-----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, Wn/e20UKZNZoTm3ya2ieA6OHgCJPS0hNPNfxGZUMKhiEH3ox2HdE9vVoSU20xT69 xFsKO6jpEOU2E8SLNzQvaQ== /in/edgar/work/20001103/0000929624-00-001524/0000929624-00-001524.txt : 20001106 0000929624-00-001524.hdr.sgml : 20001106 ACCESSION NUMBER: 0000929624-00-001524 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20001103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISHARES INC CENTRAL INDEX KEY: 0000930667 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 510396525 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 033-97598 FILM NUMBER: 753178 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-09102 FILM NUMBER: 753179 BUSINESS ADDRESS: STREET 1: 400 BELLEVUE PKWAY CITY: WILMINGTON STATE: DE ZIP: 19809 BUSINESS PHONE: 800-810-93 FORMER COMPANY: FORMER CONFORMED NAME: WEBS INDEX FUND INC DATE OF NAME CHANGE: 19970211 FORMER COMPANY: FORMER CONFORMED NAME: WFBS INDEX FUND INC DATE OF NAME CHANGE: 19961226 FORMER COMPANY: FORMER CONFORMED NAME: FOREIGN FUND INC DATE OF NAME CHANGE: 19950524 485APOS 1 0001.txt ISHARES MSCI INDEX FUNDS As filed with the Securities and Exchange Commission on November 3, 2000 Registration Nos. 33-97598 811-9102 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ______________________ FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Post-Effective Amendment No. 17 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 19 [X] (Check appropriate box or boxes) iSHARES, INC. (Exact name of registrant as specified in charter) c/o PFPC Inc. 19809 400 Bellevue Parkway (Zip Code) Wilmington, Delaware (Address of Principal Executive Offices) Registrant's Telephone Number, including Area Code: (302) 791-2000 Nathan Most President WEBS Index Fund, Inc. c/o PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 (Name and Address of Agent for Service) Copies to: Donald R. Crawshaw, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 It is proposed that this filing will become effective (check appropriate box): [_] immediate upon filing pursuant to paragraph (b) [_] on (date) pursuant to paragraph (b) [X] 60 days after filing pursuant to paragraph (a)(1) [_] on (date) pursuant to paragraph (a)(1) [_] 75 days after filing pursuant to paragraph (a)(2) [_] on (date) pursuant to paragraph (a)(ii) of rule 485 If appropriate, check the following box: [_] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. iShares, Inc. iShares, Inc. is an index fund consisting of separate series, each of which seeks investment results similar to the performance of a single stock market or all of the stock markets in a geographic region. .iShares MSCI Australia Index Fund .iShares MSCI Austria Index Fund .iShares MSCI Belgium Index Fund .iShares MSCI Brazil (Free) Index Fund .iShares MSCI Canada Index Fund .iShares MSCI EMU Index Fund .iShares MSCI France Index Fund .iShares MSCI Germany Index Fund .iShares MSCI Greece Index Fund .iShares MSCI Hong Kong Index Fund .iShares MSCI Indonesia (Free) Index Fund .iShares MSCI Italy Index Fund .iShares MSCI Japan Index Fund .iShares MSCI Malaysia (Free) Index Fund - -------------------------------------------------------------------------------- .iShares MSCI Mexico (Free) Index Fund .iShares MSCI Netherlands Index Fund .iShares MSCI Portugal Index Fund .iShares MSCI Singapore (Free) 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 Thailand (Free) Index Fund .iShares MSCI Turkey Index Fund .iShares MSCI United Kingdom Index Fund .iShares MSCI USA Index Fund - -------------------------------------------------------------------------------- The iShares MSCI Index Fund Shares, known as "iSharesSM", are listed for trading on the American Stock Exchange LLC, or AMEX. Individual iShares are not redeemable at their net asset value, but trade on the AMEX during the day at prices that are normally close to, but not the same as, their net asset value. There is no assurance that an active trading market will be maintained for iShares or that market prices of iShares of any iShares MSCI Index Fund will be close to their net asset values in the future. Each iShares MSCI Index Fund issues and redeems iShares on a continuous basis -- at net asset value -- only in large specified numbers of iShares called "Creation Units", usually in exchange for a basket of portfolio securities and an amount of cash. Except when aggregated in Creation Units, iShares are not redeemable securities. iShares, Inc. intends to have the iShares MSCI Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds listed on the AMEX. Dates for the commencement of sales to the public of these iShares MSCI Index Funds have yet to be determined. These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the SEC determined whether the information in this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. Prospectus Dated January 2, 2001 Table of Contents Introduction................................................................ 1 Investment Objective........................................................ 1 Principal Investment Strategies............................................. 1 Principal Risk Factors...................................................... 2 Fees and Expenses........................................................... 3 Details on each Index The iShares MSCI Index Funds Fund's market, iShares MSCI Australia Index Fund......................................... 7 benchmark index and iShares MSCI Austria Index Fund........................................... 8 performance iShares MSCI Belgium Index Fund........................................... 9 iShares MSCI Brazil (Free) Index Fund..................................... 10 iShares MSCI Canada Index Fund............................................ 11 iShares MSCI EMU Index Fund............................................... 12 iShares MSCI France Index Fund............................................ 13 iShares MSCI Germany Index Fund........................................... 14 iShares MSCI Greece Index Fund............................................ 15 iShares MSCI Hong Kong Index Fund......................................... 16 iShares MSCI Indonesia (Free) Index Fund.................................. 17 iShares MSCI Italy Index Fund............................................. 18 iShares MSCI Japan Index Fund............................................. 19 iShares MSCI Malaysia (Free) Index Fund................................... 20 iShares MSCI Mexico (Free) Index Fund..................................... 22 iShares MSCI Netherlands Index Fund....................................... 23 iShares MSCI Portugal Index Fund.......................................... 24 iShares MSCI Singapore (Free) Index Fund.................................. 25 iShares MSCI South Africa Index Fund...................................... 26 iShares MSCI South Korea Index Fund....................................... 27 iShares MSCI Spain Index Fund............................................. 28 iShares MSCI Sweden Index Fund............................................ 29 iShares MSCI Switzerland Index Fund....................................... 30 iShares MSCI Taiwan Index Fund............................................ 31 iShares MSCI Thailand (Free) Index Fund................................... 32 iShares MSCI Turkey Index Fund............................................ 33 iShares MSCI United Kingdom Index Fund.................................... 34 iShares MSCI USA Index Fund............................................... 35 Details on the management Investment Policies and Strategies.......................................... 36 and operations of the Additional Information About Principal Risk Factors......................... 38 Index Funds Management Investment Adviser.......................................................... 41 Details on buying and Shareholder Information selling iShares Determination of Net Asset Value............................................ 41 Buying and Selling iShares.................................................. 42 Dividends and Capital Gains Distributions................................... 44 Tax Matters................................................................. 44 Details on the Rule 12b-1 Distribution Arrangements................................................... 45 Distribution Plan Per share financial data for Financial Highlights........................................................ 45 each Index Fund
- -------------------------------------------------------------------------------- iShares page i Introduction This Prospectus provides you with information you need to make an informed decision about whether to invest in an iShares MSCI Index Fund (each an "Index Fund" and collectively, the "Index Funds") of iShares, Inc. (the "Company"). It is organized to provide you with important facts about the Company as a whole and each particular Index Fund. The Investment Objective, Principal Investment Strategies and Principal Risk Factors sections discuss the general strategies and risks applicable to all Index Funds, while the iShares MSCI Index Funds section provides important information about each particular Index Fund, including a brief description of its benchmark index, specific risks associated with a particular market or region and prior performance. Investment Objective Each Index Fund seeks investment results similar to the performance of a single stock market or all of the stock markets in a geographic region. The performance of these markets is measured by stock indices compiled by Morgan Stanley Capital International Inc. ("MSCI") and calculated for "Developed Markets" (as determined by MSCI) based on the reinvestment of net dividends and for "Emerging Markets" (as determined by MSCI) based on the reinvestment of gross dividends. Currently, MSCI has determined that the following countries are Emerging Markets: Brazil, Greece, Indonesia, Malaysia, Mexico, South Africa, South Korea, Taiwan, Thailand and Turkey. Principal Investment Strategies Unlike many investment companies, an Index Fund does not attempt to "beat" the market or its benchmark index. Instead, it uses a "passive," or indexing, investment approach to try to produce investment results that come as close as possible to matching the performance of its benchmark index. The Index Fund does this by investing in a representative sample of index stocks that the investment adviser selects using a "portfolio sampling" technique. However, most Index Funds do not usually invest in all of the stocks of a benchmark index. Some Index Funds may even invest in stocks that are not in their benchmark indices. The use of an indexing approach may eliminate some of the risks of active management such as poor stock selection. An indexing approach may also help increase after-tax performance by keeping portfolio turnover low in comparison to actively managed investment companies. One negative feature of indexing is that the Company's investment adviser cannot change a strategy even if it would be beneficial to do so. For example, an Index Fund would not ordinarily sell a stock because its issuer was in financial trouble. It would normally only sell a stock if the stock was removed from an Index Fund's benchmark index by MSCI or if the investment adviser believes that selling the stock would make an Index Fund's performance more like that of its benchmark index. Under each Index Fund's industry concentration policy, the industry weightings in an Index Fund must be within 10% of the weightings of the two most heavily weighted industries in its benchmark index, except when a single stock would cause a weighting to exceed 25%. iShares are designed for investors who want a relatively inexpensive passive approach to investing in a portfolio of stocks from a single country or region. International diversification is a generally recognized way to reduce investment portfolio risk. Also, many of the foreign stocks in an Index Fund (other than the iShares MSCI USA Index Fund) are difficult to purchase or hold, or are, as a practical matter, not available to retail investors. The Index Funds offer investors a convenient way to obtain index-based exposure to the stock markets of a specific country or region. The prices of iShares may be volatile. Therefore, if you purchase iShares, you should be able to tolerate sudden, or even drastic, changes in the value of your investment. We cannot assure that any Index Fund will achieve its investment objective, and you should understand that your investment (other than an investment in the iShares MSCI USA Index Fund) will be exposed to the risks of international equity investing. Introduction - -------------------------------------------------------------------------------- page 1 Each Index Fund issues and redeems iShares on a continuous basis -- at net asset value -- only in large specified numbers of iShares called "Creation Units", usually in exchange for a basket of portfolio securities and an amount of cash. As a practical matter, only large institutions purchase or redeem Creation Units of iShares. Information about the fees paid when they do this is included in the Company's Statement of Additional Information. Except when aggregated in Creation Units, iShares are not redeemable securities. Principal Risk Factors You may lose money by investing in an Index Fund. Each Index Fund is also subject to the following principal risks, more fully described in the Additional Risk Considerations section in this prospectus. Additional risks associated with a particular market or region in which an Index Fund invests are discussed under each Index Fund's profile in the iShares MSCI Index Funds section below. Some or all of these risks may adversely affect an Index Fund's net asset value, yield, total return and/or its ability to achieve its objective: . Market Risk. The net asset value of an Index Fund will change with changes in the market value of the stocks it holds. . Foreign Security Risk. Each Index Fund invests entirely within the equity markets of a single country or region. These markets (other than for the iShares MSCI USA Index Fund) 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; less publicly available information about issuers; the imposition of taxes; exchange controls; 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; and social, economic and political uncertainties and the risk of expropriation of assets. . Management Risk. Because an Index 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 Index Fund's net asset value is determined on the basis of US dollars, you may lose money if you invest in any Index Fund, other than the iShares MSCI USA Index Fund, if the local currency of a foreign market depreciates against the US dollar, even if the local currency value of an Index Fund's holdings goes up. . Emerging Market Risk. Some foreign markets in which the Index Funds invest are considered to be emerging market countries. Investment in these countries subjects an Index 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 Index Funds invest in emerging markets: the iShares MSCI Brazil (Free), Greece, Indonesia (Free), Malaysia (Free), Mexico (Free), South Africa, South Korea, Taiwan, Thailand (Free) and Turkey Index Funds. . Non-Diversification Risk. Each Index Fund (except for the iShares Japan, United Kingdom and USA Index Funds) is classified as "non-diversified." This means that these Index Funds may invest most of their assets in securities issued by a small number of companies. As a result, these Index Funds are more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence. . Trading Risk. While the creation/redemption feature of iShares is designed to make it likely that iShares will trade close to their net asset value, disruptions to creations and redemptions (as has occurred because of Malaysia's capital controls) may result in trading prices that differ significantly from net asset value. Also, there can be no assurance that an active trading market will exist for iShares of each Index Fund on the AMEX (or any other securities exchange on which iShares may trade). - -------------------------------------------------------------------------------- iShares page 2 Fees and Expenses If you invest in an Index Fund, you will pay various expenses, either directly or indirectly. The following tables and examples describe the fees and expenses that you may pay if you buy and hold iShares of an Index Fund. Shareholder Transaction Fees (fees paid directly from your investment). When buying or selling iShares of an Index Fund through a broker, you will incur customary brokerage commissions and charges.* Annual Index Fund Operating Expenses (expenses that are deducted from the Index Fund's assets). For the Index Funds that have commenced investment operations (except the iShares MSCI Brazil (Free), EMU, South Korea and Taiwan Index Funds, which commenced sales of iShares to the public in 2000), total annual Index Fund operating expenses are based on actual expenses accrued by those Index Funds for the fiscal year ended August 31, 2000, but actual fees and expenses from September 1, 1999 to May 7, 2000 have been restated to reflect the changes in the fee arrangements for the management fees and other expenses of these Index Funds that became effective on May 8, 2000.
Brazil iShares MSCI Index Fund Australia Austria Belgium (Free) - ----------------------- --------- ------- ------- ------ Management fees......................... . % . % . % . % Distribution (Rule 12b-1) fees.......... 0.25% 0.25% 0.25% 0.25% Other expenses.......................... . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............................... . % . % . % . % Expense Reimbursement by investment adviser................................ . % . % . % . % ----- ----- ----- ----- Net Expenses............................ 0.84% 0.84% 0.84% 0.99% ===== ===== ===== ===== iShares MSCI Index Fund Canada EMU France Germany - ----------------------- ------ --- ------ ------- Management fees......................... . % . % . % . % Distribution (Rule 12b-1) fees.......... 0.25% 0.25% 0.25% 0.25% Other expenses.......................... . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............................... . % . % . % . % Expense Reimbursement by investment adviser................................ . % . % . % . % ----- ----- ----- ----- Net Expenses............................ 0.84% 0.84% 0.84% 0.84% ===== ===== ===== ===== Hong Indonesia iShares MSCI Index Fund Greece**+ Kong (Free)**+ Italy - ----------------------- ------ ---- --------- ----- Management fees......................... . % . % . % . % Distribution (Rule 12b-1) fees.......... 0.25% 0.25% 0.25% 0.25% Other expenses.......................... . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............................... . % . % . % . % Expense Reimbursement by investment adviser................................ . % . % . % . % ----- ----- ----- ----- Net Expenses............................ 0.99% 0.84% 0.99% 0.84% ===== ===== ===== =====
- -------- * Creation Unit Transaction Fees for Institutional Investors. The Company issues and redeems shares of iShares only in "Creation Units", which are large blocks of from 50,000 to 600,000 shares, depending on the Index Fund. As a practical matter, only institutions are capable of purchasing or redeeming these Creation Units. In connection with the purchase or the redemption of a Creation Unit of an Index Fund, an investor must pay to the Company a purchase or redemption transaction fee, which is intended to offset the issuance/redemption transaction costs incurred by that Index Fund. The basic transaction fees (per Creation Unit purchase or redemption transaction) range from maximums of $1,500 to $8,000, depending on the Index Fund. In addition to the basic transaction fee, Creation Unit purchase or redemption transactions for cash (only if available) require an additional maximum variable charge based on the value of the Creation Unit being purchased or redeemed, depending on the Index Fund. See "Shareholder Information -- Buying and Selling iShares" in this Prospectus for a list of the Creation Unit maximum transaction fees for each Index Fund. ** As of the date of this prospectus, this Index Fund has not started investment operations. + These expenses are based on estimated expenses the Index Fund expects to incur for the current fiscal year. Fees paid to the administrator are included in "other expenses" and are estimated based on assumed average daily net assets of $50 million for each of the iShares MSCI Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds. Fees and Expenses - -------------------------------------------------------------------------------- page 3
Malaysia Mexico iShares MSCI Index Fund Japan (Free) (Free) Netherlands - ----------------------- ----- -------- ------ ----------- Management fees................ . % . % . % . % Distribution (Rule 12b-1) fees.......................... 0.25% 0.25% 0.25% 0.25% Other expenses................. . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............ . % . % . % . % Expense Reimbursement by investment adviser............ . % . % . % . % ----- ----- ----- ----- Net Expenses................... 0.84% 0.84% 0.84% 0.84% ===== ===== ===== ===== Singapore South South iShares MSCI Index Fund Portugal**+ (Free) Africa**+ Korea - ----------------------- -------- --------- ------ ----- Management fees................ . % . % . % . % Distribution (Rule 12b-1) fees.......................... 0.25% 0.25% 0.25% 0.25% Other expenses................. . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............ . % . % . % . % Expense Reimbursement by investment adviser............ . % . % . % . % ----- ----- ----- ----- Net Expenses................... 0.99% 0.84% 0.99% 0.99% ===== ===== ===== ===== iShares MSCI Index Fund Spain Sweden Switzerland Taiwan - ----------------------- ----- ------ ----------- ------ Management fees................ . % . % . % . % Distribution (Rule 12b-1) fees.......................... 0.25% 0.25% 0.25% 0.25% Other expenses................. . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............ . % . % . % . % Expense Reimbursement by investment adviser............ . % . % . % . % ----- ----- ----- ----- Net Expenses................... 0.84% 0.84% 0.84% 0.99% ===== ===== ===== ===== Thailand United iShares MSCI Index Fund (Free)+ Turkey+ Kingdom USA**+ - ----------------------- -------- ------ ------- --- Management fees................ . % . % . % . % Distribution (Rule 12b-1) fees.......................... 0.25% 0.25% 0.25% 0.25% Other expenses................. . % . % . % . % ----- ----- ----- ----- Total annual Index Fund operating expenses............ . % . % . % . % Expense Reimbursement by investment adviser............ . % . % . % . % ----- ----- ----- ----- Net Expenses................... 0.99% 0.99% 0.84% 0.84% ===== ===== ===== =====
- -------- ** As of the date of this prospectus, this Index Fund has not started investment operations. + These expenses are based on estimated expenses the Index Fund expects to incur for the current fiscal year. Fees paid to the administrator are included in "other expenses" and are estimated based on assumed average daily net assets of $50 million for each of the iShares MSCI Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds. - -------------------------------------------------------------------------------- iShares page 4 Example of Expenses These examples are intended to help you compare the cost of investing in an Index Fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, a 5% total return each year with no changes in operating expenses and redemption at the end of each period. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
iShares MSCI Index Fund 1 Year ($) 3 Years ($) 5 Years ($) 10 Years ($) ----------------------- ---------- ----------- ----------- ------------ Australia................ Austria.................. Belgium.................. Brazil (Free)............ Canada................... EMU...................... France................... Germany.................. Greece................... Hong Kong................ Indonesia (Free)......... Italy.................... Japan.................... Malaysia (Free).......... Mexico (Free)............ Netherlands.............. Portugal................. Singapore (Free)......... South Africa............. South Korea.............. Spain.................... Sweden................... Switzerland.............. Taiwan................... Thailand (Free).......... Turkey................... United Kingdom........... USA......................
The iShares MSCI Index Series - -------------------------------------------------------------------------------- page 5 You would pay the following expenses if you did not redeem your shares:
WEBS Index Series 1 Year ($) 3 Years ($) 5 Years ($) 10 Years ($) ----------------- ---------- ----------- ----------- ------------ Australia................. Austria................... Belgium................... Brazil (Free)............. Canada.................... EMU....................... France.................... Germany................... Greece.................... Hong Kong................. Indonesia (Free).......... Italy..................... Japan..................... Malaysia (Free)........... Mexico (Free)............. Netherlands............... Portugal.................. Singapore (Free).......... South Africa.............. Spain..................... Sweden.................... Switzerland............... Taiwan.................... Thailand (Free)........... Turkey.................... United Kingdom............ USA.......................
