net realized and unrealized gain (loss)................. (1.56) (1.34) (2.67) (0.30) 6.09 ------- ------ ------- ------- ------- Total from investment operations... (1.31) (1.15) (2.48) (0.22) 6.33 ------- ------ ------- ------- ------- Less distributions from: Net investment income......... (0.07) (0.20) (0.17) - (0.27) In excess of net investment income........... - (0.07) (0.19) (0.01) (1.21) Net realized gain............. - - - (1.19) (1.99) Return of capital............. - - - (0.91) (0.10) ------- ------ ------- ------- ------- Total distributions....... (0.07) (0.27) (0.36) (2.11) (3.57) ------- ------ ------- ------- ------- Net asset value, end of year... $ 10.43 $11.81 $ 13.23 $ 16.07 $ 18.40 ======= ====== ======= ======= ======= Total return................... (11.10)% (8.72)% (15.50)% (1.00)% 39.42 % ======= ====== ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s) $10,427 $9,918 $13,230 $13,496 $25,765 Ratio of expenses to average net assets.................. 0.84 % 0.84%/(1)/ 1.13 % 1.24 % 1.04 % Ratio of net investment income to average net assets....... 2.26 % 1.60%/(2)/ 1.36 % 0.45 % 1.28 % Portfolio turnover rate/(4)/.. 18 % 36 % 53 % 63 % 50 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 0.87%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2001 was 1.57%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. Financial Highlights page 83 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Brazil Index Fund --------------------------------------- Period from Jul. 10, 2000(7) Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 ------------- ------------- ---------------- Net asset value, beginning of period......... $ 11.20 $ 19.25 $ 20.22 ------- ------- ------- Income from investment operations: Net investment income/(3)/................. 0.38 0.68 0.02 Net realized and unrealized loss........... (3.28) (8.09) (0.63) ------- ------- ------- Total from investment operations........ (2.90) (7.41) (0.61) ------- ------- ------- Less distributions from: Net investment income...................... - (0.56) (0.02) In excess of net realized gain............. - -- (0.34) Return of capital.......................... - (0.08) - ------- ------- ------- Total distributions..................... - (0.64) (0.36) ------- ------- ------- Net asset value, end of period............... $ 8.30 $ 11.20 $ 19.25 ======= ======= ======= Total return................................. (25.89)% (38.52)% (2.97)%/(5)/ ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s)........... $83,788 $14,004 $18,283 Ratio of expenses to average net assets/(6)/............................... 0.99 % 0.99 % 0.99%/(1)/ Ratio of net investment income to average net assets/(6)/................... 3.50 % 4.44 % 0.77%/(2)/ Portfolio turnover rate/(4)/............... 103 % 43 % 64 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.40%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 0.37%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Not annualized. (6)Annualized for periods of less than one year. (7)Commencement of operations. i Shares page 84 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Canada Index Fund --------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year....................... $ 10.70 $ 16.94 $ 13.22 $ 9.90 $ 13.43 ------- ------- ------- ------ ------- Income from investment operations: Net investment income/(3)/..... 0.07 0.05 0.70 0.07 0.07 Net realized and unrealized gain (loss).................. (1.27) (5.92) 8.08 3.87 (2.89) ------- ------- ------- ------ ------- Total from investment operations.... (1.20) (5.87) 8.78 3.94 (2.82) ------- ------- ------- ------ ------- Less distributions from: Net investment income.......... (0.01) (0.02) (0.52) (0.08) (0.13) In excess of net investment income............ - - (0.03) (0.01) (0.00)/(5)/ Net realized gain.............. - - (4.08) (0.53) (0.58) In excess of net realized gains - (0.31) (0.31) - - Return of capital.............. - (0.04) (0.12) - - ------- ------- ------- ------ ------- Total distributions........ (0.01) (0.37) (5.06) (0.62) (0.71) ------- ------- ------- ------ ------- Net asset value, end of year.... $ 9.49 $ 10.70 $ 16.94 $13.22 $ 9.90 ======= ======= ======= ====== ======= Total return.................... (11.23)% (34.95)% 67.21 % 39.71% (21.69)% ======= ======= ======= ====== ======= Ratios/Supplemental data: Net assets, end of year (000s). $66,420 $28,889 $22,028 $9,253 $ 6,932 Ratio of expenses to average net assets................... 0.84% 0.84 % 1.17%/(1)/ 1.23 % 1.14 % Ratio of net investment income to average net assets........ 0.70% 0.44 % 4.07%/(2)/ 0.53 % 0.46 % Portfolio turnover rate/(4)/... 5% 63 % 64 % 12 % 4 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.19%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 4.05%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Rounds to less than $0.01. Financial Highlights page 85 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI EMU Index Fund --------------------------------------- Period from Jul. 25, 2000 Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000(8) ------------- ------------- ---------------- Net asset value, beginning of period......... $ 56.74 $ 76.02 $ 80.72 -------- ------- ------- Income from investment operations: Net investment income (loss)/(3)/........... 0.75 0.72 (0.00)/(5)/ Net realized and unrealized loss............ (11.47) (19.32) (4.70) -------- ------- ------- Total from investment operations........ (10.72) (18.60) (4.70) -------- ------- ------- Less distributions from: Net investment income....................... - (0.41) - In excess of net investment income.......... - (0.01) - Return of capital........................... - (0.26) - -------- ------- ------- Total distributions..................... - (0.68) - -------- ------- ------- Net asset value, end of period............... $ 46.02 $ 56.74 $ 76.02 ======== ======= ======= Total return................................. (18.89)% (24.51)% (5.82)%/(6)/ ======== ======= ======= Ratios/Supplemental data: Net assets, end of period (000s)............ $131,168 $90,779 $41,811 Ratio of expenses to average net assets/(7)/ 0.84 % 0.84 % 0.84%/(1)/ Ratio of net investment income to average net assets/(7)/........................... 1.44 % 1.13 % 0.03%/(2)/ Portfolio turnover rate/(4)/................ 3 % 24 % 0 %/(6)/
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.57%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was (0.70)%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Rounds to less than $0.01. (6)Not annualized. (7)Annualized for periods of less than one year. (8)Commencement of operations. i Shares page 86 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI France Index Fund ----------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...... $ 19.53 $ 26.41 $ 22.90 $ 19.13 $ 14.50 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/............ 0.18 0.06 0.10 0.14 0.30 Net realized and unrealized gain (loss)............................... (4.19) (6.89) 5.21 3.88 4.76 ------- ------- ------- ------- ------- Total from investment operations... (4.01) (6.83) 5.31 4.02 5.06 ------- ------- ------- ------- ------- Less distributions from: Net investment income................. - (0.04) (0.09) (0.10) (0.19) In excess of net investment income.... - - (0.02) (0.02) (0.03) Net realized gain..................... - - (1.64) (0.05) (0.13) In excess of net realized gain........ - (0.00)/(3)/ (0.03) - (0.01) Return of capital..................... - (0.01) (0.02) (0.08) (0.07) ------- ------- ------- ------- ------- Total distributions................ - (0.05) (1.80) (0.25) (0.43) ------- ------- ------- ------- ------- Net asset value, end of year............ $ 15.52 $ 19.53 $ 26.41 $ 22.90 $ 19.13 ======= ======= ======= ======= ======= Total return............................ (20.53)% (25.86)% 23.45 % 21.01 % 34.77 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)........ $49,674 $58,602 $95,116 $77,885 $45,922 Ratio of expenses to average net assets............................... 0.84 % 0.84 % 0.96 % 1.06 % 1.18 % Ratio of net investment income to average net assets................... 1.00 % 0.28 % 0.36 % 0.67 % 1.58 % Portfolio turnover rate/(2)/.......... 3 % 14 % 17 % 0 % 6 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. Financial Highlights page 87 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Germany Index Fund --------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year........... $ 15.19 $ 20.46 $ 21.17 $ 20.25 $ 16.31 ------- -------- -------- -------- ------- Income from investment operations: Net investment income/(1)/................. 0.11 0.18 0.18 0.12 0.29 Net realized and unrealized gain (loss).... (3.23) (5.26) 1.64 1.31 3.92 ------- -------- -------- -------- ------- Total from investment operations........ (3.12) (5.08) 1.82 1.43 4.21 ------- -------- -------- -------- ------- Less distributions from: Net investment income...................... - (0.19) (0.16) (0.10) (0.17) In excess of net investment income......... - (0.00)/(3)/ (0.01) (0.01) (0.01) Net realized gain.......................... - - (2.00) (0.31) (0.01) In excess of net realized gain............. - - (0.32) (0.08) (0.00)/(3)/ Return of capital.......................... - (0.00)/(3)/ (0.04) (0.01) (0.08) ------- -------- -------- -------- ------- Total distributions..................... - (0.19) (2.53) (0.51) (0.27) ------- -------- -------- -------- ------- Net asset value, end of year................. $ 12.07 $ 15.19 $ 20.46 $ 21.17 $ 20.25 ======= ======== ======== ======== ======= Total return................................. (20.54)% (24.87)% 8.44 % 7.04 % 25.69 % ======= ======== ======== ======== ======= Ratios/Supplemental data: Net assets, end of year (000s)............. $94,160 $118,525 $153,487 $101,645 $72,934 Ratio of expenses to average net assets.... 0.84 % 0.84 % 0.94 % 1.00 % 1.08 % Ratio of net investment income to average net assets................................ 0.77 % 0.99 % 0.73 % 0.57 % 1.43 % Portfolio turnover rate/(2)/............... 9 % 20 % 56 % 14 % 1 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. i Shares page 88 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Hong Kong Index Fund ------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...... $ 8.93 $ 13.24 $ 11.83 $ 6.41 $ 14.73 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/............ 0.23 0.23 0.33 0.29 0.35 Net realized and unrealized gain (loss)............................... (1.11) (4.30) 1.42 5.49 (8.27) ------- ------- ------- ------- ------- Total from investment operations... (0.88) (4.07) 1.75 5.78 (7.92) ------- ------- ------- ------- ------- Less distributions from: Net investment income................. (0.06) (0.23) (0.32) (0.31) (0.28) In excess of net investment income.... - - - (0.05) (0.00)/(3)/ Return of capital..................... - (0.01) (0.02) - (0.12) ------- ------- ------- ------- ------- Total distributions................ (0.06) (0.24) (0.34) (0.36) (0.40) ------- ------- ------- ------- ------- Net asset value, end of year............ $ 7.99 $ 8.93 $ 13.24 $ 11.83 $ 6.41 ======= ======= ======= ======= ======= Total return............................ (9.94)% (30.88)% 14.73 % 90.51 % (54.22)% ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)........ $99,502 $52,946 $79,479 $77,200 $49,973 Ratio of expenses to average net assets............................... 0.84 % 0.84 % 0.94 % 1.01 % 1.09 % Ratio of net investment income to average net assets................... 2.56 % 2.11 % 2.57 % 2.84 % 3.76 % Portfolio turnover rate/(2)/.......... 15 % 43 % 21 % 43 % 22 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. Financial Highlights page 89 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Italy Index Fund ----------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...................... $ 17.79 $ 22.23 $ 21.56 $ 22.89 $ 16.66 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/.... 0.37 0.24 0.39 0.17 0.18 Net realized and unrealized gain (loss)................. (3.01) (4.37) 2.51 1.05 7.94 ------- ------- ------- ------- ------- Total from investment operations... (2.64) (4.13) 2.90 1.22 8.12 ------- ------- ------- ------- ------- Less distributions from: Net investment income......... - (0.24) (0.12) (0.06) (0.18) In excess of net investment income........... - - - - (1.02) Net realized gain............. - - (1.69) (2.24) (0.69) In excess of net realized gain............... - (0.07) (0.11) - - Return of capital............. - (0.00)/(3)/ (0.31) (0.25) - ------- ------- ------- ------- ------- Total distributions....... - (0.31) (2.23) (2.55) (1.89) ------- ------- ------- ------- ------- Net asset value, end of year... $ 15.15 $ 17.79 $ 22.23 $ 21.56 $ 22.89 ======= ======= ======= ======= ======= Total return................... (14.84)% (18.61)% 13.35 % 5.14 % 47.66 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)................. $29,538 $34,682 $50,008 $58,224 $58,368 Ratio of expenses to average net assets.................. 0.84 % 0.84 % 0.99 % 1.03 % 1.02 % Ratio of net investment income to average net assets....... 2.34 % 1.16 % 1.61 % 0.70 % 0.76 % Portfolio turnover rate/(2)/.. 10 % 20 % 40 % 8 % 8 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. i Shares page 90 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Japan Index Fund ------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year... $ 9.07 $ 13.82 $ 13.22 $ 8.39 $ 12.61 -------- -------- -------- -------- -------- Income from investment operations: Net investment loss/(1)/........... (0.01) (0.01) (0.05) (0.03) (0.02) Net realized and unrealized gain (loss)............................ (1.29) (4.74) 1.21 4.91 (4.19) -------- -------- -------- -------- -------- Total from investment operations.... (1.30) (4.75) 1.16 4.88 (4.21) -------- -------- -------- -------- -------- Less distributions from: In excess of net investment income............................ - - (0.00)(3) (0.04) - Net realized gain.................. - - (0.53) - (0.00)/(3)/ Return of capital.................. - - (0.03) (0.01) (0.01) -------- -------- -------- -------- -------- Total distributions............. - - (0.56) (0.05) (0.01) -------- -------- -------- -------- -------- Net asset value, end of year......... $ 7.77 $ 9.07 $ 13.82 $ 13.22 $ 8.39 ======== ======== ======== ======== ======== Total return......................... (14.33)% (34.37)% 8.75 % 58.14 % (33.38)% ======== ======== ======== ======== ======== Ratios/Supplemental data: Net assets, end of year (000s)..... $666,376 $527,899 $787,790 $713,653 $201,485 Ratio of expenses to average net assets............................ 0.84 % 0.84 % 0.88 % 0.94 % 1.04 % Ratio of net investment loss to average net assets................ (0.12)% (0.11)% (0.32)% (0.27)% (0.21)% Portfolio turnover rate/(2)/....... 2 % 21 % 22 % 0 % 0 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. Financial Highlights page 91 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Malaysia Index Fund ------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...... $ 5.11 $ 5.96 $ 5.59 $ 2.11 $ 8.23 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/............ 0.08 0.06 0.05 0.01 0.06 Net realized and unrealized gain (loss)............................... 0.52 (0.85) 0.37 3.67 (6.10) ------- ------- ------- ------- ------- Total from investment operations... 0.60 (0.79) 0.42 3.68 (6.04) ------- ------- ------- ------- ------- Less distributions from: Net investment income................. (0.03) (0.06) (0.05) (0.01) (0.05) In excess of net investment income.... - (0.00)/(3)/ (0.00)/(3)/ - - Return of capital..................... - (0.00)/(3)/ (0.00)/(3)/ (0.19) (0.03) ------- ------- ------- ------- ------- Total distributions................ (0.03) (0.06) (0.05) (0.20) (0.08) ------- ------- ------- ------- ------- Net asset value, end of year............ $ 5.68 $ 5.11 $ 5.96 $ 5.59 $ 2.11 ======= ======= ======= ======= ======= Total return............................ 11.82 % (13.22)% 7.57 % 185.81% (73.57)% ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)........ $93,262 $80,877 $99,206 $95,251 $35,867 Ratio of expenses to average net assets............................... 0.84 % 0.84 % 0.96 % 1.43 % 1.09 % Ratio of net investment income to average net assets................... 1.53 % 1.19 % 0.81 % 0.33 % 1.40 % Portfolio turnover rate/(2)/.......... 37 % 37 % 18 % 7 % 2 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creations Units. (3)Rounds to less than $0.01. i Shares page 92 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Mexico Index Fund ---------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year................ $ 15.35 $ 16.72 $ 13.39 $ 8.11 $ 15.11 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(3)/...................... 0.32 0.17 0.06 0.06 0.09 Net realized and unrealized gain (loss)......... (1.95) (1.36) 3.69 5.36 (6.71) ------- ------- ------- ------- ------- Total from investment operations............. (1.63) (1.19) 3.75 5.42 (6.62) ------- ------- ------- ------- ------- Less distributions from: Net investment income........................... (0.07) (0.15) - (0.06) (0.09) In excess of net investment income.............. - - - (0.01) - Net realized gain............................... - (0.03) (0.42) - (0.29) In excess of net realized gain.................. - - - (0.01) - Return of capital............................... - - - (0.06) - ------- ------- ------- ------- ------- Total distributions.......................... (0.07) (0.18) (0.42) (0.14) (0.38) ------- ------- ------- ------- ------- Net asset value, end of year...................... $ 13.65 $ 15.35 $ 16.72 $ 13.39 $ 8.11 ======= ======= ======= ======= ======= Total return...................................... (10.67)% (7.02)% 28.20 % 66.92 % (44.18)% ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s).................. $70,994 $46,056 $40,127 $21,430 $ 7,296 Ratio of expenses to average net assets......... 0.84 % 0.84 % 1.04%/(1)/ 1.26% 1.34 % Ratio of net investment income to average net assets......................................... 2.05 % 1.12 % 0.35%/(2)/ 0.52% 0.60 % Portfolio turnover rate/(4)/.................... 8 % 34 % 24 % 18 % 14 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.04%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 0.35%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. Financial Highlights page 93 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Netherlands Index Fund -------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year........................ $ 18.59 $ 23.53 $ 23.45 $ 23.50 $ 21.42 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/...... 0.25 0.28 0.13 0.53 0.25 Net realized and unrealized gain (loss)................... (4.11) (4.94) 0.18 1.60 3.53 ------- ------- ------- ------- ------- Total from investment operations..... (3.86) (4.66) 0.31 2.13 3.78 ------- ------- ------- ------- ------- Less distributions from: Net investment income........... (0.04) (0.28) (0.08) (0.43) (0.16) In excess of net investment income............. - - - (0.01) - Net realized gain............... - - (0.11) (1.42) (1.47) In excess of net realized gain................. - - - (0.24) - Return of capital............... - - (0.04) (0.08) (0.07) ------- ------- ------- ------- ------- Total distributions......... (0.04) (0.28) (0.23) (2.18) (1.70) ------- ------- ------- ------- ------- Net asset value, end of year..... $ 14.69 $ 18.59 $ 23.53 $ 23.45 $ 23.50 ======= ======= ======= ======= ======= Total return..................... (20.79)% (19.83)% 1.28 % 8.98 % 17.41 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)................... $19,103 $24,184 $30,613 $31,685 $22,349 Ratio of expenses to average net assets........................ 0.84 % 0.84 % 1.03 % 1.07 % 1.12 % Ratio of net investment income to average net assets.................... 1.48 % 1.34 % 0.53 % 2.20 % 1.00 % Portfolio turnover rate/(2)/.... 15 % 35 % 22 % 32 % 16 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. i Shares page 94 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Pacific ex-Japan Index Fund -------------------- Period from Oct. 25, 2001 to Aug. 31, 2002(5) -------------------- Net asset value, beginning of period...................... $ 50.03 -------- Income from investment operations: Net investment income/(1)/............................... 1.35 Net realized and unrealized gain......................... 1.40 -------- Total from investment operations..................... 2.75 -------- Less distributions from: Net investment income.................................... (0.27) -------- Total distributions.................................. (0.27) -------- Net asset value, end of period............................ $ 52.51 ======== Total return/(3)/......................................... 5.51% ======== Ratios/Supplemental data: Net assets, end of period (000s)......................... $105,029 Ratio of expenses to average net assets/(4)/............. 0.50% Ratio of net investment income to average net assets/(4)/ 2.87% Portfolio turnover rate/(2)/............................. 5%
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Not annualized. (4)Annualized for periods of less than one year. (5)Commencement of operations. Financial Highlights page 95 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Singapore Index Fund ------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year........... $ 5.34 $ 7.58 $ 7.93 $ 3.30 $ 8.66 ------- ------- ------- -------- ------- Income from investment operations: Net investment income/(1)/................. 0.07 0.07 0.13 0.05 0.07 Net realized and unrealized gain (loss).... (0.36) (2.16) (0.21) 4.70 (5.37) ------- ------- ------- -------- ------- Total from investment operations........ (0.29) (2.09) (0.08) 4.75 (5.30) ------- ------- ------- -------- ------- Less distributions from: Net investment income...................... (0.04) (0.07) (0.11) (0.05) (0.04) In excess of net investment income......... - - - (0.06) (0.01) Net realized gain.......................... - - (0.14) - - In excess of net realized gain............. - (0.06) - - - Return of capital.......................... - (0.02) (0.02) (0.01) (0.01) ------- ------- ------- -------- ------- Total distributions..................... (0.04) (0.15) (0.27) (0.12) (0.06) ------- ------- ------- -------- ------- Net asset value, end of year................. $ 5.01 $ 5.34 $ 7.58 $ 7.93 $ 3.30 ======= ======= ======= ======== ======= Total return................................. (5.42)% (27.89)% (1.29)% 144.52 % (61.29)% ======= ======= ======= ======== ======= Ratios/Supplemental data: Net assets, end of year (000s)............. $88,126 $73,704 $88,719 $113,438 $47,248 Ratio of expenses to average net assets.... 0.84 % 0.84 % 0.94 % 0.97 % 1.08 % Ratio of net investment income to average net assets................................ 1.44 % 1.15 % 1.60 % 0.76 % 1.17 % Portfolio turnover rate/(2)/............... 9 % 32 % 52 % 25 % 67 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. i Shares page 96 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI South Korea Index Fund ------------------------------------------ Period from May 9, 2000 Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000(8) ------------- ------------- ---------------- Net asset value, beginning of period............................. $ 13.25 $ 18.16 $ 20.36 ------- ------- ------- Income from investment operations: Net investment income (loss)/(3)/.. (0.00)/(5)/ 0.09 (0.04) Net realized and unrealized gain (loss)............................ 7.92 (4.90) (2.16) ------- ------- ------- Total from investment operations.................... 7.92 (4.81) (2.20) ------- ------- ------- Less distributions from: Net investment income.............. - (0.03) - Return of capital.................. - (0.07) - ------- ------- ------- Total distributions............. - (0.10) - ------- ------- ------- Net asset value, end of period....... $ 21.17 $ 13.25 $ 18.16 ======= ======= ======= Total return......................... 59.77 % (26.49)% (10.81)%/(6)/ ======= ======= ======= Ratios/Supplemental data: Net assets, end of period (000s)... $96,336 $37,767 $13,622 Ratio of expenses to average net assets/(7)/....................... 1.00 % 1.01 % 0.99%/(1)/ Ratio of expenses to average net assets exclusive of foreign taxes on stock dividends/(7)/..... 0.99 % 0.99 % 0.99 % Ratio of net investment income (loss) to average net assets/(7)/....................... (0.01)% 0.64 % (0.63)%/(2)/ Portfolio turnover rate/(4)/....... 25 % 39 % 55 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 1.38%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was (1.02)%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Rounds to less than $0.01. (6)Not annualized. (7)Annualized for periods of less than one year. (8)Commencement of operations. Financial Highlights page 97 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Spain Index Fund ----------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year... $ 21.33 $ 24.19 $ 25.59 $ 23.84 $ 18.49 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/......... 0.17 0.19 0.15 0.09 0.16 Net realized and unrealized gain (loss)............................ (3.55) (2.89) (0.60) 3.14 5.94 ------- ------- ------- ------- ------- Total from investment operations.................... (3.38) (2.70) (0.45) 3.23 6.10 ------- ------- ------- ------- ------- Less distributions from: Net investment income.............. - (0.16) (0.14) (0.07) (0.12) In excess of net investment income............................ - - - (0.02) (0.02) Net realized gain.................. - - (0.48) (1.35) (0.55) In excess of net realized gain..... - - (0.32) - - Return of capital.................. - (0.00)/(3)/ (0.01) (0.04) (0.06) ------- ------- ------- ------- ------- Total distributions............. - (0.16) (0.95) (1.48) (0.75) ------- ------- ------- ------- ------- Net asset value, end of year......... $ 17.95 $ 21.33 $ 24.19 $ 25.59 $ 23.84 ======= ======= ======= ======= ======= Total return......................... (15.85)% (11.17)% (1.81)% 13.39 % 32.58 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)..... $18,850 $27,198 $39,913 $36,469 $25,029 Ratio of expenses to averages net assets............... 0.84 % 0.84 % 0.99 % 1.04 % 1.11 % Ratio of net investment income to average net assets............. 0.85 % 0.82 % 0.57 % 0.31 % 0.61 % Portfolio turnover rate/(2)/....... 14 % 26 % 39 % 17 % 9 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. i Shares page 98 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Sweden Index Fund ----------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...... $ 12.88 $ 24.38 $ 22.26 $ 18.39 $ 18.32 ------- ------- ------- ------- ------- Income from investment operations: Net investment income/(1)/............ 0.12 0.07 0.14 0.10 0.10 Net realized and unrealized gain (loss)............................... (3.12) (11.52) 8.38 4.52 0.95 ------- ------- ------- ------- ------- Total from investment operations... (3.00) (11.45) 8.52 4.62 1.05 ------- ------- ------- ------- ------- Less distributions from: Net investment income................. - (0.05) (0.12) (0.09) (0.08) In excess of net investment income.... - - (0.02) (0.01) (0.01) Net realized gain..................... - - (6.09) (0.62) (0.86) In excess of net realized gain........ - - (0.13) (0.01) (0.01) Return of capital..................... - (0.00)/(3)/ (0.04) (0.02) (0.02) ------- ------- ------- ------- ------- Total distributions................ - (0.05) (6.40) (0.75) (0.98) ------- ------- ------- ------- ------- Net asset value, end of year............ $ 9.88 $ 12.88 $ 24.38 $ 22.26 $ 18.39 ======= ======= ======= ======= ======= Total return............................ (23.29)% (46.99)% 39.15 % 25.09 % 5.48 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s)........ $ 8,154 $10,630 $23,774 $20,034 $13,791 Ratio of expenses to average net assets............................... 0.84 % 0.84 % 1.03 % 1.13 % 1.17 % Ratio of net investment income to average net assets................... 0.98 % 0.40 % 0.46 % 0.49 % 0.48 % Portfolio turnover rate/(2)/.......... 31 % 43 % 90 % 33 % 11 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. Financial Highlights page 99 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Switzerland Index Fund ------------------------------------------------------------------ Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year...................... $ 12.95 $ 15.54 $ 15.39 $ 15.55 $ 13.79 ------- ------- ------- ------- ------- Income from investment operations: Net investment income (loss)/(1)/.......... 0.03 0.04 0.04 0.04 (0.00)/(3)/ Net realized and unrealized gain (loss)................. (1.38) (2.54) 0.27 0.19 3.01 ------- ------- ------- ------- ------- Total from investment operations... (1.35) (2.50) 0.31 0.23 3.01 ------- ------- ------- ------- ------- Less distributions from: Net investment income......... (0.01) (0.04) (0.03) (0.03) - In excess of net investment income........... - (0.01) (0.01) (0.04) (0.01) Net realized gain............. - - (0.11) (0.17) (1.21) In excess of net realized gain - (0.04) - (0.14) - Return of capital............. - - (0.01) (0.01) (0.03) ------- ------- ------- ------- ------- Total distributions....... (0.01) (0.09) (0.16) (0.39) (1.25) ------- ------- ------- ------- ------- Net asset value, end of year... $ 11.59 $ 12.95 $ 15.54 $ 15.39 $ 15.55 ======= ======= ======= ======= ======= Total return................... (10.47)% (16.08)% 1.96 % 1.47 % 21.24 % ======= ======= ======= ======= ======= Ratios/Supplemental data: Net assets, end of year (000s) $31,883 $32,384 $44,685 $38,499 $29,163 Ratio of expenses to average net assets.................. 0.84 % 0.84 % 1.01 % 1.09 % 1.15 % Ratio of net investment income (loss) to average net assets 0.20 % 0.29 % 0.23 % 0.24 % (0.03)% Portfolio turnover rate/(2)/.. 12 % 34 % 35 % 35 % 43 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (3)Rounds to less than $0.01. i Shares page 100 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI Taiwan Index Fund --------------------------------------- Period from Jun. 20, 2000(7) Year ended Year ended to Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 ------------- ------------- ---------------- Net asset value, beginning of period....................... $ 9.01 $ 16.41 $ 19.59 -------- -------- ------- Income from investment operations: Net investment loss/(3)/................................ (0.03) (0.03) (0.01) Net realized and unrealized gain (loss)................. (0.16) (7.37) 2.31 -------- -------- ------- Total from investment operations...................... (0.19) (7.40) (2.32) -------- -------- ------- Less distributions from: Net investment income................................... - - (0.32) In excess of net realized gains......................... - - (0.10) Return of capital....................................... - - (0.44) -------- -------- ------- Total distributions................................... - - (0.86) -------- -------- ------- Net asset value, end of period............................. $ 8.82 $ 9.01 $ 16.41 ======== ======== ======= Total return............................................... (2.11)% (45.09)% (12.10)%/(5)/ Ratios/Supplemental data: Net assets, end of period (000s)........................ $142,043 $110,786 $42,667 Ratio of expenses to average net assets/(6)/............ 1.33 % 1.60 % 1.56%/(1)/ Ratio of expenses to average net assets exclusive of foreign taxes on stock dividends/(6)/................. 0.99 % 0.99 % 0.99 % Ratio of net investment loss to average net assets/(6)/. (0.28)% (0.23)% (0.28)%/(2)/ Portfolio turnover rate/(4)/............................ 11 % 30 % 52 %
- -------- (1)Ratio of expenses to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was 2.16%. (2)Ratio of net investment income to average net assets prior to waived fees and reimbursed expenses for the year ended August 31, 2000 was (0.89)%. (3)Based on average shares outstanding throughout the period. (4)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (5)Not annualized. (6)Annualized for periods of less than one year. (7)Commencement of operations. Financial Highlights page 101 Financial Highlights (For a share outstanding throughout each period)
iShares MSCI United Kingdom Index Fund -------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 1998 ------------- ------------- ------------- ------------- ------------- Net asset value, beginning of year.......................... $ 15.11 $ 18.35 $ 20.25 $ 18.48 $ 16.50 -------- -------- -------- -------- ------- Income from investment operations: Net investment income/(1)/...... 0.48 0.26 0.27 0.44 0.37 Net realized and unrealized gain (loss)................... (2.60) (3.23) (0.85) 2.40 2.12 -------- -------- -------- -------- ------- Total from investment operations....... (2.12) (2.97) (0.58) 2.84 2.49 -------- -------- -------- -------- ------- Less distributions from: Net investment income........... (0.22) (0.25) (0.23) (0.36) (0.29) In excess of net investment income............. - - (0.02) (0.01) (0.04) Net realized gain............... - - (0.84) (0.60) (0.11) In excess of net realized gains. - (0.02) (0.19) (0.02) - Return of capital............... - - (0.04) (0.08) (0.07) -------- -------- -------- -------- ------- Total distributions........... (0.22) (0.27) (1.32) (1.07) (0.51) -------- -------- -------- -------- ------- Net asset value, end of year....... $ 12.77 $ 15.11 $ 18.35 $ 20.25 $ 18.48 ======== ======== ======== ======== ======= Total return....................... (14.19)% (16.20)% (3.00)% 15.33 % 14.98 % ======== ======== ======== ======== ======= Ratios/Supplemental data: Net assets, end of year (000s).. $120,067 $117,883 $146,803 $113,402 $62,846 Ratio of expenses to average net assets.................... 0.84 % 0.84 % 0.94 % 0.97 % 1.03 % Ratio of net investment income to average net assets......... 3.39 % 1.57 % 1.39 % 2.16 % 1.90 % Portfolio turnover rate/(2)/.... 14 % 30 % 33 % 13 % 3 %
- -------- (1)Based on average shares outstanding throughout the period. (2)Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. i Shares page 102 Index Provider MSCI is a leading provider of global indices and benchmark related products and services to investors worldwide. It is headquartered in New York, and conducts business worldwide with operations in Geneva, London, Hong Kong, Tokyo, Singapore, Sydney, Frankfurt, Milan, Paris, Princeton and San Francisco. Morgan Stanley Dean Witter & Co., a global financial services firm and a market leader in securities, asset management, and credit services, is the majority shareholder of MSCI, and The Capital Group Companies, Inc., a global investment management group, is the minority shareholder. BGI has entered into a license agreement with MSCI to use the Underlying Indices. BGI is sub-licensing rights in the Underlying Indices to iShares, Inc. at no charge. Index Provider page 103 Disclaimers iShares, Inc. is not sponsored, endorsed, sold or promoted by MSCI or any affiliate of MSCI. Neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices makes any representation or warranty, express or implied, to the owners of iShares or any member of the public regarding the advisability of investing in funds generally or in these Funds particularly or the ability of the MSCI Indices to track general stock market performance. MSCI is the licensor of certain trademarks, service marks and trade names of MSCI and of the MSCI Indices which are determined, composed and calculated by MSCI without regard to the Funds. MSCI has no obligation to take the needs of the Funds or the owners of iShares into consideration in determining, composing or calculating the MSCI Indices. MSCI is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of these Funds to be issued or in the determination or calculation of the equation by which these Funds is redeemable for cash. Neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices has any obligation or liability to owners of these Funds in connection with the administration, marketing or trading of iShares. Although MSCI shall obtain information for inclusion in or for use in the calculation of the indexes from sources which MSCI considers reliable, neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices guarantees the accuracy and or the completeness of the indexes or any data included therein. Neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices makes any warranty, express or implied, as to results to be obtained by licensee, licensee's customers and counterparties, owners of the Funds, or any other person or entity from the use of the indexes or any data included therein in connection with the rights licensed hereunder or for any other use. Neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices shall have any liability for any errors, omissions or interruptions of or in connection with the indexes or any data included therein. Neither MSCI, any of its affiliates nor any other party involved in making or compiling the MSCI Indices makes any express or implied warranties, and MSCI hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the indexes or any data included therein. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any other party involved in making or compiling the MSCI Indices have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of iShares, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI's permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. iShares are not sponsored, endorsed or promoted by the AMEX. The AMEX makes no representation or warranty, express or implied, to the owners of the iShares of any Fund or any member of the public regarding the ability of a fund to track the total return performance of the Underlying Index or the ability of the Underlying Index identified herein to track stock market performance. The Underlying Index identified herein are determined, composed and calculated by MSCI without regard to the iShares of the Funds. The AMEX is not responsible for, nor has it participated in, the determination of the compilation or the calculation of any index, nor in the determination of the timing of, prices of, or quantities of the iShares of the Fund to be issued, nor in the determination or calculation of the equation by which the iShares are redeemable. The AMEX has no obligation or liability to owners of the iShares of the Fund in connection with the administration, marketing or trading of the iShares of the Funds. i Shares page 104 The AMEX does not guarantee the accuracy and/or the completeness of any indices or any data included therein. The AMEX makes no warranty, express or implied, as to results to be obtained by iShares, Inc. on behalf of its Funds as licensee, licensee's customers and counterparties, owners of the iShares, or any other person or entity from the use of the subject indices or any data included therein in connection with the rights licensed as described herein or for any other use. The AMEX makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the indices or any data included therein. Without limiting any of the foregoing, in no event shall the AMEX have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. BGFA does not guarantee the accuracy and/or the completeness of the Underlying Index or any data included therein and BGFA shall have no liability for any errors, omissions, or interruptions therein. BGFA makes no warranty, express or implied, as to results to be obtained by the Fund, owners of the iShares of the Fund, or any other person or entity from the use of the Index or any data included therein. BGFA makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Index or any data included therein. Without limiting any of the foregoing, in no event shall BGFA have any liability for any special, punitive, direct, indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages. Disclaimers page 105 [THIS PAGE INTENTIONALLY LEFT BLANK] i Shares page 106 iShares, Inc. Supplemental Information I. Premium/Discount Information (Unaudited) The charts on the following pages present information about the differences between the daily market price on secondary markets for shares of each Fund and that Fund's net asset value. Net asset value, or "NAV," is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares at the close of regular trading (normally 4:00pm Eastern time) every day the American Stock Exchange is open. The "Market Price" of each Fund generally is determined using the midpoint between the highest bid and the lowest offer on the Listing Exchange, as of the time that the Fund's NAV is calculated. Each Fund's Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its portfolio holdings. The trading price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (generally expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distributions of premiums and discounts for each of the Funds. The information shown for each Fund is for the period from January 1, 2001 through September 30, 2002, except for the iShares MSCI Pacific ex-Japan Index Fund, which covers the period from January 1, 2002 through September 30, 2002. The specific periods covered for each Fund are disclosed in the chart for such Fund. A premium/discount chart for the iShares MSCI South Africa Index Fund is not presented as the Fund had not commenced operations as of September 30, 2002. The vertical column of each chart shows the premium or discount expressed as a percentage of NAV. The horizontal column indicates the number of trading days in the period covered by each chart. Each bar in the chart shows the number of trading days in which the Fund traded within the premium/discount range indicated. All data presented here represents past performance, which cannot be used to predict future results. iShares, Inc. Supplemental Information page 107 [CHART] [CHART] i Shares page 108 [CHART] [CHART] iShares, Inc. Supplemental Information page 109 [CHART] [CHART] i Shares page 110 [CHART] [CHART] iShares, Inc. Supplemental Information page 111 [CHART] [CHART] i Shares page 112 [CHART] [CHART] iShares, Inc. Supplemental Information page 113 [CHART] [CHART] i Shares page 114 [CHART] [CHART] iShares, Inc. Supplemental Information page 115 [CHART] [CHART] i Shares page 116 [CHART] [CHART] iShares, Inc. Supplemental Information page 117 [CHART] [CHART] i Shares page 118 [THIS PAGE INTENTIONALLY LEFT BLANK] iShares, Inc. Supplemental Information page 119 II. Total Return Information (Unaudited) The tables on the following pages present information about the total return of each Fund's Underlying Index and the total return of each Fund. The information presented for each Fund is for its fiscal year ended August 31, 2002. Total return information for the iShares MSCI South Africa Index Fund is not presented as the Fund had commenced operations on the date of this Prospectus. Total returns represent the change in value of each Fund during the periods noted in each table. Market return is based on the market price per share of each Fund, and NAV return is based on the NAV per share of each Fund. For a discussion of some of the reasons why NAV per share and market price per share may differ, see "Premium/Discount Information" on page 105. The Market and NAV returns do not include brokers' commissions. If brokerage commissions were included, market returns would be lower. A Fund's past performance is no guarantee of future results. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of shares of a Fund will vary with changes in market conditions. Shares of a Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Underlying Indices are statistical composites that track specified financial markets or sectors. Unlike the Funds, the indices do not actually hold a portfolio of securities and therefore do not incur the management fees or other expenses incurred by each Fund. These fees and expenses negatively impact the performance of each Fund.