The above examples are for illustration purposes only and are not a representation of the Index Funds' actual expenses and returns, either past or future (e.g., the above examples include the maximum transaction fees chargeable by an Index Fund). - -------------------------------------------------------------------------------- iShares page 6 The iShares MSCI Index Funds iShares MSCI Australia Index Fund CUSIP: 464286103 AMEX Trading Symbol: EWA - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 52 stocks traded primarily on the Australian Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise . %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- (10.19%) 2.18% 19.24%
2000 Total Return as of September 30: (11.07%) Best Quarter Worst Quarter ------------ ------------- 13.59% (12.94%) (Quarter ended December 31, 1998) (Quarter ended December 31, 1997) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------------- Australia Index Fund 19.24% 5.57% MSCI Australia Index 17.62% 6.06%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 7 iShares MSCI Austria Index Fund CUSIP: 464286202 AMEX Trading Symbol: EWO - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 18 stocks traded primarily on the Vienna Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise . %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 1.05% (1.83%) (10.36%)
2000 Total Return as of September 30: (10.92%) Best Quarter Worst Quarter ------------ ------------- 12.76% (23.45%) (Quarter ended March 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------- --------- Austria Index Fund (10.36%) (3.74%) MSCI Austria Index (9.11%) (1.39%)
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 8 iShares iShares MSCI Belgium Index Fund CUSIP: 464286301 AMEX Trading Symbol: EWK - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 14 stocks traded primarily on the Brussels Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise . %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 11.84% 51.69% (14.05%)
2000 Total Return as of September 30: (18.82%) Best Quarter Worst Quarter ------------ ------------- 17.78% (14.06%) (Quarter ended December 31, 1998) (Quarter ended March 31, 1999) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) -------- --------- Belgium Index Fund (14.05%) 12.92% MSCI Belgium Index (14.26%) 17.05%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 9 iShares MSCI Brazil (Free) Index Fund CUSIP: 464286400 AMEX Trading Symbol: EWZ ________________________ Fund Investment Objective The iShares MSCI Brazil (Free) 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 (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 46 stocks traded primarily on the Bolsa de Valores de Sao Paulo. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance Since the Fund was first offered to the public on July 14, 2000, and has been in existence for less than one year, prior performance information is not presented. - -------------------------------------------------------------------------------- iShares page 10 iShares MSCI Canada Index Fund CUSIP: 464286509 AMEX Trading Symbol: EWC - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 72 stocks traded primarily on the Toronto Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 10.91% (6.47%) 46.13%
2000 Total Return as of September 30: 26.99% Best Quarter Worst Quarter ------------ ------------- 21.44% (24.40%) (Quarter ended December 31, 1999) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- Canada Index Fund 46.13% 17.30% MSCI Canada Index 53.74% 19.78%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 11 iShares MSCI EMU Index Fund CUSIP: 464286608 AMEX Trading Symbol: EZU ________________________ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index is comprised of 307 stocks from the following ten countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance Since the Fund was first offered to the public on July 28, 2000, and has been in existence for less than one year, prior performance information is not presented. - -------------------------------------------------------------------------------- iShares page 12 iShares MSCI France Index Fund CUSIP: 464286707 AMEX Trading Symbol: EWQ - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 56 stocks traded primarily on the Paris Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 11.47% 40.78% 29.97%
2000 Total Return as of September 30: (5.29%) Best Quarter Worst Quarter ------------ ------------- 23.51% (16.16%) (Quarter ended March 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- France Index Fund 29.97% 26.32% MSCI France Index 29.27% 26.31%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 13 iShares MSCI Germany Index Fund CUSIP: 464286806 AMEX Trading Symbol: EWG - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 55 stocks traded primarily on the Frankfurt Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 22.75% 28.28% 20.87%
2000 Total Return as of September 30: (17.69%) Best Quarter Worst Quarter ------------ ------------- 27.11% (15.76%) (Quarter ended December 31, 1999) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- Germany Index Fund 20.87% 21.26% MSCI Germany Index 20.04% 22.15%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 14 iShares iShares MSCI Greece Index Fund CUSIP: 464286889 AMEX Trading Symbol: EWE Fund Investment Objective The iShares MSCI Greece 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 Greek market, as measured by the MSCI Greece Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 34 stocks traded primarily on the Athens Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that for many years, Greece has had poor relations with its neighbor Turkey as a result of, among other things, their dispute over, and joint occupation of, the island Cyprus. This situation has resulted in threats of war by each side. Also, certain regions of Greece are prone to natural disasters, including severe earthquakes. Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. The iShares MSCI Index Funds - -------------------------------------------------------------------------------- page 15 iShares MSCI Hong Kong Index Fund CUSIP: 464286871 AMEX Trading Symbol: EWH - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 33 stocks traded primarily on the Stock Exchange of Hong Kong Limited (SEHK). As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- (26.74%) (9.21%) 54.00%
2000 Total Return as of September 30: (12.07%) Best Quarter Worst Quarter ------------ ------------- 26.95% (30.12%) (Quarter ended December 31, 1998) (Quarter ended December 31, 1997) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- Hong Kong Index Fund 54.00% 6.29% MSCI Hong Kong Index 59.50% 10.89%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 16 iShares iShares MSCI Indonesia (Free) Index Fund CUSIP: 464286863 AMEX Trading Symbol: EWX Fund Investment Objective The iShares MSCI Indonesia (Free) 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 Indonesian market, as measured by the MSCI Indonesia (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 43 stocks traded primarily on the Jakarta Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that the Indonesian economy has been severely affected by the Asian economic crisis, and the local currency is worth substantially less, in U.S. dollar terms, than it was in early 1998. The Indonesian economy has also been affected by social and political instability, including independence movements in several areas and disruptions caused by a recent change from one-party rule. This instability has resulted in a net outflow of foreign capital in recent times. Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. The iShares MSCI Index Funds - -------------------------------------------------------------------------------- page 17 iShares MSCI Italy Index Fund CUSIP: 464286855 AMEX Trading Symbol: EWI ________________________ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 48 stocks traded primarily on the Milan Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 35.77% 50.24% 0.53%
2000 Total Return as of September 30: (6.79%) Best Quarter Worst Quarter ------------ ------------- 34.44% (10.61%) (Quarter ended March 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------- Italy Index Fund 0.53% 24.67% MSCI Italy Index (0.26%) 24.65%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 18 iShares iShares MSCI Japan Index Fund CUSIP: 464286848 AMEX Trading Symbol: EWJ - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 296 stocks traded primarily on the Tokyo Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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; a labor market undergoing fundamental structural changes, as traditional lifetime employment clashes with the need for increased labor mobility; and a changing corporate governance structure. Japan's economy is heavily dependent on international trade and has been adversely affected by trade tariffs and other protectionist measures. Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- (23.63%) 3.53% 57.89%
2000 Total Return as of September 30: (15.78%) Best Quarter Worst Quarter ------------ ------------- 26.25% (19.80%) (Quarter ended December 31, 1998) (Quarter ended December 31, 1997) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- Japan Index Fund 57.89% 2.67% MSCI Japan Index 61.53% 3.80%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 19 iShares MSCI Malaysia (Free) Index Fund CUSIP: 464286830 AMEX Trading Symbol: EWM ________________________ Fund Investment Objective The iShares MSCI Malaysia (Free) 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 (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 74 stocks traded primarily on the Kuala Lumpur Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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 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. In connection with the decision to redeem Creation Units of the Fund for U.S. dollars, the Company combined its accounts in Malaysia effective May 12, 2000, and Malaysian securities acquired by the Fund before September 1, 1998 acquired a basis for purposes of the Malaysian profits levy equal to their fair market value at the time of the combination. Previously, the proceeds of such securities could be repatriated without payment of the profits levy. Under the current Malaysian capital controls, the Fund will pay a profits levy at a rate of 10% (with any profits computed based on the cost basis for purposes of the Malaysian capital controls) when it sells Malaysian securities and repatriates the proceeds (e.g., in connection with redemptions). Since the levy is not a foreign income tax it will not be "passed through" to shareholders of the Fund for possible use as a foreign tax credit. The Company recently received regulatory relief from the Malaysian authorities and is currently investigating the possibility of re-instituting sales and redemptions of Creation Units of the Fund's iShares on an "in-kind" basis, but 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 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 close to their net asset values. However, there can be no assurances that this will continue to be the case. - -------------------------------------------------------------------------------- page 20 iShares Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- (66.93%) (29.31%) 92.98%
2000 Total Return as of September 30: (12.26%) Best Quarter Worst Quarter ------------ ------------- 122.01% (46.01%) (Quarter ended June 30, 1999) (Quarter ended June 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------- Malaysia (Free) Index Fund 92.98% (16.18%) MSCI Malaysia (Free) Index 114.61% (14.70%)
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 21 iShares MSCI Mexico (Free) Index Fund CUSIP: 464286822 AMEX Trading Symbol: EWW - ------------------------ Fund Investment Objective The iShares MSCI Mexico (Free) 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 (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 34 stocks traded primarily on the Mexican Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 48.53% (35.00%) 76.12%
2000 Total Return as of September 30: (12.89%) Best Quarter Worst Quarter ------------ ------------- 35.92% (24.30%) (Quarter ended December 31, 1999) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since 1 Inception Year (3/12/96) ----- --------- Mexico (Free) Index Fund 76.12% 19.40% MSCI Mexico (Free) Index 80.07% 22.57%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 22 iShares iShares MSCI Netherlands Index Fund CUSIP: 464286814 AMEX Trading Symbol: EWN - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 26 stocks traded primarily on the Amsterdam Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 20.11% 24.09% 4.54%
2000 Total Return as of September 30: (9.25%) Best Quarter Worst Quarter ------------ ------------- 17.76% (15.33%) (Quarter ended December 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------- Netherlands Index Fund 4.54% 19.13% MSCI Netherlands Index 6.88% 20.66%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 23 iShares MSCI Portugal Index Fund CUSIP: 464286673 AMEX Trading Symbol: EZP Fund Investment Objective The iShares MSCI Portugal 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 Portuguese market, as measured by the MSCI Portugal Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 20 stocks traded primarily on the Lisbon Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. - -------------------------------------------------------------------------------- iShares page 24 iShares MSCI Singapore (Free) Index Fund CUSIP: 464286673 AMEX Trading Symbol: EWS - ------------------------ Fund Investment Objective The iShares MSCI Singapore (Free) 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 (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 28 stocks traded primarily on the Singapore Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- (43.87%) (5.44%) 55.35%
2000 Total Return as of September 30: (24.15%) Best Quarter Worst Quarter ------------ ------------- 55.99% (36.28%) (Quarter ended December 31, 1998) (Quarter ended June 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
1 Since Inception Year (3/12/96) ----- --------------- Singapore (Free) Index Fund 55.35% (5.65%) MSCI Singapore (Free) Index 60.17% (3.27%)
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 25 iShares MSCI South Africa Index Fund CUSIP: 464286780 AMEX Trading Symbol: EWR Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 46 stocks traded primarily on the Johannesburg Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that South Africa has in the past experienced internal racial and political turmoil in connection with the recently-abolished system of apartheid. While South Africa's international isolation ended with the enfranchisement of the black majority, the country continues to face significant social and economic challenges, including managing the expectations of its people in the post-apartheid era. Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. - -------------------------------------------------------------------------------- page 26 iShares iShares MSCI South Korea Index Fund CUSIP: 464286772 AMEX Trading Symbol: EWY Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 91 stocks traded primarily on the South Korean Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. Prior Performance Since the Fund was first offered for sale to the public on May 12, 2000, and has been in existence for less than one year, prior performance information is not presented. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 27 iShares MSCI Spain Index Fund CUSIP: 464286764 AMEX Trading Symbol: EWP - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 35 stocks traded primarily on the Madrid Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 23.90% 51.30% (2.12%)
2000 Total Return as of September 30: (10.26%) Best Quarter Worst Quarter ------------ ------------- 38.58% (16.56%) (Quarter ended March 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------------- Spain Index Fund (2.12%) 27.07% MSCI Spain Index 4.83% 29.99%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 28 iShares iShares MSCI Sweden Index Fund CUSIP: 464286756 AMEX Trading Symbol: EWD - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 34 stocks traded primarily on the Stockholm Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 11.00% 11.06% 63.93%
2000 Total Return as of September 30: (8.35%) Best Quarter Worst Quarter ------------ ------------- 36.63% (24.05%) (Quarter ended December 31, 1999) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------------- Sweden Index Fund 63.93% 29.47% MSCI Sweden Index 79.74% 33.78%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 29 iShares MSCI Switzerland Index Fund CUSIP: 464286749 AMEX Trading Symbol: EWL - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 31 stocks traded primarily on the Zurich Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 35.23% 18.27% (3.25%)
2000 Total Return as of September 30: % Best Quarter Worst Quarter ------------ ------------- 24.63% (22.09%) (Quarter ended December 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
Since Inception 1 Year (3/12/96) ------ --------------- Switzerland Index Fund (3.25%) 12.00% MSCI Switzerland Index (7.02%) 13.95%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 30 iShares iShares MSCI Taiwan Index Fund CUSIP: 464286731 AMEX Trading Symbol: EWT ________________________ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 76 stocks traded primarily on the Taiwan Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks 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. 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. Prior Performance Since the Fund was first offered to the public on June 23, 2000, and has been in existence for less than one year, prior performance information is not presented. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 31 iShares MSCI Thailand (Free) Index Fund CUSIP: 464286723 AMEX Trading Symbol: EWV ________________________ Fund Investment Objective The iShares MSCI Thailand (Free) 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 Thai market, as measured by the MSCI Thailand (Free) Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 40 stocks traded primarily on the Stock Exchange of Thailand. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that Thailand has experienced considerable economic turmoil in the recent past, including severe devaluation of the Thai currency and the failure of numerous financial institutions. Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. - -------------------------------------------------------------------------------- page 32 iShares iShares MSCI Turkey Index Fund CUSIP: 464286715 AMEX Trading Symbol: EZT ________________________ Fund Investment Objective The iShares MSCI Turkey 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 Turkish market, as measured by the MSCI Turkey Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 40 stocks traded primarily on the Istanbul Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Fund-Specific Risks In addition to the principal risk factors referred to elsewhere in this prospectus, you should know that recently, certain regions in Turkey have been severely adversely impacted by earthquakes. In addition, Turkey has had poor relations with Greece for many years due in large part to their dispute over, and joint occupation of, the island of Cyprus. This situation has resulted in threats of war by each side. Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. - ------------------------------------------------------------------------------- The iShares MSCI Index Funds page 33 iShares MSCI United Kingdom Index Fund CUSIP: 464286699 AMEX Trading Symbol: EWU - ------------------------ Fund 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"). Benchmark Index Information As of November 30, 2000, the Index consisted of 122 stocks traded primarily on the London Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance The chart and table below give you a picture of the Fund's long-term performance. The information shows how the Fund's performance has varied year by year and provides some indication of the risks of investing in the Fund. Annual Total Returns as of 12/31/99
1997 1998 1999 - ---------- --------- ---------- 20.85% 18.42% 12.14%
2000 Total Return as of September 30: (12.63%) Best Quarter Worst Quarter ------------ ------------- 18.43% (10.56%) (Quarter ended March 31, 1998) (Quarter ended September 30, 1998) Average Annual Total Returns as of 12/31/99 -- Comparison
1 Since Inception Year (3/12/96) ----- --------------- United Kingdom Index Fund 12.14% 20.87% MSCI United Kingdom Index 12.45% 21.64%
Past performance is not necessarily an indicator of how the Fund will perform in the future. - -------------------------------------------------------------------------------- page 34 iShares iShares MSCI USA Index Fund CUSIP: 464286681 AMEX Trading Symbol: EZA ________________________ Fund Investment Objective The iShares MSCI USA 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 U.S. market, as measured by the MSCI USA Index (the "Index"). Benchmark Index Information As of November 30, 2000, the Index consisted of 323 stocks traded primarily on the New York Stock Exchange. As of that date, the Index's three largest stocks were , and (which comprise %, % and %, respectively, of the Index's market capitalization) and its three largest industries were , and (which comprise %, % and %, respectively, of the Index's market capitalization). Prior Performance As of the date of this prospectus, the Fund has not started investment operations, and therefore no prior performance information is available. - -------------------------------------------------------------------------------- The iShares MSCI Index Funds page 35 Investment Policies and Strategies Indexing Investment Approach. Index Funds are not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based on economic, financial and market analysis and investment judgment. Instead, each Index Fund, using a "passive" or indexing investment approach, attempts to approximate the investment performance of its benchmark MSCI Index by investing in a portfolio of stocks selected by using quantitative analytical procedures. Stocks are selected for inclusion in an Index Fund in order to have investment characteristics (based on market capitalization and industry weightings), fundamental characteristics (such as return variability, earnings valuation and yield) and liquidity measures that, taken together, are similar to those of the benchmark MSCI Index taken in its entirety. Portfolio Sampling. Generally, an Index Fund does not hold all of the issues that comprise its benchmark MSCI Index, due in part to the costs involved and, in certain instances, the potential illiquidity of certain securities. Instead, an Index Fund will attempt to hold a representative sample of the securities in its benchmark MSCI Index, which will be selected by the investment adviser using quantitative analytical models in a technique known as "portfolio sampling". Under this technique, each stock is considered for inclusion in an Index Fund based on its contribution to certain capitalization, industry and fundamental investment characteristics. The investment adviser seeks to construct the portfolio of an Index Fund so that, in the aggregate, its capitalization, industry and fundamental investment characteristics perform like those of its benchmark MSCI Index. Over time, the portfolio composition of an Index Fund may be altered (or "rebalanced") to reflect changes in the characteristics of its benchmark MSCI Index or to bring the performance and characteristics of an Index Fund more in line with that of its benchmark MSCI Index. Rebalancing may also be required for tax purposes. These rebalancings will require an Index Fund to incur transaction costs and other expenses. An Index Fund reserves the right to invest in all of the securities in its benchmark MSCI Index, and an Index Fund with a benchmark index comprised of relatively few stocks may do so on a regular basis. In addition, the iShares MSCI Australia, Austria, Belgium, Brazil (Free), Greece, Hong Kong, Indonesia (Free), Italy, Mexico (Free), Netherlands, Portugal, Singapore (Free), South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand (Free) and Turkey Index Funds may hold stocks that are not in their benchmark MSCI Index if the investment adviser determines this to be appropriate in light of the Index Fund's investment objective and relevant investment constraints. Investment Assets. Each Index Fund has a policy to remain as fully invested as practicable in a pool of equity securities. Each Index Fund will normally invest at least 95% of its total assets in stocks that are represented in its benchmark MSCI Index except, in limited circumstances, to help meet shareholder redemptions of Creation Units. To comply with the US Internal Revenue Code, and manage corporate actions and index changes in the smaller markets, each of the iShares MSCI Australia, Austria, Belgium, Brazil (Free), Greece, Hong Kong, Indonesia (Free), Italy, Mexico (Free), Netherlands, Portugal, Singapore (Free), South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand (Free) and Turkey Index Funds will at all times invest at least 80% of its total assets in such stocks and at least half of the remaining 20% of its total assets in such stocks or in stocks included in the relevant market, but not in its benchmark MSCI Index. Each Index Fund may invest its remaining assets in money market instruments or funds that invest exclusively in money market instruments (subject to applicable limitations under the Investment Company Act of 1940), in repurchase agreements, in stocks that are in the relevant market but not its benchmark MSCI Index (as indicated above), and/or in combinations of stock index futures contracts, options on futures contracts, stock index options, stock index swaps, cash, local currency and forward currency exchange contracts that are intended to provide an Index Fund with exposure to a stock. The investment adviser may attempt to reduce tracking error by using futures contracts whose behavior is expected to represent the market performance of the Index Fund's underlying securities, although there can be no assurance that these futures will correlate with the performance of its benchmark - -------------------------------------------------------------------------------- page 36 iShares MSCI Index. An Index Fund will not use these instruments to leverage, or borrow against, their securities holdings or for speculative purposes. In some cases the use of these special investment techniques can adversely affect the performance of an Index Fund. Lending of Securities. Each Index Fund may lend its portfolio securities. In connection with these loans, the Company receives liquid collateral equal to at least 102% of the value of the portfolio securities being lent. This collateral is marked to market on a frequent basis. Notwithstanding such collateral, the Index Fund would lose value to the extent that a borrower defaults on its obligation to return borrowed portfolio securities and the value of the collateral is less than the value of the borrowed securities. Industry Concentration. With respect to the two most heavily weighted industries or groups of industries in its benchmark MSCI Index, an Index 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 Index Fund does not diverge 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 Index Fund's assets, that the Index 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 Index 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. An Index 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 of an Index Fund's shareholders. As of September 30, 2000, as a result of this policy with respect to industry concentration, the following Index Funds were concentrated (that is, invested 25% or more of the value of their assets) in the specified industries:
Index Fund Industry or Industries ---------- ----------------------
Borrowing Money. An Index Fund may borrow money from a bank up to a limit of 33% of the market value of its assets, but only for temporary or emergency purposes. To the extent that an Index Fund borrows money, it may be leveraged; at such times, the Index Fund's value may appreciate or depreciate more rapidly than its benchmark MSCI Index. An Index Fund will not make cash purchases of securities when the amount of money borrowed exceeds 5% of the market value of its total assets. Fundamental Policies. The concentration policy of each Index Fund is a fundamental policy that may be changed only with shareholder approval. Each of the other investment policies is a non-fundamental policy that may be changed by the Board of Directors without shareholder approval. Shareholders will be notified before any material change in these policies is implemented. Tracking Error. Due to the use of the portfolio sampling technique described above and other factors discussed in this Prospectus, an Index Fund is not expected to track its benchmark MSCI Index with the same degree of accuracy as would an investment vehicle that invested in every component security of its benchmark index. The investment adviser expects that, over time, an Index Fund's "expected tracking error" relative to the performance of its benchmark index will be less than 5% and its tracking error will generally be greater if its benchmark index has fewer rather than greater numbers of component stocks. An expected tracking error of 5% means that there is a 68% probability that the net - -------------------------------------------------------------------------------- Investment Policies and Strategies page 37 asset value of an Index Fund will be within plus or minus 5% of its benchmark MSCI Index level after one year, without rebalancing the portfolio composition. Thus, actual tracking error in a period may exceed 5%, perhaps significantly, even though the expected tracking error is less than 5%. In addition, it is possible that future developments (e.g., the domination of an Index Fund's benchmark index by a small number of stocks) may result in an Index Fund having an unexpected tracking error of greater than 5%. For the fiscal year ended August 31, 2000, the following Index Funds had a tracking error greater than 5%: Canada (-13.34%); and Sweden (-12.50%). A tracking error of 0% would indicate perfect tracking, which would be achieved when the net asset value of an Index Fund increases or decreases in exact proportion to changes in its benchmark MSCI Index. The following factors may adversely affect the tracking of an Index Fund to that of its benchmark MSCI Index: . the Index Funds must pay various expenses, while the benchmark MSCI Indices do not reflect any expenses; . since the investment portfolios of the Index Funds do not generally replicate the underlying MSCI Indices, their investment performance is likely to differ from that of the MSCI Indices; . the portfolio sampling technique used to manage the Index Funds is based on historical price relationships and changes to those relationships can adversely affect tracking. In some situations, the requirements of the US Internal Revenue Code can adversely affect tracking by preventing an Index Fund from holding optimal positions in particular securities; . an Index Fund must comply with regulatory constraints that do not affect the calculation of its corresponding MSCI Index; . the existence of uninvested assets in the portfolios (principally cash and deferred organizational expenses) while the benchmark MSCI Indices are always fully invested; . the indices for countries that MSCI identifies as "Emerging Markets" are calculated based on the reinvestment of gross dividends (that is, dividends before reduction for taxes withheld at source), whereas the securities held by the Index Funds for Emerging Markets countries may be subject to withholding taxes; . Index Funds receive income on uninvested cash interest and most Index Funds receive income from securities lending activities, whereas the benchmark MSCI Indices do not have such sources of income; . the fact that each MSCI Index "smooths" dividend payments evenly over a year while each Index Fund records dividends on the ex-dividend date; and . the fact that an Index Fund may be subject to a different foreign withholding tax rate than that assumed by its benchmark MSCI Index. Although the investment adviser regularly monitors the tracking error of each Index Fund, there can be no assurance that any Index Fund will achieve any particular level of tracking error relative to the performance of its benchmark MSCI Index. Semi-annual and annual reports of the Company disclose tracking error for each Index Fund over the previous six-month period, and in the event that tracking error exceeds 5%, the Board of Directors will consider whether it would be appropriate to take action. Additional Information About Principal Risk Factors An investment in iShares of an Index Fund involves risks similar to those of investing in a broad-based portfolio of equity securities traded on exchanges in the relevant foreign securities market, including market fluctuations caused by factors such as economic and political developments, changes in interest rates and perceived trends in stock prices. Investing in iShares MSCI Index Funds other than the - -------------------------------------------------------------------------------- page 38 iShares iShares MSCI USA Index Fund generally involves certain risks and considerations not typically associated with investing in a fund that invests in the securities of US issuers. The principal risk factors, which could decrease the value of your investment, are listed and described below: . less liquid and less efficient securities markets; . greater price volatility; . exchange rate fluctuations and exchange controls; . 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 an Index Fund; . higher transaction and custody costs and delays and risks of loss attendant in settlement procedures; . difficulties in enforcing contractual obligations; . lesser levels of regulation of the securities markets; . different accounting, disclosure and reporting requirements; . more substantial government involvement in 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. Index Funds that issue and/or redeem Creation Units for cash (the Brazil (Free), Malaysia (Free), South Korea and Taiwan Index Funds) may have greater tracking error than other Index Funds since they are at risk that the prices they pay or receive for portfolio securities will be different than the prices in effect when they determine the value of the Creation Units being issued or redeemed. Volatility of Foreign Equity Markets. The US dollar performance of foreign equity markets, particularly emerging markets, has generally been substantially more volatile than that of US markets. Greater volatility connotes greater uncertainty as to a portfolio's liquidation value at a future point in time. The volatility information below is a measurement of the standard deviation of five years of monthly total returns of the MSCI Index. The percentages reflect the historical average annual volatility for each MSCI Index, based on monthly total returns of the MSCI Indices from November 30, 1995 to November 30, 2000. MSCI Australia.......... % MSCI Netherlands........ % MSCI Austria............ % MSCI Portugal........... % MSCI Belgium............ % MSCI Singapore (Free)... % MSCI Brazil (Free)...... % MSCI South Africa....... % MSCI Canada............. % MSCI South Korea........ % MSCI France............. % MSCI Spain.............. % MSCI Germany............ % MSCI Sweden............. % MSCI Greece............. % MSCI Switzerland........ % MSCI Hong Kong.......... % MSCI Taiwan............. % MSCI Indonesia (Free)... % MSCI Thailand (Free).... % MSCI Italy.............. % MSCI Turkey............. % MSCI Japan.............. % MSCI United Kingdom..... % MSCI Malaysia (Free).... % MSCI USA................ % MSCI Mexico (Free)...... %
The larger the percentage stated for an MSCI Index, the greater the historical average annual volatility of that MSCI Index. Among the listed MSCI Indices, MSCI United Kingdom reflects the lowest historical volatility, and MSCI South Korea reflects the highest historical volatility. Short-term volatility in these markets can be significantly greater than average annual volatility. - -------------------------------------------------------------------------------- Additional Information About Principal Risk Factors page 39 Foreign Currency Fluctuations. Because each Index Fund's assets are generally invested in non-US securities (except for the iShares MSCI USA Index Fund), and because a substantial portion of the revenue and income of each Index Fund (except for the iShares MSCI USA Index Fund) is received in a foreign currency, the dollar value of an Index Fund's net assets is reduced by declines in the value of the relevant foreign currency relative to the dollar and are positively affected by increases in the value of that currency relative to the dollar. Also, government or monetary authorities may impose or alter exchange controls in a way that would adversely affect exchange rates. Any currency fluctuations will affect the net asset value of an Index Fund regardless of the performance of its underlying portfolio. Other than to facilitate settlements in local markets or to protect against currency exposure in connection with its distributions to shareholders or borrowings, no Index Fund expects to engage in currency transactions for the purpose of hedging against a decline in value of any foreign currencies. Concentration and Lack of Diversification of Certain Index Funds. Each Index Fund (except for the iShares MSCI Japan, United Kingdom and USA Index Funds) 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. In addition, a number of Index Funds concentrate their investments in particular industries as noted in the descriptions of each non-diversified Index Fund. Each Index Fund, however, whether diversified or non-diversified, 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 US Internal Revenue Code, to relieve the Index 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 US Internal Revenue Code severely limits the investment flexibility of certain Index Funds and makes it less likely that such Index Funds will meet their investment objectives. The stocks of particular issuers, or of issuers in particular industries, may dominate the benchmark index of an Index Fund and, consequently, the investment portfolio of an Index Fund. This may adversely affect the performance of an Index Fund or subject it to greater price volatility than that experienced by more diversified investment companies. The iShares of an Index 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. Trading Issues. Trading in iShares on the AMEX (or any other securities exchange on which iShares may be listed or traded) may be halted due to market conditions or for reasons that, in the AMEX's view (or that of any such other exchange's), make trading in iShares inadvisable. In addition, trading in iShares on the AMEX is subject to trading halts caused by extraordinary market volatility pursuant to AMEX "circuit breaker" rules. If trading on the AMEX or another exchange on which iShares are listed is halted, you may not be able to sell your iShares until trading resumes. There can be no assurance that the requirements of the AMEX (or any other exchange) that are necessary to maintain the listing of any Index Fund will continue to be met or will remain unchanged. Fluctuation of Net Asset Value and Trading Prices. The net asset value of iShares of an Index Fund will fluctuate with changes in the market value of an Index Fund's security holdings and changes in the exchange rate between the US dollar and the subject foreign currency. The market prices of iShares will fluctuate in accordance with changes in net asset value and supply and demand on the AMEX or another exchange on which iShares are listed. The Company cannot predict whether iShares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply and demand forces in the secondary trading market for iShares will be closely related, but not identical, to the same forces influencing the prices of the stocks of the MSCI Index trading individually or in the aggregate at any point in time. Given, however, that iShares must be created and redeemed in Creation Unit aggregations (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), the investment adviser believes that ordinarily large discounts or premiums to the net asset value of iShares should not be sustained. In the event that the Company must suspend or discourage creations - -------------------------------------------------------------------------------- page 40 iShares and/or redemptions of Creation Unit aggregations of iShares of an Index Fund, we expect larger discounts or premiums. This occurred in the case of the Malaysia (Free) Index Fund ("Malaysia Fund") iShares, which frequently traded at prices that materially differed from their net asset values between the dates creations and "in kind" redemptions of the Malaysia Fund iShares were suspended in response to capital controls imposed by Malaysia from September 1998 and May 2000, when the Company commenced sales and redemptions of Malaysia Fund iShares for cash in U.S. dollars. The Company recently received regulatory relief from the Malaysian authorities and is currently investigating the possibility of re-instituting sales and redemptions of Creation Units of the Malaysia Fund's iShares on an "in-kind" basis, but there can be no assurance that the Company will be able to offer and redeem such Creation Units in-kind at any time in the future. Management Investment Adviser Barclays Global Fund Advisors (the "Advisor") is responsible for the investment management of each Index Fund. The Advisor is a California corporation indirectly owned by Barclays Bank PLC and is registered under the Investment Advisers Act of 1940. Barclays Global Fund Advisors has managed equity portfolios, including index funds and mutual funds, for over 25 years. As of November 30, 2000, the investment adviser and its affiliates managed, administered or advised assets aggregating in excess of $ billion. The Advisor's principal business address is 45 Fremont Street, San Francisco, California 94105. For the fiscal year ended August 31, 2000, the investment adviser received 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............... % Malaysia (Free)......... % Austria................. % Mexico (Free)........... % Belgium................. % Netherlands............. % Brazil (Free)........... % Singapore (Free)........ % Canada.................. % South Korea............. % EMU..................... % Spain................... % France.................. % Sweden.................. % Germany................. % Switzerland............. % Hong Kong............... % Taiwan.................. % Italy................... % United Kingdom.......... % Japan................... %
Shareholder Information Determination of Net Asset Value The net asset value per iShares for each Index Fund is computed by dividing the value of the net assets of an Index 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 Index Funds named below, the net asset value of each Index Fund is determined as of the close of the regular trading session on the New York Stock Exchange, Inc. ("NYSE") (ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open. The net asset values of the iShares MSCI Malaysia (Free), South Korea and Taiwan Index Funds are determined as of 8:30 a.m. (Eastern time) and the net asset value of the iShares MSCI Brazil (Free) - -------------------------------------------------------------------------------- page 41 Index Fund is determined at 5:00 p.m. (Eastern time), on each day that the NYSE is open. The Company may commence determining the net asset value of certain Index Funds more frequently than once a day in connection with the possible future trading of the iShares of such Index Funds on foreign exchanges. 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 Index Funds that effect creations and/or redemptions only for cash (i.e., the iShares MSCI Brazil (Free), Malaysia (Free), South Korea and Taiwan Index Funds), it is possible that portfolio securities transactions by the Company in the relevant local markets of those Index Funds could affect the prices of those portfolio securities at the time those Index Funds' net asset values are calculated. Buying and Selling iShares There are two ways for you to buy and sell iShares. Most investors buy and sell iShares through a broker in transactions on the AMEX or any other exchange on which iShares of the relevant Index Fund may be traded. iShares are also issued and redeemed directly by the Company, but only in transactions involving aggregations of very large numbers of iShares, referred to as Creation Units. These transactions occur on an "in kind" basis for most Index Funds. Persons capable of purchasing or redeeming Creation Units of iShares should refer to the Company's Statement of Additional Information for further details. In connection with the purchase or the redemption of a Creation Unit of an Index Fund, an investor must pay to the Company a purchase or redemption transaction fee, which is intended to offset the transfer and other transaction costs incurred by that Index Fund. The maximum transaction fees that may apply to in-kind Creation Unit purchases and redemptions are listed in the second column on the table below. To the extent purchases and redemptions for cash are available, additional variable charges, up to the maximums listed in the third and fourth columns of the table below, will apply (in addition to the fees listed in the second column). This table is subject to revision from time to time. (Investors are also responsible for payment of the costs of transferring portfolio securities to the Company, in the case of a purchase transaction, or from the Company to their own account, in the case of a redemption transaction.)
In-kind and Cash Additional Variable Additional Variable iShares Purchases and Charge for Cash Charge for Cash MSCI Index Series Redemptions Purchases* Redemptions* ----------------- ---------------- ------------------- ------------------- Australia............... $1,750 0.60% 0.60% Austria................. $1,600 0.67% 0.67% Belgium................. $1,500 0.30% 0.30% Brazil (Free)........... $4,725 ** *** Canada.................. $3,250 0.30% 0.30% EMU..................... $8,000 1.05% 1.05% France.................. $3,400 0.25% 0.25% Germany................. $2,400 0.25% 0.25% Greece.................. Hong Kong............... $3,800 0.60% 0.60% Indonesia (Free)........ Italy................... $2,100 0.30% 0.30% Japan................... $7,600 0.15% 0.40% Malaysia (Free)......... $4,150 *** *** Mexico (Free)........... $2,200 0.50% 0.50% Netherlands............. $1,900 0.25% 0.25% Portugal................ Singapore (Free)........ $2,500 1.60% 1.30% South Africa............ $3,200 1.60% 1.60% South Korea............. $4,400 *** *** Spain................... $2,300 0.25% 0.45%
- -------------------------------------------------------------------------------- page 42 iShares
In-kind and Cash Additional Variable Additional Variable iShares Purchases and Charge for Cash Charge for Cash MSCI Index Series Redemptions Purchases* Redemptions* ----------------- ---------------- ------------------- ------------------- Sweden.................. $2,700 0.30% 0.30% Switzerland............. $2,200 0.40% 0.40% Taiwan.................. $7,200 *** *** Thailand (Free)......... Turkey.................. United Kingdom.......... $4,750 0.25% 0.75% USA..................... $1,900 0.50% 0.50%
-------- * 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%. iShares may trade on the AMEX (or any other securities exchange on which iShares may trade) at prices that differ to some degree from their net asset value. If you buy or sell iShares in the secondary market, you will incur customary brokerage commissions and charges and may pay some or all of the difference between the bid price and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction. Given that iShares may be created or redeemed in Creation Units, however, the Advisor believes that ordinarily large discounts or premiums to the net asset value of iShares should not be sustained for long periods. If creations or redemptions of iShares in Creation Units are suspended or difficult to effect, the iShares may trade at sustained discounts or premiums from net asset value. This occurred in the case of iShares of the iShares MSCI Malaysia (Free) Index Fund after the Company suspended creations and "in kind" redemptions of these iShares in September 1998 as a result of capital controls imposed in Malaysia. The AMEX disseminates during its trading day an indicative optimized portfolio value, or IOPV, for each Index Fund. This should not be viewed as a real time update of the net asset value per iShares of an Index Fund, which is calculated only once a day, because it may not be computed in a manner consistent with such net asset value. The Depository Trust Company ("DTC") serves as securities depository for iShares. iShares may be held only in book-entry form; stock certificates will not be issued. DTC, or its nominee, is the record or registered owner of all outstanding iShares of each Index Fund. Beneficial ownership of iShares will be shown on the records of DTC or its participants (described below). 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 of iShares. Accordingly, to exercise any rights of a holder of iShares, a beneficial owner must rely on the procedures of (i) DTC; (ii) "DTC Participants", i.e., securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC; and (iii) "Indirect Participants", i.e., brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly, through which the beneficial owner holds its interests. As described above, the Company recognizes DTC or its nominee as the owner of all iShares for all purposes. The Company will send its shareholders, through DTC Participants, unaudited semi-annual reports, audited annual reports and other information as may be required by applicable laws, rules and regulations. Beneficial owners also receive an annual notification as to the tax status of the Company's distributions. For purposes of the Investment Company Act of 1940, iShares are issued by the Index Funds, and the acquisition of iShares by investment companies is subject to the restrictions of section 12(d)(1) of the Investment Company Act. - -------------------------------------------------------------------------------- Shareholder Information page 43 Dividends and Capital Gains 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 Index Funds. In addition, the Company intends to distribute, at least annually, amounts representing the full dividend yield on the underlying portfolio securities of each Index Fund, net of expenses, as if the Index Fund owned the underlying portfolio securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital. See "Tax Matters" below. 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 an Index Fund's taxable year of the amount and nature of all distributions made to them. Tax Matters As with any investment, you should consider how the iShares of an Index Fund 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 an Index 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: . An Index Fund makes distributions, and . You sell iShares on the AMEX. Taxes on Distributions. Each Index Fund will distribute annually any net investment income, and any net realized long-term or short-term capital gains. Each Index 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 an Index 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. Distributions in excess of an Index 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 Index 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 Index Fund's total assets at the end of its taxable year will consist of foreign stocks or securities, each Index Fund will "pass through" to you any foreign income taxes (including withholding taxes) paid by an Index Fund, if you held the Index Fund, and the Index 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 (Free) Index 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 Index 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. - -------------------------------------------------------------------------------- page 44 iShares By law, each Index Fund must withhold 31% of a shareholder's distributions and proceeds if the shareholder has not provided a taxpayer identification number or social security number. Taxes When iShares Are Sold on the AMEX. 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 an Index 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. 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 an Index 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 Index Fund at a rate set from time to time by the Board, provided that the annual rate may not exceed .25% of the average daily net assets of each Index Fund. These fees are currently 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 .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 .035% of the Company's average daily net assets; and reimbursements of expenses incurred by the distributor and other persons (principally the Adviser in connection with 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 12b-1 fees received from an Index Fund, at the annual rate of up to .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 Index Fund or which securities are to be purchased or sold by any Index Fund. Financial Highlights The financial highlights table is intended to help you understand the financial performance since inception of the following Index Funds that have commenced investment operations: the iShares MSCI Australia, Austria, Belgium, Brazil (Free), Canada, EMU, France, Germany, Hong Kong, Italy, Japan, Malaysia (Free), Mexico (Free), Netherlands, Singapore (Free), South Korea, Spain, Sweden, Switzerland, Taiwan and United Kingdom Index Funds. Certain information reflects financial results for a single iShare of an Index Fund. The total returns in the table represent the rate that a shareholder would have earned (or lost) on an investment in an Index Fund (assuming reinvestment of all dividends and distributions). This information has been audited by , whose report, along with the financial statements of those Index 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. - -------------------------------------------------------------------------------- Financial Highlights page 45
iShares MSCI Australia Index Fund --------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 7.75 $ 10.35 $ 10.15 $ 9.95(1) ------- ------- ------- ------- ------- Net investment income/(loss)+.... 0.20 0.23 0.17 0.10 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 2.29 (2.60) 0.47 0.29 ------- ------- ------- ------- ------- Net increase/(decrease) in net assets resulting from operations...... 2.49 (2.37) 0.64 0.39 ------- ------- ------- ------- ------- Less Distributions Dividends from net investment income............ (0.19) (0.23) (0.16) (0.08) Dividends in excess of net investment income............ 0.00** 0.00** (0.04) (0.05) Distributions from net realized gains............. -- -- (0.04) (0.02) Distributions in excess of net realized gains.... -- -- -- -- Return of capital........... (0.06) -- (0.20) (0.04) ------- ------- ------- ------- ------- Total dividends and distributions... (0.25) (0.23) (0.44) (0.19) ------- ------- ------- ------- ------- Net asset value, end of period..... $ 9.99 $ 7.75 $ 10.35 $ 10.15 ======= ======= ======= ======= ======= Total Investment Return(2)......... 32.09% (23.11)% 6.23% 3.88%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $53,957 $34,099 $41,406 $12,177 Ratios of expenses to average net assets(5)......... 1.00% 1.05 % 1.33% 1.59%(3) Ratios of net investment income/(loss) to average net assets(5)......... 2.03% 2.38 % 1.57% 2.18%(3) Portfolio turnover(6)....... 13.83% 1.49 % 5.30% 8.84%(4) iShares MSCI Austria Index Fund iShares MSCI Belgium Index Fund ------------------------------------------------------ ---------------------------------------------------- For the For the For the For the For the For the For the For the For the For the year year year year period year year year year period ended ended ended ended 03/12/96*- ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Per Share Operating Performance Net asset value, beginning of period............ $ $ 10.11 $10.51 $10.40 $ 10.91(1) $ $ 18.40 $ 15.64 $ 14.99 $14.92(1) -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Net investment income/(loss)+.... 0.10 0.06 (0.02) 0.04 0.08 0.24 0.77 0.40 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ (0.98) 0.20 0.13 (0.41) (0.30) 6.09 0.62 0.36 -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Net increase/(decrease) in net assets resulting from operations...... (0.88) 0.26 0.11 (0.37) (0.22) 6.33 1.39 0.76 -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Less Distributions Dividends from net investment income............ (0.07) (0.04) -- (0.02) -- (0.27) (0.33) (0.54) Dividends in excess of net investment income............ (0.01) (0.01) -- (0.01) (0.01) (1.21) (0.28) (0.09) Distributions from net realized gains............. -- (0.61) -- (0.03) (1.19) (1.99) (0.12) (0.06) Distributions in excess of net realized gains.... -- 0.00** -- -- -- -- -- -- Return of capital........... (0.02) 0.00** -- (0.08) (0.91) (0.10) (0.01) -- -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Total dividends and distributions... (0.10) (0.66) -- (0.14) (2.11) (3.57) (0.74) (0.69) -------- ---------- --------- --------- -------------- -------- ---------- --------- --------- ------------ Net asset value, end of period..... $ 9.13 $10.11 $10.51 $ 10.40 $ 16.07 $ 18.40 $ 15.64 $14.99 ======== ========== ========= ========= ============== ======== ========== ========= ========= ============ Total Investment Return(2)......... (8.69)% 2.16% 1.06 % (3.39)%(4) (1.00)% 39.42% 9.26% 5.01%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $12,776 $8,085 $4,205 $13,520 $13,496 $25,765 $32,528 $1,800 Ratios of expenses to average net assets(5)......... 1.31 % 1.41% 1.68 % 1.56 %(3) 1.24 % 1.04% 1.24% 2.29%(3) Ratios of net investment income/(loss) to average net assets(5)......... 1.04 % 0.51% (0.22)% 0.87 %(3) 0.45 % 1.28% 4.63% 5.67%(3) Portfolio turnover(6)....... 49.95 % 36.14% 28.47 % 9.60 %(4) 62.99 % 50.46% 16.83% 6.25%(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/(loss) to average net assets would have been as follows: Ratios of expenses to average net assets before waivers......... -- -- 1.33% 1.60%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 1.57% 2.17%(3) Ratios of expenses to average net assets before waivers......... -- -- 1.69 % 1.57%(3) -- -- 1.24% 2.30%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- (0.22)% 0.86%(3) -- -- 4.63% 5.66%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). - -------------------------------------------------------------------------------- iShares page 46
iShares MSCI Canada Index Fund --------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 9.90 $13.43 $ 10.60 $10.17(1) ------- ------ ------ ------- ------- Net investment income/(loss)+.... 0.07 0.07 0.05 0.04 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 3.87 (2.89) 2.97 0.43 ------- ------ ------ ------- ------- Net increase/(decrease) in net assets resulting from operations...... 3.94 (2.82) 3.02 0.47 ------- ------ ------ ------- ------- Less Distributions Dividends from net investment income............ (0.08) (0.13) (0.05) (0.03) Dividends in excess of net investment income............ (0.01) (0.00)** (0.00)** (0.01) Distributions from net realized gains............. (0.53) (0.58) (0.14) -- Distributions in excess of net realized gains.... -- -- -- 0.00** Return of capital........... -- -- -- 0.00** ------- ------ ------ ------- ------- Total dividends and distributions... (0.62) (0.71) (0.19) (0.04) ------- ------ ------ ------- ------- Net asset value, end of period..... $13.22 $ 9.90 $ 13.43 $ 10.60 ======= ====== ====== ======= ======= Total Investment Return(2)......... 39.71% (21.69)% 28.50% 4.63%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $9,253 $6,932 $24,168 $13,776 Ratios of expenses to average net assets(5)......... 1.23% 1.14 % 1.35% 1.44%(3) Ratios of net investment income/(loss) to average net assets(5)......... 0.53% 0.46 % 0.39% 0.79%(3) Portfolio turnover(6)....... 11.66% 3.70 % 11.02% 0.00%(4) iShares MSCI France Index Fund iShares MSCI Germany Index Fund ---------------------------------------------------- ----------------------------------------------------- For the For the For the For the For the For the For the For the For the For the year year year year period year year year year period ended ended ended ended 03/12/96*- ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 19.13 $ 14.50 $ 12.73 $ 12.42(1) $ $ 20.25 $ 16.31 $ 13.64 $ 13.23(1) -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Net investment income/(loss)+.... 0.14 0.30 0.17 0.17 0.12 0.29 0.03 0.06 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 3.88 4.76 1.95 0.45 1.31 3.92 2.77 0.47 -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Net increase/(decrease) in net assets resulting from operations...... 4.02 5.06 2.12 0.62 1.43 4.21 2.80 0.53 -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Less Distributions Dividends from net investment income............ (0.10) (0.19) (0.15) (0.09) (0.10) (0.17) (0.03) (0.03) Dividends in excess of net investment income............ (0.02) (0.03) -- (0.01) (0.01) (0.01) (0.01) (0.01) Distributions from net realized gains............. (0.05) (0.13) (0.20) 0.00** (0.31) (0.01) (0.07) -- Distributions in excess of net realized gains.... -- (0.01) -- -- (0.08) 0.00** -- (0.01) Return of capital........... (0.08) (0.07) -- (0.21) (0.01) (0.08) (0.02) (0.07) -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Total dividends and distributions... (0.25) (0.43) (0.35) (0.31) (0.51) (0.27) (0.13) (0.12) -------- --------- --------- --------- ------------- -------- --------- ---------- --------- ------------- Net asset value, end of period..... $ 22.90 $ 19.13 $ 14.50 $ 12.73 $ 21.17 $ 20.25 $ 16.31 $ 13.04 ======== ========= ========= ========= ============= ======== ========= ========== ========= ============= Total Investment Return(2)......... 21.01% 34.77% 16.60% 4.95%(4) 7.04% 25.69% 20.51% 4.00%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $77,885 $45,922 $14,519 $22,930 $101,645 $72,934 $24,486 $28,664 Ratios of expenses to average net assets(5)......... 1.06% 1.18% 1.52% 1.84%(3) 1.00% 1.08% 1.37% 1.68%(3) Ratios of net investment income/(loss) to average net assets(5)......... 0.67% 1.58% 1.17% 2.72%(3) 0.57% 1.43% 0.23% 1.00%(3) Portfolio turnover(6)....... 0.00% 5.65% 7.13% 0.00%(4) 13.67% 0.64% 9.04% 0.00%(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/(loss) to average net assets would have been as follows: Ratios of expenses to average net assets before waivers......... -- -- 1.36% 1.45%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 0.39% 0.78%(3) Ratios of expenses to average net assets before waivers......... -- -- 1.52% 1.85%(3) -- -- 1.37% 1.69%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 1.17% 2.71%(3) -- -- 0.22% 0.99%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). - -------------------------------------------------------------------------------- Financial Highlights page 47
iShares MSCI Hong Kong Index Fund iShares MSCI Italy Index Fund --------------------------------------------------- ------------------------------------------------- For the For the For the For the For the For the For the For the For the For the year year year year period year year year year period ended ended ended ended 03/12/96*- ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 6.41 $ 14.73 $ 13.05 $12.83(1) $ $ 22.89 $ 16.66 $ 13.79 $ 13.62(1) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Net investment income/(loss)+.... 0.29 0.35 0.26 0.15 0.17 0.18 0.12 0.25 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 5.49 (8.27) 2.12 0.27 1.05 7.94 3.10 0.31 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Net increase/(decrease) in net assets resulting from operations...... 5.78 (7.92) 2.38 0.42 1.22 8.12 3.22 0.56 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Less Distributions Dividends from net investment income............ (0.31) (0.28) (0.21) (0.13) (0.06) (0.18) (0.11) (0.14) Dividends in excess of net investment income............ (0.05) 0.00** (0.01) (0.02) -- (1.02) (0.24) (0.03) Distributions from net realized gains............. -- -- (0.34) (0.01) (2.24) (0.69) -- (0.14) Distributions in excess of net realized gains.... -- -- 0.00** -- -- -- -- -- Return of capital........... -- (0.12) (0.14) (0.04) (0.25) -- -- (0.08) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Total dividends and distributions... (0.36) (0.40) (0.70) (0.20) (2.55) (1.89) (0.35) (0.39) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Net asset value, end of period..... $ 11.83 $ 6.41 $ 14.73 $13.05 $ 21.56 $ 22.89 $ 16.66 $ 13.79 ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= Total Investment Return(2)......... 90.51% (54.22)% 17.80% 3.22%(4) 5.14% 47.66% 23.37% 4.11%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $77,200 $49,973 $25,417 $7,845 $58,224 $58,368 $32,495 $35,170 Ratios of expenses to average net assets(5)......... 1.01% 1.09 % 1.43% 1.52%(3) 1.03% 1.02% 1.33% 1.43%(3) Ratios of net investment income/(loss) to average net assets(5)......... 2.84% 3.76 % 1.71% 2.37%(3) 0.70% 0.76% 0.76% 3.69%(3) Portfolio turnover(6)....... 42.89% 21.50 % 22.90% 0.00%(4) 7.89% 8.16% 13.70% 19.80%(4) iShares MSCI Japan Index Fund -------------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- ---------- ---------- ---------- -------------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 8.39 $ 12.61 $ 14.33 $ 14.79(1) -------- ---------- ---------- ---------- -------------- Net investment income/(loss)+.... (0.03) (0.02) (0.06) (0.07) Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 4.91 (4.19) (1.65) (0.39) -------- ---------- ---------- ---------- -------------- Net increase/(decrease) in net assets resulting from operations...... 4.88 (4.21) (1.71) (0.46) -------- ---------- ---------- ---------- -------------- Less Distributions Dividends from net investment income............ -- -- -- -- Dividends in excess of net investment income............ (0.04) -- -- -- Distributions from net realized gains............. -- 0.00** -- -- Distributions in excess of net realized gains.... -- -- (0.01) -- Return of capital........... (0.01) (0.01) -- -- -------- ---------- ---------- ---------- -------------- Total dividends and distributions... (0.05) (0.01) (0.01) -- -------- ---------- ---------- ---------- -------------- Net asset value, end of period..... $ 13.22 $ 8.39 $ 12.61 $ 14.33 ======== ========== ========== ========== ============== Total Investment Return(2)......... 58.14 % (33.38)% (11.97)% (3.11)%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $713,653 $201,485 $158,957 $103,164 Ratios of expenses to average net assets(5)......... 0.94 % 1.04 % 1.19 % 1.37 %(3) Ratios of net investment income/(loss) to average net assets(5)......... (0.27)% (0.21)% (0.48)% (1.01)%(3) Portfolio turnover(6)....... 0.00 % 0.00 % 12.90 % 21.54 %(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/(loss) to average net assets would have been as follows: Ratios of expenses to average net assets before waivers......... -- -- 1.43% 1.53%(3) -- -- 1.33% 1.44%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 1.71% 2.36%(3) -- -- 0.76% 3.68%(3) Ratios of expenses to average net assets before waivers......... -- -- 1.19 % 1.38 %(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- (0.48)% (1.02)%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). - -------------------------------------------------------------------------------- iShares page 48
iShares MSCI Malaysia (Free) Index Fund iShares MSCI Mexico (Free) Index Fund --------------------------------------------------- ------------------------------------------------- For the For the For the For the For the For the For the For the For the For the year year year year period year year year year period ended ended ended ended 03/12/96*- ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 2.11 $ 8.23 $ 13.80 $13.24(1) $ $ 8.11 $15.11 $ 11.52 $ 9.95(1) ------- ------- ------- ------- ------ ------- ------- ------ ------- ------ Net investment income/(loss)+.... 0.01 0.06 0.01 (0.02) 0.06 0.09 0.02 0.00** Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 3.67 (6.10) (5.55) 0.59 5.36 (6.71) 4.07 1.59 ------- ------- ------- ------- ------ ------- ------- ------ ------- ------ Net increase/(decrease) in net assets resulting from operations...... 3.68 (6.04) (5.54) 0.57 5.42 (6.62) 4.09 1.59 ------- ------- ------- ------- ------ ------- ------- ------ ------- ------ Less Distributions Dividends from net investment income............ (0.01) (0.05) 0.00** -- (0.06) (0.09) (0.01) -- Dividends in excess of net investment income............ -- -- (0.01) -- (0.01) -- (0.01) (0.01) Distributions from net realized gains............. -- -- -- -- -- (0.29) (0.44) -- Distributions in excess of net realized gains.... -- -- -- -- (0.01) -- -- -- Return of capital........... (0.19) (0.03) (0.02) (0.01) (0.06) -- (0.04) (0.01) ------- ------- ------- ------- ------ ------- ------- ------ ------- ------ Total dividends and distributions... (0.02) (0.08) (0.03) (0.01) (0.14) (0.38) (0.50) (0.02) ------- ------- ------- ------- ------ ------- ------- ------ ------- ------ Net asset value, end of period..... $ 5.59 $ 2.11 $ 8.23 $13.80 $ 13.39 $ 8.11 $ 15.11 $11.52 ======= ======= ======= ======= ====== ======= ======= ====== ======= ====== Total Investment Return(2)......... 185.81% (73.57)% (40.20)% 4.28 %(4) 66.92% (44.18)% 35.21% 15.93%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $95,251 $35,867 $12,339 $9,318 $21,430 $7,296 $16,627 $5,759 Ratios of expenses to average net assets(5)......... 1.43% 1.09 % 1.46 % 1.58 %(3) 1.26% 1.34 % 1.63% 1.75%(3) Ratios of net investment income/(loss) to average net assets(5)......... 0.33% 1.40 % 0.04 % (0.35)%(3) 0.52% 0.60 % 0.14% 0.01%(3) Portfolio turnover(6)....... 7.24% 2.11 % 0.00 % 0.00 %(4) 18.36% 14.05 % 22.80% 0.00%(4) iShares MSCI Netherlands Index Fund -------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- --------- --------- -------- ------------ Per Share Operating Performance Net asset value, beginning of period............ $ $ 23.50 $ 21.42 $17.36 $15.91(1) -------- --------- --------- -------- ------------ Net investment income/(loss)+.... 0.53 0.25 0.11 0.24 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 1.60 3.53 4.79 1.54 -------- --------- --------- -------- ------------ Net increase/(decrease) in net assets resulting from operations...... 2.13 3.78 4.90 1.78 -------- --------- --------- -------- ------------ Less Distributions Dividends from net investment income............ (0.43) (0.16) (0.10) (0.14) Dividends in excess of net investment income............ (0.01) -- (0.01) (0.01) Distributions from net realized gains............. (1.42) (1.47) (0.71) (0.08) Distributions in excess of net realized gains.... (0.24) -- -- (0.01) Return of capital........... (0.08) (0.07) (0.02) (0.09) -------- --------- --------- -------- ------------ Total dividends and distributions... (2.18) (1.70) (0.84) (0.33) -------- --------- --------- -------- ------------ Net asset value, end of period..... $ 23.45 $ 23.50 $21.42 $17.36 ======== ========= ========= ======== ============ Total Investment Return(2)......... 8.98% 17.41% 28.04% 11.19%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $31,685 $22,349 $9,661 $6,962 Ratios of expenses to average net assets(5)......... 1.07% 1.12% 1.46% 1.63%(3) Ratios of net investment income/(loss) to average net assets(5)......... 2.20% 1.00% 0.54% 2.93%(3) Portfolio turnover(6)....... 32.13% 15.81% 12.68% 4.32%(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/(loss) to average net assets would have been as follows: Ratios of expenses to average net assets before waivers......... -- -- 1.47% 1.59 %(3) -- -- 1.63% 1.76%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 0.04% (0.36)%(3) -- -- 0.13% 0.00%(3) Ratios of expenses to average net assets before waivers......... -- -- 1.46% 1.64%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 0.53% 2.92%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). Financial Highlights - -------------------------------------------------------------------------------- page 49
iShares MSCI Singapore (Free) Index Fund iShares MSCI Spain Index Fund --------------------------------------------------- ------------------------------------------------ For the For the For the For the For the For the For the For the For the For the year year year year period year year year year period ended ended ended ended 03/12/96*- ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period............ $ $ 3.30 $ 8.66 $ 11.38 $12.24(1) $ $ 23.84 $ 18.49 $14.09 $13.28(1) ------- -------- ------- ------- ------ ------- ------- ------- ------ ------ Net investment income/(loss)+.... 0.05 0.07 0.00** 0.04 0.09 0.16 0.19 0.14 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 4.70 (5.37) (2.67) (0.86) 3.14 5.94 5.33 0.98 ------- -------- ------- ------- ------ ------- ------- ------- ------ ------ Net increase/(decrease) in net assets resulting from operations...... 4.75 (5.30) (2.67) (0.82) 3.23 6.10 5.52 1.12 ------- -------- ------- ------- ------ ------- ------- ------- ------ ------ Less Distributions Dividends from net investment income............ (0.05) (0.04) 0.00** (0.03) (0.07) (0.12) (0.12) (0.18) Dividends in excess of net investment income............ (0.06) (0.01) (0.01) (0.01) (0.02) (0.02) (0.05) -- Distributions from net realized gains............. -- -- (0.02) -- (1.35) (0.55) (0.86) (0.13) Distributions in excess of net realized gains.... -- -- -- -- -- -- -- -- Return of capital........... (0.01) (0.01) (0.02) -- (0.04) (0.06) (0.09) -- ------- -------- ------- ------- ------ ------- ------- ------- ------ ------ Total dividends and distributions... (0.12) (0.06) (0.05) (0.04) (1.48) (0.75) (1.12) (0.31) ------- -------- ------- ------- ------ ------- ------- ------- ------ ------ Net asset value, end of period..... $ 7.93 $ 3.30 $ 8.66 $11.38 $ 25.59 $ 23.84 $18.49 $14.09 ======= ======== ======= ======= ====== ======= ======= ======= ====== ====== Total Investment Return(2)......... 144.52% (61.29)% (23.48)% (6.73)%(4) 13.39% 32.58% 39.15% 8.45%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $113,438 $47,248 $14,722 $9,107 $36,469 $25,029 $8,321 $4,227 Ratios of expenses to average net assets(5)......... 0.97% 1.08 % 1.43 % 1.56 %(3) 1.04% 1.11% 1.67% 1.76%(3) Ratios of net investment income/(loss) to average net assets(5)......... 0.76% 1.17 % 0.03 % 0.69 %(3) 0.31% 0.61% 1.04% 2.04%(3) Portfolio turnover(6)....... 25.31% 67.17 % 13.40 % 26.29 %(4) 16.58% 9.10% 19.21% 4.73%(4) iShares MSCI Sweden Index Fund --------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- --------- --------- --------- ------------ Per Share Operating Performance Net asset value, beginning of period............ $ $ 18.39 $ 18.32 $14.67 $13.22(1) -------- --------- --------- --------- ------------ Net investment income/(loss)+.... 0.10 0.10 (0.03) 0.20 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies........ 4.52 0.95 4.45 1.67 -------- --------- --------- --------- ------------ Net increase/(decrease) in net assets resulting from operations...... 4.62 1.05 4.42 1.87 -------- --------- --------- --------- ------------ Less Distributions Dividends from net investment income............ (0.09) (0.08) -- (0.23) Dividends in excess of net investment income............ (0.01) (0.01) -- (0.07) Distributions from net realized gains............. (0.62) (0.86) (0.77) (0.12) Distributions in excess of net realized gains.... (0.01) (0.01) -- -- Return of capital........... (0.02) (0.02) -- -- -------- --------- --------- --------- ------------ Total dividends and distributions... (0.75) (0.98) (0.77) (0.42) -------- --------- --------- --------- ------------ Net asset value, end of period..... $ 22.26 $ 18.39 $18.32 $14.67 ======== ========= ========= ========= ============ Total Investment Return(2)......... 25.09% 5.48% 30.10 % 14.13%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)............ $20,034 $13,791 $8,243 $4,400 Ratios of expenses to average net assets(5)......... 1.13% 1.17% 1.64 % 1.75%(3) Ratios of net investment income/(loss) to average net assets(5)......... 0.49% 0.48% (0.19)% 3.05%(3) Portfolio turnover(6)....... 33.44% 10.88% 13.71 % 5.87%(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/loss to average net assets would have been as follows: Ratios of expenses to average net assets before waivers......... -- -- 1.43% 1.57%(3) -- -- 1.67% 1.77%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- 0.03% 0.68%(3) -- -- 1.04% 2.03%(3) Ratios of expenses to average net assets before waivers......... -- -- 1.64 % 1.76%(3) Ratios of net investment income/(loss) to average net assets before waivers......... -- -- (0.19)% 3.04%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). - -------------------------------------------------------------------------------- page 50 iShares