Average Annual Total Returns --------------------------------------------------------------------------- Year Ended 8/31/02 5 Years Ended 8/31/02 Inception to 8/31/02* ------------------------ --------------------- ------------------------ iShares MSCI Index Fund NAV Market Index NAV Market Index NAV Market Index - ------------ ------ ------ ------ ----- ------ ----- ------ ------ ------ Australia............................... 1.74% 0.86% 1.57% 0.04% 0.07% 0.74% 1.57% 1.56% 2.02% Austria................................. 0.12% (1.46)% 2.32% (3.08)% (3.26)% (1.87)% (2.74)% (2.95)% (1.57)% Belgium................................. (11.10)% (11.54)% (18.29)% (1.10)% (1.14)% (0.33)% (1.28)% (1.15)% (2.12)% Canada.................................. (11.23)% (10.94)% (10.63)% 1.11% 1.29% 1.54% (5.57)% (5.76)% (6.27)% France.................................. (20.53)% (21.12)% (20.28)% 3.47% 3.43% 3.81% 5.92% 5.85% 6.13% Germany................................. (20.54)% (20.49)% (20.40)% (2.72)% (2.69)% (2.45)% 1.36% 1.36% 1.87% Hong Kong............................... (9.94)% (11.66)% (9.25)% (9.03)% (9.23)% (6.89)% (4.20)% (4.37)% (1.91)% Italy................................... (14.84)% (15.29)% (15.13)% 4.05% 4.24% 3.85% 7.18% 7.12% 7.03% Japan................................... (14.33)% (14.14)% (13.71)% (8.42)% (8.21)% (7.51)% (8.84)% (8.72)% (8.04)% Malaysia................................ 11.82% 14.84% 12.88% (4.62)% (4.73)% (3.45)% (10.38)% (10.56)% (9.21)% Mexico.................................. (10.67)% (10.22)% (8.78)% (0.16)% 0.07% 2.52% 7.05% 7.12% 9.96% Netherlands............................. (20.79)% (21.04)% (20.59)% (3.82)% (3.94)% (2.43)% 2.48% 2.41% 4.08% Singapore............................... (5.42)% (3.96)% (4.92)% (8.62)% (8.43)% (7.07)% (11.46)% (11.36)% (10.66)% Spain................................... (15.85)% (16.16)% (17.09)% 1.99% 1.91% 1.89% 8.19% 8.13% 8.41% Sweden.................................. (23.29)% (23.05)% (24.58)% (5.68)% (5.68)% (3.77)% 1.60% 1.58% 3.18% Switzerland............................. (10.47)% (10.60)% (7.83)% (1.18)% (1.24)% 1.08% 1.88% 1.88% 3.70% United Kingdom.......................... (14.19)% (14.34)% (13.71)% (1.55)% (1.45)% (1.08)% 4.53% 4.52% 5.11%
- -------- * Total returns for the period since inception are calculated from the inception date of the Fund (3/12/96). i Shares page 120
Cumulative Total Returns ------------------------------------------------------------------------------ Year Ended 8/31/02 5 Years Ended 8/31/02 Inception to 8/31/02* ------------------------ ------------------------ ------------------------ iShares MSCI Index Fund NAV Market Index NAV Market Index NAV Market Index - ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Australia..... 1.74% 0.86% 1.57% 0.21% 0.33% 3.74% 10.59% 10.53% 13.85% Austria....... 0.12% (1.46)% 2.32% (14.46)% (15.30)% (9.04)% (16.48)% (17.63)% (9.75)% Belgium....... (11.10)% (11.54)% (18.29)% (5.36)% (5.58)% (1.63)% 8.58% 7.71% 14.53% Canada........ (11.23)% (10.94)% (10.63)% 5.65% 6.63% 7.95% 42.05% 43.79% 48.24% France........ (20.53)% (21.12)% (20.28)% 18.62% 18.39% 20.63% 45.16% 44.54% 46.98% Germany....... (20.54)% (20.49)% (20.40)% (12.90)% (12.76)% (11.69)% 9.16% 9.11% 12.76% Hong Kong..... (9.94)% (11.66)% (9.25)% (37.71)% (38.40)% (30.08)% (24.26)% (25.15)% (11.73)% Italy......... (14.84)% (15.29)% (15.13)% 21.98% 23.07% 20.81% 56.68% 56.19% 55.27% Japan......... (14.33)% (14.14)% (13.71)% (35.58)% (34.84)% (32.38)% (45.06)% (44.65)% (41.89)% Malaysia...... 11.82% 14.84% 12.88% (21.06)% (21.53)% (16.14)% (50.83)% (51.48)% (46.51)% Mexico........ (10.67)% (10.22)% (8.78)% (0.79)% 0.36% 13.27% 55.51% 56.15% 84.93% Netherlands... (20.79)% (21.04)% (20.59)% (17.70)% (18.20)% (11.60)% 17.17% 16.71% 29.60% Singapore..... (5.42)% (3.96)% (4.92)% (36.28)% (35.65)% (30.76)% (54.52)% (54.23)% (51.82)% Spain......... (15.85)% (16.16)% (17.09)% 10.34% 9.92% 9.86% 66.51% 65.90% 68.72% Sweden........ (23.29)% (23.05)% (24.58)% (25.34)% (25.35)% (17.50)% 10.85% 10.73% 22.47% Switzerland... (10.47)% (10.60)% (7.83)% (5.75)% (6.06)% 5.52% 12.84% 12.82% 26.54% United Kingdom (14.19)% (14.34)% (13.71)% (7.51)% (7.04)% (5.27)% 33.23% 33.14% 38.08%
- -------- * Total returns for the period since inception are calculated from the inception date of the Fund (3/12/96).
Average Annual Total Returns Cumulative Total Returns --------------------------------------------------- ------------------------ Year Ended 8/31/02 Inception to 8/31/02 Inception to 8/31/02 ------------------------ ------------------------ ------------------------ iShares MSCI Index Fund NAV Market Index NAV Market Index NAV Market Index - ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Brazil*....... (25.89)% (26.82)% (23.62)% (31.65)% (32.33)% (29.25)% (55.79)% (56.73)% (52.31)% EMU**......... (18.89)% (19.64)% (18.73)% (23.02)% (23.17)% (22.85)% (42.34)% (42.58)% (42.00)% South Korea*** 59.77% 56.48% 61.67% 2.03% 1.21% 0.49% 4.77% 2.83% 1.13% Taiwan****.... (2.11)% (7.82)% (0.91)% (28.88)% (31.02)% (28.24)% (52.76)% (55.83)% (51.65)%
- -------- * Total returns for the period since inception are calculated from the inception date of the Fund (7/10/00). ** Total returns for the period since inception are calculated from the inception date of the Fund (7/25/00). *** Total returns for the period since inception are calculated from the inception date of the Fund (5/9/00). **** Total returns for the period since inception are calculated from the inception date of the Fund (6/20/00).
Total Returns -------------------- Inception to 8/31/02* -------------------- iShares MSCI Index Fund NAV Market Index ------------ ---- ------ ----- Pacific Ex-Japan 5.51% 7.03% 5.67%
- -------- * Total returns for the period since inception are calculated from the inception date of the Fund (10/25/01). Shares, Inc. Supplemental Information page 121 Copies of the Prospectus can be found on our website at www.iShares.com. For more detailed information on iShares, Inc. and iShares, you may request a copy of the Statement of Additional Information ("SAI"). The SAI provides detailed information about the Funds, and is incorporated by reference into this Prospectus. This means that the SAI, for legal purposes, is a part of this Prospectus. Additional information about a Fund's investments is available in the annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year. If you have questions about the Funds or iShares or you wish to obtain the SAI, semiannual or annual report free of charge, please: Call: 1-800-iShares Monday through Friday 8:00 am to 8:00 pm (Eastern time)
Write: iShares, Inc. c/o SEI Investments Distribution Co. 1 Freedom Valley Drive Oaks, PA 19456
Information about the Funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090. Reports and other information about the Funds are available on the EDGAR Database on the Commission's Internet site at www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102. No person is authorized to give any information or to make any representations about any Fund and its iShares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference. Investment Company Act File No. 811-09102 i Shares page 122 - -------------------------------------------------------------------------------- Investment Company Act File No. 811-09102 iShares, Inc. (The "Company") iShares MSCI Index Funds Statement of Additional Information January 1, 2003 (as revised February 7, 2003) This Statement of Additional Information ("SAI") provides information about iShares, Inc. (the "Company") and its iShares MSCI Index Funds ("Funds"). This information is in addition to the information contained in the Company's Prospectus dated January 1, 2003 (as revised February 7, 2003). This SAI is not a prospectus. It should be read in conjunction with the Prospectus and the Company's Annual Report for the fiscal year ended August 31, 2002. The financial statements and notes contained in the Annual Report are incorporated by reference into this SAI. Copies of the Company's Prospectus and Annual Report may be obtained free of charge by telephoning 1-800-iShares (1-800-474-2737) or visiting our website at www.iShares.com. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE GENERAL INFORMATION .........................................................1 INVESTMENT STRATEGIES AND RISKS .............................................1 Exchange Listing and Trading ...........................................1 Lending Portfolio Securities ...........................................2 Repurchase Agreements ..................................................3 Currency Transactions ..................................................3 Money Market Instruments ...............................................4 Futures Contracts and Options ..........................................4 Futures Transactions ...............................................5 Restrictions on the Use of Futures Contracts and Options on Future Contracts ....................................5 Federal Tax Treatment of Futures Contracts .........................6 Future Developments ................................................6 Swap Agreements ........................................................6 Non-U.S. Equity Portfolios .............................................6 Foreign Securities .....................................................7 Investment Companies, REITs ............................................7 Concentrations and Lack of Diversification of Certain Funds ............7 Investments in Subject Equity Markets ..................................7 Regional and Country-Specific Economic Considerations ..................8 MSCI INDICES ...............................................................26 INVESTMENT LIMITATIONS .....................................................29 MANAGEMENT OF THE COMPANY ..................................................32 Directors and Officers of the Company .................................32 Renumeration of Directors and Officers ................................35 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES ........................35 INVESTMENT ADVISORY MANAGEMENT, ADMINISTRATIVE AND DISTRIBUTION SERVICES .............................................43 Investment Advisor ....................................................43 Code of Ethics ........................................................46 Administrator .........................................................46 Sub-Administrator .....................................................47 Distributor ...........................................................47 BROKERAGE ALLOCATION .......................................................50 SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS ...........................51 ADDITIONAL INFORMATION CONCERNING iSHARES ..................................51 Capital Stock .........................................................51 Termination of the Company or a Fund ..................................52 Book Entry Only System ................................................52 PURCHASE AND REDEMPTION OF iSHARES .........................................53 Creation Units ........................................................54 Purchase and Issuance of iShares in Creation Units ....................54 Redemption of iShares in Creation Units ...............................58 Determining Net Asset Value ...........................................61 Continuous Offering ...................................................62 TAXES ......................................................................63 PERFORMANCE INFORMATION ....................................................64 COUNSEL AND INDEPENDENT AUDITORS ...........................................69 Counsel ...............................................................69 Independent Auditors ..................................................69 FINANCIAL STATEMENTS .......................................................69 APPENDIX A ................................................................A-1 ii The information contained herein regarding Morgan Stanley Capital International Inc. ("MSCI"), the MSCI Indices, local securities markets and The Depository Trust Company ("DTC") was obtained from publicly available sources. MSCI is a company jointly owned by Morgan Stanley Dean Witter & Co. ("MSDW"), an international investment banking, asset management and brokerage firm and The Capital Group Companies, Inc. ("Capital"), an international investment management company that is not affiliated with MSDW. MSCI is the owner of the MSCI Indices and has full responsibility for the design, maintenance, production and distribution of the Indices, including additions and deletions of constituents within the Indices. iShares are not sponsored, endorsed, or promoted by MSCI or any affiliates of MSCI. Neither MSCI or any of its affiliates nor any other party involved in making or compiling any MSCI Index makes any representation or warranty, express or implied, to the owners of the iShares of any Fund or any member of the public regarding the advisability of investing in securities generally, or in the iShares of any Fund particularly, or the ability of the indices identified herein to track general stock market performance. MSCI has no obligation to take the needs of the issuer of the iShares of any Fund or the owners of the iShares of any Fund into consideration in determining, composing, calculating or disseminating the respective MSCI Indices. Neither MSCI nor any of its affiliates nor any other party involved in making or compiling the MSCI Index is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of the iShares of any Fund to be issued or in the determination or calculation of the equation by which the iShares of any Fund are redeemable. Neither MSCI nor any of its affiliates nor any other party involved in making or compiling any MSCI Index has any obligation or liability to owners of the iShares of any Fund in connection with the administration, marketing or trading of the iShares of any Fund. Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI Indexes from sources which MSCI considers reliable, neither MSCI nor any other party involved in making or compiling any MSCI Index guarantees the accuracy and/or the completeness of the Indexes or any data obtained included therein in connection with the rights licensed hereunder or for any other use. Neither MSCI, any of its affiliates nor any other party involved in making or compiling any MSCI Index shall have any liability for any errors, omissions or interruptions of or in connection with the indexes or any data included therein. Neither MSCI or any of its affiliates nor any other party involved in making or compiling any MSCI Index makes any express or implied warranties, and MSCI hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the Indices or any data included therein. Without limiting any of the foregoing, in no event shall MSCI any affiliates or any other party involved in making or compiling any MSCI Index have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this security, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI's permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. Unless otherwise specified, all references in this SAI to "dollars," "USD," "US$" or "$" are to United States Dollars, all references to "AUD," or "A$" are to Australian Dollars, all references to "ATS" are to Austrian Schillings, all references to "BEF" are to Belgian Francs, all references to "BRL" are to Brazilian Reals, all references to "CAD" or "CA$" are to Canadian Dollars, all references to "EUR" are to Euros, all references to "FRF" or "FF" are to French Francs, all references to "DEM" or "DM" are to the German Deutsche Mark, all references to "HKD" or "HK$" are to Hong Kong Dollars, all references to "ITL" or "LL" are to Italian Lira, all references to "JPY" or "Y" are to Japanese Yen, all references to "KRW" are to Korean Wons, all references to "MYR" are to Malaysian Ringgits, all references to "MXN" are to Mexican Pesos, all references to "NLG" are to Netherlands Guilders, all references to "SGD" are to Singapore Dollars, all references to "ESP" are to Spanish Pesetas, all references to "SEK" are to Swedish Krona, all references to "CHF" are to Swiss Francs, all references to "TWD" are to New Taiwan Dollars, all references to "GBP," "(pound)" or "L" are to British Pounds Sterling and all references to "ZAR" are to South African Rand. On October 31, 2002, the 4:00 p.m. buying rates in New York City for cable transfers payable in the iii applicable currency, as certified for customs purposes by the Federal Reserve Bank of New York, were as follows for each US$1.00: AUD 1.77, ATS 13.42, BEF 39.34, BRL 3.72, CAD 1.55, EUR 0.98, FRF 6.40, DEM 1.91, HKD 7.79, ITL 1,888.12, JPY 120.71, KRW 1,201.00, MYR 3.79, MXN 10.18, NLG 2.15, NZD 1.94, SGD 1.75, ESP 102.25, SEK 8.87, CHF 1.43, TWD 34.61, GBP 0.62 and ZAR 8.53. Some numbers in this SAI have been rounded. All U.S. Dollar equivalents provided in this SAI are calculated at the exchange rate prevailing on the date to which the corresponding foreign currency amount refers. iv GENERAL INFORMATION iShares, Inc. (the "Company") was organized as a Maryland corporation on August 31, 1994, and is an open-end management investment company currently operating 23 separate investment portfolios or "Funds." The following seventeen Funds commenced operations on March 6, 1996: the iShares MSCI Australia Index Fund, the iShares MSCI Austria Index Fund, the iShares MSCI Belgium Index Fund, the iShares MSCI Canada Index Fund, the iShares MSCI France Index Fund, the iShares MSCI Germany Index Fund, the iShares MSCI Hong Kong Index Fund, the iShares MSCI Italy Index Fund, the iShares MSCI Japan Index Fund, the iShares MSCI Malaysia Index Fund, the iShares MSCI Mexico Index Fund, the iShares MSCI Netherlands Index Fund, the iShares MSCI Singapore Index Fund, the iShares MSCI Spain Index Fund, the iShares MSCI Sweden Index Fund, the iShares MSCI Switzerland Index Fund and the iShares MSCI United Kingdom Index Fund. The iShares MSCI Brazil Index Fund, the iShares MSCI EMU Index Fund, the iShares MSCI Pacific ex-Japan Index Fund, the iShares South Africa Index Fund, the iShares MSCI South Korea Index Fund and the iShares MSCI Taiwan Index Fund commenced operations on July 11, 2000, July 26, 2000, October 26, 2001, February 7, 2002, May 10, 2000, June 21, 2000, respectively. Each of the Funds offered hereby is classified as a "non-diversified" investment company under the Investment Company Act of 1940. The Board of Directors of the Company may authorize additional Funds in the future. INVESTMENT STRATEGIES AND RISKS The following supplements the information contained in the Prospectus concerning the investment objectives and policies of the Funds. Exchange Listing and Trading. The iShares of each Fund are listed for trading on the AMEX (the "Listing Exchange"). Certain Funds also trade on certain other national securities exchanges and foreign exchanges. The AMEX has approved modifications to its Rules to permit the listing of iShares of the Index Series that have commenced operations. iShares, which are non-redeemable, trade on the AMEX at prices that may differ to some degree from their net asset value. See "Special Considerations and Risks" and "Determining Net Asset Value". There can be no assurance that the requirements of the AMEX necessary to maintain the listing of iShares of any Fund will continue to be met. The AMEX may remove the iShares of a Fund from listing if (1) following the initial twelve-month period beginning upon the commencement of trading of a Fund, there are fewer than 50 beneficial holders of the iShares for 30 or more consecutive trading days, (2) the value of the underlying index or portfolio of securities on which that Fund is based is no longer calculated or available or (3) any other event shall occur or condition exist that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. In addition, the AMEX will remove the shares from listing and trading upon termination of the Company. iShares of certain of the Company's Funds may be traded on U.S. national securities exchanges other than the AMEX from time to time. In addition, the iShares MSCI Australia Index Fund, iShares MSCI Japan Index Fund, iShares MSCI Malaysia Index Fund, iShares MSCI Singapore Index Fund, iShares MSCI South Korea Index Fund, and the iShares MSCI Taiwan Index Fund are traded on certain foreign exchanges. As in the case of other stocks traded on the AMEX, the brokers' commission on transactions will be based on negotiated commission rates at customary levels for retail customers and rates which range between $0.015 to $0.12 per share for institutions and high net worth individuals. In order to provide current iShares pricing information, the AMEX disseminates through the facilities of the Consolidated Tape Association an updated "indicative optimized portfolio value" ("IOPV") for each Fund as calculated by Bloomberg, L.P ("Bloomberg"). The Company is not involved in or responsible for any aspect of the calculation or dissemination of the IOPVs, and makes no warranty as to the accuracy of the IOPVs. IOPVs are disseminated on a per Fund basis every 15 seconds during regular AMEX trading hours of 9:30 a.m. to 4:00 p.m. Eastern time. 1 The IOPV has an equity securities value component and a cash component. The equity securities values included in the IOPV are the values of the Deposit Securities for each Fund. While the IOPV reflects the current market value of the Deposit Securities required to be deposited in connection with the purchase of a Creation Unit of iShares, it does not necessarily reflect the precise composition of the current portfolio of securities held by the Company for each Fund at a particular point in time, because the current portfolio of a Fund may include securities that are not a part of the current Deposit Securities. Therefore, the IOPV on a per Fund basis disseminated during AMEX trading hours should not be viewed as a real time update of the net asset value per share of the Company, which is calculated only once a day. It is possible that the value of the portfolio of securities held by the Company for a particular Fund may diverge from the applicable IOPV during any trading day. In such a case, the IOPV would not precisely reflect the value of a Fund's portfolio. In addition, the foreign exchange rate used by the Company in computing net asset value of a Fund may differ materially from that used by Bloomberg. See "Determining Net Asset Value" below. The equity securities included in the IOPV reflect the same market capitalization weighting as the Deposit Securities of the particular Fund. In addition to the equity component described in the preceding paragraph, the IOPV for each Fund includes a cash component consisting of estimated accrued dividend and other income, less expenses. Each IOPV also reflects changes in currency exchange rates between the U.S. dollar and the applicable home foreign currency. For the iShares MSCI Australia, Hong Kong, Japan, Malaysia, Pacific ex-Japan, Singapore, South Korea and Taiwan Index Funds, there is no overlap in trading hours between the foreign market and the AMEX. Therefore, for each of these Funds, Bloomberg utilizes closing prices (in applicable foreign currency prices) in the foreign market for securities in the Fund's portfolio, and converts the price to U.S. dollars. This value is updated every 15 seconds during AMEX trading hours to reflect changes in currency exchange rates between the U.S. dollar and the applicable foreign currency. For Funds which have trading hours overlapping regular AMEX trading hours, Bloomberg updates the applicable IOPV every 15 seconds to reflect price changes in the principal foreign market, and converts those prices into U.S. dollars based on the current currency exchange rate. When the foreign market is closed but the AMEX is open, the IOPV is updated every 15 seconds to reflect changes in currency exchange rates after the foreign market closes. Lending Portfolio Securities. The Company may lend portfolio securities to brokers, dealers and other financial institutions needing to borrow securities to complete transactions and for other purposes. Because the cash government securities or other assets that are pledged as collateral to the Company in connection with these loans generate income, securities lending enables a Fund to earn additional income that may partially offset the expenses of such Fund, and thereby reduce the effect that expenses have on such Fund's ability to provide investment results that substantially correspond to the price and yield performance of its respective MSCI Index. These loans may not exceed 33 1/3% of a Fund's total assets. The documentation for these loans provide that the Fund will receive collateral equal to at least 105% of the current market value of the loaned securities, and such collateral will be periodically marked to market in accordance with procedures approved by the Board, as marked to market each day, the collateral may consist of cash government securities or other assets permitted by applicable regulations and interpretations. A Fund pays reasonable administrative and custodial fees in connection with the loan of securities. Barclays Global Investors, N.A. ("BGI") currently is seeking an exemptive order to serve as the Company's securities lending agent. The Board of Directors of the Company has approved the selection of BGI as securities lending agent, conditioned upon the receipt of an order. It is expected that, following receipt of such order, BGI will be appointed as securities lending agent to the Company. As such, BGI will share with the respective Funds any net income earned on loans of portfolio securities. Any gain or loss on the market price of the securities loaned that might occur during the term of the loan would be for the account of the relevant fund. The Company will comply with the conditions for lending established by the SEC staff. The SEC staff currently requires that the following conditions be met whenever portfolio securities are loaned: (1) the Fund must receive at least 100% collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities lent rises above the level of the collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other 2 distributions on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees in connection with the loan and will pay no finder's fees; and (6) while voting rights on the loaned securities may pass to the borrower, the Company, acting under the supervision of its Board of Directors (the "Board" or the "Directors") must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. Although each Fund will receive collateral in connection with all loans of portfolio securities, and such collateral will be marked to market, the Fund will be exposed to the risk of loss should a borrower default on its obligation to return the borrowed securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Company). In addition, each Fund bears the risk of loss of any cash collateral that it invests in short-term investments. Collateral from securities loaned to a borrower may be invested in high-quality money market instruments and other investment companies (including money market mutual funds advised by BGFA or otherwise affiliated with the Funds). The money-market instruments in which each Fund may invest include: (i) short-term obligations issued by the U.S. Government; (ii) negotiable certificates of deposit ("CDs"), fixed time deposits and bankers' acceptances of U.S. and foreign banks and similar institutions; (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. ("S&P") or, if unrated, of comparable quality as determined by BGFA; and (iv) repurchase agreements. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker's acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions. Investments of collateral from securities loaned to borrowers will not be counted in determining compliance with the investment strategies described herein under "Investment Strategies and Risks." Repurchase Agreements. Each Fund may invest in repurchase agreements with commercial banks, brokers or dealers to generate income from its excess cash balances and to invest securities lending cash collateral. A repurchase agreement is an agreement under which a Fund acquires a money market instrument (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance or a certificate of deposit) from a seller, subject to resale to the seller at an agreed upon price and date (normally, the next business day). A repurchase agreement may be considered a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a Fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a Fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and are held by the Company's custodian bank until repurchased. In addition, the Company's Board of Directors monitors the Company's repurchase agreement transactions. The Advisor has established guidelines and standards for review of the creditworthiness of any bank, broker or dealer counterparty to a repurchase agreement with a Fund. No more than an aggregate of 15% of the Fund's net assets will be invested in repurchase agreements having maturities longer than seven days and securities subject to legal or contractual restrictions on resale, or for which there are no readily available market quotations. The Funds will use their cash to enter into repurchase agreements only with registered securities dealers and Federal Reserve Member banks with minimum assets of at least $50 million and have met additional quantitative and qualitative standards set by Barclays Global Investors' Group Credit and Market Risk Group. The use of repurchase agreements involves certain risks. For example, if the other party to the agreement defaults on its obligation to repurchase the underlying security at a time when the value of the security has declined, the Company may incur a loss upon disposition of the security. If the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the Bankruptcy Code or other laws, a court may determine that the underlying security is collateral for a loan by a Fund not within the control of the Fund and therefore the Fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. While the Company's management acknowledges these risks, it is expected that they can be controlled through careful monitoring procedures. Currency Transactions. The investment policy of each Fund is to remain as fully invested as practicable in the equity securities of the relevant market. Hence, no Fund expects to engage in currency transactions for the purpose of hedging against declines in the value of the Fund's currency. A Fund may enter into foreign currency forward and foreign currency futures contracts to facilitate local securities settlement or to protect against currency exposure in connection with its distributions to shareholders, but may not enter into such contracts for speculative purposes or 3 as a way of protecting against anticipated adverse changes in exchange rates between foreign currencies and the U.S. dollar. A forward currency contract is an obligation to purchase or sell a specific 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. A currency futures contract is a contract involving an obligation to deliver or acquire the specified amount of currency at a specified price at a specified future time. Futures contracts may be settled on a net cash payment basis rather than by the sale and delivery of the underlying currency. Foreign exchange transactions involve a significant degree of risk and the markets in which foreign exchange transactions are effected are highly volatile, highly specialized and highly technical. Significant changes, including changes in liquidity and prices, can occur in such markets within very short periods of time, often within minutes. Foreign exchange trading risks include, but are not limited to, exchange rate risk, maturity gaps, interest rate risk and potential interference by foreign governments through regulation of local exchange markets, foreign investment, or particular transactions in foreign currency. If the Advisor utilizes foreign exchange transactions at an inappropriate time or judges market conditions, trends or correlations incorrectly, foreign exchange transactions may not serve their intended purpose of improving the correlation of a Fund's return with the performance of the corresponding MSCI Index and may lower the Fund's return. The Fund could experience losses if the values of its currency forwards, options and futures positions were poorly correlated with its other investments or if it could not close out its positions because of an illiquid market. In addition, each Fund will incur transaction costs, including trading commissions, in connection with certain of its foreign currency transactions. Money Market Instruments. The Fund may invest a portion of its assets in high-quality money market instruments on an ongoing basis to provide liquidity. The instruments in which the Fund may invest include: (i) short-term obligations issued by the U.S. Government; (ii) negotiable certificates of deposit ("CDs"), fixed time deposits and bankers' acceptances of U.S. and foreign banks and similar institutions; (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P or, if unrated, of comparable quality is determined by BGFA; and (iv) repurchase agreements. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker's acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions. BGFA received an exemptive order from the SEC which permits the funds it manages, including the funds of the Trust, to invest in shares of money market funds affiliated with BGFA. Pursuant to this order, the funds are permitted to invest in shares of money market funds affiliated with BGFA for cash management purposes. Futures Contracts and Options. Each Fund may utilize futures contracts and options to the extent described in the Prospectus. Futures contracts generally provide for the future sale by one party and purchase by another party of a specified commodity at a specified future time and at a specified price. Stock index futures contracts are settled by the payment by one party to the other of a cash amount based on the difference between the level of the stock index specified in the contract and at maturity of the contract. Futures contracts are standardized as to maturity date and underlying commodity and are traded on futures exchanges. At the present time, there are no liquid futures contracts traded on most of the benchmark indices of the Funds. In such circumstances a Fund may use futures contracts, and options on futures contracts, based on other local market indices or may utilize futures contracts, and options on such contracts, on other indices or combinations of indices that the Advisor believes to be representative of the relevant benchmark index. Although futures contracts (other than cash settled futures contracts including most stock index futures contracts) by their terms call for actual delivery or acceptance of the underlying commodity, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position ("buying" a contract which has previously been "sold," or "selling" a contract previously "purchased") in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract position is opened or closed. Futures traders are required to make a good faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying commodity or payment of the cash settlement amount) if it is not terminated prior to the specified delivery date. Relatively low initial margin requirements are established by the futures exchanges and may be changed. Brokers may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin deposits which may range upward from less than 5% of the value of the contract being traded. After a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of additional "variation" margin will be required. Conversely, change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as long as the contract remains open. The Company expects to earn interest income on its margin deposits. 4 Each Fund may use futures contracts and options thereon, together with positions in cash and short-term investments, to simulate full investment in the underlying index. As noted above, liquid futures contracts are not currently available for the benchmark indices of many Funds. In addition, the Company is not permitted to utilize certain stock index futures under applicable law. Under such circumstances, the Advisor may seek to utilize other instruments that it believes to be correlated to the underlying index. Since there are very few futures traded on the MSCI Indices, a Fund may need to utilize other futures contracts or combinations thereof to simulate the performance of its benchmark MSCI Index. This process may magnify the "tracking error" of a Fund's performance compared to that of its benchmark MSCI Index, due to the lower correlation of the selected futures with its benchmark MSCI Index. The investment advisor will attempt to reduce this tracking error by using futures contracts whose behavior is expected to represent the market performance of the Fund's underlying securities, although there can be no assurance that these selected futures will in fact correlate with the performance of its benchmark MSCI Index. Futures Transactions. Positions in futures contracts and options thereon may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract or option at any specific time. Thus, it may not be possible to close a futures or options position. In the event of adverse price movements, a Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, a Fund may be required to make delivery of the instruments underlying futures contracts it holds. A Fund will minimize the risk that it will be unable to close out a futures or options contract by only entering into futures and options for which there appears to be a liquid secondary market. The risk of loss in trading futures contracts in some strategies is potentially unlimited, due both to the low margin deposits required, and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of a futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, entering into long or short futures positions may result in losses well in excess of the amount initially paid. However, given the limited purposes for which futures contracts are used, and the fact that steps will be taken to eliminate the leverage of any futures positions, a Fund would presumably have sustained comparable losses if, instead of the futures contracts, it had invested in the underlying financial instrument and sold it after the decline. Utilization of futures transactions by a Fund involves the risk of imperfect or no correlation to the benchmark index where the index underlying the futures contracts being used differs from the benchmark index. There is also the risk of loss by the Company of margin deposits in the event of bankruptcy of a broker with whom a Fund has an open position in the futures contract or related option. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. Restrictions on the Use of Futures Contracts and Options on Futures Contracts. A Fund will not enter into futures contract transactions for purposes other than hedging to the extent that, immediately thereafter, the sum of its initial margin deposits on open contracts exceeds 5% of the market value of a Fund's total assets. Assets committed to initial margin deposits for futures and options on futures are held in a segregated account at the Company's 5 custodian bank. Each Fund will take steps to prevent its futures positions from "leveraging" its portfolio. When it has a long futures position, it will maintain in a segregated account with its custodian bank, cash or high quality debt securities having a value equal to the purchase price of the contract (less any margin deposited in connection with the position). When it has a short futures position, it will maintain in a segregated account with its custodian bank assets substantially identical to those underlying the contract or cash and high quality debt securities (or a combination of the foregoing) having a value equal to its obligations under the contract (less the value of any margin deposits in connection with the position). Federal Tax Treatment of Futures Contracts. Each Fund is required for federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In most cases, any gain or loss recognized with respect to the futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Furthermore, sales of futures contracts which hedge against a change in the value of securities held by a Fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A Fund may be required to defer the recognition of losses on futures contracts to the extent of any unrecognized gains on related positions held by the Fund. In order for a Fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies or other income derived with respect to the Fund's business of investing in securities. It is anticipated that any net gain realized from the closing out of futures contracts will be considered gain from the sale of securities and therefore will be qualifying income for purposes of the 90% requirement. Each Fund distributes to shareholders annually any net capital gains which have been recognized for federal income tax purposes (including unrealized gains at the end of the Fund's fiscal year) on futures transactions. Such distributions are combined with distributions of capital gains realized on the Fund's other investments and shareholders are advised on the nature of the distributions. Future Developments. Each Fund may take advantage of opportunities in the area of options, and futures contracts, options on futures contracts, warrants, swaps and any other investments which are not presently contemplated for use by such Fund or which are not currently available but which may be developed, to the extent such opportunities are both consistent with a Fund's investment objective and legally permissible for the Fund. Before entering into such transactions or making any such investment, the Fund will provide appropriate disclosure. Swap Agreements. Each Fund may utilize swap agreements to the extent described in the Prospectus. Swap agreements are contracts between parties in which one party agrees to make payments to the other party based on the change in market value or level of a specified index or asset. In return, the other party agrees to make payments to the first party based on the return of a different specified index or asset. Although swap agreements entail the risk that a party will default on its payment obligations thereunder, each Fund seeks to reduce this risk by entering into agreements that involve payments no less frequently than quarterly. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of cash or high quality debt securities having an aggregate value at least equal to the accrued excess is maintained in a segregated account at the Company's custodian bank. Non-U.S. Equity Portfolios. An investment in iShares involves risks similar to those of investing in a broad-based portfolio of equity securities traded on exchanges in the respective countries covered by the individual Fund. These risks include market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices. Investing in securities issued by companies domiciled in countries other than the domicile of the investor and denominated in currencies other than an investor's local currency entails certain considerations and risks not typically encountered by the investor in making investments in its home country and in that country's currency. These considerations include favorable or unfavorable changes in interest rates, currency exchange rates, exchange control regulations and the costs that may be incurred in connection with conversions between various currencies. Investing in a Fund whose portfolio contains non-U.S. issuers involves 6 certain risks and considerations not typically associated with investing in the securities of U.S. issuers. These risks include generally less liquid and less efficient securities markets; generally greater price volatility; less publicly available information about issuers; the imposition of withholding or other taxes; the imposition of restrictions on the expatriation of funds or other assets of a Fund; higher transaction and custody costs; delays and risks attendant in settlement procedures; difficulties in enforcing contractual obligations; lesser liquidity and significantly smaller market capitalization of most non-U.S. securities markets; different accounting and disclosure standards; lesser levels of regulation of the securities markets; more substantial government interference with the economy; higher rates of inflation; greater social, economic, and political uncertainty; and the risk of nationalization or expropriation of assets and risk of war. Foreign Securities. Each Fund may purchase publicly traded common stocks of foreign corporations. Each Fund's investment in common stock of foreign corporations may also be in the form of foreign securities such as American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs"). ADRs and GDRs are receipts, typically issued by a bank or trust company, which evidence ownership of underlying securities issued by a foreign corporation. Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These include differences in accounting, auditing and financial reporting standards, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investments in foreign countries, and potential restrictions of the flow of international capital. Foreign companies may be subject to less governmental regulation than U.S. companies. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions. Investment Companies, REITs. Each Fund may invest in the securities of other investment companies (including money market funds) and real estate investment trusts to the extent allowed by law. Under the 1940 Act, each Fund's investment in investment companies is limited to, subject to certain exceptions, (i) 3% of the total outstanding voting stock of any one investment company, (ii) 5% of the Fund's total assets with respect to any one investment company and (iii) 10% of the Fund's total assets of investment companies in the aggregate. Each Fund may invest its assets in securities of money market funds advised by BGFA or otherwise affiliated with such Fund. Nothwithstanding the foregoing, each Fund intends to limit its investment in other investment companies and pooled investment vehicles to 5% of its assets. Concentrations and Lack of Diversification of Certain Funds. Each Fund is classified as "non-diversified" for purposes of the Investment Company Act of 1940, which means that it is not limited by that Act with regard to the portion of its assets that may be invested in the securities of a single issuer. Information about large holdings in single issuers is included in the description of each Fund. In addition, a number of Funds concentrate their investments in particular industries as noted in the descriptions of each Fund. Each Fund, however, intends to maintain the required level of diversification and otherwise conduct its operations so as to qualify as a "regulated investment company" for purposes of the U.S. Internal Revenue Code, to relieve the Fund of any liability for federal income tax to the extent that its earnings are distributed to shareholders. Compliance with the diversification requirements of the U.S. Internal Revenue Code severely limits the investment flexibility of certain Funds and makes it less likely that such Funds will meet their investment objectives. The stocks of one or more particular issuers, or of issuers in particular industries, may dominate the benchmark index of a Fund and, consequently, the investment portfolio of a Fund. This may adversely affect the performance of a Fund or subject it to greater price volatility than that experienced by more diversified investment companies. The iShares of a Fund may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of an investment company that is more broadly invested in the equity securities of the relevant market. Investments in Subject Equity Markets. Brief descriptions of the equity markets in which the respective Fund are invested are provided below. 7 Country Specific Information The Australian Equity Markets General Background. Trading shares has taken place in Australia since 1828, but did not become significant until the latter half of the nineteenth century when there was strong demand for equity capital to support the growth of mining activities. A stock market was first formed in Melbourne in 1865. In 1885, the Melbourne market became The Stock Exchange of Melbourne, in which form it has remained until recently. Other stock exchanges were also established in Sydney (1871), Brisbane (1884), Adelaide (1887), Hobart (1891) and Perth (1891). In 1937, the six capital city stock exchanges established the Australian Associated Stock Exchanges (AASE) to represent them at a national level. In 1987, the regional exchanges merged to create the single entity - The Australian Stock Exchange (ASX). Trading is done via a computer link-up called "SEATS." SEATS enables all exchanges to quote uniform prices. All the exchanges are members of the ASX and are subject to the Securities Industry Act, which regulates the major aspects of stock exchange operations. Although there are stock exchanges in all six states, the Melbourne and Sydney Stock Exchanges are the major centers, covering 90% of all trades. Reporting, Accounting and Auditing. Australian reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Australian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Australian equity markets was approximately US$ 345.3 billion as of September 30, 2002. Chief Industries. Australia's chief industries are mining, industrial and transportation equipment, food processing, chemicals, and steel. Chief Imports. Australia's chief imports consist of machinery and transport equipment, computers and office machines, telecommunication equipment and parts, crude oil, and petroleum products. Chief Exports. Australia's chief exports consist of coal, gold, meat, wool, alumina, iron ore, wheat, machinery, and transport equipment. Gross Domestic Product ("GDP"). Australia's GDP annual percent change was 4.0% for the year ended September 30, 2002. Consumer Price Inflation ("CPI"). Australia's CPI annual percent change was 2.8% for the year ended September 30, 2002. Unemployment Rate. Australia's unemployment rate was 6.3% for the year ended September 30, 2002. 8 The Austrian Equity Markets General Background. Relative to international standards, the Vienna stock market is small in terms of total capitalization and yearly turnover. The Vienna Stock Exchange (VSE) is one of the oldest in the world and was founded in 1771 as a state institution to provide a market for state-issued bonds, as well as for exchange transactions. The Stock Exchange Act of 1875 (the "Act") established the VSE as an autonomous institution. The Act is still in force, placing control and administration of the exchange in the hands of the Borsekammer (Board of Governors), chosen from among the members of the exchange. The Borsekammer consists of 25 individuals with the title of Borserat (stock exchange councillor). Some are elected by members and some are designated by organizations of the securities industry for a period of five years. The councillors must be members of the exchange and they elect from amongst themselves a President and three Vice Presidents. Shares account for about 80% and investment fund certificates for about 20% of total listed securities on the VSE. Business of the exchange can be transacted only by members. Almost all the credit institutions in Vienna, some in the Austrian provinces and the joint stock banks are represented on the stock exchange, as well as the private banks, savings banks and other credit institutions. Certain securities which do not have an official listing may be dealt in on the floor of the stock exchange with permission of the management. This unlisted trading is the main activity of the free brokers (Frei Makeler). Reporting, Accounting and Auditing. Austrian reporting, accounting and auditing standards differ from U.S. standards. In general, Austrian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Austrian equity markets was approximately US$ 20.0 billion as of September 30, 2002. Chief Industries. Austria's chief industries are construction, machinery, vehicles and parts, food, chemicals, lumber and wood processing, paper and paperboard, communications equipment, and tourism. Chief Imports. Austria's chief imports consist of machinery and equipment, motor vehicles, chemicals, metal goods, oil and oil products, and foodstuffs. Chief Exports. Austria's chief exports consist of machinery and equipment, motor vehicles and parts, paper and paperboard, metal goods, chemicals, iron and steel, textiles, and foodstuffs. Gross Domestic Product ("GDP"). Austria's GDP annual percent change was 0.9% for the year ended September 30, 2002. Consumer Price Inflation ("CPI"). Austria's CPI annual percent change was 1.8% for the year ended September 30, 2002. Unemployment Rate. Austria's unemployment rate was 4.3% for the year ended September 30, 2002. The Belgian Equity Markets General Background. The Brussels Stock Exchange (BSE) was founded by Napoleonic decree in 1801. Since January 1, 1991 the BSE has been officially organized as the "Societe de la Bourse de Valeurs Mobileres de Bruxelles" (SBVM) the shareholders of which are Belgian securities houses. The law of December 4, 1990 on financial operations and markets terminated the monopoly of the individual brokers. Now only securities houses are allowed to carry out stock exchange orders. Brokers, banks, brokerage firms and insurance companies can participate in the capital of a securities house. Its management is composed of a majority of qualified people bearing the title of stockbroker. The Banking and Finance Commission was granted the power to approve securities houses by this law. The Board of Directors of the SBVM, the Stock Exchange Committee organizes and supervises the different markets and ensures market transparency. The Stock Exchange Committee also admits or dismisses brokerage firms and ensures compliance with all regulations. The Stock Exchange Committee is also in charge of the admission to listing and suspension of listing. On the Brussels Stock Exchange equities are traded on three different markets: the Official Market, which includes a Cash and a Forward Market, the Second Market and an "Over the Counter Market." 9 Reporting, Accounting and Auditing. Belgian reporting, accounting and auditing standards differ substantially from U.S. standards. In general Belgian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Belgian equity markets was approximately US$ 112.6 billion as of September 30, 2002. Chief Industries. Belgium's chief industries are engineering and metal products, motor vehicle assembly, processed food and beverages, chemicals, basic metals, textiles, glass, petroleum, and coal. Chief Imports. Belgium's chief imports consist of machinery and equipment, chemicals, metals and metal products. Chief Exports. Belgium's chief exports consist of machinery and equipment, chemicals, diamonds, and metals and metal products. Gross Domestic Product. Belgium's GDP annual percent change was 0.6% for the year ended September 30, 2002. Consumer Price Inflation. Belgium's CPI annual percent change was 1.6% for the year ended September 30, 2002. Unemployment Rate. Belgium's unemployment rate was 6.9% for the year ended September 30, 2002. The Brazilian Equity Markets General Background. There are nine stock exchanges in Brazil. The Rio de Janeiro exchange, or BVRJ (Bolsa de Valores de Rio de Janeiro) is the oldest, but is overshadowed by the Sao Paulo exchange, called BOVESPA (Bolsa de Valores de Sao Paulo), which is the largest and accounts for about 90% of trading activity. The over-the-counter market (Mercado de Balcao) trades non-listed equities. Government securities, corporate bonds, and money market instruments are traded on the open market. The Bolsa Mercdorias e de Futuros (BM&F), in Sao Paulo, is Brazil's futures exchange. It is the third largest derivatives exchange in the world in contract volume. Options on the futures also are traded, but are less liquid. BM&F is the clearinghouse for all transactions. The financial market is regulated by three main bodies: the National Monetary Council, or CMN (Conselho Monetario Nacional); the Central Bank (Banco Central do Brasil), and the Securities Commission, or CVM (Comissao de Valores Mobiliarios). Reporting, Accounting and Auditing. Brazilian reporting, auditing and accounting standards differ from U.S. standards. In general, Brazilian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Brazilian equity markets was approximately US$ 91.7 billion as of September 30, 2002. Chief Industries. Brazil's chief industries are textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery, and equipment. Chief Imports. Brazil's chief imports consist of machinery and equipment, chemical products, oil, electricity, autos, and auto parts. Chief Exports. Brazil's chief exports consist of manufactures, iron ore, soybeans, footwear, coffee, and autos. Gross Domestic Product. Brazil's GDP annual percent change was 1.5% for the year ended September 30, 2002. Consumer Price Inflation. Brazil's CPI annual percent change was 6.5% for the year ended September 30, 2002. Unemployment Rate. Brazil's unemployment rate 7.4% for the year ended September 30, 2002. The Canadian Equity Markets 10 General Background. The first Canadian stock exchange appeared in the 1870s. Today, Canada is the world's fourth largest public equity market by trading volume and the fifth largest by market capitalization. There are five stock exchanges across Canada, located in Toronto, Montreal, Vancouver, Calgary and Winnipeg. Of these, the Toronto Stock Exchange is the largest, accounting for almost 80% of Canadian trading volumes. Measured by the value of shares traded, the Toronto Stock Exchange is the second largest organized securities exchange in North America and among the ten largest in the world. Reporting, Accounting and Auditing. According to the SEC in one of the proposing releases relating to the Multijurisdictional Disclosure System, Canadian reporting, accounting and auditing practices are closer to U.S. standards than those of any other foreign jurisdiction. Every issuer that qualifies an offering of securities for distribution in Canada becomes subject to periodic disclosure requirements. Authoritative accounting and auditing standards, which are uniform across Canada, are developed by a national body, the Canadian Institute of Chartered Accountants ("CICA"). Although promulgated auditing standards in Canada differ from U.S. standards in some respects, generally accepted practices in Canada routinely encompass all significant auditing procedures required by U.S. standards. Further, CICA periodically evaluates new auditing standards adopted by the American Institute of Certified Public Accountants, CICA's U.S. counterpart, to determine whether similar guidelines may be appropriate for Canadian auditors. Canadian GAAP are similar to their U.S. counterparts, although there are some differences in measurement and disclosure. Size of Equity Markets. The total market capitalization of the Canadian markets was approximately US$ 522.2 billion as of September 30, 2002. Chief Industries. Canada's chief industries are transportation equipment, chemicals, processed and unprocessed minerals, food products; wood and paper products; fish products, petroleum, and natural gas. Chief Imports. Canada's chief imports consist of machinery and equipment, motor vehicles and parts, crude oil, chemicals, electricity, and durable consumer goods. Chief Exports. Canada's chief exports consist of motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment; chemicals, plastics, fertilizers; wood pulp, timber, crude petroleum, natural gas, electricity, and aluminum. Gross Domestic Product. Canada's GDP annual percent change was 3.4% for the year ended September 30, 2002. Consumer Price Inflation. Canada's CPI annual percent change was 1.8% for the year ended September 30, 2002. Unemployment Rate. Canada's unemployment rate was 7.6% for the year ended September 30, 2002. The EMU Equity Markets The EMU equity markets are comprised of the equity markets from the following twelve countries, which are participating in the European Economic and Monetary Union, or "EMU": Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The MSCI EMU Index is currently comprised of companies from eleven of these EMU countries (i.e., all of the EMU countries except Luxembourg). General Background. Following is a general background description of the equities market of each country included in the MSCI EMU Index for which there is no iShares MSCI Index Fund. Reporting, Accounting and Auditing Reporting. Accounting and auditing standards in the nations of the EMU differ from U.S. standards. In general, corporations in the EMU do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. 11 Size of Equity Markets. The total market capitalization of the combined equity markets of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain was approximately US$ 2.95 trillion as of September 30, 2002. Finland. Organized securities trading has existed in Finland since the 1860s, but it was 1912 before a formal exchange, the Helsinki Arvopaperiporssi, was founded. Since then there have been few changes in the rules governing trading in Finland. In October 1984, the management of the stock exchange in Helsinki was vested in a newly formed co-operative. That form of corporation was chosen because Finnish legislation covering cooperatives does not limit the number of members or the amount of capital. As a result, alone among the world's stock exchanges, the Arvopaperiporssi accepts as members all companies listed on its trading board and business organizations in addition to the bankers and brokers. Decision-making and administration with the organization are vested in the annual general meeting of the co-operative, which elects the board of administration and the board of directors to manage the daily running of the exchange. The OTC List established in 1984 acquired an organized form in September 1985, when the Association of Securities Brokers approved the listing and regulations for the information requirements of listed companies. The brokers and brokerage firms have undertaken to act as market makers. Mainly medium-sized companies are traded on the OTC List. The OTC Market is based on an agreement between a company seeking access to the share market and a brokerage firm; both are subject to certain obligations. Chief Industries. Finland's chief industries are metal products, electronics, shipbuilding, pulp and paper, copper refining, foodstuffs, chemicals, textiles, and clothing. Chief Imports. Finland's chief imports consist of foodstuffs, petroleum and petroleum products, chemicals, transport equipment, iron and steel, machinery, textile yarn and fabrics, and grains. Chief Exports. Finland's chief exports consist of machinery and equipment, chemicals, metals; timber, paper, and pulp. Gross Domestic Product. Finland's GDP annual percent change was 1.1% for the year ended September 30, 2002. Consumer Price Inflation. Finland's CPI annual percent change was 2.2% for the year ended September 30, 2002. Unemployment Rate. Finland's unemployment rate was 9.4% for the year ended September 30, 2002. Greece. The Athens Stock Exchange (ASE) is a self-managed public institution, regulated by law. It is financed chiefly by annual listing fees paid by both equity and fixed-income issuers. Until 1987, the ASE had a relatively low activity market with occasional peaks. Activity exploded that year, with foreign purchases contributing to a 1,224% rise in traded share value. Chief Industries. Greece's chief industries are tourism, food and tobacco processing, textiles, chemicals, metal products; mining, and petroleum. Chief Imports. Greece's chief imports consist of machinery, transport equipment, fuels, and chemicals. Chief Exports. Greece's chief exports consist of food and beverages, manufactured goods, petroleum products, chemicals, and textiles. Gross Domestic Product. Greece's GDP annual percent change was 3.7% for the year ended September 30, 2002. Consumer Price Inflation. Greece's CPI annual percent change was 3.8% for the year ended September 30, 2002. Unemployment Rate. Greece's unemployment rate was 10.2% for the year ended September 30, 2002. Ireland. The Irish Stock Exchange, founded in the 18th century, is the second oldest in the world. Previously it operated as part of the International Stock Exchange of the United Kingdom and Republic of Ireland. On December 12 8, 1995, it split from the U.K. Stock Exchange to form the Irish Stock Exchange (ISE). The new exchange is committed to maintaining standards equivalent to those of the London Stock Exchange (LSE), subject to adjustments dictated by Irish Law. The ISE will sign a listing protocol with the LSE, under which the ISE will maintain equivalence with the LSE rules. Companies that were listed on both the Dublin and London exchanges may apply for dual primary listing, under which they will be regulated to the same standard by both exchanges. A set of procedures has been agreed with the LSE that will streamline companies' dealing with the two exchanges. Chief Industries. Ireland's chief industries are food products, brewing, textiles, clothing; chemicals, pharmaceuticals, machinery, transportation equipment, glass and crystal, and software. Chief Imports. Ireland's chief imports consist of data processing equipment, other machinery and equipment, chemicals, petroleum and petroleum products, textiles, and clothing. Chief Exports. Ireland's chief exports consist of machinery and equipment, computers, chemicals, pharmaceuticals, live animals, and animal products. Gross Domestic Product. Ireland's GDP annual percent change was 3.7% for the year ended September 30, 2002. Consumer Price Inflation. Ireland's CPI annual percent change was 4.4% for the year ended September 30, 2002. Unemployment Rate. Ireland's unemployment rate was 4.5% for the year ended September 30, 2002. Portugal. EU membership marked the start of a period that has seen dramatic growth in the scope and activity of the Portuguese stock market. The Lisbon Stock Exchange ("LSE") is divided into three markets, each with specific requirements regarding admission to listing and trading: (1) the official market, which was created on July 23, 1991; (2) the second market, created in January 1992, which is intended for trading securities that do not meet all the requirements for admission to the official market. The main purpose of this market is to allow access to the stock exchange for small and medium-sized companies; and (3) the unofficial market, created on October 22, 1991, is intended for trading securities that do not meet the requirements for the other two markets. Securities can be admitted to this market for a limited period of time. In 1992, the LSE was privatized. It is now under the management of the Lisbon Stock Exchange Association. Further, the Oporto Derivatives Exchange was established in June 1996, where five futures contracts are traded. Chief Industries. Portugal's chief industries are textiles and footwear, wood pulp, paper, and cork; metalworking, oil refining, chemicals, fish canning, wine, and tourism. Chief Imports. Portugal's chief imports consist of machinery and transport equipment, chemicals, petroleum, textiles, and agricultural products. Chief Exports. Portugal's chief exports consist of clothing and footwear, machinery, chemicals, cork and paper products, and hides. Gross Domestic Product. Portugal's GDP annual percent change was 0.4% for the year ended September 30, 2002. Consumer Price Inflation. Portugal's CPI annual percent change was 3.7% for the year ended September 30, 2002. Unemployment Rate. Portugal's unemployment rate was 4.7% for the year ended September 30, 2002. The French Equity Markets General Background. Trading of securities in France is subject to the monopoly of the Societe de Bourse, which replaced the individual agents de change in 1991 in order to increase the cohesion of the French equity market. All purchases or sales of equity securities in listed companies on any one of the French exchanges must be executed 13 through the Societe de Bourse. There are three different markets on which French securities may be listed: (1) the official list (La Cote Officielle), comprised of equity securities of large French and foreign companies and most bond issues; (2) the second market (Le Second Marche), designed for the trading of equity securities of smaller companies; and (3) the "Hors-Cote" Market. Securities may only be traded on the official list and the second market after they have been admitted for the listing by the Conseil des Bourses de Valeurs (the "CBV"). By contrast, the Hors-Cote Market has no prerequisites to listing, and shares of otherwise unlisted companies may be freely traded there, once they have been introduced on the market by the Societe de Bourse. Although the Hors-Cote Market is frequently referred to as an over-the-counter market, this term is inaccurate in that, like the official list and the second market, it is supervised by Societes des Bourses Francaises and regulated by the CBV. Although there are seven stock exchanges in France (located in Paris, Bordeaux, Lille, Lyon, Marseille, Nancy and Nantes), the Paris Stock Exchange handles more than 95% of transactions in the country. All bonds and shares, whether listed or unlisted, must be traded on one of the seven exchanges. Trading in most of the Paris exchange-listed stocks takes place through the computer order-driven trading system CAC, launched in 1988. French market capitalization constitutes approximately 30% of the French Gross Domestic Product. Exchange securities are denominated in the Euro. Unless otherwise provided by a double tax treaty, dividends on French shares are subject to a withholding tax of 25%. Reporting, Accounting and Auditing. Although French reporting, accounting and auditing standards are considered rather rigorous by European standards, they differ from U.S. standards in certain material respects. In general, French corporations are not required to provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the French equity markets was approximately US$ 844.4 billion as of September 30, 2002. Chief Industries. France's chief industries are machinery, chemicals, automobiles, metallurgy, aircraft, electronics, textiles, food processing, and tourism. Chief Imports. France's chief imports consist of machinery and equipment, vehicles, crude oil, aircraft, plastics, and chemicals. Chief Exports. France's chief exports consist of machinery and transportation equipment, aircraft, plastics, chemicals, pharmaceutical products, iron and steel, and beverages. Gross Domestic Product. France's GDP annual percent change was 1.2% for the year ended September 30, 2002. Consumer Price Inflation. Frances's CPI annual percent change was 1.8% for the year ended September 30, 2002. Unemployment Rate. France's unemployment rate was 9.0% for the year ended September 30, 2002. The German Equity Markets General Background. The history of Frankfurt as a financial center can be traced back to the early Middle Ages. Frankfurt had the right to issue coins as early as 1180; the first exchange office was opened in 1402. Germany has been without a central stock exchange, the position formerly held by the Berlin exchange, since 1945. Today there are eight independent stock exchanges, of which Dusseldorf and Frankfurt account for over three-quarters of the total volume. Frankfurt is the main exchange in Germany. Exchange securities are denominated in the Euro. Equities may be traded in Germany in one of three markets: (I) the official market, comprised of trading in shares which have been formally admitted to official listing by the admissions committee of the relevant stock exchange, based on disclosure in the listing application; (ii) the "semi-official" unlisted market, comprised of trading in shares not in the official listing; and (iii) the unofficial, over-the-counter market, which is governed by the provisions of the Civil Code and the Merchant Code and not by the provisions of any stock exchange. There is no stamp duty in Germany, but a nonresident capital gains tax may apply in certain circumstances. 14 Reporting, Accounting and Auditing. German reporting, accounting and auditing standards differ substantially from U.S. standards. In general, German corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Germany equity markets was approximately US$ 595.1 billion as of September 30, 2002. Chief Industries. Germany's chief industries are among the world's largest and most technologically advanced producers of iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, food and beverages, shipbuilding, and textiles. Chief Imports. Germany's chief imports consist of machinery, vehicles, chemicals, foodstuffs, textiles, and metals. Chief Exports. Germany's chief exports consist of machinery, vehicles, chemicals, metals and manufactures, foodstuffs, and textiles. Gross Domestic Product. Germany's GDP annual percent change was 0.5% for the year ended September 30, 2002. Consumer Price Inflation. Germany's CPI annual percent change was 1.4% for the year ended September 30, 2002. Unemployment Rate. Germany's unemployment rate was 8.3% for the year ended September 30, 2002. The Hong Kong Equity Markets General Background. Trading in equity securities in Hong Kong began in 1891 with the formation of the Association of Stockbrokers, which was changed in 1914 to the Hong Kong Stock Exchange. In 1921, a second stock exchange, The Hong Kong Stockbrokers' Association, was established. In 1947, these two exchanges were merged under the name The Hong Kong Stock Exchange Limited. Three additional exchanges, the Far East Exchange Limited (1969), The Kam Ngan Stock Exchange Limited (1971) and The Kowloon Stock Exchange (1972) also commenced trading activities. These four exchanges were unified in 1986 to form The Stock Exchange of Hong Kong Limited (the "SEHK"). The value of the SEHK constitutes more than 100% of Hong Kong's Gross Domestic Product. Trading on the SEHK is conducted in the post trading method, matching buyers and sellers through public outcry. Securities are denominated in the official unit of currency, the Hong Kong Dollar. Foreign investment in Hong Kong is generally unrestricted. All investors are subject to a small stamp duty and a stock exchange levy, but capital gains are tax-exempt. Reporting, Accounting and Auditing. Hong Kong has significantly upgraded the required presentation of financial information in the past decade. Nevertheless, reporting, accounting and auditing practices remain significantly less rigorous than U.S. standards. In general, Hong Kong corporations are not required to provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Hong Kong equity markets was approximately US$ 238.5 billion as of September 30, 2002. Chief Industries. Hong Kong's chief industries are textiles, clothing, tourism, banking, shipping, electronics, plastics, toys, watches, and clocks. Chief Imports. Hong Kong's chief imports consist of foodstuffs, transport equipment, raw materials, semi manufactures, petroleum, plastics, machinery, and electrical equipment. Chief Exports. Hong Kong's chief exports consist of clothing, textiles, footwear, electrical appliances, watches and clocks, toys, plastics, and precious stones. Gross Domestic Product. Hong Kong's GDP annual percent change was 1.5% for the year ended September 30, 2002. 15 Consumer Price Inflation. Hong Kong's CPI annual percent change was -3.0% for the year ended September 30, 2002. Unemployment Rate. Hong Kong's unemployment rate was 7.5% for the year ended September 30, 2002. The Italian Equity Markets General Background. The regulatory structure of the Italian Stock Exchange changed radically in February 1997, when the Italian Stock Exchange Council set up a new private company, "Borsa Italiana Spa", which is now responsible for the regulation, promotion and management of the Stock Exchange, the unlisted securities market and the Italian Derivatives Market (IDEM). In 1991, the Parliament passed legislation creating Societa de intermediazone mobiliare (SIMs). SIMS were created to regulate brokerage activities in the securities market and are allowed to trade on their own and for customers' accounts. In November 1994, the Italian Derivatives Market (IDEM) started trading its first exchange-listed derivatives product, the Mib 30 index futures contract (Fib 30). In November 1995, the MIB30 Index option (MIBO30) began trading on the IDEM. In February 1996, options were introduced on single stocks, together with the transfer of all shares to a rolling settlement basis. In March 1998, the MIDEX Index contract, the futures contract on the 25 Mid-Cap Stock Index, was launched. Access to the Italian trading system can be obtained directly through the terminals provided to users or indirectly through users' own front office systems (using Application Programming Interfaces). The latter allows the use of information, analytical and trading functions developed by the users. Italy has one of the world's largest government securities markets. At the end of 1998, issues of treasury bills, notes and bonds outstanding totaled US$1,300 billion. Reporting, Accounting and Auditing. Italian reporting, accounting and auditing practices are regulated by Italy's National Control Commission (Consob). These practices bear some similarities to United States standards. However, in general, Italian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely, less frequent and less consistent than that required of U.S. corporations. Italy is, however, moving toward more transparency: from 2000, for example, the law will require quarterly disclosure. Size of Equity Markets. The total market capitalization of the Italian equity markets was approximately US$ 418.9 billion as of September 30, 2002. Chief Industries. Italy's chief industries are tourism, machinery, iron and steel, chemicals, food processing, textiles, motor vehicles, clothing, footwear, and ceramics. Chief Imports. Italy's chief imports consist of engineering products, chemicals, transport equipment, energy products, minerals and nonferrous metals, textiles and clothing, food, beverages, and tobacco. Chief Exports. Italy's chief exports consist of engineering products, textiles and clothing, production machinery, motor vehicles, transport equipment, chemicals; food, beverages and tobacco, minerals, and nonferrous metals. Gross Domestic Product. Italy's GDP annual percent change was 0.7% for the year ended September 30, 2002. Consumer Price Inflation. Italy's CPI annual percent change was 2.4% for the year ended September 30, 2002. Unemployment Rate. Italy's unemployment rate was 9.3% for the year ended September 30, 2002. The Japanese Equity Markets 16 General Background. The Japanese stock market has a history of over 100 years beginning with the establishment of the Tokyo Stock Exchange Company Ltd. In 1878. Stock exchanges are located in eight cities in Japan (Tokyo, Osaka, Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo). There is also an over-the-counter market. There are three distinct sections on the main Japanese stock exchanges. The First Section trades in over 1,100 of the largest and most active stocks, which account for over 95% of total market capitalization. The Second Section consists of over 400 issues with lower turnover than the First Section, which are newly quoted on the exchange or which are not listed and would otherwise be traded over-the-counter. The Third Section consists of foreign stocks which are traded over-the-counter. The main activity of the regular exchange members is the buying and selling of securities on the floor of an exchange, both for their customers and for their own account. Japan is second only to the United States in aggregate stock market capitalization. Securities are denominated in the official unit of currency, the Japanese Yen. Takeover activity is negligible in Tokyo, and although foreign investors play a significant role, the trend of the market is set by the domestic investor. The statutory at-source withholding tax is 20% on dividends. There also is a transaction tax on share trades and a small stamp duty. Reporting, Accounting and Auditing. Although some Japanese reporting, accounting and auditing practices are based substantially on U.S. principles, they are not identical to U.S. standards in some important respects, particularly with regard to unconsolidated subsidiaries and related structures. In general, Japanese corporations are not required to provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Japanese equity markets was approximately US$ 2.39 trillion as of September 30, 2002. Chief Industries. Japan's chief industries are among world's largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods. Chief Imports. Japan's chief imports consist of fuels, foodstuffs, chemicals, textiles, and office machinery. Chief Exports. Japan's chief exports consist of motor vehicles, semiconductors, office machinery, and chemicals. Gross Domestic Product. Japan's GDP annual percent change was -0.5% for the year ended September 30, 2002. Consumer Price Inflation. Japan's CPI annual percent change was -1.0% for the year ended September 30, 2002. Unemployment Rate. Japan's unemployment rate was 5.5% for the year ended September 30, 2002. The Malaysian Equity Markets General Background. The securities industry in Malaysia dates back to the early 1930's. Kuala Lumpur and Singapore were a single exchange until 1973 when they separated and the Kuala Lumpur Stock Exchange (KLSE) was formed. The KLSE operated under a provisional set of rules until 1983 when a new Securities Industry Act came into force. As of June 30, 1999, 458 companies were listed on the KLSE main board. A Second Board, established in 1988, allows smaller companies to tap additional capital. There were 287 companies listed on the Second Board as of June 30, 1999. Over the years, the KLSE's close links with the Stock Exchange of Singapore (SES) has rendered it very vulnerable to developments in Singapore. Consequently, the Government decided, as a matter of national policy, on a delisting of Malaysian incorporated companies from the SES. This was effected on January 1, 1990. A similar move was made by Singapore, resulting in the delisting of all Singapore companies on the KLSE on January 1, 1990. There are two main stock indices in Malaysia. The wider ranging KLSE Composite represents 80 companies. The New Straits Times Industrial Index is an average of 30 industrial stocks. Malaysian currency volatility and general economic deterioration led to the imposition of stringent capital controls in September 1998, including a one year prohibition on repatriation of capital and an indefinite prohibition on free transfers of securities. The prohibition on repatriation of capital was removed in February 1999 but the controls have adversely impacted foreign investors, including the Fund, which suspended creations in response to the controls. This adversely affected the trading market for Malaysia Index Fund iShares. 17 Reporting, Accounting and Auditing. Malaysian reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Malaysian corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Malaysian equity markets was approximately US$ 121.2 billion as of September 30, 2002. Chief Industries. Peninsular Malaysia's main industries are rubber and oil palm processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber. Sabah's main industries are logging, and petroleum production. Sarawak's main industries are agriculture processing, petroleum production and refining, and logging. Chief Imports. Malaysia's chief imports consist of electronics, machinery, petroleum products, plastics, vehicles, iron and steel and iron and steel products, and chemicals. Chief Exports. Malaysia's chief exports consist of electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, and chemicals. Gross Domestic Product. Malaysia's GDP annual percent change was 3.5% for the year ended September 30, 2002. Consumer Price Inflation. Malaysia's CPI annual percent change was 1.8% for the year ended September 30, 2002. Unemployment Rate. Malaysia's unemployment rate was 3.9% for the year ended September 30, 2002. The Mexican Equity Markets General Background. There is only one stock exchange in Mexico, the Bolsa Mexicana de Valores (BMV), which was established in 1894 and is located in Mexico City. The stock exchange is a private corporation whose shares are owned solely by its authorized members and operates under the stock market laws passed by the government. The National Banking and Securities Commission (CNV) supervises the stock exchange. The Mexican exchange operates primarily via the open outcry method. However, firm orders in writing can supersede this system, provided there is a perfect match of the details of a buy and sell order. Executions on the exchange can be done by members only. Membership of the stock exchange is restricted to Casas de Bolsa brokerage houses and Especialistas Bursatiles (stock exchange specialists). Reporting, Accounting and Auditing. Mexican reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Mexican corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Mexican equity markets was approximately US$ 113.1 billion as of September 30, 2002. Chief Industries. Mexico's chief industries are among world's largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods. Chief Imports. Mexico's chief imports consist of metalworking machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft, and aircraft parts. Chief Exports. Mexico's chief exports consist of manufactured goods, oil and oil products, silver, fruits, vegetables, coffee, and cotton. Gross Domestic Product. Mexico's GDP annual percent change was 1.5% for the year ended September 30, 2002. 18 Consumer Price Inflation. Mexico's CPI annual percent change was 4.8% for the year ended September 30, 2002. Unemployment Rate. Mexico's unemployment rate was 2.7% for the year ended September 30, 2002. The Netherlands Equity Markets General Background. Trading securities on the AEX Stock Exchange (AEX) (formerly the Amsterdam Stock Exchange) started at the beginning of the seventeenth century. The United East India Company was the first company in the world financed by an issue of shares, and such issue was effected through the exchange. The Netherlands claims the honor of having the oldest established stock exchange in existence. In 1611 a stock market began trading in the coffee houses along the Dam Square. A more formal establishment, the Amsterdam Stock Exchange Association, began trading industrial stocks in 1876, and until World War II, Amsterdam ranked after New York and London as the third most important stock market in the world. After the war, the AEX Stock Exchange only gradually began to resume its activities, as members felt threatened by what they saw as an impending socialist order which would leave little of the stock market intact. Since the end of the war, the Dutch market has remained relatively neglected, as local companies have found it more favorable to use bank financing to meet their capital requirements. Trading in shares on the AEX may take place on the official market or on the parallel market, which is available to medium-sized and smaller companies that cannot yet meet the requirements demanded for the official market. Reporting, Accounting and Auditing. Dutch reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Dutch corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Dutch equity markets was approximately US$ 329.9 billion as of September 30, 2002. Chief Industries. The Netherlands' chief industries are among world's largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods. Chief Imports. The Netherlands' chief imports consist of agroindustries, metal and engineering products, electrical machinery and equipment, chemicals, petroleum, construction, microelectronics, and fishing. Chief Exports. The Netherlands' chief exports consist of machinery and equipment, chemicals, fuels, and foodstuffs. Gross Domestic Product. The Netherlands' GDP annual percent change was 0.4% for the year ended September 30, 2002. Consumer Price Inflation. The Netherlands' CPI annual percent change was 3.8% for the year ended September 30, 2002. Unemployment Rate. The Netherlands' unemployment rate was 2.9% for the year ended September 30, 2002. The Pacific Ex-Japan Equity Markets The Pacific ex-Japan equity markets are comprised of the equity markets from Australia, Hong Kong, New Zealand and Singapore. General Background. Following is a general background description of the New Zealand equity market for which there is no iShares MSCI Index Fund. Reporting, Accounting and Auditing. Reporting, accounting and auditing standards in the nations that make up the Pacific ex Japan equity markets differ substantially from U.S. standards. In general, these countries' corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. 19 Size of Equity Markets. The total market capitalization of the combined equity markets of Australia, Hong Kong, New Zealand and Singapore was approximately US$ 714.5 billion as of September 30, 2002. New Zealand. The New Zealand Stock Exchange (NZSE) was originated in the 1870's in four regions: Auckland, Thames, Dunedin and Reefton. In 1915, the Stock Exchange Association of New Zealand was formed. The Sharebrokers Act Amendment 1981governs the operations of the NZSE. During 1989, the Exchange changed from four separate entities to one. Additionally, a Board of Directors was appointed to replace the traditional council. The NZSE also appointed an independent Market Surveillance Panel and adopted revised Listing Rules. On June 24, 1991, they also eliminated the open outcry market and on August 1, 1992, introduced its FASTER system of electronic transfer and moved to fully automated clearing and settlement of trades. Chief Industries. New Zealand's chief industries are food processing, wood and paper products, textiles, machinery, transportation equipment, banking and insurance, tourism, and mining. Chief Imports. New Zealand's chief imports consist of machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles, and plastics. Chief Exports. New Zealand's chief exports consist of dairy products, meat, wood and wood products, fish, and machinery. Gross Domestic Product. New Zealand's GDP annual percent change was 3.0% for the year ended September 30, 2002. Consumer Price Inflation. New Zealand's CPI annual percent change was 2.6% for the year ended September 30, 2002. Unemployment Rate. New Zealand's unemployment rate was 5.4% for the year ended September 30, 2002. The Singaporean Equity Markets General Background. The Stock Exchange of Singapore (SES) was formed in 1973 with the separation of the joint stock exchange with Malaysia, which had been in existence since 1938. The linkage between the SES and the Kuala Lumpur Stock Exchange (KLSE) remained strong as many companies in Singapore and Malaysia jointly listed on both exchanges, until January 1, 1990 when the dual listing was terminated. SES has a tiered market, with the formation of the second securities market, SESDAQ (Stock Exchange of Singapore Dealing and Automated Quotation System) in 1987. SESDAQ was designed to provide an avenue for small and medium-sized companies to raise funds for expansion. In 1990, SES introduced an over-the-counter (OTC) market known as CLOB International, to allow investors access to international securities listed on foreign exchanges. SES also has a direct link with the National Association of Securities Dealers Automated Quotation (NASDAQ) system, which was set up in March 1988 to allow traders in the Asian time zone access to selected securities on the U.S. OTC markets. This is made possible through a daily exchange of trading prices and volumes of the stocks quoted on NASDAQ. The Singapore Stock Exchange is one of the most developed in Asia and has a strong international orientation. Reporting, Accounting and Auditing. Singaporean reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Singaporean corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Singaporean markets was approximately US$ 101.4 billion as of September 30, 2002. Chief Industries. Singapore's chief industries are electronics, chemicals, financial services, oil drilling equipment, petroleum refining, rubber processing and rubber products, processed food and beverages, ship repair, entrepot trade, and biotechnology. 20 Chief Imports. Singapore's chief imports consist of machinery and equipment, mineral fuels, chemicals, and foodstuffs. Chief Exports. Singapore's chief exports consist of machinery and equipment (including electronics), consumer goods, chemicals, and mineral fuels. Gross Domestic Product. Singapore's GDP annual percent change was 3.6% for the year ended September 30, 2002. Consumer Price Inflation. Singapore's CPI annual percent change was 0% for the year ended September 30, 2002. Unemployment Rate. Singapore's unemployment rate was 3.0% for the year ended September 30, 2002. The South African Equity Markets General Background. The Johannesburg Stock Exchange (JSE), the only stock exchange in South Africa, was initially founded in 1887. The JSE operates an equities market. However, many of the members of the JSE also participate in the trading of bonds and financial futures, with traditional options traded on an OTC basis. Introduced in November 1995, corporate limited liability membership with ownership by non-stockbrokers was established to supplement the present membership of partnerships, unlimited liability corporate members or sole traders. Foreigners are allowed by the JSE to operate as member firms. Reporting, Accounting and Auditing. South African reporting, accounting and auditing standards differ substantially from U.S. standards. In general, South African corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. As of September 30, 2002, the total market capitalization of the South African equity markets was approximately US$ 151.6 billion. Chief Industries. South Africa's chief industries consist of mining (it is the world's largest producer of platinum, gold, chromium), automobile assembly, metal working, machinery, textile, iron and steel, chemicals, fertilizer and foodstuffs. Chief Imports. South Africa's chief imports consist of machinery, foodstuffs and equipment, chemicals, petroleum products and scientific instruments. Chief Exports. South Africa's chief exports consist of gold, diamonds, platinum, other metals, minerals, machinery and equipment. Gross Domestic Product. South Africa's GDP annual percent change was 5.2% for the year ended September 30, 2002. Consumer Price Inflation. South Africa's CPI annual percent change was 5.5% for the year ended September 30, 2002. Unemployment Rate. South Africa's unemployment rate was 26.7% for the year ended September 30, 2002. The South Korean Equity Markets General Background. After the formation of South Korea in 1948, the government issued Farmland Compensation Bonds to landowners in exchange for their farmland, and Kunkuk Bonds to cover their financial debt. The Daehan Stock Exchange was established in 1956 to enable trading of these bonds. The South Korea Stock Exchange was established several years later. The government enacted the Securities and Exchange Law in January 1962 as part of the First Five Year Economic Plan. The law was intended to help South Korean companies arrange funds for economic development by using the stock market. Within a year the market boomed and crashed. The Securities and Exchange Law was amended in April 1962 to impose stricter regulatory measures on the operation of the securities market. The stock exchange became a non-profit, government-owned corporation called the South Korea Stock Exchange. However, the securities market was unable to overcome the aftermath of the crash and entered a period of inactivity. In 1967, as part of the Second Five Year Economic Plan, the government encouraged the public to invest in the stock market by increasing the number of listed companies and the acceptability of equity shares. Tax advantages were given to companies that went public. Further legislation was passed in 1972 to encourage share flotation in the belief that corporations would reduce their high financing costs by converting bank loans into share capital. As a result of these market measures, the number of listed companies started to increase. The Securities and Exchange Commission and its executive body, the Securities Supervisory Board, were established to strengthen investor protection. The South Korea Securities Settlement Corporation, since renamed the South Korea Depository Corporation (KSD), was set up in 1974 to act as the clearing agent for the stock exchange and as the central depository. In 1977, the South Korea Securities Computer Corporation was established as an electronic data processing center for the securities industry to enable members to transmit orders directly to the trading floor. In 1981, the government announced its long-term plans for opening the South Korean securities market to foreigners. International investment trusts were established and the South Korea Fund and the South Korea Europe Fund were incorporated overseas. In 1985, the government began to allow some domestic corporations to issue convertible bonds, bonds with warrants and depository receipts overseas. The government also eased controls to allow domestic institutional investors to invest in foreign securities. In December 1988, a new, detailed plan was put forward for the internationalization of the capital market from 1989 to 1992. A more open capital market was proposed to improve the financial structure of domestic firms and to strengthen their international competitiveness. The firms would be given access to an expanded and revitalized domestic capital market and cheaper sources of financing in the international markets. The stock market began to be opened to foreign investors in January 1992. Reporting, Accounting and Auditing. South Korean reporting, accounting and auditing standards differ substantially from U.S. standards. In general, South Korean corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. 21 Size of Equity Markets. The total market capitalization of the South Korean equity markets was approximately US$ 213.1 billion as of September 30, 2002. Chief Industries. South Korea's chief industries are electronics, chemicals, financial services, oil drilling equipment, petroleum refining, rubber processing and rubber products, processed food and beverages, ship repair, entrepot trade, and biotechnology. Chief Imports. South Korea's chief imports consist of machinery and equipment, mineral fuels, chemicals, and foodstuffs. Chief Exports. South Korea's chief exports consist of machinery and equipment (including electronics), consumer goods, chemicals, and mineral fuels. Gross Domestic Product. South Korea's GDP annual percent change was 3.6% for the year ended September 30, 2002. Consumer Price Inflation. South Korea's CPI annual percent change was 0% for the year ended September 30, 2002. Unemployment Rate. South Korea's unemployment rate was 3.0% for the year ended September 30, 2002. The Spanish Equity Markets General Background. The Securities Market Act (LMV) recognizes the following as official secondary markets: . stock exchanges; . the public debt market organized by the Bank of Spain; and . futures and options markets. Stock exchanges in Spain (Madrid, Bilbao, Barcelona and Valencia) are the official secondary markets which trade shares and convertible bonds or those which grant the right of purchase or subscription. Issuers of shares go to the stock market as the primary market, where they formalize transactions or capital increases. Fixed-income securities (both governmental and private sector debt) are also traded on the stock market. The organization and functioning of each stock exchange is the responsibility of each respective governing body (Sociedad Rectora), each of which is a limited company whose sole shareholders are the dealer-brokers and brokers and the stock exchanges themselves. The Sociedad de Bolsa, established by the four stock exchanges, is responsible for the technical management of the computerized trading system, which operates at a national level. Under the LMV, the National Securities Market Commission (CNMV) is responsible for supervising and inspecting the securities markets as well as the activity of all individuals and companies who deal with the markets. It has the power to punish and other functions. These Spanish futures and options markets are organized by the holding company MEFF (Mercado Espanol de Futuros Financieros) Sociedad Holding and two subsidiaries: MEFF Renta Variable (equities), based in Madrid, and MEFF Renta Fija (fixed-income securities), based in Barcelona. MEFF Renta Variable manages the trading of options and futures on the Ibex-35 stock index, and individual options on certain shares. MEFF Renta Fija manages the trading of futures and options on interest rates and bonds. Bonds, Treasury bills and debt issued by other public administrations and organizations are traded in the public debt market. These securities are also traded at the same time on the stock market, which has a specific trading system for them. The Bank of Spain's Book-Entry Office is responsible for supervising the public debt market. Reporting, Accounting and Auditing. Spanish reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Spanish corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Spanish equity markets was approximately US$ 274.1 billion as of September 30, 2002. 22 Chief Industries. Spain's chief industries are textiles and apparel (including footwear), food and beverages, metals and metal manufactures, chemicals, shipbuilding, automobiles, machine tools, and tourism. Chief Imports. Spain's chief imports consist of machinery and equipment, fuels, chemicals, semifinished goods, foodstuffs, consumer goods. Chief Exports. Spain's chief exports consist of machinery, motor vehicles; foodstuffs, other consumer goods. Gross Domestic Product. Spain's GDP annual percent change was 2.0% for the year ended September 30, 2002. Consumer Price Inflation. Spain's CPI annual percent change was 2.8% for the year ended September 30, 2002. Unemployment Rate. Spain's unemployment rate was 10.7% for the year ended September 30, 2002. The Swedish Equity Markets General Background. Organized trading of securities in Sweden can be traced back to 1776. Although the Stockholm Stock Exchange was founded in 1864, the real formation of a stock exchange in an international sense took place in 1901. The statutes of the Stock Exchange were modified in 1906 and, from the beginning of 1907, commercial banks were admitted as members. During the 1970s, the Stockholm market had low turnover and dull trading conditions. The market started to climb in 1980 and for several years Stockholm was one of the best performing stock markets, in terms of both price and volume growth. This regeneration of a market for risk capital was reflected in the large number of companies introduced in the early 1980s. The Stockholm Stock Exchange is structured on a membership basis, under the supervision of the Bank Inspection Board. The Board consists of 11 directors and one chief executive. The directors of the Board are elected by the Swedish government, the Association of the Swedish Chamber of Commerce, the Federation of Swedish Industries and the member companies of the Stock Exchange. There are three different markets for trading shares in Sweden. The dominant market is the A-1 list, for the largest and most heavily traded companies. The second market is the over-the-counter market, which is more loosely regulated than the official market and caters to small- and medium-sized companies. The third market is the unofficial parallel market, which deals in unlisted shares, both on and off the exchange floor. The shares most frequently traded on this market are those which have been de-listed from other markets and those that are only occasionally available for trading. On July 1, 1999, the Stockholm Stock Exchange and OM Stockholm merged to create the OM Stockholm Exchange - OM Stockholmsborsen AB. In addition, the Stockholm Stock Exchange and the Copenhagen Stock Exchange have signed an agreement covering a common Nordic securities market, NOREX. There are also two independent markets for options - the Swedish Options Market (OM) and the Swedish Options and Futures Exchange (SOFE), which offer calls, puts and forwards on Swedish stocks and stock market indices. Reporting, Accounting and Auditing. Swedish reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Swedish corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. The basic concepts used are historical cost, going concern, accrual basis, consistency and prudence. Size of Equity Markets. The total market capitalization of the Swedish equity markets was approximately US$ 147.2 billion as of September 30, 2002. Chief Industries. Sweden's chief industries are iron and steel, precision equipment (bearings, radio and telephone parts, armaments), wood pulp and paper products, processed foods, and motor vehicles. Chief Imports. Sweden's chief imports consist of machinery, petroleum and petroleum products, chemicals, motor vehicles, iron and steel; foodstuffs, and clothing. Chief Exports. Sweden's chief exports consist of machinery 35%, motor vehicles, paper products, pulp and wood, iron and steel products, and chemicals. 23 Gross Domestic Product. Sweden's GDP annual percent change was 1.6% for the year ended September 30, 2002. Consumer Price Inflation. Sweden's CPI annual percent change was 2.3% for the year ended September 30, 2002. Unemployment Rate. Sweden's unemployment rate was 4.2% for the year ended September 30, 2002. The Swiss Equity Markets General Background. There are three principal stock exchanges in Switzerland, the largest of which is Zurich, followed by Geneva and Basle. The Geneva exchange is the oldest and was formally organized in 1850. The Basle and the Zurich exchanges were founded in 1876 and 1877, respectively. The Geneva Exchange is a corporation under public law and in Zurich and Basle the exchanges are institutions under public law. There are three different market segments for the trading of equities in Switzerland. The first is the official market, the second is the semi-official market, and the third is the unofficial market. On the official market, trading takes place among members of the exchange on the official trading floors. Trading in the semi-official market also takes place on the floors of the exchanges, but this market has traditionally been reserved for smaller companies not yet officially accepted on the exchange. Unofficial market trading is conducted by members and non-members alike. Typical trading on this market involves shares with small turnover. Both listed and unlisted securities can, however, be traded on this market. Since July 1998, SWX has provided facilities for electronic trading in Eurobonds. Repo SWX, the first electronic market for repos with integrated clearing and settlement, was inaugurated in June 1999. In addition, SWX launched a new market segment for emerging-growth companies in July 1999, under the name SWX New Market. Eurex, the first trans-national derivatives market, is a co-operative venture between the SWX Swiss Exchange and Deutsche Borse Ag, each of which holds a 50% stake. Eurex is the largest derivative exchange in the world. Reporting, Accounting and Auditing. Swiss reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Swiss corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Swiss equity markets was approximately US$ 534.6 billion as of September 30, 2002. Chief Industries. Switzerland's chief industries are machinery, chemicals, watches, textiles, and precision instruments. Chief Imports. Switzerland's chief imports consist of machinery, chemicals, vehicles, metals, agricultural products, and textiles. Chief Exports. Switzerland's chief exports consist of machinery, chemicals, metals, watches, and agricultural products. Gross Domestic Product. Switzerland's GDP annual percent change was 0% for the year ended September 30, 2002. Consumer Price Inflation. Switzerland's CPI annual percent change was 0.7% for the year ended September 30, 2002. Unemployment Rate. Switzerland's unemployment rate was 2.7% for the year ended September 30, 2002. The Taiwanese Equity Markets General Background. The Taiwan Stock Exchange, in Taipei, is the only stock exchange in Taiwan. Its roots can be traced to the Land Reform Movement of 1953. The government bought tracts of land from large landowners and paid for them with bonds and shares in government-owned companies. The need to trade those shares and bonds gradually bred the formation of a fledging over-the-counter market. As the economy prospered, the importance of a securities market was recognized. The government established the Securities Market Research Committee to study 24 the feasibility of a formal stock market. Consequently, the Securities and Exchange Commission (SEC) was established on September 1, 1960, as a department of the Ministry of Finance. The Taiwan Stock Exchange (TSE) was founded a year later and officially commenced operation in February 1962. In the exchange's first year, there were 18 listed companies with an average trading volume of TWD 1,647,760. By 1963, there were 23 listed companies; by 1980, there were 100; and by 2000 there were 531. As listings steadily increased, the market remained stable for several years. Since then, the number of brokerage firms has multiplied and limitations on foreign investors have recently been relaxed. Reporting, Accounting and Auditing. Taiwanese reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Taiwanese corporations do not provide all of the disclosure required by U.S. law and accounting practice, and such disclosure may be less timely and less frequent than that required of U.S. corporations. Size of Equity Markets. The total market capitalization of the Taiwanese equity markets was approximately US$ 215.9 billion as of September 30, 2002. Chief Industries. Taiwan's chief industries are electronics, petroleum refining, chemicals, textiles, iron and steel, machinery, cement, and food processing. Chief Imports. Taiwan's chief imports consist of machinery and electrical equipment 50%, minerals, and precision instruments. Chief Exports. Taiwan's chief exports consist of machinery and electrical equipment 55%, metals, textiles, plastics, and chemicals. Gross Domestic Product. Taiwan's GDP annual percent change was 3.3% for the year ended September 30, 2002. Consumer Price Inflation. Taiwan's CPI annual percent change was 0.4% for the year ended September 30, 2002. Unemployment Rate. Taiwan's unemployment rate was 5.0% for the year ended September 30, 2002. The United Kingdom Equity Markets General Background. The UK is Europe's largest equity market in terms of aggregate market capitalization. Trading is fully computerized under the SETS System for FTSE- 100 (and 83 other) stocks and the Stock Exchange Automated Quotation System (SEAQ) operates for international equities. The London Stock Exchange exists alongside Tradepoint, while there is also a network of regional offices. The London Stock Exchange has the largest volume of trading in international equities in the world. Reporting, Accounting and Auditing. Despite having a great deal of common purpose and common concepts, the accounting principles in the UK and the U.S. can lead to markedly different financial statements. In the global market for capital, investors may want to know about a company's results and financial position under their own principles. This is particularly so in the U.S. capital markets. The overriding requirement for a UK company's financial statements is that they give a `true and fair' view. Accounting standards are an authoritative source as to what is and is not a true and fair view, but do not define it unequivocally. Ad hoc adaptations to specific circumstances may be required. In the U.S., financial statements are more conformed because they must be prepared in accordance with GAAP. Size of Equity Markets. The total market capitalization of the United Kingdom equity markets was approximately US$ 1.72 trillion as of September 30, 2002. Chief Industries. United Kingdom's chief industries are machine tools, electric power equipment, automation equipment, railroad equipment, shipbuilding, aircraft, motor vehicles and parts, electronics and communications equipment, metals, chemicals, coal, petroleum, paper and paper products, food processing, textiles, clothing, and other consumer goods. 