iShares MSCI Switzerland Index Fund ----------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- -------- -------- -------- ---------- Per Share Operating Performance Net asset value, beginning of period..... $ $ 15.55 $ 13.79 $ 12.29 $12.07(1) ------- ------- ------- ------- ------ Net investment income/(loss)+.......... 0.04 (0.00)%** (0.04) 0.08 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies... 0.19 3.01 2.11 0.24 ------- ------- ------- ------- ------ Net increase/(decrease) in net assets resulting from operations....... 0.23 3.01 2.07 0.32 ------- ------- ------- ------- ------ Less Distributions Dividends from net investment income....... (0.03) -- -- (0.10) Dividends in excess of net investment income... (0.04) (0.01) -- -- Distributions from net realized gains.......... (0.17) (1.21) (0.57) -- Distributions in excess of net realized gains... (0.14) -- -- -- Return of capital....... (0.01) (0.03) 0.00** -- ------- ------- ------- ------- ------ Total dividends and distributions......... (0.39) (1.25) (0.57) (0.10) ------- ------- ------- ------- ------ Net asset value, end of period.................. $ 15.39 $ 15.55 $ 13.79 $12.29 ======= ======= ======= ======= ====== Total Investment Return(2)............... 1.47% 21.24 % 16.69 % 2.60%(4) iShares MSCI United Kingdom Index Fund ---------------------------------------------------- For the For the For the For the For the year year year year period ended ended ended ended 03/12/96*- 08/31/00 08/31/99 08/31/98 08/31/97 08/31/96 -------- --------- --------- --------- ------------- Per Share Operating Performance Net asset value, beginning of period..... $ $ 18.48 $ 16.50 $ 13.15 $ 12.14(1) -------- --------- --------- --------- ------------- Net investment income/(loss)+.......... 0.44 0.37 0.38 0.21 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions and translation of other assets and liabilities denominated in foreign currencies... 2.40 2.12 3.62 1.06 -------- --------- --------- --------- ------------- Net increase/(decrease) in net assets resulting from operations....... 2.84 2.49 4.00 1.27 -------- --------- --------- --------- ------------- Less Distributions Dividends from net investment income....... (0.36) (0.29) (0.32) (0.20) Dividends in excess of net investment income... (0.01) (0.04) (0.06) (0.03) Distributions from net realized gains.......... (0.60) (0.11) (0.17) 0.00** Distributions in excess of net realized gains... (0.02) -- -- -- Return of capital....... (0.08) (0.07) (0.10) (0.03) -------- --------- --------- --------- ------------- Total dividends and distributions......... (1.07) (0.51) (0.65) (0.26) -------- --------- --------- --------- ------------- Net asset value, end of period.................. $ 20.25 $ 18.48 $ 16.50 $ 13.15 ======== ========= ========= ========= ============= Total Investment Return(2)............... 15.33% 14.98% 30.48% 10.41%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)....... $38,499 $29,153 $13,805 $6,158 Ratios of expenses to average net assets(5)... 1.09% 1.15 % 1.52 % 1.82%(3) Ratios of net investment income/(loss) to average net assets(5)... 0.24% (0.03)% (0.29)% 1.39%(3) Portfolio turnover(6)... 35.10% 43.09 % 48.05 % 17.06%(4) Ratios/Supplemental Data Net assets, end of period (in 000's)....... $113,402 $62,846 $29,721 $15,790 Ratios of expenses to average net assets(5)... 0.97% 1.03% 1.38% 1.61%(3) Ratios of net investment income/(loss) to average net assets(5)... 2.16% 1.90% 2.47% 3.62%(3) Portfolio turnover(6)... 13.24% 2.83% 1.84% 0.00%(4) - ---- * Commencement of operations. ** Less than one cent per share. + Based on average shares outstanding throughout the period. (1) Net asset value per share on March 12, 1996 (commencement of operations). (2) Total investment return is calculated assuming a purchase of capital stock at net asset value per share on the first day and a sale at the net asset value per share on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at the net asset value per share on the ex-dividend date. (3) Annualized. (4) Not Annualized. (5) Includes voluntary waivers through December 31, 1996. If such waivers had not been made the ratios of expenses to average net assets and ratios of net investment income/(loss) to average net assets would have been as follows: Ratios of expenses to average net assets before waivers........ -- -- 1.53 % 1.83%(3) Ratios of net investment income/(loss) to average net assets before waivers........ -- -- (0.29)% 1.38%(3) Ratios of expenses to average net assets before waivers........ -- -- 1.38% 1.62%(3) Ratios of net investment income/(loss) to average net assets before waivers........ -- -- 2.47% 3.61%(3)
(6) Excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Unit(s). Financial Highlights - -------------------------------------------------------------------------------- page 51 [THIS PAGE INTENTIONALLY LEFT BLANK] The iShares MSCI Index Funds - -------------------------------------------------------------------------------- page 53 [THIS PAGE INTENTIONALLY LEFT BLANK] - -------------------------------------------------------------------------------- iShares page 54 For More Information FOR INVESTORS WHO WANT MORE INFORMATION ON THE iSHARES MSCI INDEX FUNDS, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST: Annual/Semi-Annual Reports: Contain a discussion of market conditions and investment strategies, performance data and information on portfolio holdings for the Company's most recently completed fiscal year or half year, a statement from management and, on an annual basis, the auditor's report. Statement of Additional Information (SAI): Contains more detailed information about the Company's policies, investment restrictions, risks and business structure. This Prospectus incorporates the SAI by reference. Copies of these documents and answers to questions about Index Funds may be obtained without charge by contacting: iSHARES, INC. 400 Bellevue Parkway Wilmington, Delaware 19809 1-800-474-2737 www.iShares.com Information about Index Funds (including the SAI) can be viewed and copied at the Public Reference Room of the SEC in Washington, D.C. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at publicinfo@sec.gov or by writing the Public Reference Room of the SEC, Washington, D.C., 20549-6009. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information about Index Funds may be viewed on-screen or downloaded from the SEC's Internet site at www.sec.gov. - ------------------------------------------------------------------------------- FOR MORE INFORMATION ON iSHARES MSCI INDEX FUNDS, PLEASE CALL: 1-800-iSHARES (1-800-474-2737) - ------------------------------------------------------------------------------- Investment Company Act File No. 811-09102. iSHARES, INC. (THE "COMPANY") iSHARES MSCI INDEX FUNDS STATEMENT OF ADDITIONAL INFORMATION JANUARY ___, 2000 This Statement of Additional Information ("SAI") provides information about the Company and its iShares MSCI Index Funds ("Index Funds"). This information is in addition to the information contained in the Company's Prospectus dated January 2, 2000. This SAI is not a prospectus. It should be read in conjunction with the Prospectus and the Company's Annual Report dated August 31, 2000. The financial statements and notes contained in the Annual Report are incorporated by may be obtained free of charge by telephoning 1-800-iShares (1-800-474-2737). iShares, Inc. intend to have the iShares MSCI Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds listed on the AMEX. Dates for the commencement of sales to the public of these iShares MSCI Index Funds have yet to be determined. 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 Futures Contracts and Options............................................................................ 4 Futures Transactions.................................................................................. 4 Restrictions on the Use of Futures Contracts and Options on Future Contracts.......................... 5 Federal Tax Treatment of Futures Contracts............................................................ 5 Future Developments................................................................................... 6 Swap Agreements.......................................................................................... 6 Non-U.S. Equity Portfolios............................................................................... 6 Concentrations and Lack of Diversification of Certain Index Funds........................................ 6 Investments in Subject Equity Markets.................................................................... 7 Regional and Country-Specific Economic Considerations.................................................... 19 MSCI INDICES............................................................................................... 36 INVESTMENT LIMITATIONS..................................................................................... 40 MANAGEMENT OF THE COMPANY.................................................................................. 42 Directors and Officers of the Company.................................................................... 42 Directors' Compensation.................................................................................. 44 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................................................ 45 INVESTMENT ADVISORY MANAGEMENT, ADMINISTRATIVE AND DISTRIBUTION SERVICES................................................................................ 51 Investment Adviser....................................................................................... 51 Administrator............................................................................................ 52 Sub-Administrator........................................................................................ 53 Distributor.............................................................................................. 54 Custodian and Lending Agent.............................................................................. 57 Transfer Agent........................................................................................... 57 BROKERAGE ALLOCATION....................................................................................... 57 ADDITIONAL INFORMATION CONCERNING iSHARES.................................................................. 58 Capital Stock............................................................................................ 58 Book Entry Only System................................................................................... 59 PURCHASE AND REDEMPTION OF iSHARES......................................................................... 60 Creation Units........................................................................................... 60 Purchase and Issuance of iShares in Creation Units....................................................... 61 Redemption of iShares in Creation Units.................................................................. 65 Determining Net Asset Value.............................................................................. 68 Continuous Offering...................................................................................... 69 TAXES...................................................................................................... 69 PERFORMANCE INFORMATION.................................................................................... 71 COUNSEL AND INDEPENDENT AUDITORS........................................................................... 74 Counsel.................................................................................................. 74 Independent Auditors..................................................................................... 74 FINANCIAL STATEMENTS....................................................................................... 75 APPENDIX A................................................................................................. A-1 APPENDIX B................................................................................................. B-1
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. ii 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 MSDW or any of its affiliates. Neither MSDW nor any of its affiliates make any representation or warranty, express or implied, to the owners of the iShares of any Index Fund or any member of the public regarding the advisability of investing in securities generally, or in the iShares of any Index Fund particularly, or the ability of the indices identified herein to track general stock market performance. The MSCI Indices identified herein are determined, composed and calculated without regard to the iShares of any Index Fund or the issuer thereof. Neither MSCI nor either of its owners has any obligation to take the needs of the issuer of the iShares of any Index Fund or the owners of the iShares of any Index Fund into consideration in determining, composing, calculating or disseminating the respective MSCI Indices. Neither MSCI nor either of its owners is responsible for, nor have they participated in the determination of the timing of, prices of, or quantities of the iShares of any Index Fund to be issued or in the determination or calculation of the equation by which the iShares of any Index Fund are redeemable. Neither MSCI nor either of its owners has any obligation or liability to owners of the iShares of any Index Fund in connection with the administration, marketing or trading of the iShares of any Index Fund. Although MSCI and Capital, which are primarily responsible for formulating the MSCI Indices, shall obtain information for inclusion in or for use in the calculation of the MSCI Indices from sources which they consider reliable, neither MSCI nor Capital guarantees the accuracy and/or the completeness of the component data of any MSCI Index obtained from independent sources. Neither MSCI nor Capital makes any warranty, express or implied, as to results to be obtained by licensee, owners of the products, or any other person or entity from the use of the MSCI Indices or any data included therein in connection with the rights licensed under any license agreement or for any other use. Neither MSCI nor Capital makes any express or implied warranties, and each hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the MSCI Indices or any data included therein. Without limiting any of the foregoing, in no event shall MSCI or Capital 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. 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$" are to Canadian Dollars, all references to "EUR" are to Euros, all references to "FRF" or "FF" are to French Francs, all references to "DEM" or "DM" are to the German Deutsche Mark, all references to "GRD" are to Greek Drachmas, all references to "HKD" or "HK$" are to Hong Kong Dollars, all references to "IDR" are to Indonesian Rupiahs, 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 "PTE" are to Portuguese Escudos, all references to "SGD" are to Singapore Dollars, all references to "ZAR" are to South African Rands, 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 "THB" are to Thai Bahts, all references to "TRL" are to Turkish Lira and all references to "GBP," "(Pounds)" or "L" are to British Pounds Sterling. On November 30, 2000, the 4:00 p.m. buying rates in New York City for cable transfers payable in the applicable currency, as certified for customs purposes by the Federal Reserve Bank of New York, were as follows for each US $1.00: AUD ______, ATS ______, BEF ______, BRL ______, CAD ______, EUR ______, FRF ______, DEM ______, GDR ______, HKD ______, IDR ______, ITL ______, JPY ______, KRW ______, MYR ______, MXN ______, NLG ______, PTE ______, SGD ______, ZAR ______, ESP ______, SEK ______, CHF ______, TWD ______, THB ______, TRL ______ and GBP ______. Some numbers in this SAI have been rounded. All US Dollar equivalents provided in this SAI are calculated at the exchange rate prevailing on the date to which the corresponding foreign currency amount refers. iii 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 or proposing to operate 28 separate investment portfolios or "Index Funds". The following seventeen Index 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 (Free) Index Fund, the iShares MSCI Mexico (Free) Index Fund, the iShares MSCI Netherlands Index Fund, the iShares MSCI Singapore (Free) 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 (Free) Index Fund, the iShares MSCI EMU Index Fund, the iShares MSCI South Korea Index Fund and the iShares MSCI Taiwan Index Fund commenced operations on July 14, 2000, July 28, 2000, May 12, 2000 and June 23, 2000, respectively. The following Index Funds had not commenced operations as of the date of this SAI: the iShares MSCI Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds. Each of the iShares MSCI Japan, United Kingdom and USA Index Funds is classified as a "diversified" investment company under the Investment Company Act of 1940. Each of the other Index 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 Index 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 Index Funds. Exchange Listing and Trading. Except for the Greece, Indonesia (Free), ---------------------------- Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds, for which application will be made prior to the date that these Index Funds commence operations, the iShares of each Index Fund have been listed for trading on the AMEX. The AMEX has approved modifications to its Rules to permit the listing of iShares. 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 Index Fund will continue to be met. The AMEX may remove the iShares of an Index Fund from listing if (1) following the initial twelve-month period beginning upon the commencement of trading of an Index 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 Index 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 Index Funds may be traded on U.S. exchanges other than the AMEX from time to time. In addition, it is possible that, in the future, iShares of some of the Company's Index Funds may be traded on one or more 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 $.015 to $.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 Index 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 Index 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 Index 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 Index Fund at a particular point in time, because the current portfolio of an Index Fund may include securities that are not a part of the current Deposit Securities. Therefore, the IOPV on a per Index 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 Index Fund may diverge from the applicable IOPV during any trading day. In such a case, the IOPV would not precisely reflect the value of an Index Fund' portfolio. In addition, the foreign exchange rate used by the Company in computing net asset value of an Index 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 Index Fund. In addition to the equity component described in the preceding paragraph, the IOPV for each Index 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, Indonesia (Free), Japan, Malaysia (Free), Singapore (Free), South Korea, Taiwan and Thailand (Free) Index Funds, there is no overlap in trading hours between the foreign market and the AMEX. Therefore, for each of these Index Funds, Bloomberg utilizes closing prices (in applicable foreign currency prices) in the foreign market for securities in the Index 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 Index 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 government securities or other assets that are pledged as collateral to the Company in connection with these loans generate income, securities lending enables an Index Fund to earn additional income that may partially offset the expenses of such Index Fund, and thereby reduce the effect that expenses have on such Index 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% of an Index Fund's total assets. The documentation for these loans provide that the Index Fund will receive collateral equal to at least 105% of the current market value of the loaned securities, as marked to market each day on the same basis as the net asset value of the Index Fund is determined, consisting of government securities or other assets permitted by applicable regulations and interpretations. An Index Fund pays reasonable administrative and custodial fees in connection with the loan of securities. The Index Fund invests collateral in short-term investments. The Chase Manhattan Bank ("Chase") serves as Lending Agent of the Company and, in such capacity, shares with the respective Index Fund any net income earned on invested collateral on a 40/60 basis (i.e., Chase receives 40% of such net income and the Index Fund receives 60%). An Index Fund's share of income from the loan collateral is included in the Index Fund's gross investment income. The Company will comply with the conditions for lending established by the SEC. The SEC currently requires that the following conditions be met whenever portfolio securities are loaned: (1) the Index 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 Index Fund must be able to terminate the loan at any time; (4) the Index Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (5) the Index 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's 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 Index Fund will receive collateral in connection with all loans of portfolio securities, and such collateral will be marked to market, the Index 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 2 beyond the value of the collateral held by the Company). In addition, each Index Fund bears the risk of loss of any cash collateral that it invests in short-term investments. Repurchase Agreements. Each Index 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 an Index 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 an Index Fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by an Index 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 generally and has established guidelines and standards for review of the creditworthiness of any bank, broker or dealer counterparty to a repurchase agreement with an Index Fund. No more than an aggregate of 15% of the Index 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. An Index Fund will enter into repurchase agreements only with Federal Reserve member banks with minimum assets of at least $2 billion or registered securities dealers. 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 an Index Fund not within the control of the Index Fund and therefore the Index 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 Index Fund is to --------------------- remain as fully invested as practicable in the equity securities of the relevant market. Hence, no Index Fund expects to engage in currency transactions for the purpose of hedging against declines in the value of the Index Fund's currency. An Index Fund (except for the iShares MSCI USA Index 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 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 Adviser 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 an Index Fund's return with the performance of the corresponding MSCI Index and may lower the Index Fund's return. The Index 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 Index Fund will incur transaction costs, including trading commissions, in connection with certain of its foreign currency transactions. 3 Futures Contracts and Options. Each Index 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 Index Funds. In such circumstances an Index 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 Adviser 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. Each Index 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 Index Funds. In addition, the Company is not permitted to utilize certain stock index futures under applicable law. Under such circumstances, the Adviser 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, an Index 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 an Index 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 adviser will attempt to reduce this tracking error by using futures contracts whose behavior is expected to represent the market performance of the Index 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, an Index Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if an Index 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, an Index Fund may be required to make delivery of the instruments underlying futures contracts it holds. 4 An Index 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, an Index 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 an Index 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 an Index 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. An Index 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 an Index 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 custodian bank. Each Index 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 Index 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 an Index Fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. An Index 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 Index Fund. In order for an Index 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 Index Fund's business of investing in securities. It is anticipated that any 5 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 Index 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 Index Fund's fiscal year) on futures transactions. Such distributions are combined with distributions of capital gains realized on the Index Fund's other investments and shareholders are advised on the nature of the distributions. Future Developments. Each Index 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 Index Fund or which are not currently available but which may be developed, to the extent such opportunities are both consistent with an Index Fund's investment objective and legally permissible for the Index Fund. Before entering into such transactions or making any such investment, the Index Fund will provide appropriate disclosure. Swap Agreements. Each Index 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 Index 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 an Index 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 Index 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 an Index Fund whose portfolio contains non-U.S. issuers involves 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 an Index 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; lesser levels of regulation of the securities markets; more substantial government involvement in 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. Concentrations and Lack of Diversification of Certain Index Funds. Each ----------------------------------------------------------------- Index Fund (except for the Japan, United Kingdom and USA Index Funds) 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. In addition, a number of Index Funds concentrate their investments in particular industries as noted in the descriptions of each Index Fund. Each Index Fund, however, whether diversified or non-diversified, 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 Index 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 Index Funds and makes it less likely that such Index Funds will meet their investment objectives. 6 The stocks of a particular issuers, or of issuers in particular industries, may dominate the benchmark index of an Index Fund and, consequently, the investment portfolio of an Index Fund. This may adversely affect the performance of an Index Fund or subject it to greater price volatility than that experienced by more diversified investment companies. The iShares of an Index 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 Index Fund are invested are provided below. 