25 Chief Imports. United Kingdom's chief imports consist of manufactured goods, machinery, fuels, and foodstuffs Chief Exports. United Kingdom's chief exports consist of manufactured goods, fuels, chemicals; food, beverages, and tobacco. Gross Domestic Product. United Kingdom's GDP annual percent change was 1.7% for the year ended September 30, 2002. Consumer Price Inflation. United Kingdom's CPI annual percent change was 1.9% for the year ended September 30, 2002. Unemployment Rate. United Kingdom's unemployment rate was 5.2% for the year ended September 30, 2002. THE MSCI EQUITY INDICES In General. The MSCI Indices were founded in 1969 by Capital International S.A. as the first international performance benchmarks constructed to facilitate accurate comparison of world markets. Morgan Stanley acquired rights to the Indices in 1986. In November 1998, Morgan Stanley transferred all rights to the MSCI Indices to Morgan Stanley Capital International Inc. ("MSCI"), a Delaware corporation of which Morgan Stanley is the majority owner and Capital is the minority owner. The MSCI Equity Indices have covered the world's developed markets since 1969, and in 1988, MSCI commenced coverage of the emerging markets. Although local stock exchanges have traditionally calculated their own indices, these are generally not comparable with one another, due to differences in the representation of the local market, mathematical formulas, base dates and methods of adjusting for capital changes. MSCI applies the same criteria and calculation methodology across all markets for all equity indices, developed and emerging. MSCI Equity Indices are notable for the depth and breadth of their coverage. MSCI's standard equity indices generally seeks to have 85% of the free float-adjusted market capitalization of a country's stock market reflected in the MSCI Index for such country. The MSCI Equity Indices seek to balance the inclusiveness of an "all share" index against the replicability of a "blue chip" index. Weighting. Effective May 31, 2002, all single-country MSCI Indices are free-float weighted, i.e., companies are included in the indices at the value of their free public float (free float, multiplied by price). MSCI defines "free float" as total shares excluding shares held by strategic investors such as governments, corporations, controlling shareholders and management, and shares subject to foreign ownership restrictions. Regional Weights. Market capitalization weighting, combined with a consistent target of 85% of free float-adjusted market capitalization, helps ensure that each country's weight in regional and international indices approximates its weight in the total universe of developing and emerging markets. Maintaining consistent policy among MSCI developed and emerging market indices is critical to the calculation of certain combined developed and emerging market indices published by MSCI. Selection Criteria To construct relevant and accurate equity indices for the global institutional investor, MSCI undertakes an index construction process, which involves: (i) Defining the equity universe, (ii) Adjusting the total market capitalization of all securities in the universe for free float available to foreign investors. (iii) Classifying the universe of securities under the Global Industry Classification Standard (GICS), and (iv) Selecting securities for inclusion according to MSCI's index construction rules and guidelines. Defining the Universe. The index construction process starts at the country level, with the identification of all listed securities for that country. Currently, MSCI creates equity indices for 51 country markets globally. MSCI classifies each company and its securities in one and only one country. This allows securities to be sorted distinctly by their respective countries. In general, companies and their respective securities are classified as belonging to the country 26 in which they are incorporated. All listed equity securities, or listed securities that exhibit characteristics of equity securities, except investment trusts, mutual funds and equity derivatives, are eligible for inclusion in the universe. Shares of non-domiciled companies generally are not eligible for inclusion in the universe. Adjusting the Total Market Capitalization of Securities in the Universe for Free Float. After identifying the universe of securities, MSCI calculates the free float-adjusted market capitalization of each security in that universe using publicly available information. The process of free float adjusting market capitalization involves (i) defining and estimating the free float available to foreign investors for each security, using MSCI's definition of free float (ii) assigning a free float-adjustment factor to each security and (iii) calculating the free float-adjusted market capitalization of each security. Classifying Securities Under the Global Industry Classification Standard (GICS). In addition to the free float-adjustment of market capitalization, all securities in the universe are assigned to an industry based hierachy that describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor's, the Global Industry Classification Standard. This comprehensive classification scheme provides a universal approach to industries worldwide and forms the basis for achieving MSCI's objective of reflecting broad and fair industry representation in its indices. Selecting Securities for Index Inclusion. In order to ensure a broad and fair representation in the indices of the diversity of business activities in the universe, MSCI follows a "bottom-up" approach to index construction, building indices up to the industry group level. The bottom-up approach to index construction requires a thorough analysis and understanding of the characteristics of the universe. This analysis drives the individual security selection decisions, which aim to reflect the overall features of the universe in the country index. MSCI targets an 85% free float-adjusted market representation level within each industry group, within each country. The security selection process within each industry group is based on the careful analysis of: (i) each company's business activities and the diversification that its securities would bring to the index, (ii) the size (based on free float-adjusted market capitalization) and liquidity of securities. All else being equal, MSCI targets for inclusion the most sizable and liquid securities in an industry group. In addition, securities that do not meet the minimum size guidelines discussed below and/or securities with inadequate liquidity are not considered for inclusion, (iii) the estimated free float for the company and its individual share classes. Only securities of companies with estimated free float greater than 15% are, in general, considered for inclusion. Exceptions to this general rule are made only in significant cases, where not including a security of a large company would compromise the index's ability to fully and fairly represent the characteristics of the underlying market. Free Float. MSCI defines the free float of a security as the proportion of shares outstanding that are deemed to be available for purchase in the public equity markets by international investors. In practice, limitations on free float available to international investors include: (i) Strategic and other shareholdings not considered part of available free float. (ii) Limits on share ownership for foreigners. Under MSCI's free float-adjustment methodology, a constituent's Inclusion Factor is equal to its estimated free float rounded-up to the closest 5% for constituents with free float equal to or exceeding 15%. For example, a constituent security with a free float of 23.2% will be included in the index at 25% of its market capitalization. For securities with an a free float of less than 15% than are included on an exceptional basis, the Estimated free float is adjusted to the nearest 1%. Price and Exchange Rates. Prices. Prices used to calculate the MSCI Indices are the official exchange closing prices. All prices are taken from the dominant exchange in each market. In countries where there are foreign ownership limits, MSCI uses the price quoted on the official exchange, regardless of whether the limit has been reached. Exchange Rates. MSCI uses WM/Reuters Closing Spot Rates for all developed and emerging markets. The WM/Reuters Closing Spot Rates were established by a committee of investment managers and data providers, including MSCI, whose object was to standardize exchange rates used by the investment community. Exchange rates are taken daily at 4 p.m. London time by the WM/Reuters Company and are sourced whenever possible from multi-contributor quotes on Reuters. Representative rates are selected for each currency based on a number of 27 "snapshots" of the latest contributed quotations taken from the Reuters service at short intervals around 4 PM. WM/Reuters provides closing bid and offer rates. MSCI uses these to calculate the mid-point to 5 decimal places. MSCI continues to monitor exchange rates independently and may, under exceptional circumstances, elect to use an alternative exchange rate if the WM/Reuters rate is believed not to be representative for a given currency on a particular day. Changes to the Indices. Under the Enhanced Methodology, the MSCI Equity Indices are maintained with the objective of reflecting, on a timely basis, the evolution of the underlying equity markets. In maintaining the indices, emphasis is also placed on their continuity and on minimizing turnover in the indices. MSCI classifies index maintenance in two broad categories: (i) Index rebalancing and (ii) Market driven changes and corporate events. The index rebalancing process is designed to ensure that the indices continue to be an accurate reflection of an evolving marketplace. The evolution may be due, for example, to a change in the composition or structure of an industry or other developments, including regular updates in shareholder information used in the estimation of free float. During the examination of a country index at a quarterly index rebalancing, the free float-adjusted market capitalization and representation of each industry group in the index is measured against the underlying market. A complete or partial index rebalancing, which will result in additions and deletions, for a country may be necessary if one or more industry groups have become significantly over- or under-represented. Index rebalancing for each MSCI Country Index generally takes place every 12 months. Individual country index rebalancing for MSCI Country Indices usually occurs on only four dates throughout the year: as of the close of the last business day of February, May, August and November. MSCI Index additions and deletions due to quarterly index rebalancings are announced at least two weeks in advance. New Issues. In general, newly listed equity securities available to foreign investors would be considered for inclusion in the MSCI Indices, according to MSCI's Enhanced Methodology index rules and guidelines, at the time of the quarterly index rebalancing for the country. However, for new issues that are significant in size and meet all the MSCI inclusion criteria, an early inclusion, outside of the quarterly index rebalancing, may be considered. Index Rebalancing Deletions During an index rebalancing, securities may be deleted from a country index for a variety of reasons, including significant decreases in free float-adjusted market capitalization, significant deterioration in liquidity, changes in industry classification, decreases in free float, more restrictive Foreign Ownership Limits (FOLs), and availability of a better industry representative. In assessing deletions, it is important to emphasize that indices must represent the full-investment cycle, including bull as well as bear markets. Out-of-favor industries and their securities may exhibit declining prices, declining market capitalizations, and/or declining liquidity, and yet not be deleted because they continue to be good representatives of their industry group. 28 INVESTMENT LIMITATIONS The Company has adopted the following investment restrictions as fundamental policies with respect to each Fund. These restrictions cannot be changed with respect to a Fund without the approval of the holders of a majority of such Fund's outstanding voting securities. For purposes of the 1940 Act, a majority of the outstanding voting securities of a Fund means the vote, at a meeting of the security holders of the Company, of the lesser of (1) 67% or more of the voting securities of the Fund present at such meeting, if the holders of more than 50% of the outstanding voting securities of such Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Fund. Except as otherwise noted below, a Fund may not: 1. Change its investment objective (this restriction does not apply to the iShares MSCI South Africa Index Fund); 2. Lend any funds or other assets except through the purchase of all or a portion of an issue of securities or obligations of the type in which it is permitted to invest (including participation interests in such securities or obligations) and except that a Fund may lend its portfolio securities in an amount not to exceed 33 1/3% of the value of its total assets; 3. Issue senior securities or borrow money, except borrowings from banks for temporary or emergency purposes in an amount up to 33 1/3% of the value of the Fund's total assets (including the amount borrowed), valued at the lesser of cost or market, less liabilities (not including the amount borrowed) valued at the time the borrowing is made, and the Fund will not purchase securities while borrowings in excess of 5% of the Fund's total assets are outstanding, provided, that for purposes of this restriction, short-term credits necessary for the clearance of transactions are not considered borrowings; 4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings. (The deposit of underlying securities and other assets in escrow and collateral arrangements with respect to initial or variation margin for currency transactions and futures contracts will not be deemed to be pledges of the Fund's assets); 5. Purchase a security (other than obligations of the United States Government, its agencies or instrumentalities) if as a result 25% or more of its total assets would be invested in a single issuer. (This restriction applies to each of the iShares MSCI Mexico, Singapore and South Korea Index Funds only); 6. Purchase, hold or deal in real estate, or oil, gas or mineral interests or leases, but a Fund may purchase and sell securities that are issued by companies that invest or deal in such assets; 7. Act as an underwriter of securities of other issuers, except to the extent the Fund may be deemed an underwriter in connection with the sale of securities in its portfolio; 8. Purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions, except that a Fund may make margin deposits in connection with transactions in currencies, options, futures and options on futures; 9. Sell securities short; or 10. Invest in commodities or commodity contracts, except that an Fund may buy and sell currencies and forward contracts with respect thereto, and may transact in futures contracts on securities, stock indices and currencies and options on such futures contracts and make margin deposits in connection with such contracts. Industry concentration. Each of the iShares MSCI Mexico, Singapore and South Korea Index Funds has the following concentration policy: With respect to the two most heavily weighted industries or groups of industries in its benchmark MSCI Index, a Fund will invest in securities (consistent with its investment objective and other investment policies) so that the weighting of each such industry or group of industries in the Fund does not diverge 29 by more than 10% from the respective weighting of such industry or group of industries in its benchmark MSCI Index. An exception to this policy is that if investment in the stock of a single issuer would account for more than 25% of the Fund, the Fund will invest less than 25% of its net assets in such stock and will reallocate the excess to stock(s) in the same industry or group of industries, and/or to stock(s) in another industry or group of industries, in its benchmark MSCI Index. Each Fund will evaluate these industry weightings at least weekly, and at the time of evaluation will adjust its portfolio composition to the extent necessary to maintain compliance with the above policy. A Fund may not concentrate its investments except as discussed above. This policy is a fundamental investment policy and may not be changed without the approval of a majority (as defined in the Investment Company Act of 1940) of a Fund's shareholders. As of October 31, 2002, as a result of this policy with respect to industry concentration, the following Funds were concentrated (that is, invested 25% or more of the value of their assets) in the specified industries: iShares MSCI Index Fund Industry or Industries - -------------------------------------------------------------------------------- Mexico Integrated Telecommunication Services Singapore Banks South Korea Semiconductors Each of the iShares MSCI Australia, Austria, Belgium, Brazil, Canada, EMU, France, Germany, Hong Kong, Italy, Japan, Malaysia, Netherlands, Pacific ex-Japan, South Africa, Spain, Sweden, Switzerland, Taiwan and United Kingdom Index Funds will not concentrate its investments (i.e., hold 25% or more of its total assets in the stocks of a particular industry or group of industries), except that, to the extent practicable, the Fund will concentrate to approximately the same extent that its benchmark MSCI Index concentrates in the stocks of such particular industry or group of industries, provided that the Fund will comply with the diversification requirements applicable to regulated investment companies of the Internal Revenue Code, any underlying Treasury regulations or any successor provision. As of October 31, 2002, as a result of this policy with respect to industry concentration, the following Funds were concentrated (that is, invested 25% or more of the value of their assets) in the specified industries: iShares MSCI Index Fund Industry or Industries - -------------------------------------------------------------------------------- Australia Banks Belgium Banks Hong Kong Real Estate Management & Development Netherlands Integrated Oil and Gas Pacific ex-Japan Banks Switzerland Pharmaceuticals Taiwan Semiconductors In addition to the investment restrictions adopted as fundamental policies as set forth above, each Fund observes the following restrictions, which may be changed by the Board without a shareholder vote. A Fund will not: 1. Invest in the securities of a company for the purpose of exercising management or control, or in any event purchase and hold more than 10% of the securities of a single issuer, provided that the Company may vote the investment securities owned by each Fund in accordance with its views; or 2. Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is any asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment. For purposes of the percentage limitation on each Fund's investments in illiquid securities, with respect to each Fund, foreign equity securities, though not registered under the Securities Act of 1933 (the "Securities Act"), are not deemed illiquid if they are otherwise readily marketable. Such securities ordinarily are considered to be "readily marketable" if they are traded on an exchange or other organized market and are not legally restricted from sale by 30 the Fund. The Advisor monitors the liquidity of restricted securities in each Fund's portfolio under the supervision of the Company's Board. In reaching liquidity decisions, the Advisor considers, among other things, the following factors: 1. The frequency of trades and quotes for the security; 2. The number of dealers wishing to purchase or sell the security and the number of other potential purchasers; 3. Dealer undertakings to make a market in the security; and 4. The nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). If a percentage limitation is adhered to at the time of investment or contract, a later increase or decrease in percentage resulting from any change in value or total or net assets will not result in a violation of such restriction, except that the percentage limitations with respect to the borrowing of money and illiquid securities will be observed continuously. 31 MANAGEMENT OF THE COMPANY The following information supplements and should be read in conjunction with the section in the Prospectus entitled Management. Directors and Officers. The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by the Advisor and other service providers. Each Director serves until his or her successor is duly elected and qualified. iShares, Inc., iShares Trust, Barclays Global Investors Funds and Master Investment Portfolio are considered to be members of the same fund complex, as defined in Form N-1A under the 1940 Act. Each Director also serves as a Trustee for iShares Trust and oversees 56 portfolios within the fund complex. In addition, Richard K. Lyons serves as a Trustee for Barclays Global Investors Funds and Master Investment Portfolio and oversees 103 portfolios within the fund complex.
Interested Directors - ----------------------------- ------------------- ------------------------------ ---------------------------- Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held - ----------------------------- ------------------- ------------------------------ ---------------------------- *Garrett F. Bouton (56) Director (since Managing Director and Chief Trustee (since 2002) of Barclays Global Investors 2002), Chairman Executive Officer (since iShares Trust; Chairman of 45 Fremont Street (since February 1999) for Barclays Global the Board of Directors San Francisco, CA 94105 28, 2002) and Investors, N.A. ("BGI") (since 1998) of BGFA; President. Global Individual Investor Director (since 1998) of Business; Global H.R. BGI; Director of various Director (from 1996-1999) Barclays subsidiaries for BGI. (since 1997). *Nathan Most (88) Director (since Consultant to BGI Trustee (since 2000) and P.O. Box 193 1996). (1998-2002), American President (2000-2002) of Burlingame, CA 94011 Stock Exchange (1996-2000) iShares Trust and the Hong Kong Stock Exchange (1998 to present); Consultant to the Amsterdam Stock Exchange (1997-1998); Consultant to the Pacific Stock Exchange (1997-1998). - ----------------------------- ------------------- ------------------------------ ---------------------------- * Garrett F. Bouton and Nathan Most are deemed to be "interested persons" (as defined in the 1940 Act) of the Company due to their affiliations with BGFA, the Funds' investment advisor and BGI, the parent company of BGFA. Independent Directors - ----------------------------- ------------------- ------------------------------ ---------------------------- Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held - ----------------------------- ------------------- ------------------------------ ---------------------------- John B. Carroll (65) Director (since Retired Vice President of Trustee (since 2001) of 520 Main Street 1996) Investment Management iShares Trust; Trustee and Ridgefield, CT 06877 (1984-2000) of Verizon member of the Executive Corporation; Advisory Board Committee (since 1991) of member of Ibbotson The Common Fund Associates (1992-1998); Institutional Funds, a former Vice Chairman and non-profit organization; Executive Committee Member Member of the Board of (1994-1998) of the Committee Managers of JP Morgan on Investment of Employee Private Equity Funds. Benefit Assets of the Financial Executive Institute. Richard K. Lyons (41) Director (since Professor, University of Trustee (since 2000) of Haas School of Business, 2001) California, Berkeley: Haas iShares Trust; Board of UC Berkeley School of Business (since Trustees: Matthews Asian Berkeley, CA 94720 1993); Consultant for IMF Funds since 1995 (oversees World Bank, Federal Reserve 6 portfolios). Bank, and Citibank N.A. (since 2000).
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Independent Directors (continued) - ----------------------------- ------------------- ----------------------------- ------------------------------ Position(s), Principal Occupation(s) Name, Age and Address Length of Service During Past 5 Years Other Directorships Held - ----------------------------- ------------------- ----------------------------- ------------------------------ George C. Parker (61) Director (since Dean Witter Distinguished Trustee (since 2000) of Graduate School of Business 2001) Professor of Finance (since iShares Trust; Affinity (Room K301) 1994); Associate Dean for Group (since 1998) Bailard, Stanford University Academic Affairs, Director Biehl and Kaiser, Inc. 521 Memorial Way of MBA Program, and (since 1985); California Stanford, CA 94305 Professor, Stanford Casualty Group of University: Graduate School Insurance Companies (since of Business (1993-2001). 1978); Continental Airlines, Inc. (since 1996); Community First Financial Group (since 1995); Dresdner/RCM Mutual Funds (1994-2002); Tyon Ranch Company (since 1999). W. Allen Reed (54) Director (since President and Chief Trustee (since 2001) of iShares Trust; General Motors Investment 1996) Executive Officer (since Director (since 1994) of General Motors Management Corp. 1994) of General Motors Investment Management Corporation; 767 Fifth Avenue Investment Management Director (1995-1998) of Taubman Centers, New York, NY 10153 Corporation. Inc. (a real estate investment trust); Director (since 1992) of FLIR Systems (an imaging technology company); Director (since 1994) of General Motors Acceptance Corporation; Director (since 1994) of GMAC Insurance Holdings, Inc.; Director (since 1995) of Global Emerging Markets Fund; Director (since 2000) Temple Inland Industries; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute. - ----------------------------- ------------------- --------------------------------------- ------------------------------------- Officers who are not Directors - ----------------------------- ------------------- --------------------------------------- ------------------------------------- Principal Occupation(s) Directorships Held by Name, Age and Address Position During Past 5 Years Officers - ----------------------------- ------------------- --------------------------------------- ------------------------------------- Lee T. Kranefuss (39) Vice President Chief Executive Officer of the Board of Trustees for Barclays Global Barclays Global Investors Individual Investor Business Investors Funds and Master Investment 45 Fremont Street of BGI; The Boston Consulting Portfolios (since 2001). San Francisco, CA 94105 Group (until 1997). Michael Latham (36) Secretary, Director of Mutual Fund None. Barclays Global Investors Treasurer and Delivery in the U.S. 45 Fremont Street Principal Individual Investor San Francisco, CA 94105 Financial Officer Business of BGI (since 2000); Head of Operations, BGI Europe (1997-2000). Donna M. Rogers (36) Assistant Senior Director (formerly None. Investors Bank & Trust Co. Treasurer Director), Mutual Fund 200 Clarendon Street Administration at Investors Boston, MA 02116 Bank & Trust Company ("IBT")(since 1994). Jeffrey J. Gaboury (33) Assistant Director (formerly None. Investors Bank & Trust Co. Treasurer Manager), Mutual Fund 200 Clarendon Street Administration, Reporting Boston, MA 02116 and Compliance, IBT (since 1996). Susan C. Mosher (47) Assistant Senior Director & Senior None. Investors Bank & Trust Co. Secretary Counsel, Mutual Fund 200 Clarendon Street Administration, IBT (since Boston, MA 02116 1995). Sandra I. Madden (36) Assistant Senior Associate Counsel, None. Investors Bank & Trust Co. Secretary Mutual Fund Administration,
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200 Clarendon Street IBT (since 1999); Boston, MA 02116 Associate, Scudder Kemper Investments, Inc. (1996-1999). Lois Towers (52) Assistant Vice US Compliance Officer, BGI None. Barclays Global Investors President-AML (since 1999). 45 Fremont Street Compliance Officer San Francisco, CA 94105
The following table sets forth, as of December 31, 2001, the dollar range of equity securities beneficially owned by each Director in the Funds and in other registered investment companies overseen by the Director within the same family of investment companies as the Company.
- -------------------------- ------------------------------------------------------------- ---------------------------------------- Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Director in Family of Investment Name of Director Dollar Range of Equity Securities in the Funds Companies - -------------------------- ------------------------------------------------------------- ---------------------------------------- Garrett F. Bouton iShares S&P 500 Index Fund: over $100,000 over $100,000 iShares Dow Jones U.S. Technology Sector Index Fund: over $100,000 iShares Russell 2000 Value Index Fund: over $100,000 iShares Russell 1000 Value Index Fund: $50,001 - $100,000 - -------------------------- ------------------------------------------------------------- ---------------------------------------- Nathan Most iShares MSCI EAFE Index Fund: over $100,000 over $100,000 - -------------------------- ------------------------------------------------------------- ---------------------------------------- John B. Carroll N/A N/A - -------------------------- ------------------------------------------------------------- ---------------------------------------- Richard K. Lyons iShares S&P 500 Index Fund: $1 - $10,000 $1 - $10,000 - -------------------------- ------------------------------------------------------------- ---------------------------------------- George G.C. Parker iShares S&P 100 Index Fund: $50,001 - $100,000 over $100,000 iShares S&P Midcap 400/Barra Value Index Fund: $10,001 - $50,000 iShares S&P Global 100 Index Fund: $10,001 - $50,000 iShares Dow Jones U.S. Technology Sector Index Fund: $10,001 - $50,000 iShares Russell 1000 Value Index Fund: over $100,000 iShares MSCI France Index Fund: $10,001 - $50,000 iShares MSCI Mexico Index Fund: $10,001 - $50,000 iShares MSCI Singapore Index Fund: $10,001 - $50,000 iShares MSCI South Korea Index Fund: $10,001 - $50,000 iShares MSCI United Kingdom Index Fund: $10,001 - $50,000 - -------------------------- ------------------------------------------------------------- ---------------------------------------- W. Allen Reed N/A N/A - -------------------------- ------------------------------------------------------------- ----------------------------------------
The following table sets forth, as of December 31, 2001, for each independent Director and his immediate family members, ownership of securities in the Company's investment adviser, principal underwriter, or any person, other than an investment company, directly or indirectly controlling, controlled by, or under common control with the Company's investment adviser or principal underwriter.
- --------------------- --------------------- ---------------------- -------------------- --------------------- -------------------- Name of Owners and Relationship to Name of Director Director Company Title of Class Value of Securities Percent of Class - --------------------- --------------------- ---------------------- -------------------- --------------------- -------------------- Garrett F. Bouton Self Barclays Global Options None (not exercised) N/A Investors Nathan Most N/A John B. Carroll N/A Richard K. Lyons N/A George G.C. Parker N/A W. Allen Reed N/A
Committees of the Company. Each Independent Director of the Company serves on the Audit and Nominating Committees of the Company. The purposes of the Audit Committee are to assist the Board of Directors (1) in its oversight of the Company's accounting and financial reporting principles and policies and related controls and procedures maintained by or on behalf of the Company; (2) in its oversight of the Company's financial statements and the independent audit thereof; (3) in selecting, evaluating and, where deemed appropriate, replacing the independent accountants (or nominating the independent accountants to 34 be proposed for shareholder approval in any proxy statement); and (4) in evaluating the independence of the independent accountants. The Audit Committee of the Company met twice during calendar year ended December 31, 2001. The Nominating Committee nominates individuals for Independent Director membership on the Board of Directors. The Nominating Committee evaluates candidates' qualifications for board membership, including their independence from the investment adviser and other principal service providers and the potential effects of any other relationship that might impair the independence of a candidate. In addition, the Nominating Committee periodically reviews the composition of the Board of Directors to determine whether it may be appropriate to add individuals with different backgrounds or skills from those already on the Board of Directors. The Nominating Committee met once during the calendar year ended December 31, 2001. Remuneration of Directors and Officers. The Company pays each Director an annual retainer of $50,000 plus a per meeting fee of $500 for meetings of the Board attended by the Director. The Company also reimburses each Director for travel and other out-of-pocket expenses incurred by him/her in connection with attending such meetings. The table below sets forth the compensation paid to each Director during the calendar year ended December 31, 2001:
Aggregate Pension or Estimated Retirement Total Estimated Compensation Benefits Accrued Estimated Annual Compensation from the As Part of Company Benefits Upon From the Fund Name of Director Company Expenses** Retirement** and Fund Complex* - ---------------- ------------ ------------------ ---------------- ----------------- Garrett F. Bouton*** ... $ 0 Not Applicable. Not Applicable. $ 0 John B. Carroll ........ $ 50,000 Not Applicable. Not Applicable. $ 50,000 Richard K. Lyons*** .... $ 0 Not Applicable. Not Applicable. $ 52,500 Nathan Most ............ $119,500 Not Applicable. Not Applicable. $172,000 George G.C. Parker*** .. $ 0 Not Applicable. Not Applicable. $ 52,500 W. Allen Reed .......... $ 50,000 Not Applicable. Not Applicable. $ 50,000
* Includes compensation as Trustee of iShares Trust, an investment company with over 50 investment portfolios also advised by BGFA. ** No Director or Officer is entitled to any pension or retirement benefits from the Company. *** Messrs. Bouton, Lyons and Parker did not serve as Directors of the Company during the year ended December 31, 2001. Directors and officers of the Company collectively owned less than 1% of each of the Company's outstanding shares as of October 2, 2002. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES Although the Company does not have information concerning the beneficial ownership of iShares held in the names of DTC Participants, as of December 14, 2002, the name, address and percentage ownership of each DTC Participant that owned of record 5% or more of the outstanding shares of a Fund were as follows:
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Australia JPMorgan Chase Bank 41.02% One Chase Manhattan Plaza New York, NY 10081 Morgan Stanley & Co. 11.72% One Pierrepont Plaza Brooklyn, NY 11201 Merrill Lynch Pierce Fenner & Smith Inc. 7.33% Safekeeping 101 Hudson Street Jersey City, NJ 07302
35 iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Austria Morgan Stanley & Co. 29.62% One Pierrepont Plaza Brooklyn, NY 11201 Merrill Lynch Pierce Fenner & Smith Inc. 26.41% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Salomon Smith Barney Inc. 9.51% 333 West 34th Street, 3rd Floor New York, NY 10001 National Financial Services Corp. 8.43% 200 Liberty Street, 5th Floor New York, NY 10281 Citibank/Private Banking 6.58% One Court Square, 22nd Floor Long Island City, NY 11120 Charles Schwab & Co., Inc. 6.46% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Belgium Citibank/Private Banking 15.55% One Court Square, 22nd Floor Long Island City, NY 11120 Salomon Smith Barney Inc. 11.84% 333 West 34th Street, 3rd Floor New York, NY 10001 Merrill Lynch Pierce Fenner & Smith Inc. 10.87% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Spear, Leeds & Kellogg 9.47% 120 Broadway, 5th Floor New York, NY 10006 Charles Schwab & Co., Inc. 6.51% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Brazil Morgan Stanley & Co. 22.34% One Pierrepont Plaza Brooklyn, NY 11201 Boston Safe Deposit & Trust Co. 13.35% One Cabot Road Medford, MA 02155
36 iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Brown Bros. Harriman & Co. 12.83% 59 Wall Street New York, NY 10005 Merrill Lynch Pierce Fenner & Smith Inc. 8.43% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Bear Stearns Securities Corp. 5.62% One Metrotech Center North Brooklyn, NY 11201 Canada Merrill Lynch Pierce Fenner & Smith Inc. 22.25% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Citibank, N.A. 21.57% 1410 Westshore Blvd. Tampa, FL 33607 Salomon Smith Barney Inc. 10.98% 333 West 34th Street, 3rd Floor New York, NY 10001 Brown Bros. Harriman & Co. 7.78% 59 Wall Street New York, NY 10005 Charles Schwab & Co., Inc. 7.46% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 UBS PaineWebber, Inc. 5.87% 1285 Avenue of the Americas New York, NY 10019 EMU Merrill Lynch Pierce Fenner & Smith Inc. 22.25% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Brown Bros. Harriman & Co. 9.58% 59 Wall Street New York, NY 10005 JPMorgan Chase Bank 8.83% One Chase Manhattan Plaza New York, NY 10081 Morgan Stanley & Co. 8.35% One Pierrepont Plaza Brooklyn, NY 11201
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iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Royal Trust Corp. 7.39% 733 3rd Avenue New York, NY 10017 State Street Bank & Trust Company 6.81% 1776 Heritage Drive Quincy, MA 02171 Morgan Stanley Dean Witter, Inc. 6.56% New York, NY 10048 France State Street Bank & Trust Company 17.57% 1776 Heritage Drive Quincy, MA 02171 Brown Bros. Harriman & Co. 10.86% 59 Wall Street New York, NY 10005 Morgan Stanley & Co. 10.58% One Pierrepont Plaza Brooklyn, NY 11201 Merrill Lynch Pierce Fenner & Smith Inc. 10.58% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Germany Morgan Stanley & Co. 19.56% One Pierrepont Plaza Brooklyn, NY 11201 Merrill Lynch Pierce Fenner & Smith Inc. 14.48% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Brown Bros. Harriman & Co. 6.43% 59 Wall Street New York, NY 10005 State Street Bank & Trust Company 5.57% 1776 Heritage Drive Quincy, MA 02171 Charles Schwab & Co., Inc. 5.34% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Hong Kong Morgan Stanley & Co. 16.97% One Pierrepont Plaza Brooklyn, NY 11201 Deutsche Bank Securities, Inc. 13.84% 175 Water Street New York, NY 10038
38 iShares MSCI Index Fund Name and Address Prcentage of Ownership - ----------------------- ---------------- ---------------------- Merrill Lynch Pierce Fenner & Smith 13.61% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Bear Stearns Securities Corp. 7.92% One Metrotech Center North Brooklyn, NY 11201 Bankers Trust Co. 7.20% 16 Wall Street New York, NY 10015 UBS PaineWebber, Inc. 5.22% 1285 Avenue of the Americas New York, NY 10019 Italy Morgan Stanley & Co. 30.47% One Pierrepont Plaza Brooklyn, NY 11201 Merrill Lynch Pierce Fenner & Smith 17.19% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Brown Bros. Harriman & Co. 6.82% 59 Wall Street New York, NY 10005 Japan Merrill Lynch Pierce Fenner & Smith 9.53% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Morgan Stanley & Co. 7.74% One Pierrepont Plaza Brooklyn, NY 11201 Brown Bros. Harriman & Co. 5.72% 59 Wall Street New York, NY 10005 Malaysia Brown Bros. Harriman & Co. 26.73% 59 Wall Street New York, NY 10005 State Street Bank & Trust Company 20.65% 1776 Heritage Drive Quincy, MA 02171 Salomon Smith Barney Inc. 7.70% 333 West 34th Street, 3rd Floor New York, NY 10001 Mexico Morgan Stanley & Co. 20.78% One Pierrepont Plaza Brooklyn, NY 11201
39
iShares MSCI Index Fund Name and Address Prcentage of Ownership - ----------------------- ---------------- ---------------------- Merrill Lynch Pierce Fenner & Smith 8.87% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Bank of New York 6.32% One Wall Street New York, NY 10286 State Street Bank & Trust Company 5.27% 1776 Heritage Drive Quincy, MA 02171 Netherlands Merrill Lynch Pierce Fenner & Smith 16.10% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Citibank, N.A. 8.01% 1410 Westshore Blvd. Tampa, FL 33607 State Street Bank & Trust Company 7.21% 1776 Heritage Drive Quincy, MA 02171 JPMorgan Chase Bank 6.79% One Chase Manhattan Plaza New York, NY 10081 Morgan Stanley & Co. 5.73% One Pierrepont Plaza Brooklyn, NY 11201 Swiss American Securities, Inc. 5.68% 12 E. 49th Street New York, NY 10017 Pacific ex-Japan Boston Safe Deposit & Trust Co. 15.59% One Cabot Road Medford, MA 02155 Morgan Stanley & Co. 11.93% One Pierrepont Plaza Brooklyn, NY 11201 Brown Bros. Harriman & Co. 7.37% 59 Wall Street New York, NY 10005 Royal Trust Corp. 6.57% 733 3rd Avenue New York, NY 10017 Bankers Trust Co. 6.02% 16 Wall Street New York, NY 10015
40
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Singapore Morgan Stanley & Co. 33.05% One Pierrepont Plaza Brooklyn, NY 11201 Spear, Leeds & Kellogg 5.46% 120 Broadway, 5th Floor New York, NY 10006 Charles Schwab & Co., Inc. 5.36% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 South Korea Deutsche Bank Securities, Inc. 20.45% 175 Water Street New York, NY 10038 Brown Bros. Harriman & Co. 15.21% 59 Wall Street New York, NY 10005 Morgan Stanley & Co. 9.08% One Pierrepont Plaza Brooklyn, NY 11201 Royal Trust Corp. 7.62% 733 3rd Avenue New York, NY 10017 Boston Safe Deposit & Trust Co. 5.95% One Cabot Road Medford, MA 02155 Spain Merrill Lynch Pierce Fenner & Smith 29.94% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Morgan Stanley & Co. 6.06% One Pierrepont Plaza Brooklyn, NY 11201 Charles Schwab & Co., Inc. 6.30% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Swiss American Securities, Inc. 5.73% 12 E. 49th Street New York, NY 10017 Sweden Merrill Lynch Pierce Fenner & Smith 32.33% Safekeeping 101 Hudson Street Jersey City, NJ 07302
41
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- JPMorgan Chase Bank 7.61% One Chase Manhattan Plaza New York, NY 10081 National Financial Services Corp. 6.91% 200 Liberty Street, 5th Floor New York, NY 10281 Morgan Stanley & Co. 6.65% One Pierrepont Plaza Brooklyn, NY 11201 Charles Schwab & Co., Inc. 5.55% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Switzerland Brown Bros. Harriman & Co. 20.51% 59 Wall Street New York, NY 10005 Merrill Lynch Pierce Fenner & Smith 11.64% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Swiss American Securities, Inc. 9.64% 12 E. 49th Street New York, NY 10017 Morgan Stanley & Co. 7.77% One Pierrepont Plaza Brooklyn, NY 11201 State Street Bank & Trust Company 5.15% 1776 Heritage Drive Quincy, MA 02171 Taiwan State Street Bank & Trust 20.79% 1776 Heritage Drive Quincy, MA 02171 Boston Safe Deposit & Trust Co. 8.69% One Cabot Road Medford, MA 02155 JPMorgan Chase Bank 8.34% One Chase Manhattan Plaza New York, NY 10081 Citibank, N.A. 8.03% 1410 Westshore Blvd. Tampa, FL 33607 Morgan Stanley & Co. 7.99% One Pierrepont Plaza Brooklyn, NY 11201