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. As of November 30, 2000, the total market capitalization of the Australian equity markets was approximately AUD _____ billion or US$ _____ billion. 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. As of November 30, 2000, the total market capitalization of the Austrian equity markets was approximately EUR ____ billion or US$ ____ billion. 7 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." 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. As of November 30, 2000, the total market capitalization of the Belgian equity markets was approximately EUR _____ billion or US$ _____ billion. 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. As of November 30, 2000, the total market capitalization of the Brazilian equity markets was approximately BRL _____ billion or US$ _____ billion. The Canadian Equity Markets 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. 8 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. As of November 30, 2000, the total market capitalization of the Canadian markets was approximately CAD _____ billion or US$ _____ billion. The EMU Equity Markets The EMU equity markets are comprised of the equity markets from the following eleven 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 ten 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. 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. 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 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. 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. 9 Structure of Equity Markets - --------------------------- As of November 30, 2000, the total market capitalization of the combined equity markets of Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain was approximately US$ _____ trillion. 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 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. As of November 30, 2000, the total market capitalization of the French equity markets was approximately EUR _______ billion or US$ _______ billion. 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. 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. 10 Size of Equity Markets. As of November 30, 2000, the total market capitalization of the Germany equity markets was approximately EUR _______ billion or US$ _______ billion. The Greek Equity Markets General Background. 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. Reporting, Accounting And Auditing. Greek reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Greek 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. Structure Of Equity Markets. As of November 30, 2000, the total market capitalization of the Greek equity markets was approximately GRD _______ billion or US$ _______ billion. 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. As of November 30, 2000, the total market capitalization of the Hong Kong equity markets was approximately HKD _______ billion or US$ _____ billion. The Indonesian Equity Markets General Background. A stock exchange has existed in Jakarta, Indonesia, since 1912, when the country was still a colony known as the Dutch East Indies. In 1925, additional exchanges were opened in Surabaya, in east Java, and in Semarang, in central Java. Before World War II, there was active trading in locally issued securities and those issued in the Netherlands. The exchanges were closed during the war and did not reopen until June 1952. Once reopened, the Jakarta Stock Exchange (JSX) primarily facilitated the issuance of government bonds to stimulate the economy. However, the exchange proved less than successful and was later closed. In 1976, the management of the JSX changed by presidential decree and the exchange was formally reopened. The JSX is the most important of the exchanges operating in Indonesia. The Surabaya Stock Exchange and the Bursa Parallel (Parallel Exchange) are much smaller. The Bursa Parallel was formed to accommodate over-the-counter trading. Throughout most of its history, the JSX has been operated and controlled through the state Capital Market Supervisory Agency (locally known as BAPEPAM, for Badan Pengawas Pasar Modal). BAPEPAM was both 11 executive of the exchange and supervisory body for the market, a duality that delayed decisions and left issues unresolved. To rectify this, BAPEPAM was streamlined into a solely supervisory role. A private stock exchange company, PT Bursa Efek Jakarta (BEJ), took over the day-to-day operations of the JSX in December 1991. The JSX became officially privatized on April 16, 1992. A series of new rules has been issued by BAPEPAM and BEJ to regulate and develop the capital market. Reporting, Accounting And Auditing. Indonesian reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Indonesian 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. Structure Of Equity Markets. As of November 30, 2000, the total market capitalization of the Indonesian equity markets was approximately IDR _______ billion or US$ _______ billion. 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 $1,300 billion. Reporting, Accounting and Auditing. Italian reporting, accounting and auditing practices are regulated by Italy's National Control Commission (Consob). These practices bear some similarities to United States standards. However, in general, Italian corporations do not provide all of the disclosure required by US law and accounting practice, and such disclosure may be less timely, less frequent and less consistent than that required of US corporations. Italy is, however, moving toward more transparency: from 2000, for example, the law will require quarterly disclosure. Size of Equity Markets. As of November 30, 2000, the total market capitalization of the Italian equity markets was approximately EUR _____ billion or US$ _____ billion. The Japanese Equity Markets 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 12 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. As of November 30, 2000, the total market capitalization of the Japanese equity markets was approximately JPY _________ billion or US$ _______ billion. 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 April 30, 1993, 320 companies were listed on the KLSE main board. A Second Board, established in 1988, allows smaller companies to tap additional capital. Fifty-seven companies were listed on the Second Board as of April 30, 1993. 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 Index Fund, which suspended creations in response to the controls. This adversely affected the trading market for Malaysia (Free) Index Fund iShares. 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. As of November 30, 2000, the total market capitalization of the Malaysian equity markets was approximately MYR _____ billion or US$ _____ billion. 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). 13 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. As of November 30, 2000, the total market capitalization of the Mexican equity markets was approximately MXN _______ billion or US$ _____ billion. 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. As of November 30, 2000, the total market capitalization of the Dutch equity markets was approximately EUR _____ billion or US$ _____ billion. The Portuguese Equity Markets General Background. 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. Reporting, Accounting and Auditing. Portuguese reporting, accounting and auditing standards differ substantially from U.S. standards. In general, Portuguese 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. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the Portuguese equity markets was approximately EUR _______ billion or US$ _______ billion. 14 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. As of November 30, 2000, the total market capitalization of the Singaporean markets was approximately SGD _____ billion or US$ _____ billion. The South African Equity Markets General Background. The Johannesburg Stock Exchange (JSE), established in 1887, is the only stock exchange in South Africa. Its major traded shares have been mining and gold stocks, such as De Beers and the Anglo American Corporation of South Africa. The minerals-related sectors still account for 14% of the market's capitalization, although there are now many other important sectors including banking, insurance, industrials and leisure. The market capitalization of the JSE has grown enormously from ZAR 13.3 billion in 1970 to approximately ZAR 1022.0 billion in 1995. 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. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the South African equity markets was approximately ZAR _______ billion or US$ _____ billion. 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 15 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. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the South Korean equity markets was approximately KRW _______.5 billion or US$ _____ billion. 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 16 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 US standards. In general, Spanish corporations do not provide all of the disclosure required by US law and accounting practice, and such disclosure may be less timely and less frequent than that required of US corporations. Size of Equity Markets. As of November 30, 2000, the total market capitalization of the Spanish equity markets was approximately EUR _____ billion or US$ _____ billion. 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 US standards. In general, Swedish corporations do not provide all of the disclosure required by US law and accounting practice, and such disclosure may be less timely and less frequent than that required of US corporations. The basic concepts used are historical cost, going concern, accrual basis, consistency and prudence. Size of Equity Markets. As of November 30, 2000, the total market capitalization of the Swedish equity markets was approximately SEK _______ billion or US$ _____ billion. 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 17 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 US standards. In general, Swiss corporations do not provide all of the disclosure required by US law and accounting practice, and such disclosure may be less timely and less frequent than that required of US corporations. Size of Equity Markets. As of November 30, 2000, the total market capitalization of the Swiss equity markets was approximately CHF _____ billion or US$ _____ billion. 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 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. Listings steadily increased and 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 US standards. In general, Taiwanese corporations do not provide all of the disclosure required by US law and accounting practice, and such disclosure may be less timely and less frequent than that required of US corporations. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the Taiwanese equity markets was approximately TWD ________ billion or US$ _____ billion. The Thai Equity Markets General Background. The Bangkok Stock Exchange Co. Ltd. (BSE) was established in 1962 as a partnership; it was the first organized stock exchange in Thailand. There was little trading on the exchange, and the BSE acted as an indicator of current share prices rather than as a center for trading. In 1974, the Securities Exchange of Thailand Act established a new exchange called the Stock Exchange of Thailand (SET). The SET started trading on April 30, 1975. 18 Reporting, Accounting and Auditing. Thai reporting, auditing and accounting standards differ substantially from U.S. standards. In general, Thai 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. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the Thai equity markets was approximately THB _______ billion or US$ _______ billion. The Turkish Equity Markets General Background. The Istanbul Stock Exchange (ISE), which was formed in 1866 and closed in 1938 because of domestic and international economic conditions, was reactivated following the enactment of the Capital Market Law in July 1983 and Decree No. 91, which was issued in October 1983. Trading at the ISE was reinitiated in January 1986 in Istanbul and moved in May 1995 to new, fully automated headquarters at Istinye. Development banks, commercial banks and brokerage houses are eligible for membership in the ISE. The Turkish equities market consists of the national market on which 198 stocks are traded, a regional market on which 13 stocks are traded and a new companies market, which is not yet fully operational. The new companies market will feature newly established, yet promising, companies that are not eligible to trade on the national market. The bonds and bills market features markets in government bonds and treasury bills, corporate bonds, revenue sharing certificates and repurchase agreements. Reporting, Accounting and Auditing. Turkish reporting, auditing and accounting standards differ substantially from U.S. standards. In general, Turkish 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. Structure of Equity Markets. As of November 30, 2000, the total market capitalization of the Turkish equity markets was approximately TRL _______ billion or US$ _______ billion. 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 US 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 US 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 US, financial statements are more conformed because they must be prepared in accordance with GAAP. Size of Equity Markets. As of November 30, 2000, the total market capitalization of the United Kingdom equity markets was approximately GBP _______ billion or US$ _______ billion. Regional and Country-Specific Economic Considerations. - ------------------------------------------------------ Europe. In 1986, the member states of the European Union (the "Member States") signed the "Single European Act," an agreement to establish a free market. The development of a unified common European market has promoted the free flow of goods and services; however, since September 1992, Europe's monetary policy has 19 been affected by fluctuating currencies. Additionally, 1993's tight monetary policies and high inflation caused Europe's economies to ebb into recession. The Maastricht Treaty on economic and monetary union ("EMU") is intended to provide its members with a stable monetary framework. The prospect of EMU has triggered a sharp convergence of interest rates across Europe, with risk premium over the German interest rates levels having decreased. Adding to the favorable monetary conditions, the monetary easing experienced by core countries has triggered a strong depreciation of their currencies. Consequently, European activity has accelerated again in 1997. On January 1, 1999, the third and final stage of EMU began with the establishment of a currency union encompassing 11 of the 15 Member States of the European Union (EU) - Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. On that date, these countries locked their exchange rates and adopted the euro as their common currency, with monetary and exchange rate policy determined by area-wide institutions. Thus, each country will give up the possibility of independent monetary and exchange rate policy. EMU does not change the locus of responsibility for policies other than monetary and exchange rate policies. Policies affecting external trade and the integration of internal markets were already a matter of EU competence. Fiscal and labor market policies will continue to be decided mostly at the national level, albeit subject to closer surveillance by EU institutions. The Stability and Growth Pact (SGP), agreed in June 1997, set out the procedures for surveillance of national fiscal policies, strengthening the framework provided in the Maastricht Treaty. Also, the Treaty of Amsterdam, signed in October 1997, explicitly recognized labor market policies as a matter of common concern and set out procedures for their surveillance. Except for monetary and exchange rate policies, area-wide decision making and surveillance are the responsibility of institutions of the EU as a whole. It has been agreed that ministers of euro-area countries can meet (as the Euro-11 Group), to discuss issues related to the single currency, but that formal surveillance and coordination decisions will be the prerogative of the full EU Council of Ministers (ECOFIN). The prospective euro-area rivals the United States in terms of output and trade. The delineation of monetary, fiscal, and structural policy responsibility between the euro-area institutions and national governments helps assign responsibility for these policies, but also complicates their coordination. Austria. Following three years of acceleration, culminating in 3.3% GDP growth in 1998, economic activity in Austria decelerated sharply in late 1998 and early 1999. The main culprit for the slowdown was the Russian crisis (which hit Austria's exports to Central and Eastern Europe) and the generalized slowing of growth in the euro area. However, there was a turnaround in foreign demand and a continuation of solid consumer-spending growth in late 1999. Consumer price inflation troughed at 0.2% year on year in April 1999, following a deceleration from 1.2% a year earlier, because of falling oil prices. The recovery in oil prices and the depreciation of the euro since the start of the year led to a moderate acceleration in price increases, to 0.6% in August 1999. Meanwhile, short-term interest rates declined from 3.7% in 1997 to 3.2% in 1998 and long-term interest rates fell from 5.5% in 1997 to 3.8% in 1998. The general government deficit was 2.1% of GDP in 1998 and 1.9% of GDP in 1997. Tax cuts for low- and middle-income households planned for 2000 may mean that the deficit could come dangerously close to the 3% Maastricht threshold. Thus, one of the first tasks of the new government will be to prevent the deficit from surpassing that level. Belgium. Belgium joined the European Monetary Union on May 1, 1998. Belgium shows a high degree of economic openness. It is therefore extremely sensitive to economic developments abroad and, in particular, to those occurring in the EMU, as activity in Belgium fluctuates almost exactly in line with that of the euro area. The latest economic developments are no exception in that respect. Thus, in 1998, along with the rest of the euro area, Belgium faced a general slowdown of activity. Output growth slowed from a healthy 4% pace at the beginning of the year to a sluggish 1.6% by the fourth quarter. During the first two quarters of 1999, activity remained somewhat subdued, as output grew by 1.6% to1.7%. Since late 1998, general 20 economic sentiment, as measured by the National Bank of Belgium, has been improving. Similarly, manufacturers have completely recovered from their recent sluggishness. The Belgian unemployment rate typically is lower than the rest of the EMU. But that gap shrunk significantly in 1997 and 1998 and now amounts to less than one percent. Total employment growth has remained strong and the unemployment rate was below 9% in fall 1999. Belgian consumers' prices rose by 0.9% in August and by 1.3% in September against an average of 1.2% and 1.3%, respectively, in the euro area. After some hard times, Belgian public finances have greatly improved. The public sector borrowing requirement has been curbed from roughly 8% of GDP in 1992 to about 1% in 1998. Similarly, the primary surplus has risen from 3.0% of GDP to 6.7%. Public debt has fallen from almost 128% of GDP in 1992 to 116% in 1998. The recovery of public finances is such that despite lower GDP growth, the budget ministry decided, in last spring's budget review, to carry on with its six-year program to cut permanently employers' social security contributions and reduce labor costs by some 6%. General elections were held on June 13, resulting in an historic shift of power: Jean-Luc Dehaene's Christian Democrats lost the majority in the lower house to Liberals for the first time in history. Now, Guy Verhofstadt's `blue- red-green' coalition made of French-and-Dutch speaking Liberals, Socialists and Greens - the latter in a coalition for the first time - faces the task of restoring public confidence after a series of political scandals. France. Following a slowdown last winter, growth re-accelerated in the second quarter of 1999. Since then, manufacturing companies have become increasingly optimistic about trends in aggregate demand and their own production plans. In September, they signaled that output prices should cease declining for the first time since early 1996. On the demand side, retail sales jumped sharply during the summer months, led by booming durable goods sales. Employment growth remained surprisingly robust during the winter slowdown, due to a buoyant services sector, in which new companies, having benefitted from the deregulation of former state monopolies (such as telecoms, public utilities and media) are doing well. On the other hand, French companies have kept wage rates steady (up 1.5% year on year in the second quarter of 1999) in order to mitigate the rise in labor costs that might result from the reduction of working hours next year. At 0.5% on average for 1999, French inflation is among the lowest in Europe. On top of very slow wage growth, deregulation is taking its toll on retail prices every month, largely offsetting cyclical forces. The budget was slightly expansionary in 1999, as civil servants benefitted from pay raises based on inflation forecasts that proved to be too high. The 2000 budget signals a return to orthodoxy. The first two years of the government's five-year term were favorable for corporate France, despite the rise of the corporate tax rate to 40% in 1997. Large-scale privatization took place (France Telecom, Air France, Aerospatiale, Credit Lyonnais, among others) and French companies, which had been hurt by years of high real interest rates, fully reaped the benefits of EMU and its generous monetary policy. Despite promises, it is unclear whether the corporate tax rate will be cut next year. The pending reduction of the working week will make business more costly and more complicated for medium-sized companies (smaller companies will be hit only in 2001). Finally, the government is planning to make restructuring more costly and short-term labor contracts (used to encourage labor flexibility) more expensive for companies. Germany. Germany, the third largest economy in the world, has faced substantial economic and political challenges in the wake of reunification between West and East Germany. Previously-communist eastern Germany, which had been largely insulated from international competition, saw most of its capital stock become obsolete after the reunification. Transforming eastern Germany into a modern market economy has been more difficult and costly than anticipated initially. 21 According to new measures of national accounts data, unified Germany's economic growth in the period 1991-98 was worse than previously thought. For instance, GDP rose by only 2.2% in 1998, when measured according to the new standards, as compared to 2.8% under the old measure. Since Germany's 1993 recession, annual GDP growth has averaged only 1.8% according to the new standards. An export-led, sharp deceleration of growth in the second half of 1998 resulted from the global recession, which meant that the German economy started 1999 on a weak footing. The Bundesbank no longer conducts an independent monetary policy, as it surrendered its monetary policy-making ability to the European Central Bank in 1999. The German government recently introduced a reform package consisting of reductions in personal and corporate income tax spending cuts. A corporate tax reform will reduce the overall tax rate on German corporate profits to 35% by 2001, from more than 56% currently. Greece. Industrial output increased by 4.4% during the first quarter of 1999, but only because of a 49.7% increase in natural gas and electricity production as the natural gas network finally came on stream. All other components of the industrial output index declined, including manufacturing, which was down by 1.1%. In May, year-on-year inflation fell to 2.4%, and in April wholesale prices were almost unchanged since April 1998. Registered unemployment has risen sharply, but the harmonized Eurostat rate is estimated to have edged down to 9.4% in 1998. Stock market prices continue to rise, having overcome a temporary fall at the start of the war in Yugoslavia. The current-account deficit fell by 24.8% in 1998 according to the Bank of Greece, but, according to statistical service figures, merchandise export growth was weak and well exceeded by import growth. Shipping receipts have fallen. The drachma continues to trade well above its central parity with the euro, but has declined against the dollar. Budget revenue in the first five months was well ahead of target and expenditures have come under control. The government has hinted at tax reforms in the 2000 budget which might lower the income tax burden, especially on low- to-average incomes. Short-term interest rates remain high with Bank of Greece intervention rates close to 11%, but high borrowing led the central bank to impose credit restrictions in April. Ionian Bank has been sold to Alpha Credit Bank, and private banks are expanding. A fourth tranche of shares of the Hellenic Telecommunications Organisation is to be sold, reducing the state's holding to 51%. Italy. Italy's economic strength lies in manufacturing, mainly through networks of small and medium-sized companies, producing in particular machine tools and consumer goods. Two key service sectors are tourism and the rapidly expanding telecom industry. In the early 1990's, industry began to struggle to compete as a result of wage increases and a restrictive exchange rate policy designed to put an `external bound' on the inflation rate. But in September 1992, the lira collapsed and was forced to leave the Exchange Rate Mechanism (ERM). The lira recovered in 1996 and returned to the ERM by the end of that year. The Italian economy has been characterized in recent years by the attempt to reduce the significant public deficit, and reverse the dynamic of the public debt, which reached a peak in 1995 at 125% of GDP. These efforts were particularly strong in 1996 and 1997, in the run up to the European Monetary Union, to comply with the Maastricht rules. The attempt was successful: the public deficit was lowered to 2.7% of GDP in 1997 from 11%, which allowed Italy to joint EMU from its inception. Restrictive budget measures were, however, mainly responsible for the poor performance of the Italian economy in the 1990s (the economy grew by 1.3% on average in 1990-1998). The Italian unemployment rate is high (11.8%), although reforms in 1997 eased the rigidity in the labor market. As a consequence, a healthy increase in employment has taken place since the beginning of 1998 (more than 1% yearly), driven mostly by the development of part-time and short-term contracts. In 1992, Italy began a privatisation program by transferring major state holdings to joint stock companies as an intermediate step to total or, at least partial, floatation of those holdings on the stock exchange. Since then, Italy has performed one of the world's largest privatization programs and is still proceeding. 