42
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- Salomon Smith Barney Inc. 7.47% 333 West 34th Street, 3rd Floor New York, NY 10001 Brown Bros. Harriman & Co. 7.95% 59 Wall Street New York, NY 10005 Merrill Lynch Pierce Fenner & Smith 6.99% Safekeeping 101 Hudson Street Jersey City, NJ 07302 United Kingdom Royal Trust Corp. 13.80% 733 3rd Avenue New York, NY 10017 JPMorgan Chase Bank 8.64% One Chase Manhattan Plaza New York, NY 10081 Merrill Lynch Pierce Fenner & Smith 8.30% Safekeeping 101 Hudson Street Jersey City, NJ 07302 Brown Bros. Harriman & Co. 6.91% 59 Wall Street New York, NY 10005
INVESTMENT ADVISORY, MANAGEMENT, ADMINISTRATIVE AND DISTRIBUTION SERVICES Investment Advisor. Barclays Global Fund Advisors (the "Advisor") acts as investment advisor to the Company and, subject to the supervision of the Board, is responsible for the investment management of each Fund. The Advisor is a California corporation indirectly owned by Barclays Bank PLC, and is registered as an investment advisor under the Investment Advisers Act of 1940. The Advisor and its parent, Barclays Global Investors, N.A., manage, administer or advise assets aggregating in excess of $690 billion as of September 30, 2002. The Advisor serves as investment advisor to each Fund pursuant to an Advisory Agreement (the "Advisory Agreement") between the Company and the Advisor dated December 28, 2001 (except that the Advisory Agreement applicable to the iShares MSCI Singapore Index Fund (the Singapore Index Fund) is dated May 8, 2000). Under the Advisory Agreement, the Advisor, subject to the supervision of the Company's Board and in conformity with the stated investment policies of each Fund, manages the investment of each Fund's assets. The Advisor may enter into subadvisory agreements with additional investment advisors to act as subadvisors with respect to particular Fund. The Advisor will pay subadvisors, if any, out of the fees received by the Advisor. The Advisor is responsible for (i) placing purchase and sale orders, (ii) providing continuous supervision of the investment portfolio of each Fund, and (iii) the general management of the Company's affairs. For its investment management services to each Fund, except the four (4) Funds listed below, the Advisor is paid a fee equal to each of those Fund's allocable portion of: .59% per annum of the aggregate net assets of those Funds less than or equal to $7 billion, plus .54% per annum of the aggregate net assets of those Funds between $7 billion and $11 billion, plus ..49% per annum of the aggregate net assets of those Funds in excess of $11 billion; for its investment management services to the iShares MSCI Brazil, South Korea and Taiwan Index Funds, the Advisor is paid management fees equal to each of those Fund's allocable portion of: 0.74% per annum of the aggregate net assets of those Funds less than or equal to $2 billion, plus 0.69% per annum of the aggregate net assets of those Funds between $2 billion and $4 billion, plus 0.64% per annum of the aggregate net assets of those Funds greater than $4 billion; for its investment management services to the iShares 43 MSCI Pacific ex-Japan Index Fund, the Advisor is paid management fees equal to 0.50% per annum of the net assets of that Fund. Pursuant to the Advisory Agreement, with the exception of the Singapore Index Fund, the Advisor is responsible for the payment of all of the expenses of each Fund, other than (i) expenses of the Funds incurred in connection with the execution of portfolio securities transactions on behalf of such Funds, (ii) expenses incurred in connection with any distribution plan adopted by the Company in compliance with Rule 12b-1 under the Investment Company Act of 1940, (iii) litigation expenses, (iv) taxes (including, but not limited to, income, excise, transfer and withholding taxes), (v) any cost or expense that a majority of the Directors of the Company who are not "interested persons" (as defined in the Investment Company Act of 1940) deems to be an extraordinary expense and (vi) the advisory fee payable to the Advisor under the Advisory Agreement. (The Singapore Index Fund, by contrast, pays its own expenses and the Advisor receives fees equal to the difference between such expenses and the rate specified above for the Singapore Index Fund (subject to the exceptions noted in the previous sentence) or reimburses expenses to the extent necessary to cause the Singapore Index Fund's expenses to be at the specified rate (again, subject to the same exceptions). The shareholders of the Singapore Index Fund may vote to approve the advisory fee arrangement applicable to each other Fund, if that approval occurs no later than January 24, 2002.) The management fees are accrued daily and paid by the Company as soon as practical after the last day of each calendar quarter. The Company's management fees, like those paid by most index funds, are lower than those paid by many actively managed funds. One reason for the difference in fee levels is that passive management requires fewer investment, research and trading decisions, thereby justifying lower fees. Pursuant to the Advisory Agreement, the Advisor is not liable for any error of judgment or mistake of law or for any loss suffered by the Company, unless caused by the Advisor's willful malfeasance, bad faith or gross negligence in the performance of its duties or reckless disregard of its duties and obligations under the Advisory Agreement. The Advisory Agreement, with respect to all Funds, is subject to annual approval by (1) the Company's Board or (2) vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Company, provided that in either event the continuance also is approved by a majority of the Company's Board who are not interested persons (as defined in the 1940 Act) of the Company by vote cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement is terminable without penalty, on 60 days' notice, by the Company's Board or by vote of the holders of a majority (as defined in the 1940 Act) of the Company's outstanding voting securities. The Advisory Agreement is also terminable upon 60 days' notice by the Advisor and will terminate automatically in the event of its assignment (as defined in the 1940 Act). The Advisory Agreement between the Company and BGFA was most recently approved by the Board of Trustees on May 21, 2002. In making the determination to approve the Investment Advisory Agreement, the Board considered the qualifications of BGFA to provide advisory services, an analysis of BGFA's profitability, and the reasonableness of the advisory fees paid to BGFA in relation to the services provided and the advisory fees paid by other comparable mutual funds. Based on these considerations, the Board concluded that the terms of the Advisory Agreement are fair and reasonable with respect to the Company, are in the best interests of the Company's shareholders, and are similar to those which could have been obtained through arm's length negotiations. For its advisory services, the Company paid and accrued the following fees to the Advisor:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Fund August 31, 2000 August 31, 2001 August 31, 2002 ------------------------- --------------------- ---------------------- ---------------------- Australia $148,628 $113,828 $327,154 Austria $19,889 $0 $52,808 Belgium $25,952 $0 $37,985 Brazil $410(1) $9,271 $637,828 Canada $23,119 $3,760 $181,343 EMU $7,196(2) $86,333 $489,430 France $208,698 $177,550 $259,112 Germany $415,826 $406,730 $521,451 Hong Kong $203,154 $153,909 $380,665 Italy $154,493 $86,114 $139,606
44
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fund August 31, 2000 August 31, 2001 August 31, 2002 ------------------------- --------------------- ---------------------- ---------------------- Japan $2,363,952 $2,011,201 $2,733,089 Malaysia $264,088 $179,613 $394,527 Mexico $45,446 $32,399 $496,588 Netherlands $61,274 $60,956 $94,688 Pacific ex-Japan(3) N/A N/A $205,239 Singapore $268,788 $153,096 $252,406 South Africa(4) N/A N/A N/A South Korea $8,252(5) $22,313 $520,694 Spain $94,886 $63,808 $88,489 Sweden $52,196 $7,760 $37,202 Switzerland $88,433 $72,584 $148,854 Taiwan $16,530(6) $181,157 $914,919 United Kingdom $349,463 $432,898 $587,967 ---------------------
(1) For the period July 11, 2000 (commencement of operations) through August 31, 2000. (2) For the period July 26, 2000 (commencement of operations) through August 31, 2000. (3) The fund commenced operations on October 26, 2001. (4) The fund commenced operations on February 7, 2003. (5) For the period May 10, 2000 (commencement of operations) through August 31, 2000. (6) For the period June 21, 2000 (commencement of operations) through August 31, 2000. Under the advisory agreement in effect for each Fund prior to December 28, 2001, each Fund paid its own expenses and Barclays Global Fund Advisors received fees equal to the difference between such expenses and specified rates (subject to the exceptions noted above) or reimbursed expenses to the extent necessary to cause the Fund's expenses to be at such specified rates (again, subject to the same exceptions). (As discussed above, this agreement currently remains in effect for the iShares MSCI Singapore Index Fund.) The net advisory fees and total expenses of each Fund were not affected by the recent changes to the Advisory Agreement. Pursuant to the prior advisory agreement, the following reimbursement was paid and accrued to the Company by the Advisor: Fiscal Year Ended Fiscal Year Ended Fund August 31, 2000 August 31, 2001 ------------------------- -------------------- --------------------- Australia $0 $0 Austria $4,019 $14,481 Belgium $0 $3,325 Brazil $13,265(1) $0 Canada $3,428 $0 EMU $29,111(2) $0 France $0 $0 Germany $0 $0 Hong Kong $0 $0 Italy $0 $0 Japan $0 $0 Malaysia $0 $0 Mexico $463 $0 Netherlands $0 $0 Pacific ex-Japan(3) N/A N/A Singapore $0 $0 South Africa(4) N/A N/A South Korea $21,736(5) $0 Spain $0 $0 Sweden $0 $0 Switzerland $0 $0 Taiwan $37,794(6) $0 United Kingdom $0 $0 --------------------- (1) For the period July 11, 2000 (commencement of operations) through August 31, 2000. 45 (2) For the period July 26, 2000 (commencement of operations) through August 31, 2000. (3) The fund commenced operations on October 26, 2001. (4) The fund commenced operations on February 7, 2003. (5) For the period May 10, 2000 (commencement of operations) through August 31, 2000. (6) For the period June 21, 2000 (commencement of operations) through August 31, 2000. Code of Ethics. Each of the Company, the Advisor and the Company's Distributor, SEI Investments Distribution Co. (the "Distributor"), have adopted a Code of Ethics designed to prevent affiliated persons of the Company, the Advisor and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Funds. Administrator, Custodian and Transfer Agent. On May 25, 2002, Investors Bank & Trust Company ("Investors Bank") began serving as Administrator, Custodian and Transfer Agent for the Funds. Its principal address is 200 Clarendon Street, Boston, MA 02111. Under the Administration Agreement with the Company, Investors Bank provides necessary administrative and accounting services for the maintenance and operations of the Company and each Fund. In addition, Investors Bank makes available the office space, equipment, personnel and facilities required to provide such services. Investors Bank pays Morgan Stanley & Co. Incorporated a fee of 0.05% of the average daily net assets of the Company for sub-administration services as described under "The Sub-Administrator" below. Under the Custodian Agreement with the Company, Investors Bank maintains in separate accounts cash, securities and other assets of the Company and each Fund, keeps all necessary accounts and records, and provides other services. Investors Bank is required, upon the order of the Company, to deliver securities held by Investors Bank and to make payments for securities purchased by the Company for each Fund. Also, under a Delegation Agreement, Investors Bank is authorized to appoint certain foreign custodians or foreign custody managers for Fund investments outside the United States. Pursuant to a Transfer Agency and Service Agreement with the Company, Investors Bank acts as a transfer agent for each Fund's authorized and issued shares of beneficial interest, and as dividend disbursing agent of the Company. As compensation for the foregoing services, Investors Bank receives certain out-of-pocket costs, transaction fees and asset-based fees which are accrued daily and paid monthly by BGFA from its management fee. Administrative Fees. For its administrative services, the Company paid and accrued the following fees during the periods indicated in the following table:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Fund August 31, 2000 August 31, 2001 August 31, 2002(1) ------------------------- -------------------- --------------------- ----------------------- Australia $106,930 $82,034 $20,376 Austria $19,678 $16,537 $3,646 Belgium $22,408 $16,152 $3,220 Brazil $4,908(2) $24,693 $5,774 Canada $23,780 $31,647 $8,908 EMU $6,012(3) $86,065 $30,128 France $152,143 $115,968 $19,337 Germany $272,489 $220,636 $37,663 Hong Kong $141,347 $98,077 $19,083 Italy $107,296 $65,865 $11,001 Japan $1,506,281 $942,137 $181,964 Malaysia $185,310 $127,986 $25,333 Mexico $45,292 $58,484 $13,749 Netherlands $47,334 $48,662 $7,707 Pacific ex-Japan(4) N/A N/A $4,875 Singapore $188,421 $98,430 $54,583 South Africa(5) N/A N/A N/A South Korea $8,322(6) $29,066 $16,669 Spain $71,035 $51,020 $9,067 Sweden $42,428 $24,633 $3,646 Switzerland $69,813 $61,178 $11,026 Taiwan $9,318(7) $131,529 $40,700 United Kingdom $226,121 $210,427 $42,138
46 (1) Prior to May 20, 2002 PFPC, Inc. ("PFPC") was paid for administrative services it provided to each Fund. From May 20, 2002 to August 31, 2002, Investors Bank was paid for administrative services it provided to each Fund. All such fees were paid by the Company prior to December 28, 2001, at which time each Fund (other than the iShares MSCI Singapore Index Fund) entered into a new Investment Advisory Agreement obligating BGFA to pay the administration fees for each Fund (other than the iShares MSCI Singapore Index Fund). (2) For the period July 11, 2000 (commencement of operations) through August 31, 2000. (3) For the period July 26, 2000 (commencement of operations) through August 31, 2000. (4) The fund commenced operations on October 26, 2001. (5) The fund commenced operations on February 7, 2003. (6) For the period May 10, 2000 (commencement of operations) through August 31, 2000. (7) For the period June 21, 2000 (commencement of operations) through August 31, 2000. Sub-Administrator. Morgan Stanley & Co. Incorporated provides certain sub-administrative services relating to the Company pursuant to a Sub-Administration Agreement and receives a fee from the Administrator equal to 0.05% of the Company's average daily net assets for providing such services. Morgan Stanley & Co. Incorporated, as Sub-Administrator, has no role in determining the investment policies of the Company or which securities are to be purchased or sold by the Company. The principal business address of Morgan Stanley & Co. Incorporated is 1585 Broadway, New York, New York, 10036. For sub-administrative services, PFPC and BGI paid or accrued the following fees to the Sub-Administrator and its affiliates:
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fund August 31, 2000 August 31, 2001 August 31, 2002(1) ------------------------- -------------------- ---------------------- ----------------------- Australia $30,652 $27,308 $9,503 Austria $5,555 $5,505 $1,699 Belgium $6,385 $5,379 $1,501 Brazil $1,636(2) $8,220 $2,704 Canada $7,050 $10,535 $4,156 EMU $2,004(3) $28,644 $14,053 France $44,197 $38,617 $9,018 Germany $80,143 $73,466 $17,567 Hong Kong $40,420 $32,659 $8,911 Italy $31,093 $21,931 $5,132 Japan $432,336 $313,575 $84,726 Malaysia $53,762 $42,608 $11,803 Mexico $13,186 $19,461 $6,408 Netherlands $13,362 $16,203 $3,594 Pacific ex-Japan(4) N/A N/A $2,298 Singapore $52,989 $32,781 $41,496 South Africa(5) N/A N/A N/A South Korea $2,774(6) $9,676 $7,820 Spain $20,513 $16,990 $4,230 Sweden $12,361 $8,205 $1,702 Switzerland $20,057 $20,372 $5,141 Taiwan $3,106(7) $43,778 $19,054 United Kingdom $65,478 $70,067 $19,647
- --------------------- (1) PFPC paid fees prior accrued September 1, 2001 through May 19, 2002; BGI paid fees accrued May 20, 2002 through August 31, 2002. (2) For the period July 11, 2000 (commencement of operations) through August 31, 2000. (3) For the period July 26, 2000 (commencement of operations) through August 31, 2000. (4) The fund commenced operations on October 26, 2001. (5) The fund commenced operations on February 7, 2003. (6) For the period May 10, 2000 (commencement of operations) through August 31, 2000. (7) For the period June 21, 2000 (commencement of operations) through August 31, 2000. Distributor. SEI Investments Distribution Co. is the principal underwriter and distributor of iShares. The Distributor's principal offices are located at One Freedom Valley Drive, Oaks, PA 19456. Investor information can be obtained by calling 1-800-iShares (1-800-474-2737). The Distributor has entered into an agreement with the 47 Company which continues for two years from its effective date, and is renewable annually thereafter (the "Distribution Agreement"), pursuant to which it distributes Company shares. iShares are continuously offered for sale by the Company through the Distributor only in Creation Units, as described below under "Purchase and Issuance of iShares in Creation Units." iShares in less than Creation Units are not distributed by the Distributor. The Distributor also acts as agent for the Company. The Distributor delivers a prospectus to persons purchasing iShares in Creation Units and maintains records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the National Association of Securities Dealers, Inc. SEI Investments Distribution Co. as Distributor, has no role in determining the investment policies of the Company or which securities are to be purchased or sold by the Company. To compensate the Distributor for the distribution-related services it provides, and broker-dealers authorized by the Distributor for distribution services they provide, including for example, advertising, sales and marketing expenses, the Company has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Company's Plan, for each Fund other than the iShares MSCI Pacific ex-Japan Index Fund, the Distributor is entitled to receive a distribution fee, accrued daily and paid monthly, calculated with respect to each Fund at a rate set from time to time by the Board of Directors, provided that the annual rate may not exceed 0.25% of the average daily net assets of such Fund. From time to time the Distributor may waive all or a portion of these fees. The Plan is designed to enable the Distributor to be compensated by the Company for distribution services provided by it with respect to each Fund other than the iShares MSCI Pacific ex-Japan Index Fund. Payments under the Plan are not tied exclusively to the distribution expenses actually incurred by the Distributor. The Board, including a majority of the Directors who are not interested persons of the Company and who have no direct or indirect financial interest in the operation of the Plan ("Independent Directors"), evaluate the appropriateness of the Plan and its payment terms on a continuing basis and in doing so consider all relevant factors, including expenses borne by the Distributor in the current year and in prior years and amounts received under the Plan. Under its terms, the Plan remains in effect from year to year, provided such continuance is approved annually by vote of the Board, including a majority of the Independent Directors. The Plan may not be amended to increase materially the amount to be spent for the services provided by the Distributor without approval by the shareholders of the Fund to which the Plan applies, and all material amendments of the Plan also require Board approval. The Plan may be terminated at any time, without penalty, by vote of a majority of the Independent Directors, or, with respect to the Fund to which it applies, by a vote of a majority of the outstanding voting securities of such Fund (as such vote is defined in the 1940 Act). If a Plan is terminated (or not renewed) with respect to any one or more Fund to which it applies, it may continue in effect with respect to any Fund as to which it has not been terminated (or has been renewed). Pursuant to the Distribution Agreement, the Distributor will provide the Board periodic reports of any amounts expended under the Plan and the purpose for which such expenditures were made. The distribution fees payable under the 12b-1 Plan are used to pay distribution related expenses, including: compensation to the distributor at a rate fixed by the Company's Board of Directors from time to time (currently 0.02% of the Company's average daily net assets, subject to an annual minimum of $845,000); compensation to a sales and marketing consultant retained by the Company at a rate of 0.035% of the Company's average daily net assets attributed to the Company's original 17 Funds; and reimbursements of expenses incurred by the distributor and other persons (principally the Advisor) in connection with the distribution of the Company's shares. In addition, the Distributor also has entered into sales and investor services agreements with broker-dealers or other persons that are DTC Participants (as defined below) to provide distribution assistance, including broker-dealer and shareholder support and educational and promotional services. Under the terms of each sales and investor services agreement, the Distributor will pay such broker-dealers or other persons, out of Rule 12b-1 fees received from the Fund to which such fees apply, at the annual rate of up to 0.25 of 1% of the average daily net asset value of iShares held through DTC for the account of such DTC Participant. The amounts of the fees paid to the distributor and the sales and marketing consultant are not dependent on the amount of distribution expenses actually incurred by such persons. 48 The Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, (i) by vote of a majority of the Directors who are not interested persons of the Company (as defined under the 1940 Act) or (ii) by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the relevant Fund, on at least 60 days' written notice to the Distributor. The Distribution Agreement is also terminable upon 60 days' notice by the Distributor and will terminate automatically in the event of its assignment (as defined in the 1940 Act). As principal underwriter and distributor of iShares, SEI received the following amounts pursuant to the Plan:
March 28, 2000 Fiscal Year Ended Fiscal Year Ended through August 31, 2001 August 31, 2002 Fund August 31, 2000 ------------------------- ------------------- ---------------------- ----------------------- Australia $66,338 $136,549 $168,339 Austria $11,546 $27,523 $32,080 Belgium $14,060 $26,887 $24,099 Brazil $8,179(1) $41,100 $228,648 Canada $18,702 $52,667 $91,773 EMU $10,021(2) $143,207 $248,069 France $101,660 $193,060 $137,825 Germany $192,778 $367,265 $269,909 Hong Kong $83,315 $163,260 $191,230 Italy $72,173 $109,650 $77,462 Japan $929,584 $1,568,286 $1,374,835 Malaysia $118,841 $213,047 $205,689 Mexico $30,779 $97,341 $236,900 Netherlands $27,343 $81,006 $54,040 Pacific ex-Japan(3) N/A N/A N/A Singapore $100,657 $163,869 $207,777 South Africa(4) N/A N/A N/A South Korea $13,870(5) $48,377 $202,505 Spain $46,035 $84,938 $53,098 Sweden $28,601 $41,017 $25,008 Switzerland $44,744 $101,847 $80,898 Taiwan $15,531(6) $218,895 $371,701 United Kingdom $156,078 $350,308 $300,622
--------------------- (1) For the period July 11, 2000 (commencement of operations) through August 31, 2000. (2) For the period July 26, 2000 (commencement of operations) through August 31, 2000. (3) The fund does not pay Rule 12b-1 fees. (4) The fund commenced operations on February 7, 2003. (5) For the period May 10, 2000 (commencement of operations) through August 31, 2000. (6) For the period June 21, 2000 (commencement of operations) through August 31, 2000. In the aggregate, the Distributor received $2,090,825, $4,230,099 and $4,582,507, respectively, for the period March 29, 2000 to August 31, 2000, the fiscal year ended August 31, 2001 and the fiscal year ended August 31, 2002 from the Funds pursuant to the Plan, retaining $167,266, $338,392 and $863,812, respectively, and paying out the remainder to unaffiliated third parties. The retained amounts represent .02%, respectively, of the average daily net assets of the Funds, which the Distributor received for monitoring the purchase and redemption of Creation Units, as described below under the "Purchase and Issuance of iShares in Creation Units" and "Redemption of iShares in Creation Units." During the period March 26, 2000 to August 31, 2000, the fiscal year ended August 31, 2001 and the fiscal year ended August 31, 2002, the Distributor paid $402,423, $768,927 and $682,457; $411,034, $2,351,571 and $2,996,369; $824,050, $242,760 and $470,497; and $286,052, $528,449 and $863,822, respectively, for (1) postage and other expenses of distributing prospectuses, statements of additional information and other marketing materials, (2) advertising-related expenses, (3) compensation to broker-dealers for distribution assistance, and (4) fees paid to the Company's marketing and sales consultant, respectively, which amounts were allocated to payments made under the Plan by each Fund based on its average daily net assets for the period. 49 Prior to March 29, 2000, Funds Distributor, Inc. ("FDI"), located at 60 State Street, Suite 1300, Boston, MA 02109 served as the principle underwriter distributor of iShares. FDI received or accrued the following amounts pursuant to the Plan: September 1, 1999 to Fund March 28, 2000 --------------------- ---------------------- Australia 69,538 Austria 12,982 Belgium 14,290 Canada 13,240 France 95,459 Germany 166,348 Hong Kong 95,027 Italy 66,635 Japan 985,679 Malaysia 119,977 Mexico 28,127 Netherlands 31,576 Singapore 131,430 Spain 45,226 Sweden 26,562 Switzerland 44,434 United Kingdom 137,048 In the aggregate, FDI received $2,083,576 from the Funds for the period September 1, 1999 to March 28, 2000 pursuant to the Plan, retaining $2,084 and paying out the remainder to unaffiliated third parties. The retained amounts represent .02% of the average daily net assets of the Funds, which FDI received for monitoring the purchase and redemption of Creation Units, as described below under the "Purchase and Issuance of iShares in Creation Units" and "Redemption of iShares in Creation Units." During the period September 1, 1999 to March 28, 2000, FDI paid $1,526,358; $381,537; and $173,388, respectively, for (1) postage and other expenses of distributing prospectuses, statements of additional information and other marketing materials, (2) advertising-related expenses and (3) compensation to broker-dealers for distribution assistance, respectively, which amounts were allocated to payments made under the Plan by each Fund based on its average daily net assets for the period. BROKERAGE ALLOCATION When selecting brokers and dealers to handle the purchase and sale of portfolio securities, the Advisor looks for prompt execution of the order at a favorable price. Generally, the Advisor works with recognized dealers in these securities, except when a better price and execution of the order can be obtained elsewhere. The Company will not deal with affiliates in principal transactions unless permitted by exemptive order or applicable rule or regulation. Since the investment objective of each Fund is investment performance that corresponds to that of an index, the Advisor does not intend to select brokers and dealers for the purpose of receiving research services in addition to a favorable price and prompt execution either from that broker or an unaffiliated third party. Subject to allocating brokerage to receive a favorable price and prompt execution, the Advisor may select brokers who are willing to provide payments to third party service suppliers to a Fund, to reduce expenses of the Fund. The Advisor assumes general supervision over placing orders on behalf of the Company for the purchase or sale of portfolio securities. If purchases or sales of portfolio securities of the Company and one or more other investment companies or clients supervised by the Advisor are considered at or about the same time, transactions in such securities are allocated among the several investment companies and clients in a manner deemed equitable to all by the Advisor, taking into account the sizes of such other investment companies and clients and the amount of securities to be purchased or sold. In some cases this procedure could have a detrimental effect on the price or volume of the security so far as the Company is concerned. However, in other cases it is possible that the ability to 50 participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Company. The primary consideration is prompt execution of orders at the most favorable net price. Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses. The portfolio turnover rate for each Fund is expected to be under 50%. See "Implementation of Policies" in the Prospectus. The overall reasonableness of brokerage commissions is evaluated by the Advisor based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. For the fiscal year ended August 31, 2002, the Company paid $513,404 in aggregate brokerage commissions. During that fiscal year, certain portfolio transactions were executed through Morgan Stanley & Co. Incorporated ("MS&Co."), an affiliated broker of the Company due to the former Company Secretary's position as a Managing Director of MS&Co. During the fiscal years ended August 31, 2002, 2001, 2000 and 1999, the Company paid brokerage commissions to MS&Co. in amounts of $103,076, $201,691, $229,929 and $40,364, respectively (or 14.3%, 12.9% and 5.7%, respectively, of the aggregate brokerage commissions paid in those years). On February 28, 2002, the Board elected a new secretary who is not affiliated with MS&Co. Short-Term Instruments and Temporary Investments. Each Fund may invest in high-quality money market instruments on an ongoing basis to provide liquidity. The instruments in which each Fund may invest include: (i) short-term obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises); (ii) negotiable certificates of deposit ("CDs"), bankers' acceptances, fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and that are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"); (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated,of comparable quality as determined by BGFA, (iv) non-convertible corporate debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase of not more than one year that are rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, at the time of investment have more than $10 billion, or the equivalent in other currencies, in total assets and in the opinion of BGFA are of comparable quality to obligations of U.S. banks which may be purchased by a Fund. ADDITIONAL INFORMATION CONCERNING iSHARES Capital Stock. The Company currently is comprised of 23 series of shares of common stock, par value $0.001 per share, referred to herein as iShares: the iShares MSCI Australia Index Fund, the iShares MSCI Austria Index Fund, the iShares MSCI Belgium Index Fund, the iShares MSCI Brazil Index Fund, the iShares MSCI Canada Index Fund, the iShares MSCI EMU Index Fund, the iShares MSCI France Index Fund, the iShares MSCI Germany Index Fund, the iShares MSCI Hong Kong Index Fund, the iShares MSCI Italy Index Fund, the iShares MSCI Japan Index Fund, the iShares MSCI Malaysia Index Fund, the iShares MSCI Mexico Index Fund, the iShares MSCI Netherlands Index Fund, the iShares MSCI Pacific ex-Japan Index Fund, the iShares MSCI Singapore Index Fund, the iShares MSCI South Africa Index Fund, the iShares MSCI South Korea Index Fund, the iShares MSCI Spain Index Fund, the iShares MSCI Sweden Index Fund, the iShares MSCI Switzerland Index Fund, the iShares MSCI Taiwan Index Fund, and the iShares MSCI United Kingdom Index Fund. Each Fund has been issued as a separate class of capital stock. In addition to the 23 Funds listed above, the Company has authorized for issuance, but is not currently offering for sale to the public, six additional series of shares of common stock. The Board may designate additional series of common stock and classify shares of a particular series into one or more classes of that series. The Articles of Incorporation confers upon the Board of Directors the power to establish the number of shares which constitute a Creation Unit or by resolution, restrict the redemption right to Creation Unit aggregations of shares. Each iShares issued by the Company has a pro rata interest in the assets of the corresponding Fund. The Company is currently authorized to issue 10.9 billion shares of common stock. The following number of shares is currently authorized for each Fund: the iShares MSCI Australia 51 Index Fund, 127.8 million shares; the iShares MSCI Austria Index Fund, 19.8 million shares; the iShares MSCI Belgium Index Fund, 136.2 million shares; the iShares MSCI Brazil Index Fund, 500 million shares; the iShares MSCI Canada Index Fund, 340.2 million shares; the iShares MSCI EMU Index Fund, 500 million shares; the iShares MSCI France Index Fund, 340.2 million shares; the iShares MSCI Germany Index Fund, 382.2 million shares; the iShares MSCI Hong Kong Index Fund, 191.4 million shares; the iShares MSCI Italy Index Fund, 63.6 million shares; the iShares MSCI Japan Index Fund, 2,124.6 million shares; the iShares MSCI Malaysia Index Fund, 127.8 million shares; the iShares MSCI Mexico Index Fund, 255 million shares; the iShares MSCI Netherlands Index Fund, 255 million shares, iShares MSCI Pacific ex-Japan Index Fund, 500 million shares; the iShares MSCI Singapore Index Fund, 191.4 million shares; the iShares MSCI South Africa Index Fund, 200 million shares; the iShares MSCI South Korea Index Fund, 200 million shares; the iShares MSCI Spain Index Fund, 127.8 million shares; the iShares MSCI Sweden Index Fund, 63.6 million shares; the iShares MSCI Switzerland Index Fund, 318.625 million shares; the iShares MSCI Taiwan Index Fund, 200 million shares; and the iShares MSCI United Kingdom Index Fund, 943.2 million shares. Fractional shares will not be issued. Shares have no preemptive, exchange, subscription or conversion rights and are freely transferable. Each share is entitled to participate equally in dividends and distributions declared by the Board with respect to the relevant Fund, and in the net distributable assets of such Fund on liquidation. Shareholders are entitled to require the Company to redeem Creation Units of their shares. The Articles of Incorporation confers upon the Board of Directors the power, by resolution, to alter the number of shares constituting a Creation Unit or to specify that shares of common stock of the Company may be individually redeemable. Each iShares has one vote with respect to matters upon which a stockholder vote is required consistent with the requirements of the 1940 Act and the rules promulgated thereunder and the Maryland General Corporation Law; stockholders have no cumulative voting rights with respect to their shares. Shares of all series vote together as a single class except that if the matter being voted on affects only a particular Fund it will be voted on only by that Fund and if a matter affects a particular Fund differently from other Funds, that Fund will vote separately on such matter. Under Maryland law, the Company is not required to hold an annual meeting of stockholders unless required to do so under the 1940 Act. The policy of the Company is not to hold an annual meeting of stockholders unless required to do so under the 1940 Act. All shares of the Company (regardless of Fund) have noncumulative voting rights for the election of Directors. Under Maryland law, Directors of the Company may be removed by vote of the stockholders. The Company issues through the Authorized Participants to its stockholders semi-annual reports containing unaudited financial statements and annual reports containing financial statements audited by independent auditors approved by the Company's Directors and by the stockholders when meetings are held and such other information as may be required by applicable laws, rules and regulations. Beneficial owners also receive annually notification as to the tax status of the Company's distributions. Stockholder inquiries may be made by writing to the Company c/o the Distributor, SEI Investments Distribution Co., at 1 Freedom Valley Drive, Oaks, PA 19456. Termination of the Company or a Fund. The Company or a Fund may be terminated by a majority vote of the Board or the affirmative vote of a super majority of the holders of the Company or such Fund entitled to vote on termination. Although the iShares are not automatically redeemable upon the occurrence of any specific event, the Company's organizational documents provide that the Board will have the unrestricted power to alter the number of iShares in a Creation Unit Aggregation. In the event of a termination of the Company or a Fund, the Board, in its sole discretion, could determine to permit the iShares to be redeemable in aggregations smaller than Creation Unit Aggregations or to be individually redeemable. In such circumstance, the Company may make redemptions in-kind, for cash, or for a combination of cash or securities. Book Entry Only System. DTC acts as securities depository for iShares. iShares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for iShares. DTC has advised the Company as follows: it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (the "DTC Participants") and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange, Inc., the AMEX and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the "Indirect Participants"). DTC agrees with and represents to its 52 Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of iShares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in iShares (owners of such beneficial interests are referred to herein as "Beneficial owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of iShares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in iShares. Beneficial owners of iShares are not entitled to have iShares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial Owner must rely on the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights of a holder of iShares. The Company understands that under existing industry practice, in the event the Company requests any action of holders of iShares, or a Beneficial Owner desires to take any action that DTC, as the record owner of all outstanding iShares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above, the Company recognizes DTC or its nominee as the owner of all iShares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Company and DTC, DTC is required to make available to the Company upon request and for a fee to be charged to the Company a listing of the iShares holdings of each DTC Participant. The Company shall inquire of each such DTC Participant as to the number of Beneficial owners holding iShares, directly or indirectly, through such DTC Participant. The Company shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Company shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. iShares distributions shall be made to DTC or its nominee, Cede & Co., as the registered holder of all iShares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in iShares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of iShares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Company has no responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such iShares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC Participants. DTC may determine to discontinue providing its service with respect to iShares at any time by giving reasonable notice to the Company and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Company shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of iShares, unless the Company makes other arrangements with respect thereto satisfactory to the AMEX (or such other exchange on which iShares may be listed). PURCHASE AND REDEMPTION OF iSHARES 53 Creation Units. The Company issues and redeems iShares of each Fund only in aggregations of iShares specified for each Fund. The following table sets forth the number of iShares of a Fund that constitute a Creation Unit for such Fund and the value of such Creation Unit at September 30, 2002: Value Per iShares Per Creation Fund Creation Unit Unit ($U.S.) - -------------------------- ----------------- --------------- Australia 200,000 $1,768,000 Austria 100,000 $ 774,000 Belgium 40,000 $ 349,600 Brazil 50,000 $ 290,000 Canada 100,000 $ 872,000 EMU 50,000 $1,911,000 France 200,000 $2,628,000 Germany 300,000 $2,745,000 Hong Kong 75,000 $ 552,750 Italy 150,000 $1,951,500 Japan 600,000 $4,452,000 Malaysia 75,000 $ 382,500 Mexico 100,000 $1,229,000 Netherlands 50,000 $ 607,000 Pacific ex-Japan 100,000 $2,957,000 Singapore 100,000 $ 443,000 South Africa 50,000 $2,000,000 South Korea 50,000 $ 904,000 Spain 75,000 $1,142,250 Sweden 75,000 $ 615,000 Switzerland 125,000 $1,346,250 Taiwan 50,000 $ 374,500 United Kingdom 200,000 $2,292,000 See "Purchase and Issuance of iShares in Creation Units" and "Redemption of iShares in Creation Units" below. The Board of Directors of the Company reserves the right to declare a split or a consolidation in the number of iShares outstanding of any Fund of the Company, and to make a corresponding change in the number of iShares constituting a Creation Unit, in the event that the per iShares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board. Purchase and Issuance of iShares in Creation Units. General. The Company issues and sells iShares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day (as defined herein), of an order in proper form. A "Business Day" with respect to each Fund is any day on which (i) the American Stock Exchange ("AMEX") and (ii) the stock exchange(s) and Company subcustodian(s) relevant to such Fund are open for business. As of the date of this SAI, the AMEX observes the following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, President's Day (Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The stock exchange and/or subcustodian holidays relevant to each Fund are set forth in Appendix A to this SAI. Portfolio Deposit. The consideration for purchase of a Creation Unit of iShares of a Fund (except for the iShares MSCI Brazil, Malaysia, South Korea and Taiwan Index Funds, which are currently offered, in their iShares Creation Units solely for cash) generally consists of the in-kind deposit of a designated portfolio of equity securities (the "Deposit Securities") constituting an optimized representation of the Fund's benchmark foreign securities index and an amount of cash computed as described below (the "Cash Component"). Together, the Deposit Securities and the Cash Component constitute the "Portfolio Deposit," which represents the minimum initial and subsequent 54 investment amount for shares of any Fund of the Company. The Cash Component is an amount equal to the Dividend Equivalent Payment (as defined below), plus or minus, as the case may be, a Balancing Amount (as defined below). The "Dividend Equivalent Payment" enables the Company to make a complete distribution of dividends on the next dividend payment date, and is an amount equal, on a per Creation Unit basis, to the dividends on all the Portfolio Securities with ex-dividend dates within the accumulation period for such distribution (the "Accumulation Period"), net of expenses and liabilities for such period, as if all of the Portfolio Securities had been held by the Company for the entire Accumulation Period. The "Balancing Amount" is an amount equal to the difference between (x) the net asset value (per Creation Unit) of the Fund and (y) the sum of (i) the Dividend Equivalent Payment and (ii) the market value (per Creation Unit) of the securities deposited with the Company (the sum of (i) and (ii) is referred to as the "Deposit Amount"). The Balancing Amount serves the function of compensating for any differences between the net asset value per Creation Unit and the Deposit Amount. The Advisor makes available through the National Securities Clearing Corporation ("NSCC") on each Business Day, immediately prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of each Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of iShares of a given Fund until such time as the next-announced Portfolio Deposit composition is made available. The identity and number of shares of the Deposit Securities required for a Portfolio Deposit for each Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by the Advisor with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index. In addition, the Company reserves the right to permit or require the substitution of an amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to the Advisor on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by the relevant Fund, or resulting from stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on each Business Day, the Cash Component effective through and including the previous Business Day, per outstanding iShares of each Fund, will be made available. Role of The Authorized Participant. Creation Units of iShares may be purchased only by or through a DTC Participant that has entered into an Authorized Participant Agreement with the Distributor ("Authorized Participant"). Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available in advance of each purchase of iShares an amount of cash sufficient to pay the Cash Component, once the net asset value of a Creation Unit is next determined after receipt of the purchase order in proper form, together with the transaction fee described below. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters, including payment of the Cash Component. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of iShares may have to be placed by the investor's broker through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor. The Company does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants that have international capabilities. A list of the current Authorized Participants may be obtained from the Distributor. Purchase Order. To initiate an order for a Creation Unit of iShares, the Authorized Participant must submit to the Distributor an irrevocable order to purchase iShares after 9:00 a.m. but not later than 4:00 p.m., Eastern time (except for the Malaysia, South Korea and Taiwan Index Funds for which orders must be submitted by 11:59 p.m. Eastern time) on the relevant Business Day. The Distributor shall cause the Advisor and the Custodian to be informed of such advice. The Custodian will then provide such information to the appropriate subcustodian. For 55 each Fund, the Custodian shall cause the subcustodian of the Fund to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the securities included in the designated Portfolio Deposit (or the cash value of all or a part of such securities, in the case of a permitted or required cash purchase or "cash in lieu" amount), with any appropriate adjustments as advised by the Company. Deposit Securities must be delivered to an account maintained at the applicable local subcustodian. Those placing orders to purchase Creation Units through an Authorized Participant should allow sufficient time to permit proper submission of the purchase order to the Distributor by the cut-off time on such Business Day. The Authorized Participant must also make available on or before the contractual settlement date, by means satisfactory to the Company, immediately available or same day funds estimated by the Company to be sufficient to pay the Cash Component next determined after acceptance of the purchase order, together with the applicable purchase transaction fee. Any excess funds will be returned following settlement of the issue of the Creation Unit of iShares. Those placing orders should ascertain the applicable deadline for cash transfers by contacting the operations department of the broker or depositary institution effectuating the transfer of the Cash Component. This deadline is likely to be significantly earlier than the closing time of the regular trading session on the AMEX. Investors should be aware that an Authorized Participant may require orders for purchases of iShares placed with it to be in the particular form required by the individual Authorized Participant. Timing of Submission of Creation Unit Purchase Orders and Redemption Requests. Although an Authorized Participant ordinarily must submit to the Distributor a purchase order or a redemption request in respect of Creation Units of any Fund on a day that the AMEX is open for business, between the hours of 9:00 a.m. and 4:00 p.m. Eastern time, the Distributor in its discretion may permit the submission of such orders and requests by or through an Authorized Participant at any time (including on days on which the AMEX is not open for business) via communication through the facilities of the Distributor's proprietary website maintained for this purpose. However, the ability of an Authorized Participant to submit a purchase order or redemption request at any time via this website does not assure the Authorized Participant that such order or request will be accepted or processed at the net asset value determined on the date of such submission. The purchase order or redemption request, if accepted by the Company, will be processed based on the net asset value determined after such acceptance, either on the date of submission or on the next day that net asset value is determined, as the case may be, in accordance with the Company's standard cut-off times as provided in the Authorized Participant Agreement and disclosed in this Statement of Additional Information. Acceptance of Purchase Order. Subject to the conditions that (i) an irrevocable purchase order has been submitted by the Authorized Participant (either on its own or another investor's behalf) not later than the closing time of the regular trading session on the AMEX, and (ii) arrangements satisfactory to the Company are in place for payment of the Cash Component and any other cash amounts which may be due, the Company will accept the order, subject to its right (and the right of the Distributor and the Advisor) to reject any order until acceptance. Once the Company has accepted an order, upon next determination of the net asset value of the shares, the Company will confirm the issuance of a Creation Unit of iShares of the Fund, against receipt of payment, at such net asset value. The Distributor will then transmit a confirmation of acceptance to the Authorized Participant that placed the order. The Company reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding shares of any Fund; (b) the Deposit Securities delivered are not as specified by the Advisor, as described above; (c) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (d) the acceptance of the Portfolio Deposit would, in the opinion of counsel, be unlawful; (e) the acceptance of the Portfolio Deposit would otherwise, in the discretion of the Company or the Advisor, have an adverse effect on the Company or the rights of beneficial owners; or (f) in the event that circumstances outside the control of the Company, the Distributor and the Advisor make it for all practical purposes impossible to process purchase orders. The Company shall notify a prospective purchaser of its rejection of the order of such person. The Company and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Portfolio Deposits nor shall either of them incur any liability for the failure to give any such notification. 56 Issuance of a Creation Unit. Except as provided herein, a Creation Unit of iShares of a Fund will not be issued until the transfer of good title to the Company of the Deposit Securities and the payment of the Cash Component have been completed. When the subcustodian has confirmed to the Custodian that the required securities included in the Portfolio Deposit (or the cash value thereof) have been delivered to the account of the relevant subcustodian or subcustodians, the Distributor and the Advisor shall be notified of such delivery, and the Company will issue and cause the delivery of the Creation Unit of iShares. To the extent contemplated by an Authorized Participant's agreement with the Distributor, the Company will issue Creation Units of iShares to such Authorized Participant notwithstanding the fact that the corresponding Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participant's delivery and maintenance of collateral having a value at least equal to 125% of the value of the missing Deposit Securities in accordance with the Company's then-effective procedures. The only collateral that is acceptable to the Company is cash in U.S. dollars or an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Company. The cash collateral posted by the Authorized Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to that Authorized Participant. Information concerning the Company's current procedures for collateralization of missing Deposit Securities is available from the Distributor. The Authorized Participant Agreement will permit the Company to buy the missing Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Company of purchasing such securities and the cash collateral or the amount that may be drawn under any letter of credit. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Company, and the Company's determination shall be final and binding. Cash Purchase Method. Although the Company does not ordinarily permit cash purchases of Creation Units, when cash purchases of Creation Units of iShares are available or specified for a Fund (Creation Units of the Brazil, Malaysia, South Korea and Taiwan Index Funds are currently offered only for cash), they will be effected in essentially the same manner as in-kind purchases thereof. In the case of a cash purchase, the investor must pay the cash equivalent of the Deposit Securities it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser. In addition, to offset the Company's brokerage and other transaction costs associated with using the cash to purchase the requisite Deposit Securities, the investor will be required to pay a fixed purchase transaction fee, plus an additional variable charge for cash purchases, which is expressed as a percentage of the value of the Deposit Securities. The transaction fees for in-kind and cash purchases of Creation Units of iShares are described below. Purchase Transaction Fee. A purchase transaction fee payable to the Company is imposed to compensate the Company for the transfer and other transaction costs of a Fund associated with the issuance of Creation Units of iShares. Purchasers of Creation Units of iShares for cash are required to pay an additional variable charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Company permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed the additional variable charge for cash purchases on the "cash in lieu" portion of its investment. Purchasers of iShares in Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Company. The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table below. This table is subject to revision from time to time. Investors are also responsible for payment of the costs of transferring the Deposit Securities to the Company. 57 Maximum Additional In-kind and cash Variable Charge for Fund purchases Cash Purchases* - -------------------------- -------------------- ----------------------- Australia $2,400 0.60% Austria $ 600 0.67% Belgium $ 700 0.30% Brazil $2,400 ** Canada $3,300 0.30% EMU $8,000 1.05% France $2,900 0.25% Germany $1,500 0.25% Hong Kong $2,000 0.60% Italy $1,400 0.30% Japan $5,000 0.15% Malaysia $5,000 ** Mexico $1,400 0.50% Netherlands $1,000 0.25% Pacific ex-Japan $6,000 1.80% Singapore $2,000 1.60% South Africa $1,200 0.75% South Korea $4,000 ** Spain $1,500 0.25% Sweden $1,300 0.30% Switzerland $1,500 0.40% Taiwan $4,500 ** United Kingdom $3,500 0.25% * As a percentage of the value of amount invested. ** This percentage, when aggregated with the basic in-kind transaction fee, will not exceed 3.00%. Example. A hypothetical example of the costs of creating a Creation Unit of iShares of the Japan Index Fund is set forth below for illustrative purposes only. The exchange rate reflected in the table is 120.545 per US$1.
Unit Creation Calculation in Unit Creation Calculation in Daily NAV Calculation in Japanese Yen United States Dollars United States Dollars ----------------------------------------------------------------------------------------- Execution 486,712,371 4,037,599 4,037,599 Commissions 243,380 2,019 N/A Stamp Taxes 0 0 N/A Risk Premium 0 0 N/A Cash Component 1,385,906 11,497 11,497 Creation Charge 602,725 5,000 N/A Total cost to create 536,666,340 4,452,000 4,452,000 one unit Per iShares 7.42 7.42 Shares 600,000
See "Investment Advisory, Management, Administrative and Distribution Services" herein, for additional information concerning the distribution arrangements for iShares. Redemption of iShares in Creation Units. iShares may be redeemed only in Creation Units at their net asset value next determined after receipt of a redemption request in proper form by the Distributor and only on a day on which the AMEX is open for trading. The Company will not redeem iShares in amounts less than Creation Units. Beneficial owners also may sell iShares in the secondary market, but must accumulate enough iShares to constitute a Creation Unit in order to have such shares redeemed by the Company. There can be no assurance, however, that 58 there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit of iShares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of iShares to constitute a redeemable Creation Unit. With respect to each Fund (other than the Brazil, Malaysia, South Korea and Taiwan Index Funds, which currently redeem Creation Units of iShares solely for cash) the Advisor makes available through the NSCC immediately prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time) on each day that the AMEX is open for business the Portfolio Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day. Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit generally consist of Deposit Securities as announced by the Advisor through the NSCC on the Business Day of the request for redemption, plus cash in an amount equal to the difference between the net asset value of the shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Deposit Securities, less the redemption transaction fee described below. The redemption transaction fee described below is deducted from such redemption proceeds. In the case of a resident Australian or New Zealand holder, notwithstanding the foregoing, such holder is only entitled to receive cash upon its redemption of Creation Units of iShares. A redemption transaction fee payable to the Company is imposed to offset transfer and other transaction costs that may be incurred by the relevant Fund, including market impact expenses relating to disposing of portfolio securities. The redemption transaction fee for redemptions in kind and for cash and the additional variable charge for cash redemptions (when cash redemptions are available or specified) are listed in the table below. Investors will also bear the costs of transferring the Portfolio Deposit from the Company to their account or on their order. Investors who use the services of a broker or other such intermediary may be charged a fee for such services. Additional variable In-kind and cash charge for cash Fund Redemptions redemptions* - ---------------------------------------------------------------------- Australia $2,400 0.60% Austria $ 600 0.67% Belgium $ 700 0.30% Brazil $2,400 ** Canada $3,300 0.30% EMU $8,000 1.05% France $2,900 0.25% Germany $1,500 0.25% Hong Kong $2,000 0.60% Italy $1,400 0.30% Japan $5,000 0.40% Malaysia $5,000 ** Mexico $1,400 0.50% Netherlands $1,000 0.25% Pacific ex-Japan $6,000 1.50% Singapore $2,000 1.30% South Africa $1,200 0.75% South Korea $4,000 ** Spain $1,500 0.45% Sweden $1,300 0.30% Switzerland $1,500 0.40% Taiwan $4,500 ** United Kingdom $3,500 0.75% * As a percentage of the value of amount invested. ** This percentage, when aggregated with the basic in-kind transaction fee, will not exceed 2.00%. 59 Redemption requests in respect of Creation Units of any Fund must be submitted to the Distributor by or through an Authorized Participant on a day that the AMEX is open for business, between the hours of 9:00 a.m. and 4:00 p.m., Eastern time (except for the Malaysia, South Korea and Taiwan Index Funds for which orders must be submitted by 11:59 p.m. Eastern time). Investors other than through Authorized Participants are responsible for making arrangements for a redemption request to be made through an Authorized Participant. The Distributor will provide a list of current Authorized Participants upon request. The Authorized Participant must transmit the request for redemption, in the form required by the Company, to the Distributor in accordance with procedures set forth in the Authorized Participant Agreement. Investors should be aware that their particular broker may not have executed an Authorized Participant Agreement, and that, therefore, requests to redeem Creation Units may have to be placed by the investor's broker through an Authorized Participant who has executed an Authorized Participant Agreement. At any given time there will be only a limited number of broker-dealers that have executed an Authorized Participant Agreement. Investors making a redemption request should be aware that such request must be in the form specified by such Authorized Participant. Investors making a request to redeem Creation Units should allow sufficient time to permit proper submission of the request by an Authorized Participant and transfer of the iShares to the Company's Transfer Agent; such investors should allow for the additional time that may be required to effect redemptions through their banks, brokers or other financial intermediaries if such intermediaries are not Authorized Participants. A redemption request is considered to be in "proper form" if (i) an Authorized Participant has transferred or caused to be transferred to the Company's Transfer Agent the Creation Unit of iShares being redeemed through the book-entry system of DTC so as to be effective by the AMEX closing time on a day on which the AMEX is open for business and (ii) a request in form satisfactory to the Company is received by the Distributor from the Authorized Participant on behalf of itself or another redeeming investor within the time periods specified above. If the Transfer Agent does not receive the investor's iShares through DTC's facilities by 2:00 p.m. on the AMEX business day next following the day that the redemption request is received, the redemption request shall be rejected. Investors should be aware that the deadline for such transfers of shares through the DTC system may be significantly earlier than the close of business on the AMEX. Those making redemption requests should ascertain the deadline applicable to transfers of shares through the DTC system by contacting the operations department of the broker or depositary institution effecting the transfer of the iShares. Upon receiving a redemption request, the Distributor shall notify the Company and the Company's Transfer Agent of such redemption request. The tender of an investor's iShares for redemption and the distribution of the cash redemption payment in respect of Creation Units redeemed will be effected through DTC and the relevant Authorized Participant to the beneficial owner thereof as recorded on the book-entry system of DTC or the DTC Participant through which such investor holds iShares, as the case may be, or by such other means specified by the Authorized Participant submitting the redemption request. See "Book-Entry System Only." In connection with taking delivery of shares of Deposit Securities upon redemption of iShares, a redeeming Beneficial Owner or Authorized Participant acting on behalf of such Beneficial Owner must maintain appropriate security arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in which any of the Portfolio Securities are customarily traded, to which account such Portfolio Securities will be delivered. Deliveries of redemption proceeds by the Funds relating to those countries generally will be made within three business days. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds may take longer than three business days after the day on which the redemption request is received in proper form. For each country relating to a Fund, Appendix A hereto identifies the instances where more than seven days would be needed to deliver redemption proceeds. Pursuant to an order of the SEC, in respect of each Fund, the Company will make delivery of in-kind redemption proceeds within the number of days stated in Appendix A to be the maximum number of days necessary to deliver redemption proceeds. If neither the redeeming Beneficial Owner nor the Authorized Participant acting on behalf of such redeeming Beneficial Owner has appropriate arrangements to take delivery of the Portfolio Securities in the applicable foreign jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Portfolio Securities in such jurisdiction, the Company may in its discretion exercise its option to redeem such shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In such 60 case, the investor will receive a cash payment equal to the net asset value of its shares based on the net asset value of iShares of the relevant Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional variable charge for cash redemptions specified above, to offset the Company's brokerage and other transaction costs associated with the disposition of Portfolio Securities of the Fund). Redemptions of iShares for Deposit Securities will be subject to compliance with applicable United States federal and state securities laws and each Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Deposit Securities upon redemptions or could not do so without first registering the Deposit Securities under such laws. Although the Company does not ordinarily permit cash redemptions of Creation Units (except that, as noted above, Creation Units of the Brazil, Malaysia, South Korea and Taiwan Index Funds may be redeemed only for cash, and resident Australian and New Zealand holders may redeem solely for cash), in the event that cash redemptions are permitted or required by the Company, proceeds will be paid to the Authorized Participant redeeming shares on behalf of the redeeming investor as soon as practicable after the date of redemption (within seven calendar days thereafter, except for the instances listed in Appendix A hereto where more than seven calendar days would be needed). To the extent contemplated by an Authorized Participant's agreement with the Distributor, in the event the Authorized Participant that has submitted a redemption request in proper form is unable to transfer all or part of the Creation Units of iShares to be redeemed to the Company, at or prior to 2:00 p.m. on the AMEX business day after the date of submission of such redemption request, the Distributor will nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing iShares as soon as possible, which undertaking shall be secured by the Authorized Participant's delivery and maintenance of collateral consisting of cash having a value at least equal to 125% of the value of the missing iShares in accordance with the Company's then-effective procedures. The only collateral that is acceptable to the Company is cash in U.S. dollars or an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Company. The Company's current procedures for collateralization of missing iShares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds and shall be held by the Company's custodian and marked to market daily, and that the fees of the custodian and any subcustodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. The cash collateral posted by the Authorized Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to that Authorized Participant. The Authorized Participant Agreement permits the Company to purchase the missing iShares or acquire the Portfolio Securities and the Cash Component underlying such iShares at any time and subjects the Authorized Participant to liability for any shortfall between the cost to the Company of purchasing such iShares, Portfolio Securities or Cash Component and the cash collateral or the amount that may be drawn under any letter of credit. Because the Portfolio Securities of a Fund may trade on the relevant exchange(s) on days that the AMEX is closed or are otherwise not Business Days for such Fund, stockholders may not be able to redeem their shares of such Fund, or to purchase or sell iShares on the AMEX, on days when the net asset value of such Fund could be significantly affected by events in the relevant foreign markets. The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund's portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC. Determining Net Asset Value. Net asset value per share for each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by the total number of iShares outstanding, rounded to the nearest cent. Expenses and fees, including the management, administration and distribution fees, are accrued daily and taken into account for purposes of determining net asset value. Except in the case of the iShares MSCI Malaysia, South Korea and Taiwan Index Funds, the net asset value of each Fund is determined as of the close of the regular trading session on the AMEX (ordinarily 4:00 p.m., Eastern time) on each day that the AMEX is 61 open. The net asset value of each of the iShares MSCI Malaysia, South Korea and Taiwan Index Funds is determined as of 8:30 a.m. (Eastern time) on each day that the New York Stock Exchange, Inc. ("NYSE") is open. The Company may establish additional times for the computation of net asset value of one or more Funds in the future in connection with the possible future trading of iShares of such Funds on one or more foreign exchanges. Portfolio securities for which market prices are readily available are valued using the official closing prices of the primary exchange on which they are traded. The methodology used to determine such closing prices varies among markets. Such prices are generally the same as those used by MSCI in calculating the benchmark indices used by the Funds. Other portfolio securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures adopted by the Company's Board of Directors. Currency values generally are converted into U.S. dollars using the same exchange rates utilized by MSCI in the calculation of the relevant MSCI Indices (currently, exchange rates as of 4:00 p.m. London time). However, the Company may use a different rate from the rate used by MSCI in the event the Advisor concludes that such rate is more appropriate. Any such use of a different rate than MSCI may adversely affect a Fund's ability to track its benchmark MSCI Index. Continuous Offering. The method by which Creation Unit Aggregations of iShares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of iShares are issued and sold by each Fund on an ongoing basis, at any point a "distribution," as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the Prospectus-delivery requirement and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with the Distributor, breaks them down into constituent iShares, and sells such iShares directly to customers, or if it chooses to couple the creation of a supply of new iShares with an active selling effort involving solicitation of secondary market demand for iShares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are not "underwriters" but are effecting transactions in iShares, whether or not participating in the distribution of iShares, are generally required to deliver a Prospectus. This is because the Prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur a Prospectus-delivery obligation with respect to iShares are reminded that, under the Securities Act Rule 153, a Prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Listing Exchange is satisfied by the fact that the Prospectus is available at the Listing Exchange upon request. The Prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange. 62 TAXES The Company on behalf of each Fund has the right to reject an order for a purchase of iShares if the purchaser (or group of purchasers) would, upon obtaining the iShares so ordered, own 80% or more of the outstanding iShares of a given Fund and if, pursuant to section 351 of the Internal Revenue Code, the respective Fund would have a basis in the securities different from the market value of such securities on the date of deposit. The Company also has the right to require information necessary to determine beneficial share ownership for purposes of the 80% determination. See "Purchase and Issuance of iShares in Creation Units." Each Fund intends to qualify for and to elect treatment as a separate RIC under Subchapter M of the Internal Revenue Code. To qualify for treatment as a RIC, a company must annually distribute at least 90 percent of its net investment company taxable income (which includes dividends, interest and net short-term capital gains) and meet several other requirements. Among such other requirements are the following: (1) at least 90 percent of the company's annual gross income must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (2) at the close of each quarter of the company's taxable year, (a) at least 50 percent of the market value of the company's total assets must be represented by cash and cash items, U.S. government securities, securities of other regulated investment companies and other securities, with such other securities limited for purposes of this calculation in respect of any one issuer to an amount not greater than 5% of the value of the company's assets and not greater than 10% of the outstanding voting securities of such issuer, and (b) not more than 25 percent of the value of its total assets may be invested in the securities of any one issuer or of two or more issuers that are controlled by the company (within the meaning of Section 851(b)(3)(B) of the Internal Revenue Code) and that are engaged in the same or similar trades or businesses or related trades or businesses (other than U.S. government securities or the securities of other regulated investment companies). Each Fund may be subject to foreign income taxes withheld at source. Each Fund will elect to "pass through" to its investors the amount of foreign income taxes paid by the Fund provided that the investor held the Fund, and the Fund held the security, on the ex-dividend date and for at least fifteen additional days immediately before and/or thereafter, with the result that each investor will (i) include in gross income, even though not actually received, the investor's pro rata share of the Fund's foreign income taxes, and (ii) either deduct (in calculating U.S. taxable income) or credit (in calculating U.S. federal income tax) the investor's pro rata share of the Fund's foreign income taxes. A foreign tax credit may not exceed the investor's U.S. federal income tax otherwise payable with respect to the investor's foreign source income. For this purpose, each shareholder must treat as foreign source gross income (i) his proportionate share of foreign taxes paid by the Fund and (ii) the portion of any dividend paid by the Fund which represents income derived from foreign sources; the Fund's gain from the sale of securities will generally be treated as U.S. source income. This foreign tax credit limitation is applied separately to separate categories of income; dividends from the Fund will be treated as "passive" or "financial services" income for this purpose. The effect of this limitation may be to prevent investors from claiming as a credit the full amount of their pro rata share of the Fund's foreign income taxes. Taxes other than foreign income taxes are not passed through to you in this way. If any Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies," the Fund will be subject to one of the following special tax regimes: (i) the Fund is liable for U.S. federal income tax, and an additional charge in the nature of interest, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund were able and elected to treat a passive foreign investment company as a "qualified electing fund," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the passive foreign investment company, whether or not such earnings or gains are distributed to the Fund or (iii) the Fund in certain circumstances is entitled to mark-to-market annually the shares of the passive foreign investment company, and is required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above. A Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to a Fund and/or defer a Fund's ability to recognize losses, and, in 63 limited cases, subject a Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by a Fund. In certain cases, a Fund will be required to withhold at the applicable withholding rate, and remit to the U.S. Treasury such amounts withheld from 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; (3) has failed to certify to a Fund that such shareholder is not subject to backup withholding; or (4) has not certified that such shareholder is a U.S. person (including a U.S. resident alien). A Fund will be subject to a 4 percent excise tax on certain undistributed income if it does not distribute to its shareholders in each calendar year at least 98 percent of its ordinary income for the calendar year plus 98 percent of its capital gain net income for the twelve months ended October 31 of such year. Each Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application of this 4 percent excise tax. An investor in a Fund that is a foreign corporation or an individual who is a nonresident alien for U.S. tax purposes will be subject to adverse U.S. tax consequences. For example, dividends paid out of a Fund's investment company taxable income will generally be subject to U.S. federal withholding tax at a rate of 30% (or lower treaty rate if the foreign investor is eligible for the benefits of an income tax treaty). Foreign investors are urged to consult their own tax advisors regarding the U.S. tax treatment, in their particular circumstances, of ownership of shares in a Fund. The foregoing discussion is a summary only and is not intended as a substitute for careful tax planning. Purchasers of shares of the Company should consult their own tax advisors as to the tax consequences of investing in such shares, including under state, local and other tax laws. Finally, the foregoing discussion is based on applicable provisions of the Internal Revenue Code, regulations, judicial authority and administrative interpretations in effect on the date hereof. Changes in applicable authority could materially affect the conclusions discussed above, and such changes often occur. PERFORMANCE INFORMATION The performance of the Funds may be quoted in advertisements, sales literature or reports to shareholders in terms of average annual total return, cumulative total return and yield. Quotations of average annual total return are expressed in terms of the average annual rate of return of a hypothetical investment in a Fund over periods of 1, 5 and 10 years (or the life of a Fund, if shorter). Such total return figures will reflect the deduction of a proportional share of such Fund's expenses on an annual basis, and will assume that all dividends and distributions are reinvested when paid. Average annual total return before taxes is calculated according to the following formula: P(1 + T)/n/ = ERV (where P = a hypothetical initial payment of $1,000, T = the average annual total return, n = the number of years and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year period or fractional portion). Average Annual Total Return Before Taxes One Year Ended Five Years Ended Inception* through Fund August 31, 2002 August 31, 2002 August 31, 2002 ----------------------------------------------------------------------------- Australia 1.74% 0.04% 1.57% Austria 0.12 -3.08 -2.74 Belgium -11.10 -1.10 1.28 Brazil -25.89 N/A -31.65 (1) Canada -11.23 1.11 5.57 EMU -18.89 N/A -23.02 (2) France -20.53 3.47 5.92 Germany -20.54 -2.72 1.36 Hong Kong -9.94 -9.03 -4.20 Italy -14.84 4.05 7.18 Japan -14.33 -8.42 -8.84 Malaysia 11.82 -4.62 -10.38 64 Mexico -10.67 -0.16 7.05 Netherlands -20.79 -3.82 2.48 Pacific ex-Japan N/A(3) N/A(3) 5.51 (4) Singapore -5.42 -8.62 -11.46 South Africa(5) N/A N/A N/A South Korea 59.77 N/A 2.03 (6) Spain -15.85 1.99 8.19 Sweden -23.29 -5.68 1.60 Switzerland -10.47 -1.18 1.88 Taiwan -2.11 N/A -28.88 (7) United Kingdom -14.19 -1.55 4.53 ------------------- *Unless otherwise noted, each Fund commenced operations on March 6, 1996. (1) For the period July 10, 2000 (commencement of operations) through August 31, 2002. (2) For the period July 25, 2000 (commencement of operations) through August 31, 2002. (3) The fund commenced operations on October 26, 2001. (4) Not annualized. (5) The fund commenced operations on February 7, 2003. (6) For the period May 9, 2000 (commencement of operations) through August 31, 2002. (7) For the period June 20, 2000 (commencement of operations) through August 31, 2002. Average annual total return after taxes on distributions is calculated according to the following formula: P(1 + T)/n/ = ATV/D/ (where P = a hypothetical initial payment of $1,000, T = the average annual total return, n = the number of years and ATV/D/ = the ending value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year period or fractional portion, after taxes on distributions but not after taxes on redemption). Average Annual Total Return After Taxes on Distributions One Year Ended Five Years Ended Inception* through Fund August 31, 2002 August 31, 2002 August 31, 2002 ----------------------------------------------------------------------------- Australia 1.58% -0.64% 0.82% Austria 0.12 -3.45 -3.05 Belgium -11.33 -2.71 -0.41 Brazil -25.86 N/A -32.33 (1) Canada -11.21 -0.51 4.20 EMU -18.89 N/A -23.09 (2) France -20.52 3.05 5.45 Germany -20.54 -3.53 0.67 Hong Kong -10.17 -9.88 -5.12 Italy -14.84 2.83 5.98 Japan -14.30 -8.53 -8.91 Malaysia 11.56 -4.98 -10.59 Mexico -10.80 -0.62 6.52 Netherlands -20.85 -4.51 1.73 Pacific ex-Japan N/A(3) N/A(3) 5.30 (4) Singapore -5.72 -9.13 -11.88 South Africa(5) N/A N/A N/A South Korea 59.79 N/A 2.04 (6) Spain -15.83 1.52 7.47 Sweden -23.29 -6.84 0.35 Switzerland -10.48 -1.69 1.31 Taiwan -2.09 N/A -28.99 (7) United Kingdom -14.67 -2.37 3.66 ------------------- *Unless otherwise noted, each Fund commenced operations on March 6, 1996. (1) For the period July 10, 2000 (commencement of operations) through August 31, 2002. (2) For the period July 25, 2000 (commencement of operations) through August 31, 2002. (3) The fund commenced operations on October 26, 2001. (4) Not annualized. (5) The fund commenced operations on February 7, 2003. (6) For the period May 9, 2000 (commencement of operations) through August 31, 2002. (7) For the period June 20, 2000 (commencement of operations) through August 31, 2002. Average annual total return after taxes on distributions and redemption is calculated according to the following formula: P(1 + T)/n/ = ATV/DR/ (where P = a hypothetical initial payment of $1,000, T = the average annual total return, n = the number of years and ATV/DR/= the ending value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year period or fractional portion, after taxes on distributions and redemption). 