22 Currently, after having reached the much-desired EMU target and having consolidated its public finances, the aim of the government is to rekindle with growth, while pursuing a systematic and continued reduction of the public debt. The Netherlands. The economic performance of the Netherlands, the fifth largest economy in the European Union, has grown impressively in the past decade. Emerging from a deep recession in the 1980s, the Netherlands' economy has become one of the fastest growing in Europe and the pace at which new jobs are generated is close to that of the United States. In the first half of 1999, the Dutch economy expanded by about 3% over the same period in 1998. GDP grew 0.7% in the first quarter of 1999 and by 0.8% in the second quarter, which was more than twice the expected rate. The unemployment rate is at 3.2% of the labor force. Despite a tight labor market, collective wage agreements entered into this year have provided for relatively moderate pay rises only. The Dutch government has announced plans to bring the budget into surplus in 2001, which would be the first surplus since 1974. Stronger-than-expected growth created leeway to cut taxes and trim the budget deficit. The Dutch government has also presented a comprehensive tax reform to be implemented in 2001, which would reduce the top income tax rate from 60% to 52% and the lowest income tax rate from 36.5% to 20%. At the same time, the VAT will be raised by 1.5 %, to 19%. The tax reform is estimated to result in a net tax relief of NLG 5 billion (0.7% of GDP), with low income earners being the main beneficiaries. In addition, the Dutch government has announced plans to cut the corporate tax rate from 35% to 30%. Spain. Spain's entry into the European Community in 1986 was followed by a period of rapid economic growth and sharp restructuring. Strong growth did not continue, however, and the government's restrictive monetary policy and the overvalued peseta contributed to a downturn in investment, along with a rise in unemployment, in the early 1990s. Despite the devaluation of the peseta and the easing of monetary policy in 1993, Spain slipped into its worst recession in 30 years. Economic growth has recovered since then, averaging 3.0% from 1994 to 1998. The center-right government elected in 1996 has displayed a strong ability to control public spending through structural reforms. In 1997, Spain was able to fulfill all the Maastricht criteria and was among the eleven participants in the European Monetary Union, which started at the beginning of 1999. The Spanish unemployment rate is currently the highest in the European Union, and unemployment is the main economic problem in Spain. In 1994 and again in 1997, reforms in the labor market were undertaken, mainly to ease the rigid regulations that govern permanent job contracts. The recent strong economic growth and new reforms to improve the flexibility of the labor market have decreased the rate of unemployment from 25% in 1994 to 16% in 1999. Currently, the government faces the challenges of addressing the domestic concerns of controlling inflation, at 2.4% yearly in August 1999, which was more than one percentage point above the EMU average, and consolidating the improvements in the labor market. Portugal. Portugal is one of the smallest countries in Europe and is the poorest member of the EU, with a per capita GDP of approximately 60% of the European average. Portugal's principal exports include automobiles, textiles, clothing and footwear. As a result of the completion of a $3 billion foreign investment by Ford-Volkswagen, minivans became Portugal's single most important export in 1996, accounting for 13% of all foreign sales. Other multinational companies have taken advantage of low wage costs, one of the strong competitive advantages of the country, and relatively high labor qualification to set up operations in Portugal. Portugal's entry into the European Community in 1986 was followed by a period of rapid economic growth and sharp restructuring. Strong growth did not continue, however, and the government's restrictive monetary policy and the overvalued escudo contributed to a downturn in economic conditions in the early 1990s. Economic growth has recovered since then, averaging 3.3% from 1995 to 1998. Thanks to its efforts to meet the Maastricht criteria, the Portugese economy successfully joined the European Monetary Union at inception, in early 1999. 23 In the 1990s, the Portuguese government has progressively reduced its role in the economy, with government-controlled companies now accounting for less than 8% of GDP, down from 20% at the beginning of the decade. Although some of the privatizations planned for 1999 have been postponed, the privatization program is set to continue. Sweden. Sweden has a highly developed and successful industrial sector. The chief industries, most of which are privately owned, include textiles, furniture, electronics, dairy, metals, ship building, clothing, engineering, chemicals, food processing, fishing, paper, oil and gas, automobiles and shipping. Productivity, as measured by GDP per capita, is well above the European average, although two-thirds of GDP passes through the public sector. Successive governments have traditionally afforded Swedes generous benefits for unemployment, sick leave, childcare and general public welfare, along with state medical care. This extensive social welfare system has become unsustainable in recent years, notably when the economy slowed down significantly in the early 1990s, which caused large government deficits. Almost half of the personal disposable income received by Swedes resulted from transfer payments, a system for redistributing income. Since then, a massive turnaround in public finances has occurred thanks to years of fiscal restraint and an increase in economic growth. The Swedish government has announced that it plans to cut taxes within the next five years. The Swedish economy has weathered an export slowdown, due mostly to the currency depreciation of the third quarter of 1999. Further, the repo rate was cut 1.45% between October 1998 and March 1999. The Swedish central bank, the Riksbank, has a two-year forward inflation target of 1.0% to 3.0%. The upside surprises on growth and the looming tax cuts were not factored in the last inflation report, when two-years forward inflation was foreseen to remain at 2.0%. Indeed, the Riksbank has repeatedly warned that tax cuts boosting consumer spending may lead to an overexpansion of the economy. Switzerland. Due to its lack of raw materials, Switzerland has based its economic growth on its highly skilled labor market and technological manufacturing expertise. Switzerland's strengths lie in chemicals and pharmaceuticals, watches, precision instruments (machinery equipment), engineering, food, financial services and tourism. Additionally, its small domestic market's reliance on exports accounted for 36% of the GDP in 1994. It therefore suffered significantly from the world trade slowdown of the second half of 1998. While the Swiss official unemployment rate fell to 2.5% in July 1999, the underlying rate was 4.6%, i.e. above official estimates, which range between 2% and 2.5%. The VAT hike (from 6.5% to 7.5% on Jan 1st 1999), a tobacco tax increase and oil prices have all pushed inflation away from deflationary readings since early 1999, up to 0.9% for the year from August 1998 to August 1999. The United Kingdom. The UK is a large, open economy with total exports accounting for approximately 30% of GDP. The service sector's share in total GDP has been on an upward trend and now stands at about two-thirds of overall activity, as the UK has particularly strong business and financial services sector. By contrast, the manufacturing sector's share in GDP has been declining and is now estimated at just over 20%. The Bank of England was made independent in May 1997 and conducts interest rate policy consistent with reaching an inflation target (set by the government) two years hence. Economic growth was slow throughout most of 1998 and early 1999. Last year's slowdown in large part reflected a sharp deterioration in the net trade position, prompted by continued currency strength and a weakening in world trade and global economic growth. Net trade in 1998 fell by more than 2%. Manufacturing output slowed accordingly, exhibiting growth of only 0.4% during 1998. The sector was in technical recession in the fourth quarter of 1998, but contributed positively to output growth for the first time in a year by the second quarter of 1999. The service sector meanwhile grew by 3.7% in 1998, supported by robust activity across the range of sub-sectors, particularly within business and financial services. Strength in the service sector has to some extent been reflected within the expenditure components of GDP, where domestic demand remained resilient, expanding by 4.1% in 1998. Of this, just over 2% was household 24 spending, while total fixed investment contributed a further 1.5%. Household spending expanded by an annualized rate of 5.5% during the first half of 1999. A sharp (Pounds)1.8bn de-stocking weighed on total domestic demand during the second quarter of 1999, but the underlying picture is very robust. Excluding stocks, total demand expanded by 4.4% in the year from the second quarter of 1998 to the second quarter of 1999. Household spending growth has been underpinned by a strong labor market. Manufac turing employment has fallen by some 5% since early 1998, but total employment has risen by more than 0.5% over the same period. The labor market has proved tighter than previously assumed. Declines in claimant count unemployment have continued, while vacancies have remained high. Thus far, inflation pressures have been subdued. The retail prices index excluding mortgage interest payments (RPIX) - the government's target measure - stood at 3.2% in the year to May 1998, but fell to just 2.1% by August. This is explained by goods price inflation, which eased from over 2% in early 1998 to a series-low of 0.5% in August 1999. This in turn reflects sterling's persistent strength, which has dragged import prices lower. From a peak of 7.5% in June 1998, the Bank of England started lowering interest rates in October, because of perceived undershooting of its inflation target. Rates bottomed at 5% in June 1999. But with upside risks to the RPIX target gathering momentum, the Bank has started a tightening cycle, raising interest rates to 5.25% in September 1999. Real GDP Annual Rate of Growth (annual % change) 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- Austria 0.5 2.4 1.7 2.0 2.5 3.3 Belgium -1.5 2.6 2.3 1.3 3.0 3.0 France -1.3 2.8 2.1 1.6 2.3 3.2 Germany -1.1 2.4 1.8 0.8 1.8 2.3 Greece -1.6 2.0 2.1 2.4 3.2 3.7 Italy -0.9 2.2 2.9 0.9 1.5 1.3 Netherlands 0.8 3.2 2.3 3.1 3.6 3.8 Portugal -1.4 2.4 2.4 3.6 3.8 3.9 Spain -1.2 2.1 2.9 2.4 3.7 4.0 Sweden -2.2 3.9 3.7 1.3 1.8 2.6 Switzerland -0.5 0.5 0.5 0.3 1.7 2.1 United Kingdom 2.3 4.4 2.8 2.6 3.5 2.2 Source: World Economic Outlook, October 2000 (International Monetary Fund) Japan, the Pacific Basin, and Southeast Asia. Many Asian countries may be subject to a greater degree of social, political and economic instability than is the case in the United States and Western European countries. Such may result from (i) authoritarian governments or military involvement in political and economic decision-making; (ii) popular unrest associated with demands for improved political, economic, and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious, and racial disaffection. The economies of most of the Asian countries continue to depend heavily upon international trade and, accordingly, are affected by protective trade barriers and the economic conditions of their trading partners, principally the United States, Japan, China and the European Community. The enactment by the United States or other principal trading partners of protectionist trade legislation, along with the reduction of foreign investment in the local economies and a general decline in the international securities markets, could have a significant adverse effect upon the economies and securities markets of the Asian countries. The success of market reforms and a surge in infrastructure spending have fueled rapid growth in many developing Asian countries. Rapidly rising household incomes have fostered large middle classes and new waves of consumer spending. The increases in infrastructure spending and consumer spending have made domestic demand the growth engine for these countries. Thus, their growth now depends less upon exports. While exports may no longer be the sole source of growth for these developing economies, improved competitiveness in export markets has contributed to growth in many of these nations. The increased productivity of many Asian countries has enabled them to achieve, or continue, their status as top exporters while improving their national living standards. 25 In the fourth quarter 1997, the Southeast Asian currency markets came under severe selling pressure from abroad, as foreign investors and speculators alike have heavily sold regional currencies viewed to be overvalued. The Thai Baht was the first to come under pressure, but Indonesian, Malaysian, Phillipine, Singaporean, Taiwanese, South Korean and Hong Kong currencies have all been affected. Equity and fixed income markets have also faced selling pressure as foreign investors have been concerned with the overall financial prospects of the region. Among the countries at the center of the Asian crisis, Korea and Thailand have made encouraging advances toward restoring confidence and initiating recovery, although their turnarounds remain at risk, including from the external environment. The situation in Indonesia, however, remains very difficult. Malaysia has resorted to external payments controls in an effort to insulate its economy from the regional crisis. In Japan, despite substantial fiscal stimulus and new initiatives to deal with banking sector problems, significant downside risks remain. Growth in China appears to be slowing, and both the renminbi and the Hong Kong dollar have been under considerable pressure. Australia. After a period of high growth in 1998 and early 1999, the Australian economy began to show signs of slowing in the second quarter of 1999. Private investment growth slowed to just 2.2% (annualized) in the first half of 1999, down from an average rate of approximately 9% in 1998. Consumer demand, which fueled the economy through 1998, has remained reasonably strong. But demand for some goods, such as autos and white goods, has been distorted by the phasing-in of several tax reforms (the addition of a goods and services tax and abolition of a wholesale sales tax). Meanwhile, inflation has been relatively low. In the second quarter of 1999, Australia's consumer prices were up just 1.1% from a year earlier. The most recent national budget featured a surplus of A$5.4 billion, or about 0.9% of GDP. The Government, headed by John Howard, was reelected in October 1998 with a mandate to overhaul Australia's tax system. After the implementation of goods and services and personal income taxes, business tax reform is the next major item it intends to push through the legislature. The Howard Government holds 80 of 148 seats in the Lower House and 35 out of 76 seats in the Senate. The next general election is due by December 2001. Indonesia. The Indonesian economy has reached a natural bottom and returned to growth in the second quarter of 1999. GDP rose a modest 1.8% in the second quarter, following the 9.5% decline of the previous quarter. Capital flight occurred last year when the May riots broke out, resulting in a plunge in output by close to 20% in the second half of 1998. After 12 months of calm, the chaos and violence in East Timor are posing a threat to the economy again, as GDP growth fell from 4.9% in 1997 to -13.7% in 1998. The IMF and the World Bank have suspended foreign aid to Indonesia. If foreign capital ceases to flow in, Indonesia would have difficulties servicing its external debt, which is estimated to be around US$150 billion. Without foreign capital, Indonesia's economic recovery is in jeopardy. Having retreated from the 15,000 level during the peak of the crisis in 1998, the rupiah has recently strengthened to the 8,000 level. This sharply reduces import costs. Consequently, the inflation rate has fallen quickly so far this year. Growth in the CPI slipped to 5.8% in August, the first single- digit inflation rate recorded in 20 months. CPI inflation had averaged 58.0% in 1998. Month on month, deflation persisted for six straight months through August. This is normal as it represents a correction of the high inflation rate in 1998 and improvement in production and distribution. Low inflation allows expansionary monetary policy. Interest rates continue to come down. The yield on the one-month SBI fell below 13% recently; at its peak in September 1998, it reached 70%. Fiscal policy became expansionary in the second half of 1998/1999, with higher expenditure budgeted to strengthen the social safety net. However, actual realized spending fell short of the target, partly due to delays in implementing the private bank recapitalization program. Costs of much-needed bank restructuring are currently at about 3% of GDP. Government bonds are to be issued to finance the cost of bank recapitalization. Government debt is high, at an estimated 100% of GDP in the current fiscal year. The government hopes to bring this down to 60% in five years. 26 Indonesia produces 2% of the world's total oil output. Revenues derived from oil and gas production have been a major source of income for the country. However, the trade balance of oil and gas slipped to a deficit in July, for the first time since October 1983 when the data first became available. Indonesia is a net oil exporter. If rising oil prices fail to generate a surplus on the external account, the chances of the country sustaining its economic recovery will be reduced. Non-oil and gas exports have been disappointing. Lack of funding and concerns over political and social stability have constrained growth. In contrast, the volume of non-oil/gas imports has improved since the beginning of the year. Hong Kong. The transfer of sovereignty from Britain to China, which has created a sense of uncertainty in Hong Kong's economy, has largely been a smooth transition. Under the principle of "one country, two systems," Hong Kong is now a special administrative region (SAR) of the People's Republic of China and is empowered with a high degree of autonomy. It has retained its administrative, legislative and judicial systems. The SAR government has full control over its monetary and fiscal policies and it maintains its own customs and immigration control, separate from the mainland. Except for issues relating to national security and foreign policy, the SAR is largely run as an independent territory. The first chief executive of the SAR, Mr. C.H. Tung, a former shipping tycoon, has vowed to make a difference in the lives of the people of Hong Kong, by focusing his attention on the areas of housing, education and infrastructure. In the past, the chronic shortage of housing has been a strong influence on the property market. Hong Kong property prices today are among the highest in the world. Worth noting is that there is heavy exposure to the property market in Hong Kong's banking sector as well as the stock market as a whole. The integration of Hong Kong's economy with that of the mainland continues apace. While the integration process in the 1980's was driven by the relocation of Hong Kong's labor-intensive manufacturing sector to Southern China, the integration theme for the 1990's is that of Hong Kong becoming a service center for China's fast growing economy. A large number of mainland companies have established offices in Hong Kong as a window for interaction with the global economy. The Hong Kong financial sector is increasing its role in the intermediation of foreign funds for investment in China. Close to half of the FDI into China goes through Hong Kong. Furthermore, Hong Kong is increasingly playing a role in intermediating China's savings for investment in China. Hong Kong is well on its way in becoming a bona fide financial center for China. Hong Kong's economy has been in a recession since the Asian crisis that began in the second half of 1998. Deflation has been a major problem, as it has discouraged investment, postponed consumption and delayed a turnaround in the inventory cycle. Nevertheless, GDP growth seems to be recovering somewhat, as it has increased to a seasonally adjusted rate of 3.1% from the first quarter of 1999 to the second quarter of the year, as compared to an average 1998 GDP growth rate of -5.1%. The downward adjustment in goods and services prices in Hong Kong continues; this is the natural process of restoring competitiveness against the territory's devalued neighbors. Further, deflation deepened sharply in July and August due to cuts in housing costs resulting from concessions on rates (taxes) granted by the government. The CPI(A) declined 3.2% in the first eight months of this year. Despite loose liquidity conditions and the plunging of the loan-to-deposit ratio to 1991 levels, Hong Kong's banking cartel raised interest rates in August, following the Fed's latest move. Ongoing deflation has reduced the demand for and supply of new loans; outstanding domestic credit has declined by 11.7% from the peak in September 1997. Fiscal support remains key to Hong Kong's economy. The government ran a HK$30 billion deficit in the first four months of fiscal year 2000 following one of HK$31.5 billion (2.5% of GDP) in fiscal year 1999. The deficit has been financed primarily by foreign reserves, which totaled US$89.2 billion at the end of August. In efforts to maintain the level of foreign reserves, the government will start selling off its local stock holdings, which could curb liquidity conditions. Future sources of fiscal revenue include the privatization of water supply services and the Mass Transit Railway Corp. 27 The trade deficit shrank in the first half of 1999 due to weak domestic demand and the curtailing of smuggling into China. However, the deficit started to expand again in July and August (on a year-on-year basis) as domestic demand recovered. Domestic demand recovery is key to growth going forward. The Hang Seng Index has been flat in the past few months. The government's plan to dispose of its local stock holdings starting in October will increase the supply of Hong Kong dollar assets. Japan. Japan's economic growth in the 1990s has been substantially below the levels of earlier decades. Major fiscal spending programs have brought positive growth in some years, but Japan's gross national product shrank by 2.8% in calendar 1998, its worst performance in the postwar period. A further round of major fiscal spending was implemented in late 1998. Prices are largely stable at the consumer level, even though deflation is occurring at the wholesale level, and cash earnings per worker have continued to drop in nominal terms. The unemployment rate has reached a historical peak of 4.9%. Despite growth problems, the Japanese economy maintains several strengths. The manufacturing sector includes some of the world's most innovative companies in the electronics and precision machinery areas, along with world leaders in automotive and machinery industries. Educational achievement levels are high in comparison with other developed nations. Public sector infrastructure is also extremely well developed. Nevertheless, the Japanese economy faces significant weaknesses. The financial system retains large levels of non-performing loans, which have made intermediaries conservative in lending behavior. Many corporate balance sheets remain overleveraged, with low returns on assets, compared to both some other industrial countries and to Japan's own history. The labor market is undergoing a fundamental structural change, because of the system of lifetime employment clashes with the need for increased labor mobility to adapt to new technologies and global competition. Corporate governance is also undergoing major changes, with the introduction of new accounting rules, new decision making mechanisms, and changed incentives for managers. Growth may continue to be hindered in 2000, due to the difficulty of expanding fiscal policy further and to the adverse effects of industrial and financial sector restructuring on business investment and wages. Investors have shown confidence, as the Japanese stock market has grown in the first nine months of 1999. The macroeconomic performance of the Japanese economy could suffer, however, as cuts in employment and investment may constrain income. Interest rates in the overnight market are currently at 0.03% (effectively zero), in light of the policy of the Bank of Japan to give maximum support to the economy. Nevertheless, long term bond yields have risen since the end of 1998, because of high government deficits and the hesitant attitude on the part of some institutions to buy securities with high duration risk, even if government-issued. The Japanese yen has fluctuated widely over the last year. At its most recent trough, the currency was Y147/US$, in September 1998, just prior to the adoption of financial sector reform bills by the Japanese Diet. After strengthening early in 1999, then weakening at mid-year, the currency has restrengthened, to Y104/US$ in mid-September 1999. Most observers view this level of the yen as strong, and likely to have adverse impacts on the Japanese economy, although neighboring Asian countries could benefit. The political environment is stable, with the pending formation of a three- party coalition government. The next general election (in which all seats of the Lower House are up for re-election) must occur by November 2000, within one month of the expiration of the 4 year term of the current Lower House. The next election for the Upper House is scheduled for July 2001. Japan has very large and active securities markets. The main stock exchange is the Tokyo Stock Exchange, where a large majority of equity transactions occur. This exchange is supported, however, by several regional exchanges, which list local companies. Fixed income securities are traded actively, usually off-exchange. Derivative markets in Japanese securities are well developed. The securities markets are overseen by both private and public regulatory bodies. The Japan Securities Dealers Association is the main private regulatory force. In the public sector, a set of agencies under the Financial Regulatory Commission is responsible for the oversight of trading activities and inspection of securities companies. 28 Reporting, accounting and auditing standards differ considerably from those in the United States. Stricter requirements have been introduced over the past decade, however, and from March 2001, the method of the International Accounting Standards system will become mandatory, as will mark-to-market valuation for marketable securities held for trading purposes. In addition, discussions are currently under way on whether to introduce a requirement that values for land based on discounted cash flow models be disclosed, along with the current book value disclosure. Auditing standards are also becoming more stringent. Japan's heavy dependence on international trade has been adversely affected by trade tariffs and other protectionist measures, as well as the economic condition of its trading partners. Japan subsidizes its agricultural industry since only 19% of its land is suitable for cultivation. It is only 50% self- sufficient in food production. Accordingly, it is highly dependent on large imports of wheat, sorghum and soybeans. In addition, industry, its most important economic sector, depends on imported raw materials and fuels, including iron ore, copper, oil and many forest products. Japan's high volume of exports, such as automobiles, machine tools and semiconductors, has caused trade tensions, particularly with the United States. Some trade agreements have been implemented to reduce these tensions. The relaxing of official and de facto barriers to imports, or hardships created by any pressures brought by trading partners, could adversely affect Japan's economy. A substantial rise in world oil or commodity prices could also have a negative affect. Since the Japanese economy is so dependent on exports, any fall off in exports may be seen as a sign of economic weakness, which may adversely affect the market. Japan's real GDP for the first six months of 1998 was 2.7% less than the level achieved in the first half of 1997. Geologically, Japan is located in a volatile area of the world and has historically been vulnerable to earthquakes, volcanoes and other natural disasters. As demonstrated by the Kobe earthquake in January of 1995, which resulted in the death of 5,000 people and billions of dollars of damage, natural disasters can be significant enough to affect the country's economy. Malaysia. Over the last two decades, Malaysia has experienced rapid industrialization, transforming a once commodity driven economy to one dominated by the manufacturing sector. Although commodities remain important to the Malaysian economy, where tin, rubber, palm oil, timber, oil and gas have played a leading role, the electronics sector is now the fastest growing and most important sector by far. In fact, Malaysia has become the world's third-largest producer of semiconductor devices (after the U.S. and Japan) and the world's largest exporter of semiconductor devices. The high rates of investment that have been required to sustain Malaysia's rapid growth have been met with high rates of domestic savings and significant inflows of foreign direct investment. This combination has been instrumental in maintaining fast growth while simultaneously limiting inflationary pressures. Although free repatriation of profits is allowed, Malaysia has experienced a high rate of reinvestment of profits from foreign direct investment. Until September 1, 1998 Bank Negara Malaysia (the central bank) managed the exchange value of the ringgit against a basket of foreign currencies. During the first nine months of 1998, investors sold ringgit together with other East Asian currencies because of fundamental concerns over the economic conditions within the region as reflected in the sharp contractions in some economies, including Malaysia, as well as a general deterioration in sentiment toward emerging markets, particularly following the Russian debt moratorium. 