65 Average Annual Total Return After Taxes on Distributions and Redemptions One Year Ended Five Years Ended Inception* through Fund August 31, 2002 August 31, 2002 August 31, 2002 ---------------------------------------------------------------------------- Australia 1.08% -0.29% 0.92% Austria 0.08 -2.41 -2.14 Belgium -6.81 -1.05 0.75 Brazil -15.86 N/A -24.18/(1)/ Canada -6.84 1.23 4.85 EMU -11.60 N/A -17.84/(2)/ France -12.59 2.94 4.92 Germany -12.61 -2.10 1.14 Hong Kong -6.09 -7.25 -3.59 Italy -9.11 3.44 5.95 Japan -8.77 -6.36 -6.57 Malaysia 7.24 -3.82 -7.82 Mexico -6.51 -0.26 5.66 Netherlands -12.75 -2.79 2.19 Pacific ex-Japan N/A/(3)/ N/A/(3)/ 3.38/(4)/ Singapore -3.34 -6.76 -8.57 South Africa/(5)/ N/A N/A N/A South Korea 36.72 N/A 1.65/(6)/ Spain -9.71 1.77 6.83 Sweden -14.30 -3.49 2.08 Switzerland -6.43 -0.90 1.54 Taiwan -1.27 N/A -21.94/(7)/ United Kingdom -8.65 -1.22 3.67 ------------------- *Unless otherwise noted, each Fund commenced operations on March 6, 1996. (1) For the period July 10, 2000 (commencement of operations) through August 31, 2002. (2) For the period July 25, 2000 (commencement of operations) through August 31, 2002. (3) The fund commenced operations on October 26, 2001. (4) Not annualized. (5) The fund commenced operations on February 7, 2003. (6) For the period May 9, 2000 (commencement of operations) through August 31, 2002. (7) For the period June 20, 2000 (commencement of operations) through August 31, 2002. Quotations of a cumulative total return will be calculated for any specified period by assuming a hypothetical investment in a Fund on the date of the commencement of the period and will assume that all dividends and distributions are reinvested on ex date. However, currently there is no dividend reinvestment option available to shareholders of iShares and such calculation is provided for informational purposes only. The net increase or decrease in the value of the investment over the period will be divided by its beginning value to arrive at cumulative total return. Total return calculated in this manner will differ from the calculation of average annual total return in that it is not expressed in terms of an average rate of return. The yield of a Fund is the net annualized yield based on a specified 30-day (or one month) period assuming a semiannual compounding of income. Included in net investment income is the amortization of market premium or accretion of market and original issue discount. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: YIELD = 2[(a-b/cd + 1)/6/-1] (where a = dividends and interest earned during the period, b = expenses accrued for the period (net of reimbursements), c = the average daily number of shares outstanding during the period that were entitled to receive dividends and d = the maximum offering price per share on the last day of the period). Quotations of cumulative total return, average annual total return or yield reflect only the performance of a hypothetical investment in a Fund during the particular time period on which the calculations are based. Such quotations for a Fund will vary based on changes in market conditions and the level of such Fund's expenses, and no reported performance figure should be considered an indication of performance which may be expected in the future. The cumulative and average total returns and yields do not take into account federal or state income taxes which may be payable; total returns and yields would, of course, be lower if such charges were taken into account. 66 A comparison of the quoted non-standard performance offered for various investments is valid only if performance is calculated in the same manner. Since there are different methods for calculating performance, investors should consider the effects of the methods used to calculate performance when comparing performance of the Company with performance quoted with respect to other investment companies or types of investments. Because some or all of the Company's investments are denominated in foreign currencies, the strength or weakness of the U.S. dollar as against these currencies may account for part of the Company's investment performance. Historical information on the value of the dollar versus foreign currencies may be used from time to time in advertisements concerning the Company. Such historical information is not indicative of future fluctuations in the value of the U.S. dollar against these currencies. In addition, marketing materials may cite country and economic statistics and historical stock market performance information for any of the countries in which the Company invests, including, but not limited to, the following: population growth, gross domestic product, inflation rate, average stock market price-earnings ratios and the total value of stock markets. Sources for such statistics may include official publications of various foreign governments and exchanges. From time to time, in advertising and marketing literature, the Company's performance may be compared to the performance of broad groups of open-end and closed-end investment companies with similar investment goals, as tracked by independent organizations such as Investment Company Data, Inc., Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., Value Line Mutual Fund Survey and other independent organizations. When these organizations' tracking results are used, the Company will be compared to the appropriate fund category, that is, by fund objective and portfolio holdings, or to the appropriate volatility grouping, where volatility is a measure of a fund's risk. In addition, in connection with the communication of its performance to current or prospective shareholders, the Company also may compare those figures to the performance of certain unmanaged indices which may assume the reinvestment of dividends or interest but generally do not reflect deductions for administrative and management costs. Examples of such indices include, but are not limited to the following: .. Dow Jones Industrial Average .. Consumer Price Index .. Standard & Poor's 500 Composite Stock Price Index (S&P 500) .. Nasdaq OTC Composite Index .. Nasdaq Industrials Index .. International Finance Corporation's (Global) Composite and (Investable) Composite Indices .. Morgan Stanley Capital International Indices .. Nasdaq Composite Index .. Wilshire 5000 Stock Index In addition, the Company from time to time may compare the results of each Fund to the following national benchmarks: COUNTRY NATIONAL INDEX - ----------------------------------------------------- Australia All Ordinaries Austria Vienna Stock Exchange Brazil Sao Paulo Bovespa Belgium Brussels Stock Exchange Canada Toronto 300 EMU Euro Stoxx 50 France CAC 40 Germany DAX Hong Kong Hang Seng Italy BCI Japan Nikkei 225 Malaysia KLSE 67 COUNTRY NATIONAL INDEX - ----------------------------------------------------- Mexico IPC Netherlands CBS All Share New Zealand NZSE 40 Singapore SES All South Africa JSE South Korea Composite Spain MA Madrid Index Sweden Aff. General Switzerland Swiss Market Index Taiwan TWSE U.K. FTSE 100 From time to time, the Company may use in marketing materials a graph entitled "The Efficient Frontier," which illustrates the historical risks and returns of selected unmanaged indices which track the performance of various combinations of United States and international securities for a certain time period, such as twenty years. A twenty year graph, for example, shall use twenty year annualized international returns represented by the MSCI Europe, Australasia and Far East (EAFE) Index and twenty year annualized United States returns represented by the S&P 500 Index. Risk is measured by the standard deviation in overall performance within each index. Data presented in the graph shall be provided by Ibbotson Associates, Inc. Performance of an index is historical and does not represent performance of the Company, and is not a guarantee of future results. Evaluation of Company performance of the Funds or other relevant statistical information made by independent sources may also be used in advertisements and sales literature concerning the Company, including reprints of, or selections from, editorials or articles about the Company. Sources for Company performance information and articles about the Company include, but are not limited to, the following: American Association of Individual Investors' Journal, a monthly publication of the AAII that includes articles on investment analysis techniques. Barron's, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews investment company performance data. Business Week, a national business weekly that periodically reports the performance rankings and ratings of a variety of investment companies investing abroad. CDA Investment Technologies, an organization that provides performance and ranking information through examining the dollar results of hypothetical mutual fund investments and comparing these results against appropriate indices. Forbes, a national business publication that from time to time reports the performance of specific investment companies. Fortune, a national business publication that periodically rates the performance of a variety of investment companies. The Frank Russell Company, a West-Coast investment management firm that periodically evaluates international stock markets and compares foreign equity market performance to U.S. stock market performance. Ibbotson Associates, Inc., a company specializing in investment research and data. Investment Company Data, Inc., an independent organization that provides performance ranking information for broad classes of mutual funds. Investor's Business Daily, a daily newspaper that features financial, economic, and business news. Kiplinger's Personal Finance Magazine, a monthly investment advisory publication that periodically features the performance of a variety of securities. Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly publication of industry-wide mutual fund averages by type of fund. Money, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole. Morgan Stanley International, an integrated investment banking firm that compiles statistical information. The New York Times, a nationally distributed newspaper that regularly covers financial news. Smart Money, a national personal finance magazine published monthly by Dow Jones & Company, Inc. and The Hearst Corporation that focuses on ideas for investing, spending and saving. 68 Value Line Mutual Fund Survey, an independent organization that provides biweekly performance and other information on mutual funds. The Wall Street Journal, a Dow Jones and Company, Inc. newspaper that regularly covers financial news. Wiesenberger Investment Companies Services, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records and price ranges. Worth, a national publication distributed ten times per year by Capital Publishing Company, a subsidiary of Fidelity Investments that focuses on personal financial journalism. COUNSEL AND INDEPENDENT AUDITORS Counsel. Morgan, Lewis & Bockius LLP, Washington, D.C., is counsel to the - -------- Company. Independent Auditors. PriceWaterhouseCoopers LLP, 333 Market Street, San - --------------------- Francisco, California, 94105, currently serves as the independent auditor of the Company. FINANCIAL STATEMENTS The audited financial statements and notes thereto in the Company's Annual Report to Shareholders for the fiscal year ended August 31, 2002 (the "2002 Annual Report") are incorporated in this SAI by reference. No other parts of the 2002 Annual Report are incorporated by reference herein. The financial statements included in the 2002 Annual Report have been audited by the Company's independent auditors, PricewaterhouseCoopers LLP, whose report thereon is incorporated herein by reference. Additional copies of the 2002 Annual Report may be obtained at no charge by telephoning the Distributor at 1-800-iShares (1-800-474-2737). 69 APPENDIX A The Company generally intends to effect deliveries of Portfolio Securities on a basis of "T" plus three New York business days (i.e., days on which the New York Stock Exchange is open) in the relevant foreign market of each Fund. The Company (i) intends to effect deliveries of Portfolio Securities of the South Africa Index Fund on a basis of "T" plus five Johannesburg Stock Exchange ("JSE") business days, since the normal settlement cycle for local securities trading in South Africa is T plus five business days, and (ii) may effect deliveries of Portfolio Securities on a basis other than T plus three or T plus five to accommodate local holiday schedules or under certain other circumstances. The ability of the Company to effect in-kind redemptions within three New York business days (or five JSE business days in the case of the South Africa Fund) of receipt of a redemption request is subject, among other things, to the condition that, within the time period from the date of the request to the date of delivery of the securities, there are no days that are local market holidays but "good" New York business days. For every occurrence of one or more intervening holidays in the local market that are not holidays observed in New York, the redemption settlement cycle will be extended by the number of such intervening local holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Company from delivering securities within three New York business days. The securities delivery cycles currently practicable for transferring Portfolio Securities to redeeming investors, coupled with local market holiday schedules, will require a delivery process longer than seven calendar days for some Fund, in certain circumstances, during the calendar year 2003. The holidays applicable to each Fund during such periods are listed below, as are instances where more than seven days will be needed to deliver redemption proceeds. Although certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given year is not expected to exceed the maximum number of days listed below for each Fund. The proclamation of new holidays, the treatment by market participants of certain days as "informal holidays" (e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in local securities delivery practices, could affect the information set forth herein at some time in the future. iSHARES MSCI AUSTRALIA INDEX FUND Regular Holidays. The regular Australian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: Redemption. The Company is not aware of a redemption request over any Australian holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. New Year's Day January 1, 2003 Australia Day January 27, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Anzac Day April 25, 2003 Queen's Birthday June 9, 2002 Bank Holiday August 4, 2003 Labour Day October 6, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 iSHARES MSCI AUSTRIA INDEX FUND Regular Holidays. The regular Austrian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Epiphany January 6, 2003 Easter Monday April 21, 2003 Labour Day May 1, 2003 Ascension May 29, 2003 Whit Monday June 9, 2003 Corpus Christi June 19, 2003 Assumption Day August 15, 2003 National Holiday October 26, 2003 All Saints Day November 1, 2003 Immaculate Conception Day December 8, 2003 Christmas Eve December 24, 2003 Christmas Day December 25, 2003 St. Stephen's Day December 26, 2003 A-1 Redemption. A redemption request over the following Austrian holidays would result in a settlement period that will exceed 7 calendar days (examples are based on the days particular holidays fall during the calendar year 2003):
Redemption Redemption Date Holiday Request Date (R) Settlement Date Settlement Period ---- ------- ---------------- --------------- ----------------- 12/24/03 Christmas Eve 12/19/03 12/28/03 R +10 12/25/03 Christmas Day 12/22/03 12/30/03 R +8 12/26/03 St. Stephen's Day 12/23/03 12/31/03 R +8
In the calendar year 2003, R+10 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request made on the iShares MSCI Austria Index Fund. iSHARES MSCI BELGIUM INDEX FUND Regular Holidays. The regular Belgian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Easter Monday April 21, 2003 Labour Day May 1, 2003 Ascension Day May 29, 2003 Whit Monday June 9, 2003 Independence Day July 21, 2003 Assumption Day August 15, 2003 All Saints Day November 1, 2003 Armistice Day November 11, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Belgian holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI BRAZIL INDEX FUND Regular Holidays. The regular Brazilian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Carnival Monday March 3, 2003 Carnival Tuesday March 4, 2003 Good Friday April 18, 2003 Tiradentes Day April 21, 2003 Labor Day May 1, 2003 Corpus Christi June 19, 2003 Independence Day September 7, 2003 Day of Our Lady Aparecida October 12, 2003 All Souls Day November 2, 2003 Proclamation of the Republic November 15, 2003 Christmas Day December 25, 2002 Redemption. The Company is not aware of a redemption request over any Brazilian holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003: iSHARES MSCI CANADA INDEX FUND Regular Holidays. The regular Canadian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: A-2 New Year's Day January 1, 2003 Good Friday April 18, 2003 Victoria Day May 19, 2003 Canada Day Observed July 1, 2003 Civic Holiday August 4, 2003 Labor Day September 1, 2003 Thanksgiving Day October 13, 2003 Remembrance Day Observed November 11, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Canadian holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI EMU INDEX FUND Regular Holidays. The dates in the calendar year 2003 on which the regular Austrian, Belgian, Finnish, French, German, Greek, Irish, Italian, Dutch, Portuguese and Spanish holidays affecting the relevant securities markets fall are as follows: Austria January 1, 2003 May 29, 2003 October 26, 2003 December 25, 2003 January 6, 2003 June 9, 2003 November 1, 2003 December 26, 2003 April 21, 2003 June 19, 2003 December 8, 2003 May 1, 2003 August 15, 2003 December 24, 2003 Belgium January 1, 2003 June, 9 2003 November 11, 2003 April 21, 2003 July, 21 2003 December 25, 2003 May 1, 2003 August 15, 2003 December 26, 2003 May 29, 2003 November 1, 2003 Finland January 1, 2003 May 1, 2003 December 6, 2003 January 6, 2003 May 29, 2003 December 24, 2003 April 18, 2003 June 20, 2003 December 25, 2003 April 21, 2003 June 21, 2003 December 26, 2003 France January 1, 2003 May 29, 2003 November 1, 2003 April 21, 2003 June 29, 2003 November 11, 2003 May 1, 2003 July 14, 2003 December 25, 2003 May 8, 2003 August 15, 2003 Germany January 1, 2003 May 29, 2003 November 1, 2003 December 31, 2003 April 18, 2003 June 9, 2003 December 24, 2003 April 21, 2003 June 19, 2003 December 25, 2003 May 1, 2003 October 3, 2003 December 26, 2003 Greece January 1, 2003 April 25, 2003 August 15, 2003 January 6, 2003 April 28, 2003 October 28, 2003 March 10, 2003 May 1, 2003 December 25, 2003 March 25, 2003 June 16, 2003 December 26, 2003 A-3 Ireland January 1, 2003 May 5, 2003 December 25, 2003 March 17, 2003 June 2, 2003 December 26, 2003 April 18, 2003 August 4, 2003 April 25, 2003 October 27, 2003 Italy January 1, 2003 May 1, 2003 December 25, 2003 January 6, 2003 August 15, 2003 December 26, 2003 April 21, 2003 November 1, 2003 April 25, 2003 December 28, 2003 Netherlands January 1, 2003 May 29, 2003 April 18, 2003 June 9, 2003 April 21, 2003 December 25, 2003 April 30, 2003 December 26, 2003 Portugal January 1, 2003 April 25, 2003 August 15, 2003 December 8, 2003 March 4, 2003 May 1, 2003 October 5, 2003 December 25, 2003 April 18, 2003 June 10, 2003 November 1, 2003 April 21, 2003 June 19, 2003 December 1, 2003 Spain January 1, 2003 May 1, 2003 December 8, 2003 January 6, 2003 October 12, 2003 December 25, 2003 April 18, 2003 November 1, 2003 December 26, 2003 April 21, 2003 December 6, 2003 Redemption. A redemption request over the following holidays would result in a settlement period that will exceed 7 calendar days (examples are based on the days particular holidays fall during the calendar year 2003). The longest redemption cycle for the iShares MSCI EMU Index Fund is a function of the longest redemption cycles among the countries whose stocks comprise this Index Fund. In the calendar year 2003, the dates of the regular holidays affecting the German securities markets present the worst-case redemption cycle for the iShares MSCI EMU Index Fund as follows:
Redemption Redemption Date Holiday Request Date (R) Settlement Date Settlement Period ---- ------- ---------------- --------------- ----------------- 12/24/03 Christmas Eve 12/19/03 12/28/03 R +10 12/25/03 Christmas Day 12/22/03 12/30/03 R +8 12/26/03 St. Stephen's Day 12/23/03 12/31/03 R +8
In the calendar year 2003, R+10 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request made on the iShares MSCI EMU Index Fund. iSHARES MSCI FRANCE INDEX FUND A-4 Regular Holidays. The regular French holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Easter Monday April 21, 2003 Labor Day May 1, 2003 Victory Day May 8, 2003 Ascension Day May 29, 2003 Whit Monday June 9, 2003 Bastille Day July 14, 2003 Assumption Day August 15, 2003 All Saints Day November 1, 2003 Armistice Day November 11, 2003 Christmas Day December 25, 2003 Redemption. The Company is not aware of a redemption request over any French holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI GERMANY INDEX FUND Regular Holidays. The regular German holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Labor Day May 1, 2003 Ascension Day May 29, 2003 Pentecost Monday June 9, 2003 Corpus Christi Day June 19, 2003 Day of German Unity October 3, 2003 All Saint's Day November 1, 2003 Exchange Holiday December 24, 2003 Christmas Day December 25, 2003 Christmas Holiday December 26, 2003 Exchange Holiday December 31, 2003 Redemption. A redemption request over the following German holidays would result in a settlement period that will exceed 7 calendar days (examples are based on the days particular holiday fall in the calendar year 2003):
Redemption Redemption Date Holiday Request Date (R) Settlement Date Settlement Period ---- ------- ---------------- --------------- ----------------- 12/24/03 Exchange Holiday 12/19/03 12/28/03 R +10 12/25/03 Christmas Day 12/22/03 12/30/03 R +8 12/26/03 Christmas Holiday 12/23/03 12/31/03 R +8
In the calendar year 2003, R+10 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request made on the iShares MSCI Germany Index Fund. iSHARES MSCI HONG KONG INDEX FUND Regular Holidays. The regular Hong Kong holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Lunar New Year January 31, 2003 Lunar New Year February 1, 2003 A-5 Lunar New Year February 2, 2003 Lunar New Year February 3, 2003 Ching Ming Festival April 5, 2003 Good Friday April 18, 2003 Day After Good Friday April 19, 2003 Easter Monday April 21, 2003 Labor Day May 1, 2003 Buddha's Birthday May 8, 2003 Tuen Ng Festival June 4, 2003 SAR Establishment Day Observed July 1, 2003 Day following Mid-Autumn Festival September 21, 2003 Chinese National Day October 1, 2003 Chung Yeung Festival October 4, 2003 Christmas Day December 25, 2003 Christmas Holiday December 26, 2003 Redemption. The Company is not aware of a redemption request over any Hong Kong holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI ITALY INDEX FUND Regular Holidays. The regular Italian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Epiphany January 6, 2003 Easter Monday April 21, 2003 Liberation Day April 25, 2003 Labor Day May 1, 2003 All Saints Day November 1, 2003 Christmas Day December 25, 2003 St. Stephen's Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Italian holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI JAPAN INDEX FUND Regular Holidays. The regular Japanese holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 New Year's Holiday January 2, 2003 Bank Holiday January 3, 2003 Coming of Age Day January 13, 2003 National Foundation Day Observed February 11, 2003 Vernal Equinox Day March 21, 2003 Greenery Day Observed April 29, 2003 Constitution Memorial Day May 3, 2003 National Holiday May 4, 2003 Children's Day May 5, 2003 Marine Day July 21, 2003 Respect for the Aged Day September 15, 2003 Autumnal Equinox Day Observed September 23, 2003 Health-Sports Day October 13, 2003 A-6 National Culture Day November 3, 2003 Labor Thanksgiving Day November 24, 2003 Emperor's Birthday Observed December 23, 2003 Exchange Holiday December 31, 2003 Redemption. The Company is not aware of a redemption request over any Japanese holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI MALAYSIA INDEX FUND Regular Holidays. The regular Malaysian holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Federal Territory Day February 1, 2003 Chinese New Year February 1, 2003 Chinese New Year February 2, 2003 Hari Raya Haji February 12, 2003 Awal Muharram March 5, 2003 Labor Day May 1, 2003 Nabi Muhammad May 14, 2003 Wesak Day May 25, 2003 King's Holiday June 7, 2003 National Day August 31, 2003 Deepavali October 23, 2003 Hari Raya Puasa November 26, 2003 Hari Raya Puasa November 27, 2003 Christmas Day December 25, 2003 Redemptions. The Company is not aware of a redemption request over any Malaysian holidays that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI MEXICO INDEX FUND Regular Holidays. The regular Mexican holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Constitution Day February 5, 2003 Juarez's Birthday March 21, 2003 Holy Thursday April 17, 2003 Good Friday April 18, 2003 Labor Day May 1, 2003 Puebla Battle May 5, 2003 Presidential Report September 1, 2003 Independence Day September 16, 2003 All Souls Day November 2, 2003 Revolution Day November 20, 2003 Our Lady of Guadalupe Day December 12, 2003 Christmas Day December 25, 2003 Redemption. The Company is not aware of a redemption request over any Mexican holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI NETHERLANDS INDEX FUND A-7 Regular Holidays. The regular Netherlands holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Queen's Day April 30, 2003 Ascension Day May 29, 2003 Whit Monday June 9, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Dutch holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI PACIFIC EX JAPAN INDEX FUND Regular Holidays. The dates in the calendar year 2003 on which the regular Australian, Hong Kong, New Zealand and Singaporean holidays affecting the relevant securities markets fall are as follows: Australia January 1, 2003 April 25, 2003 December 25, 2003 January 27, 2003 June 9, 2003 December 26, 2003 April 18, 2003 August 4, 2003 April 21, 2003 October 6, 2003 Hong Kong January 1, 2003 February 3, 2003 April 21, 2003 July 1, 2003 December 25, 2003 January 31, 2003 April 15, 2003 May 1, 2003 September 12, 2003 December 26, 2003 February 1, 2003 April 18, 2003 May 8, 2003 October 1, 2003 February 2, 2003 April 19, 2003 June 4, 2003 October 1, 2003 New Zealand January 1, 2003 April 18, 2003 October 27, 2003 January 2, 2003 April 21, 2003 December 25, 2003 January 27, 2003 April 25, 2003 December 26, 2003 February 6, 2003 June 2, 2003 Singapore January 1, 2003 April 18, 2003 October 23, 2003 February 1, 2003 May 1, 2003 November 25, 2003 February 3, 2003 May 15, 2003 December 25, 2003 February 12, 2003 August 9, 2003
Redemption. The Company is not aware of a redemption request over any Australian, Hong Kong, New Zealand or Singaporean holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI SINGAPORE INDEX FUND Regular Holidays. The regular Singaporean holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Chinese New Year February 1, 2003 Chinese New Year February 3, 2003 Hari Raya Haji February 12, 2003 A-8 Good Friday April 18, 2003 Labor Day May 1, 2003 Vesak Day May 15, 2003 National Day August 9, 2003 Deepavali October 23, 2002 Hari Raya Puasa November 25, 2003 Christmas Day December 25, 2003 Redemption. The Company is not aware of a redemption request over any Singaporean holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI SOUTH AFRICA INDEX FUND Regular Holidays. The regular South African holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Human Rights Day March 21, 2003 Good Friday April 18, 2003 Family Day April 21, 2003 Worker's Day May 1, 2003 Worker's Day June 16, 2003 Heritage Day September 24, 2003 Day of Reconciliation December 16, 2003 Christmas Day December 25, 2003 Day of Goodwill December 26, 2003 Redemption. A redemption request over the following South African holidays would result in a settlement period that will exceed 7 calendar days (examples are based on the day particular holidays fall in the calendar year 2003):
Redemption Redemption Date Holiday Request Date (R) Settlement Date Settlement Period - ---- ------- ---------------- --------------- ----------------- 4/18/03 Good Friday 4/11/03 4/22/03 R +11 4/21/03 Family Day 4/14/03 4/23/03 R +9 4/18/03 Family Day 4/15/03 4/24/03 R +9 4/18/03 Family Day 4/16/03 4/25/03 R +9 4/18/03 Family Day 4/17/03 4/28/03 R +11 12/25/03 Christmas Day 12/18/03 12/29/03 R +11 12/25/03 Christmas Day 12/19/03 12/30/03 R +11 12/26/03 Day of Goodwill 12/22/03 12/31/03 R +9
In the calendar year 2003, R+11 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request made on the iShares MSCI South Africa Index Fund. iSHARES MSCI SOUTH KOREA INDEX FUND Regular Holidays. The regular South Korean holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Lunar New Year January 31, 2003 Lunar New Year February 1, 2003 Independence Day March 1, 2003 Arbor Day April 5, 2003 Labor Day May 1, 2003 Children's Day May 5, 2003 Buddha's Birthday May 8, 2003 Memorial Day June 6, 2003 Constitution Day July 17, 2003 Liberation Day August 15, 2003 Harvest Moon Day (Chusok) September 10, 2003 Harvest Moon Day (Chusok) September 11, 2003 Harvest Moon Day (Chusok) September 12, 2003 National Foundation Day October 3, 2003 Christmas Day December 25, 2003 Redemption. The Company is not aware of a redemption request over any South Korean holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. A-9 iSHARES MSCI SPAIN INDEX FUND Regular Holidays. The regular Spanish holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Epiphany January 6, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Labour Day May 1, 2003 National Day October 12, 2003 All Saints Day November 1, 2003 Constitution Day December 6, 2003 Immaculate Conception December 8, 2003 Christmas Day December 25, 2003 St. Stephen Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Spanish holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI SWEDEN INDEX FUND Regular Holidays. The regular Swedish holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Epiphany January 6, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Labour Day May 1, 2003 Ascension Day May 29, 2003 Whit Monday June 9, 2003 Midsummer's Eve June 20, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any Swedish holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI SWITZERLAND INDEX FUND Regular Holidays. The regular Swiss holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003 are as follows: New Year's Day January 1, 2003 Berchtoldstag January 2, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 Labour Day May 1, 2003 Ascension Day May 29 2003 Whit Monday June 9, 2003 National Holiday August 1, 2003 Christmas Eve December 24, 2003 Christmas Day December 25, 2003 St. Stephen's Day December 26, 2006 A-10 Redemption. A redemption request over the following Swiss holidays would result in a settlement period that will exceed 7 calendar days (examples are based on the day particular holidays fall in the calendar year 2003:
Redemption Redemption Date Holiday Request Date (R) Settlement Date Settlement Period ---- ------- ---------------- --------------- ----------------- 12/24/03 Christmas Eve 12/19/03 12/28/03 R +10 12/25/03 Christmas Day 12/22/03 12/30/03 R +8 12/26/03 St. Stephen's Day 12/23/03 12/31/03 R +8
In the calendar year 2003, R+10 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request made on the iShares MSCI Switzerland Fund. iSHARES MSCI TAIWAN INDEX FUND Regular Holidays. The regular Taiwanese holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003 are as follows: New Year's Day January 1, 2003 Lunar New Year's Eve January 31, 2003 Lunar New Year February 1, 2003 Lunar New Year February 2, 2003 Lunar New Year February 3, 2003 Lunar New Year February 4, 2003 Lunar New Year February 5, 2003 Peace Day February 28, 2003 Tomb Sweeping Day April 5, 2003 Labor Day May 1, 2003 Dragon Boat Day June 4, 2003 Mid-Autumn Festival Day September 11, 2003 National Day October 10, 2003 Redemption. The Company is not aware of a redemption request over any Taiwanese holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003. iSHARES MSCI UNITED KINGDOM INDEX FUND Regular Holidays. The regular United Kingdom holidays affecting the relevant securities markets (and their respective dates in the calendar year 2003) are as follows: New Year's Day January 1, 2003 Good Friday April 18, 2003 Easter Monday April 21, 2003 May Day May 5, 2003 Spring Bank Holiday May 26, 2003 Summer Bank Holiday August 25, 2003 Christmas Day December 25, 2003 Boxing Day December 26, 2003 Redemption. The Company is not aware of a redemption request over any United Kingdom holiday that would result in a settlement period that will exceed 7 calendar days during the calendar year 2003). A-11 -----END PRIVACY-ENHANCED MESSAGE-----