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 Malaysia (Free) Index Fund, which suspended creations in response to the controls. This adversely affected the trading market for the Malaysia (Free) Index Fund. After contracting for five consecutive quarters, the Malaysian economy returned to 4.1% growth in the second quarter of 1999. The GDP decline was a severe 7.5% in 1998. The decline was particularly marked in the second half of the year, at 10.6%. The expansionary monetary and fiscal policies implemented since the second half of 1998 set the stage for economic recovery in 1999. Added to this, the turnaround in global trade, especially 29 electronics goods, acted as a catalyst for economic recovery. A 38.3% growth in electronics exports boosted overall export growth by 15.8% in the second quarter of 1999 and 28.9% in July. Consumer prices have been quite stable since the beginning of the year. However, on a year-on-year basis, inflation has declined steadily from 4% in the first quarter to 2.4% in the July-August period. At this point, inflationary pressure is still a non-issue. Year-to-date, inflation averaged 3.1%. Monetary policy has been easing. Since the third quarter of 1998, the central bank has cut the official three-month intervention rate nine times, for a total cut of 5.5%. Most of the rate cuts were implemented between August and November 1998. The statutory reserve requirement was cut by 6% during the third quarter of 1998. The stringent rate cut effectively pushed down market interest rates. The three-month interbank rate fell to a record low of 3.2% recently, down from the peak of 11% in 1998. After a 1.8% fiscal deficit in 1998, the Malaysian government budgeted for a deeper deficit of 5.4% in 1999. This was due to a 9.3% increase in government expenditure in nominal terms. In real terms, government consumption rose 13.9% in the first half of 1999, against declines of 5.5% in the first half of 1998 and 9.5% in the second half of 1998. The government pegged the ringgit at an undervalued rate of M$3.8:US$1 on September 1, 1998. The undervaluation of the currency has supported export growth. US dollar exports returned to growth starting from October last year, half a year earlier than the export recovery in other Asian economies. Export competitiveness has improved over time. Exports measured in US dollars rose 4.5% in the first quarter of 1999 and accelerated to 15.8% in the second quarter of 1999. In July, exports surged 28.2%, led mainly by 56% growth in electronics exports. Malaysia produces and packages about one-third of the world's semiconductors and benefits from the strong demand for electronics worldwide. Singapore. Singapore has become a high-income, highly industrialized country though rapid growth in its manufacturing sector due largely to significant foreign investment. Of particular importance is the electronics industry in which Singapore is the leading producer of disk drives. The financial and business services sector has also experienced recent growth, while the mining and agriculture sectors are of minimal importance. Oil refining and chemical industries have long been important and recently a significant pharmaceutical sector has emerged. Since 1987, annual growth has been high, ultimately reaching 10% in 1993 and 1994 and 9% in 1995. This sustained annual growth can be attributed to high investment and exports. Personal consumption growth has been low, which makes Singapore the highest saving country in the world. The government has followed an interventionist economic policy with respect to its individual industries. To instill faith in its interventionist policies, the government has sought to maintain economic stability. The taxes are relatively high, but rates are stable. Monetary policy has aimed at keeping inflation low by using the exchange rate as the main instrument. Labor market pressure has been controlled by setting limits on the percentage of foreign labor employed and applying a levy on employers of foreign labor. In addition, the government, recognizing that land use is a constraint on growth, has sought to make existing land use more efficient. The government directly holds stakes in individual companies across the board, from high-tech defense contractors to low-tech service businesses. The government also holds indirect stakes in firms through a number of agencies. Such government ownership interests may discourage the development of private firms due to fears that the government entities may be given certain advantages not available to private entities. Some privatization of state-owned businesses is ongoing, however, such as the telephone business and certain other utilities. As a small open economy, Singapore is particularly vulnerable to external shocks. The Asian crisis that crushed its neighbors caused the economy to shrink for two quarters in 1998. The economy has returned to growth since the first quarter of 1999, led by the manufacturing sector. In the second quarter of 1999, GDP growth accelerated to 6.7%. Although the recovery is becoming more broad-based, not every sector is doing well. Consumer confidence resumed quickly as the rate of retrenchment slowed substantially. External demand is recovering gradually but the investment sector is still shrinking. Weak demand for disk drives and Indonesia's political situation pose two big risks to the Singaporean economy. 30 The 11-month deflation spiral ended in April. Since then, the CPI has risen moderately, averaging 0.4% for the three months through July. The import price index registered four straight months of growth from April to July. Singapore opts to control its exchange rate. This decision is based on the economy's openness. By controlling the exchange rate, it is easier to attain the objective of monetary policy -- price stability. The exchange rate policy was eased at the height of the crisis to cushion the economy from adverse shocks. This year, the trade-weighted exchange rate index (TWI) has returned to the pre-crisis level. The exchange rate band has also narrowed as the crisis has subsided. By ceding control of monetary aggregates, domestic interest rates are moving in line with foreign interest rates. The spread between the three- month interbank rate and the Federal Funds rate widened to about 8% at one stage; it has since returned to its historical level of around 3%. The Singapore government has historically been prudent in its fiscal policy, keeping fiscal expenditure below 20% of GDP. In response to the Asian crisis, the government announced two stimulus packages in 1998 -- a S$2 billion off-budget package and a S$10.5 billion cost-cutting package. The cost-cutting package has an impact on the current budget, raising government expenditure to 20.5% of GDP in fiscal year 1999 from 19.6% in fiscal year 1998. Singapore's competitive advantage is in producing electronics goods. Electronics goods account for about half of total manufacturing production and two-thirds of domestic exports. The external trade account is, therefore, highly sensitive to the global electronics cycle. Global electronics demand has revived due to Year 2000 computer adaptability issues. Electronics production rose 14% in the first quarter of 1999 and 23% in the second quarter of 1999. In July, it accelerated to 34%. However, strong electronics production failed to boost electronics exports. Exports of electronics goods rose a mere 1.4% in the second quarter of 1999. Although they accelerated to 13% in July, exports slowed again to 6.1% in August. Non-electronics goods, however, have become the main driver for Singapore's overall export growth. After enjoying 18 months of trade surplus, the external trade account reverted to a deficit for July and August. South Korea. The South Korean economic recovery has gained momentum. After recording 4.6% GDP growth in the first quarter of 1999, in August the government announced stronger 9.8% GDP growth for the second quarter of the year. Despite rising oil and commodity prices, inflation remained subdued during the first eight months of 1999, averaging 0.6% for the period. Import prices have risen faster recently, however. In response to the Daewoo liquidity crunch and market uncertainty about possible runs on investment trust companies (ITCs), the government has committed to keep the official overnight call rate at the current level to help stabilize long-term interest rates. In case of a liquidity squeeze, the central bank will supply liquidity to narrow the spread between long-term and short-term interest rates. The overnight call rate has been quite stable over the last four months but the corporate bond yield has been under pressure. Since Daewoo's insolvency was exposed in mid-July, the spread between the 3-year corporate bond yield and the overnight call rate has increased by 2.25%. The government has budgeted for a W22 trillion deficit this year, equivalent to 5% of GDP. As the economy has recovered faster than expected, tax revenue collected has been higher than the government's original projection. Government outlays will continue to focus on social safety net and financial sector restructuring. The government now expects the budget deficit to narrow to 4% this year and 3.5% for 2000, and seeks a balanced budget in 2003. Moving to the third quarter of 1999, the external account improved substantially. Double-digit export growth rates have been recorded since June. Import growth rates have been even stronger, rising by more than 30%. The collapse of imports in 1998 forced many firms to deplete their stocks. As export orders mount, firms have the incentive to increase imports of raw materials in machinery. South Korea now imports about US$10 billion a month, still considerably lower than the monthly rate of US$12 billion before the crisis. Stronger imports have resulted in a shrinking trade surplus, and hence a narrowing current account surplus. 31 Taiwan. The Central Bank has maintained an eased monetary policy in recent times. This has not fueled inflation. The New Taiwan dollar has strengthened against the US dollar. The government has tightened controls on the foreign- exchange market. The budget deficit has eased. The government has revised its forecast for economic growth in 1999 to at least 5.5%. Private consumption indicators have remained weak. New domestic investment fell by 12.5% year on year in January-June 1999. The electronics sector has continued to perform strongly in 1999. Housing construction performance has been mixed. A delay in a national high-speed rail project has harmed construction companies. Consumer prices have remained subdued and wholesale prices have continued to fall through September 30, 1999. Unemployment rose to 2.9% in June 1999, owing both to weaker domestic demand and technological innovations that reduce the need for workers. Non-performing loan ratios have remained high. The government announced in May that all state banks would be privatized by 2002. Foreign banks have established themselves in areas such as derivatives. Foreigners were net buyers of Taiwan stocks, in the amount of NT$140bn (US$4.3bn) in January-June 1999. The government intervened in July to prop up the stock market after military threats from China caused a sharp fall in the TAIEX. Merchandise exports rose by 5.4% year-on-year in US dollar terms in January-July 1999. Merchandise imports have also started to revive. The merchandise trade surplus totalled US$6.7bn in the first seven months of 1999, nearly triple the level recorded in the same period in 1998. The current- account surplus rose to US$1.7bn in the second quarter of 1999. Merchandise trade with China has remained strong. Thailand. Thailand's economic recovery broadened and deepened in the second quarter of 1999, with private consumption and fixed investment registering their first year-on-year gains thanks to a Bt130 billion (US$3 billion) fiscal stimulus package implemented since early April. The public sector should continue to lead domestic demand. However, a high ratio of non- performing loans in the banking system is slowing the economic recovery. As of June, banks were holding about 47% of non-performing loans. Banks are being encouraged to set up their own asset management companies to speed the pace of debt restructuring and to reduce non-performing loans, thus enabling a revival of credit. Since the government introduced a fiscal package that includes cuts to the value-added tax and energy prices, year-on-year inflation began to turn into deflation. From growth of 2.7% in the first quarter of 1999, the CPI slipped to 0.4% in the second quarter and to -1.1% in the first two months of the third quarter. Month-on-month price changes have showed two months of increase, indicating that inflation has begun to gain momentum. While world interest rates are heading higher, the Thai government continues to keep rates low to stimulate demand. The official discount rate fell from 12.5% at the beginning of 1999 to 4% in fall 1999. Banks' lending and deposit rates are at a decade low. The government is taking the lead to revive the Thai economy. Fiscal measures that began in the second quarter resulted in 41.3% year-on-year growth in public spending that quarter. Compared with a mere 6.2% growth in the first quarter of 1999, the increase is significant. The government budgets a fiscal deficit equivalent to 6% of GDP in the current fiscal year, with the deficit expected to fall to 5% of GDP in the fiscal year starting in October. The trade account improved over the course of the second quarter and this appears set to continue in the third quarter. Exports began to register growth in April, with export value reaching almost as high as that which prevailed before the crisis. However, import value is still short of the pre-crisis level. This allows Thailand to enjoy a trade surplus, which was rarely seen before the crisis. Real GDP Annual Rate of Growth (annual % change) 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- Australia 3.8 5.0 4.4 4.0 3.9 5.1 32 Hong Kong 6.1 5.4 3.9 4.5 5.3 -5.1 Indonesia 7.3 7.5 8.2 8.0 4.8 13.7 Japan 0.3 0.6 1.5 5.1 1.4 -2.8 Malaysia 8.4 9.3 9.4 8.6 7.7 -6.7 Singapore 12.8 11.4 8.2 7.5 9.0 0.4 South Korea 5.5 8.3 8.9 6.8 5.0 -5.8 Taiwan 6.3 6.5 6.0 5.7 6.8 4.9 Thailand 8.5 8.6 8.8 5.5 1.3 9.4 Source: World Economic Outlook, October 2000 (International Monetary Fund) Brazil. Brazil is Latin America's largest economy and the world's tenth largest. Manufacturing is the dominant industrial sector, generating 24% of GDP, followed by agriculture at 12%; services represent 55% of GDP. In the period from 1994 to 1998, annualized economic growth averaged 3.1%. Growth ended in mid-1998, as fears of contagion from Russia caused a sharp loss of liquidity through capital flight. The economy contracted 2.1% in the fourth quarter of 1998, bringing growth for the year to 0.1%. The economy fell 0.7% in the first half of 1999, following January's currency devaluation. The real stood at R$1.21/US$ at the end of 1998. Growing concerns over the sustainability of the real's crawling peg exchange rate resulted in the devaluation of the currency on January 13. By March 1, the currency had fallen to R$2.13/US$, but it then rallied to R$1.66/US$ in early May. Concerns about fiscal progress at home and general global concerns weakened the currency again, to near R$2/US$ by mid-August. Inflation tumbled from more than 2500% per annum in 1994 to 1.7% in 1998. The January 1999 currency devaluation caused inflation to surge to 3.6% in February, but it receded quickly thereafter. Despite tight control of monetary aggregates, real rates of interest have decreased, with lower foreign exchange risk and reduced risk of an inflation surge. Real rates of interest declined from 40% at the end of the first quarter of 1999 to roughly 15% by mid-August. Further, after several failed attempts, Congress passed fiscal adjustment measures in January-February 1999, after years of delay. Brazilian Real GDP Annual Rate of Growth (annual % change) 1999 1998 0.1 1997 3.7 1996 2.8 1995 4.2 1994 5.9 1993 4.9 Source: World Economic Outlook, October 2000 (International Monetary Fund) Canada. The Canadian economy has performed well in recent quarters, expanding at a 3.75% annualized pace in the first half of 1999. Growth in the first half of 1999 was evenly balanced between the domestic and net export sectors. Initial indicators suggest that the economy continued to expand in the 4% to 4.5% range in the second half of 1999, on average. Underlying inflation pressure remains benign in Canada. The "core" CPI inflation rate, which excludes food and energy prices, was 1.6% in August, at roughly the mid-point of the Bank of Canada's 1% to 3% target band for core inflation. The Bank of Canada's primary policy objective is to target core inflation, i.e. keep it to within a range of 1% to 3%. To achieve this goal, the authorities have traditionally relied on their estimates of potential output (and the output gap) to determine the inflation outlook. However, as the economy nears theoretical levels of full 33 capacity, the Bank has announced that it will put increased emphasis on other measures of inflation and capacity pressures. Meanwhile, the weak Canadian dollar has remained below US 69c (CAD 1.45). Canada's Federal budget was balanced in 1997 and is forecast to remain in balance for the next two years. Additionally, all ten provinces are expected to post balanced budgets by 2000. This may speed a decline in Canada's public sector debt-to-GDP ratio, which was 98% of GDP in 1997. Separation politics seems to be on hold as Quebeckers seem more concerned about employment growth and the provision of government services. One issue that continues to rise to the surface nationally is whether Canada should enter a currency union with the United States. Canadian Real GDP Annual Rate of Growth (annual % change) 1999 1998 3.1 1997 4.0 1996 1.7 1995 2.8 1994 4.7 1993 2.3 Source: World Economic Outlook, October 2000 (International Monetary Fund) Mexico. Mexico's economy is the second largest in Latin America. Post- NAFTA integration with the U.S. has been the engine for growth in the Mexican economy since the peso crisis of 1994-95. GDP growth was 7.0% in 1997 and 4.8% in 1998. Mexican inflation is sensitive to both monetary and exchange-rate policy. In 1998, higher-than-expected inflation of 18.6%, up from 15.7% in 1997, was generated by currency weakness, the decontrol of tortilla prices, and higher crop prices due to El Nino. Real wages fell sharply in the 1995 recession and had recovered only slightly by the end of the third quarter of 1999. The strength of the peso, weak demand, and an ongoing restrictive monetary policy have helped restrain inflation. The peso is a floating currency that was priced at M$9.4/US$ at the end of summer 1999. The peso ended 1998 at M$9.91/US$, down 23.0% for the year in nominal terms. The peso's history since the late-1994 devaluation is a mixture of periods of remarkable stability interwoven with episodes of sudden moves to either weaker or stronger levels. Further, since the 1994 devaluation, Mexico has assiduously adhered to tight monetary targets. Timely fiscal cuts and very strong oil prices have helped the government adhere to its 1.25% of GDP fiscal target for 1999. The cost of a bank support program boosts actual deficit spending by about 1% of GDP per annum, but the overall fiscal policy is prudent. The government reportedly is pushing for a 1% deficit in 2000 and for a real spending hike of 5%. Mexican Real GDP Annual Rate of Growth (annual % change) 1999 1998 4.6 1997 7.0 1996 5.2 1995 -6.2 1994 4.4 1993 2.0 Source: World Economic Outlook, October 2000 (International Monetary Fund) 34 South Africa. The South African economy is recovering slowly. 1999 second-quarter GDP gained 0.4% from the first quarter of 1999, following a 0.2% rise in the first quarter of the year. In the first half of 1999, GDP grew 0.4% from the second half of last year, while final sales grew by 1.1%. Inflation in August declined to 3.2%. The decline, from almost 9% at the beginning of the year, is due mainly to the effect of a 6% decline in mortgage rates in 1999. Further, core inflation declined from 8.2% in July to 7.9% in August. Last year's state budget constituted 3.3% of GDP, compared with an original target of 3.5% of GDP. Furthermore, the publication of the first inter- governmental fiscal review revealed that the country's nine provinces managed to run a combined surplus of R 1.1 billion in fiscal 1998-1999, a significant improvement from the deficit of R 5.8 billion in the previous fiscal year, suggesting that fiscal austerity has extended beyond the central government. On September 23, 1999, commercial banks cut the prime rate by 1% to 15.5%. The cut followed an accelerated pace of cuts in the official repo rate. This accelerated pace is underscored by the economic data and the economy appears to be recovering. A rally in the price of gold, beginning with the second gold auction by the Bank of England, highlighted improved sentiment in the gold market and supported the rand. Finally, despite sharp interest rate cuts in recent months, bond- market performance has continued to be disappointing. South African Real GDP Annual Rate of Growth (annual % change) 1999 1998 0.6 1997 2.5 1996 4.2 1995 3.1 1994 3.2 1993 1.2 Source: World Economic Outlook, October 2000 (International Monetary Fund) The United States. The United States economy has grown consistently in the 1990s, while inflation has been kept to favorable levels in the last two years. Recently, GDP has grown in the U.S. at a rate of 3.9% in both 1997 and 1998, while inflation, measured by the Consumer Price Index, grew by 2.3% in 1997 and 1.5% in 1998. While corporate profits, after tax, grew substantially in 1997, at a rate of 7.5%, they slipped somewhat in 1998, to -2.2%, due mainly to the effects of the world-wide slowdown caused by Russia's default on bond payments in August 1998 and the Asian recession that hindered world markets generally in the second half of 1998. Meanwhile, U.S. economic expansion in the 1990s led to the first U.S. federal government surplus in decades: 0.8% of GDP in 1998. The federal budget deficit had already begun to show signs of turning in 1997, when it was reduced to -0.3%. The Federal Reserve's monetary policy continued to be favorable to economic expansion in recent years, as the Federal Funds Rate was 5.5% in 1997 and 4.75% in 1998. The Federal Reserve increased its lending rate slightly to 5.25% in September 1999 to ameliorate inflationary concerns, but the U.S. equity markets did not immediately slow as a result. U.S. bond markets were relatively flat. The 30-year Treasury Bond yield was 5.95% at the end of 1997 and 5.15% at the close of 1998, and increased somewhat by September 1999 to approximately 6.0%. Turkey. The Turkish securities market is relatively less developed, smaller and less liquid than the securities markets of many other countries. At December 31, 1998, the total market value of the equity securities listed on the senior market of the Istanbul Stock Exchange (the "ISE") was TL51,557 trillion ($97.65 billion). 35 Average daily trading volume for equity securities listed on the senior market of the ISE for the year ended 1998 was TL 70.4 trillion ($273.5 million). For the nine months ended September 30, 1999, average daily trading volume was TL 109.6 trillion ($280 million). The public float of the equity securities listed on the senior market of the ISE is estimated on average to be in the range of 20.6% of total market capitalization. The Turkish securities markets tend to be susceptible to being influenced by large investors trading significant blocks of securities or by large dispositions of securities resulting from failure to meet margin calls when due. In addition to its small size and illiquidity, the Turkish securities market is extremely volatile and trading is concentrated. There are no market making activities for equity securities listed on the ISE (although there is, in general, a 10% daily limit on price increases and decreases in each equity security). There is no assurance in light of the historical volatility of the Turkish securities markets that any particular level will be sustained. Further, there are only 283 companies listed on the senior market of the ISE and the top 5 of those companies in terms of trading volume accounted for 20.9% of the trading volume on the senior market of the ISE for the year ended December 31, 1998 while the top 5 of those companies in terms of market capitalization accounted for 37% of the total market capitalization on the senior market of the ISE for such year. Turkish accounting, financial and other reporting standards are extremely limited compared to United States standards. Under Turkish practice, material disclosures generally are not made by, and little information is available about, Turkish companies. Turkish companies do not have continuous disclosure obligations other than the recent requirement that companies listed on the senior market of the ISE publish annual audited financial statements (which are not prepared in accordance with generally accepted accounting principles and are not adjusted to reflect the impact of inflation). Also, there is a low level of regulation of the markets for Turkish securities and the activities of investors in such markets, and enforcement of regulatory provisions which exist has been extremely limited. There are no prohibitions against broker-dealers trading for their own account ahead of their customers or other conflict of interest practices with respect to securities transactions and currently no prohibitions against insider trading. Turkish Real GDP Annual Rate of Growth (annual % change) 1999 1998 2.8 1997 7.6 1996 7.0 1995 8.1 1994 -4.7 1993 7.7 Source: World Economic Outlook, October 2000 (International Monetary Fund) United States Real GDP Annual Rate of Growth (annual % change) 1999 1998 3.9 1997 3.9 1996 3.5 1995 2.3 1994 3.5 1993 2.3 Source: World Economic Outlook, October 2000 (International Monetary Fund) THE MSCI INDICES In General. The 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 36 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 MSDW is the majority owner. The MSCI 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 indices, developed and emerging. MSCI Indices are notable for the depth and breadth of their coverage. MSCI generally seeks to have 60% of the capitalization of a country's stock market reflected in the MSCI Index for such country. Thus, the MSCI Indices balance the inclusiveness of an "all share" index against the replicability of a "blue chip" index. Weighting. All single-country MSCI Indices are market capitalization --------- weighted, i.e., companies are included in the indices at their full market value (total number of shares issued and paid up, multiplied by price). MSCI believes full market capitalization weighting is preferable to other weighting schemes for both theoretical and practical reasons. MSCI calculates two indices in some countries in order to address the issue of restrictions on foreign ownership in such countries. The additional indices are called "free" indices, and they exclude companies and share classes not purchasable by foreigners. Free indices are currently calculated for Brazil, China, Indonesia, Malaysia, Mexico, the Philippines, Singapore and Thailand, and for those regional and international indices which include such markets. Indonesia, Malaysia, Singapore and Thailand currently impose foreign ownership limits on domestic stock, and when the foreign ownership limit is reached, foreigners may only trade with other foreigners, frequently at a price that is higher than the price available to domestic investors. The Free Indices for such countries are designed to reflect the actual investment conditions for international investors by using the foreign prices for stocks where relevant. The Free Indices for Indonesia, Malaysia, Singapore and Thailand will use foreign prices only when a foreign ownership limit is reached on a constituent stock and a determination is made that there is sufficient long-term liquidity at the foreign price. To compensate for the distorting inflation of a company's weight that may occur as a result of using the higher foreign prices for its shares, a compensating factor called a Free Market Capitalization Factor ("FMCF") may be applied to the total number of shares of a "foreign priced" constituent stock in the respective Index. A FMCF is the approximate ratio of domestic price to foreign price and is applied in an effort to align the free market capitalization weight with the domestic market capitalization weight. Regional Weights. Market capitalization weighting, combined with a consistent target of 60% of 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 also critical to the calculation of certain combined developed and emerging market indices published by MSCI. Selection Criteria ------------------ The Universe of Securities. The constituents of a country index are selected from the full range of securities available in the market, excluding issues which are either small or highly illiquid. Non-domiciled companies and investment trusts are also excluded from consideration. After the index constituents are chosen, they are reclassified using MSCI's schema of 38 industries and 8 economic sectors in order to facilitate cross-country comparisons. The Optimization Process. The process of choosing index constituents from the universe of available securities is consistent among indices. Determining the constituents of an index is an optimization process which involves maximizing float and liquidity, reflecting accurately the market's size and industry profiles and minimizing cross-ownership. The optimization variables and their targets are: 37 Market Coverage Target 60% of market Industry Representation Mirror the local market Liquidity Maximize Float Maximize Cross-Ownership Avoid/Minimize Size Sample with size characteristics of universe Coverage. To reflect accurately country-wide performance as well as the performance of industry groups, MSCI aims to capture 60% of total market capitalization at both the country and industry level. To reflect local market performance, an index should contain a percentage of the market's overall capitalization sufficient to achieve a high level of tracking. The greater the coverage, however, the greater the risk of including securities which are illiquid or have restricted float. MSCI's 60% coverage target reflects a balance of these considerations. Industry Representation. Within the overall target of 60% market coverage, MSCI aims to capture 60% of the capitalization of each industry group, as defined by local practice. MSCI believes this target assures that the index reflects the industry characteristics of the overall market and permits the construction of accurate industry indices. MSCI may exceed the 60% of market capitalization target in the index for a particular country because, e.g., one or two large companies dominate an industry. Similarly, MSCI may underweight an industry in an index if, e.g., the companies in such industry lack good liquidity and float, or because of extensive cross-ownership. Liquidity. Liquidity is measured by trading value, as reported by the local exchanges. Trading value is monitored over time in order to determine "normal" levels exclusive of short-term peaks and troughs. A stock's liquidity is significant not only in absolute terms (i.e., a determination of the market's most actively traded stocks), but also relative to its market capitalization and to average liquidity for the country as a whole. Float. Float, or the percentage of shares freely tradeable, is one measure of potential short-term supply. Low float raises the risk of insufficient liquidity. MSCI monitors float for every security in its coverage, and low float may exclude a stock from consideration. However, float can be difficult to determine. In some markets good sources are generally not available. In other markets, information on smaller and less prominent issues can be subject to error and time lags. Government ownership and cross-ownership positions can change over time, and are not always made public. Float also tends to be defined differently depending on the source. MSCI seeks to maximize float. As with liquidity, float is an important determinant, but not a hard-and-fast screen for inclusion of a stock in, or exclusion of a stock from, a particular index. Cross-ownership. Cross-ownership occurs when one company has an ownership position in another. In situations where cross-ownership is substantial, including both companies in an index may skew industry weights, distort country- level valuations and over-represent buyable opportunities. An integral part of MSCI's country research is identifying cross-ownerships in order to avoid or minimize them. Cross-ownership cannot always be avoided, especially in markets where it is prevalent. When MSCI makes exceptions, it strives to select situations where the constituents operate in different economic sectors, or where the subsidiary company makes only a minor contribution to the parent company's results. Size. MSCI attempts to meet its 60% coverage target by including a representative sample of large, medium and small capitalization stocks, in order to capture the sometimes disparate performance of these sectors. In the emerging markets, the liquidity of smaller issues can be a constraint. At the same time, properly representing the lower capitalization end of the market risks overwhelming the index with names. Within these constraints, MSCI strives to include smaller capitalization stocks, provided they exhibit sufficient liquidity. Calculation Methodology. All MSCI Indices are calculated daily using Laspeyres' - ----------------------- concept of a weighted arithmetic average together with the concept of "chain- linking," a classical method of calculating stock market indices. The Laspeyres method weights stocks in an index by their beginning-of-period market capitalization. Share prices are "swept clean" daily and adjusted for any rights issues, stock dividends or splits. Most MSCI Indices are currently calculated in local currency and in U.S. dollars, without dividends, with gross dividends reinvested and with net dividends reinvested. Except for the iShares MSCI Brazil (Free), Malaysia (Free), Mexico (Free), South 38 Africa, South Korea and Taiwan Index Funds, where the corresponding MSCI Index of each is calculated with gross dividends reinvested, the Company's Index Funds ----- utilize MSCI Indices calculated with net dividends reinvested. "Net dividends" --- means dividends after reduction for taxes withheld at source at the rate applicable to holders of the underlying stock that are resident in Luxembourg. With respect to the iShares MSCI Australia, Austria and Germany Index Funds, such withholding rate currently differs from that applicable to United States residents. So-called "un-franked" dividends from Australian companies are withheld at a 30% rate to Luxembourg residents and a 15% rate to the iShares MSCI Australia Index Fund (there is no difference in the treatment of "franked" dividends). Austrian companies impose a 15% dividend withholding on Luxembourg residents and an 11% rate on the iShares MSCI Austria Index Fund. German companies impose a 15% dividend withholding on Luxembourg residents and a 10% rate on the iShares MSCI Germany Index Fund. "Gross dividends" means dividends before reduction for taxes withheld at source. Dividend Treatment. In respect of developed markets, MSCI Indices with ------------------ dividends reinvested constitute an estimate of total return arrived at by reinvesting one twelfth of the year end yield at every month end. In respect of emerging markets, MSCI has constructed its indices with dividends reinvested as follows: . In the period between the ex date and the date of dividend reinvestment, a dividend receivable is a component of the index return. . Dividends are deemed received on the payment date. . To determine the payment date, a fixed time lag is assumed to exist between the ex date and the payment date. This time lag varies by country, and is determined in accordance with general practice within that market. . Reinvestment of dividends occurs at the end of the month in which the payment date falls. 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 except those in Latin America. 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 Company and are sourced whenever possible from multi-contributor quotes on Reuters. Representative rates are selected for each currency based on a number of "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. Because of the high volatility of currencies in some Latin American countries, MSCI continues to use its own timing and sources for these markets. The exchange rate for the MSCI Mexico (Free) Index is that prevailing as of 3:00 p.m. Eastern time. Changes to the Indices. In changing the constituents of the indices, MSCI ---------------------- attempts to balance representativeness versus undue turnover. An index must represent the current state of an evolving marketplace, yet at the same time minimize turnover, which is costly as well as inconvenient for managers. There are two broad categories of changes to the MSCI Indices. The first consists of market-driven changes such as mergers, acquisitions, bankruptcies, etc. These are announced and implemented as they occur. The second category consists of structural changes to reflect the evolution of a market, for example due to changes in industry composition or regulations. In the emerging markets, index restructurings generally take place every one year to eighteen months. Structural changes may occur only on four dates throughout the year: the first business day of March, June, September and December. They are preannounced at least two weeks in advance. 39 Additions. Restructuring an index involves a balancing of additions and deletions. To maintain continuity and minimize turnover, MSCI is reluctant to delete index constituents, and its approach to additions is correspondingly stringent. As markets grow because of privatizations, investor interest, or the relaxation of regulations, index additions (with or without corresponding deletions) may be needed to bring industry representations up to the 60% target. Companies are considered not only based on their broad industry, but also based on their sub-sector, in order to achieve, if possible, a broader range of economic activity. Beyond industry representativeness, new constituents are selected based on the criteria discussed above, i.e. float, liquidity, cross- ownership, etc. New Issues. In general, new issues are not eligible for immediate inclusion in the MSCI Indices because their liquidity remains unproven. Usually, new issues undergo a "seasoning" period of one year to eighteen months between index restructurings until a trading pattern and volume are established. After that time, they are eligible for inclusion, subject to the criteria discussed above (industry representation, float, cross-ownership, etc.). In the emerging markets, however, it is not uncommon that a large new issue, usually a privatization, comes to market and substantially changes the country's industry profile. In exceptional circumstances, where the issue's size, visibility and investor interest assure high liquidity, and where excluding it would distort the characteristics of the market, MSCI may decide to include it immediately in the indices. In other cases, MSCI may decide not to include a large new issue even in the normal process of restructuring, and in spite of its substantial size and liquidity. Deletions. MSCI's primary concern when considering deletions is the continuity of the indices. Of secondary concern are the turnover costs associated with deletions. The indices must represent the full investment cycle, including bear as well as bull markets. Out-of-favor stocks may exhibit declining price, market capitalization or liquidity, and yet continue to be good representatives of their industry. Companies may be deleted because they have diversified away from their industry classification, because the industry has evolved in a different direction from the company's thrust, or because a better industry representative exists (either a new issue or an existing company). In addition, in order not to exceed the 60% target coverage of industries and countries, adding new index companies may entail corresponding deletions. Usually such deletions take place within the same industry, but there are occasional exceptions. Each of the MSCI Indices utilized as the benchmark for an Index Fund is calculated reflecting dividends reinvested. Except for the iShares MSCI Brazil (Free), Malaysia (Free), Mexico (Free), South Africa, South Korea and Taiwan Index Funds, where the corresponding MSCI Index of each is calculated with gross ----- dividends reinvested, the Company's Index Funds utilize MSCI Indices calculated with net dividends reinvested. MSCI refers to each of its Indices calculated --- reflecting net dividends reinvested as the "MSCI [relevant country] Index (with net dividends reinvested)." INVESTMENT LIMITATIONS The Company has adopted the following investment restrictions as fundamental policies with respect to each Index Fund. These restrictions cannot be changed with respect to an Index Fund without the approval of the holders of a majority of such Index Fund's outstanding voting securities. For purposes of the 1940 Act, a majority of the outstanding voting securities of an Index Fund means the vote, at an annual or a special meeting of the security holders of the Company, of the lesser of (1) 67% or more of the voting securities of the Index Fund present at such meeting, if the holders of more than 50% of the outstanding voting securities of such Index Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Index Fund. An Index Fund may not: 1. Change its investment objective; 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 40 securities or obligations) and except that an Index Fund may lend its portfolio securities in an amount not to exceed 33% 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% of the value of the Index 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 Index Fund will not purchase securities while borrowings in excess of 5% of the Index 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 Index 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; 6. Purchase, hold or deal in real estate, or oil, gas or mineral interests or leases, but an Index 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 Index 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 an Index 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 Index 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. With respect to the two most heavily weighted industries or groups of industries in its benchmark MSCI Index, an Index 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 Index Fund does not diverge 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 Index Fund, the Index 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 Index 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. An Index 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 of an Index Fund's shareholders. As of September 30, 2000, as a result of this policy with respect to industry concentration, the following Index Funds were concentrated (that is, invested 25% or more of the value of their assets) in the specified industries: Index Fund Industry or Industries ------------------------------------------------------------------------ 41 Index Fund Industry or Industries ------------------------------------------------------------------------ In addition to the investment restrictions adopted as fundamental policies as set forth above, each Index Fund observes the following restrictions, which may be changed by the Board without a shareholder vote. An Index 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 Index 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 Index Fund has valued the investment. For purposes of the percentage limitation on each Index Fund's investments in illiquid securities, with respect to each Index 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 the Index Fund. The Adviser monitors the liquidity of restricted securities in each Index Fund's portfolio under the supervision of the Company's Board. In reaching liquidity decisions, the Adviser considers, inter alia, 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. MANAGEMENT OF THE COMPANY Directors and Officers of the Company. The Board has responsibility for ------------------------------------- the overall management and operations of the Company, including general supervision of the duties performed by the Adviser and other service providers. The Board currently consists of five Directors. Nathan Most is an "interested" director, as defined in the 1940 Act, by reason of his position as President of the Company.
Principal Occupations Name and Address Position with the Company During Past Five Years - ----------------------------------------------------------------------------------------------------------------------------------- Nathan Most Director, President and Consultant to various companies including the P.O. Box 193 Chairman of the Board Adviser; Senior Vice President (retired) (from Burlingame, CA 94011-0193 1992 to 1996) and Vice President (from 1980 to Age 86 1992) of the American Stock Exchange, Inc.; President and CEO (retired) (from 1982 to 1996) of AMEX Commodities Corporation.
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Principal Occupations Name and Address Position with the Company During Past Five Years - ----------------------------------------------------------------------------------------------------------------------------------- John B. Carroll Director Retired Vice President of Investment Management 520 Main Street (from 1984-2000) of GTE Corporation; Advisory Ridgefield, CT 06877 Board member of Ibbotson Assoc. (since 1998); Age 65 former Trustee and Member of the Executive Committee (since 1991) of The Common Fund, a non-profit organization; Member of the Investment Committee (since 1988) of the TWA Pilots Annuity Trust Fund; former Vice Chairman and Executive Committee Member (since 1992) of the Committee on Investment of Employee Benefit Assets of the Financial Executive Institute; and Member (since 1986) of the Pension Advisory Committee of the New York Stock Exchange. Timothy A. Hultquist Director Advisory Director (since 1995 and Managing Advisory Director Director (from 1985 to 1995) of Morgan Stanley Morgan Stanley & Co., Incorporated & Co., Incorporated; Chairman (since 1994) and 1221 Avenue of the Americas Trustee (since 1885) of the Board of Trustees 30/th/ Floor of Macalester College; Treasurer and Trustee New York, NY 10020 (since 1995) of Russell Sage Foundation; Member Age 50 (since 1994) of Wilmer Eye Institute Advisory Counsel at John Hopkins University Hospital; President (since 1992) of the Hultquist Foundation; Chairman, Council of Board Chairmen of Independent Colleges. Lloyd N. Morrisett Director President (retired) of The John and Mary R. Children's Television Workshop Markle Foundation (from 1969 to 1998); Chairman One Lincoln Plaza, 4/th/ Floor (since 1970) of the Children's Television New York, NY 10023 Workshop; Chairman (since 1998) and Director Age 71 (since 1994) of Infonautics Corporation; Trustee (from 1973 to 1983, from 1985 to 1995, and since 1996) of RAND; Director (since 1976) of Haskins Laboratories, Inc.; Director (1990-January, 1997) of the Multimedia Corporation; Director (since 1992) of Classroom, Inc.; Director (since 1995) of Smith College Center for the Study of Social and Political Change; Director (since 1998) of Public Agenda Foundation; Member of Board of Overseers (from 1995 to 1998) of Dartmouth School of Medicine; Member (since 1968) of the Council on Foreign Relations; and Member (since 1970) of the American Association for the Advancement of Science.
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Principal Occupations Name and Address Position with the Company During Past Five Years - ----------------------------------------------------------------------------------------------------------------------------------- W. Allen Reed Director President and CEO and Director (since 1994) of President General Motors Investment Management General Motors Investment Management Corporation; Vice President and Treasurer (from Corp. 1991 to 1994) of Hughes Electronics; President 767 Fifth Avenue (from 1984 to 1991) of Hughes Investment New York, NY 10153 Management Company; Director (from 1995 to Age 53 1998) of Taubman Centers, 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 General Motors Insurance Corporation; Director (since 1995) of Equity Fund of Latin America; Director (since 1995) of the Commonwealth Equity Fund; Member (from 1994 to 1998) of the Pension Managers Advisory Committee of the New York Stock Exchange; Member (since 1995) of the New York State Retirement System Advisory Board; Chairman (since 1995) of the Investment Advisory Committee of Howard Hughes Medical Institute. Stephen M. Wynne Treasurer Chairman of PFPC Trustee & Custodial Services Executive Vice President Ltd. (since 1995); Executive Vice President and PFPC Inc. Chief Accounting Officer (since 1993) and 400 Bellevue Parkway Senior Vice President and Chief Accounting Wilmington, DE 19809 Officer (from 1991 to 1993) of PFPC Inc.; Age 45 Executive Vice President (from 1993 to 1995) of PFPC International. R. Sheldon Johnson Secretary Managing Director, Global Equity Managing Director Derivatives, Morgan Stanley & Co. Morgan Stanley & Co. Incorporated Incorporated (since 1988). 1585 Broadway New York, NY 10036 Age 54
Directors' Compensation. The table below sets forth the compensation paid ----------------------- to Directors and officers of the Company for the fiscal year ended August 31, 2000.
Pension or Total Compensation Aggregate Retirement Benefits Estimated Annual from Registrant and Name of Person Compensation from Accrued as Part of Benefits Upon Company Complex Paid And Position Registrant Company Expenses Retirement to Directors - -------------------------------------------------------------------------------------------------------------------- Nathan Most, Director, $______ None None $______ President and Chairman of the Board John B. Carroll, $______ None None $______ Director Timothy A. Hultquist, $______ None None $______ Director Lloyd N. Morrisett, $______ None None $______ Director W. Allen Reed, Director $______ None None $______
44 No officer is entitled to any compensation, and no officer or Director is entitled to any pension or retirement benefits, from the Company. The Company does not have information concerning the beneficial ownership of the iShares held in the names of such DTC Participants. 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 November 30, 2000, the name, address and percentage ownership of each DTC Participant that owned of record 5% or more of the outstanding shares of an Index Fund were as follows: [TO BE UPDATED]
iShares MSCI Index Fund Name and Address Percentage of Ownership - -------------------------------- ---------------------------------- ----------------------------- Australia The Chase Manhattan Bank ______% One Chase Manhattan Plaza New York, NY 10081 The Bank of New York ______% One Wall Street New York, NY 10286 Bankers Trust _____% 648 Grassmere Park Road Nashville, TN 37211 Austria The Bank of New York _____% One Wall Street New York, NY 10286 Salomon Smith Barney Inc. _____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001 Brown Brothers Harriman & Co. _____% 63 Wall Street, 8th Floor New York, NY 10005 National Financial Services Corporation _____% 1 World Financial Center, Tower A New York, NY 10281 Belgium The Bank of New York _____% One Wall Street New York, NY 10286 Citibank, N.A. _____% P.O. Box 30576 Tampa, FL 33630 Bear, Stearns Securities Corp. _____% One Metrotech Center, North Brooklyn, NY 11201
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iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- --------------------------------------- ---------------------------- National Financial Services Corporation _____% 200 Liberty Street New York, NY 10281 Salomon Smith Barney Inc. _____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001 Brazil (Free) [TO BE UPDATED] ______% Canada Charles Schwab & Co., Inc. ______% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Prudential Securities Incorporated _____% 1 New York Plaza, 9th Floor New York, NY 10292 Brown Bros. Harriman & Co. _____% 59 Wall Street New York, NY 10005 Goldman, Sachs & Co. ____% 1 New York Plaza New York, NY 10004 RBC Dominion Securities Inc. -- NSCC ____% 200 Bay Street, Royal Bank Plaza Toronto, Ontario Canada M5J 2W7 National Investors Services Corp. ____% 55 Water Street New York, NY 10281 EMU [TO BE UPDATED] _____% France Morgan Stanley & Co. Incorporated _____% One Pierrepont Plaza Brooklyn, NY 11201 State Street Bank & Trust Company ____% 1776 Heritage Drive Quincy, MA 02171 The Bank of New York ____% One Wall Street New York, NY 10286 Brown Bros. Harriman & Co. ____% 59 Wall Street New York, NY 10005 Wells Fargo Bank, N.A. ____% 464 California Street San Francisco, CA 94104
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iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- -------------------------- Germany Brown Bros. Harriman & Co. _____% 59 Wall Street New York, NY 10005 State Street Bank & Trust Company _____% 1776 Heritage Drive Quincy, MA 02171 The Bank of New York ____% One Wall Street New York, NY 10286 Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 Charles Schwab & Co., Inc. ____% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Hong Kong Salomon Smith Barney Inc. ____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001 Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 Charles Schwab & Co., Inc. ____% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Merrill Lynch Pierce Fenner & Smith Safekeepi ____% 101 Hudson Street Jersey City, NJ 07302 Brown Bros. Harriman & Co. ____% 59 Wall Street New York, NY 10005 Italy Brown Bros. Harriman & Co. _____% 59 Wall Street New York, NY 10005 The Bank of New York _____% One Wall Street New York, NY 10286 Bear, Stearns Securities Corp. ____% One Metrotech Center North Brooklyn, NY 11201-3859 Citibank, N.A. ____% 1410 Westshore Blvd. Tampa, FL 33607
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iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ------------------------- Japan Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 Citibank, N.A. ____% 1410 Westshore Blvd. Tampa, FL 33607 Brown Bros. Harriman & Co. ____% 59 Wall Street New York, NY 10005 State Street Bank & Trust Company ____% 1776 Heritage Drive Quincy, MA 02171 The Bank of New York ____% One Wall Street New York, NY 10286 Malaysia (Free) Brown Bros. Harriman & Co. ____% 59 Wall Street New York, NY 10005 State Street Bank & Trust Company ____% 1776 Heritage Drive Quincy, MA 02171 The Bank of New York ____% One Wall Street New York, NY 10286 Merrill Lynch Pierce Fenner & Smith Safekeeping ____% 101 Hudson Street Jersey City, NJ 07302 Salomon Smith Barney Inc. ____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001 Charles Schwab & Co., Inc. ____% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Mexico (Free) Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 The Bank of New York ____% One Wall Street New York, NY 10286 Salomon Smith Barney Inc. ____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001
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iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- --------------------------- Netherlands Brown Bros. Harriman & Co. _____% 59 Wall Street New York, NY 10005 Morgan Stanley & Co. Incorporated _____% One Pierrepont Plaza Brooklyn, NY 11201 The Bank of New York ____% One Wall Street New York, NY 10286 Citibank, N.A. ____% 1410 Westshore Blvd. Tampa, FL 33607 Prudential Securities Incorporated ____% 1 New York Plaza 9/th/ Floor New York, NY 10292 Singapore (Free) Charles Schwab & Co., Inc. ____% Newport Financial Center 111 Pavonia Avenue East, 3rd Floor Jersey City, NJ 07310 Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 Salomon Smith Barney Inc. ____% 333 West 34/th/ Street, 3/rd/ Floor New York, NY 10001 Merrill Lynch Pierce Fenner & Smith Safekeeping ____% 101 Hudson Street Jersey City, NJ 07302 National Financial Services Corporation ____% 1 World Financial Center, Tower A New York, NY 10281 South Korea [TO BE UPDATED] _____% Spain The Bank of New York _____% One Wall Street New York, NY 10286 Brown Bros. Harriman & Co. _____% 59 Wall Street New York, NY 10005 Morgan Stanley & Co. Incorporated _____% One Pierrepont Plaza Brooklyn, NY 11201
49
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- -------------------------- Citibank, N.A. ___% 1410 Westshore Blvd. Tampa, FL 33607 Sweden The Bank of New York ___% One Wall Street New York, NY 10286 Brown Bros. Harriman & Co. ___% 59 Wall Street New York, NY 10005 Citibank, N.A. ___% 1410 Westshore Blvd. Tampa, FL 33607 Merrill Lynch Pierce Fenner & Smith Safekeeping ___% 101 Hudson Street Jersey City, NJ 07302 Spear, Leeds & Kellogg ___% 120 Broadway New York, NY 10271 Switzerland Morgan Stanley & Co. Incorporated ___% One Pierrepont Plaza Brooklyn, NY 11201 Brown Bros. Harriman & Co. ___% 59 Wall Street New York, NY 10005 Wells Fargo Bank, N.A. ___% 464 California Street San Francisco, CA 94104 Citibank, N.A. ___% 1410 Westshore Blvd. Tampa, FL 33607 State Street Bank & Trust Company ___% 1776 Heritage Drive Quincy, MA 02171 The Bank of New York ___% One Wall Street New York, NY 10286 Taiwan [TO BE UPDATED] ___% United Kingdom Brown Bros. Harriman & Co. ___% 59 Wall Street New York, NY 10005 The Bank of New York ___% One Wall Street New York, NY 10286
50
iShares MSCI Index Fund Name and Address Percentage of Ownership - ----------------------- ---------------- ----------------------- State Street Bank & Trust Company ____% 1776 Heritage Drive Quincy, MA 02171 Citibank, N.A. ____% 1410 Westshore Blvd. Tampa, FL 33607 Morgan Stanley & Co. Incorporated ____% One Pierrepont Plaza Brooklyn, NY 11201 Prudential Securities Incorporate ____% 1 New York Plaza, 9/th/ Floor New York, NY 10292
INVESTMENT ADVISORY, MANAGEMENT, ADMINISTRATIVE AND DISTRIBUTION SERVICES Investment Adviser. Barclays Global Fund Advisors (the "Adviser") acts as ------------------ investment adviser to the Company and, subject to the supervision of the Board, is responsible for the investment management of each Index Fund. The Adviser is a California corporation indirectly owned by Barclays Bank PLC, and is registered as an investment adviser under the Investment Advisers Act of 1940. The Adviser and its parent, Barclays Global Investors, N.A., manage, administer or advise assets aggregating in excess of $____ billion as of November 30, 2000. The Adviser serves as investment adviser to each Index Fund pursuant to an Advisory Agreement (the "Advisory Agreement") between the Company and the Adviser that was amended effective May 8, 2000. Under the Advisory Agreement, the Adviser, subject to the supervision of the Company's Board and in conformity with the stated investment policies of each Index Fund, manages the investment of each Index Fund's assets. The Adviser may enter into subadvisory agreements with additional investment advisers to act as subadvisers with respect to particular Index Fund. The Adviser will pay subadvisers, if any, out of the fees received by the Adviser. The Adviser is responsible for (i) placing purchase and sale orders, (ii) providing continuous supervision of the investment portfolio of each Index Fund, (iii) the general management of the Company's affairs, and (iv) paying all expenses for Company operations and activities. For its investment management services to each Index Fund, except the nine (9) Index Funds listed below, the Adviser is paid a fee equal to each of those Index Fund's allocable portion of: .59% per annum of the aggregate net assets of those Index Funds less than or equal to $7 billion, plus .54% per annum of the aggregate net assets of those Index Funds between $7 billion and $11 billion, plus .49% per annum of the aggregate net assets of those Index Funds in excess of $11 billion; for its investment management services to the iShares MSCI Brazil (Free), Greece, Indonesia (Free), Portugal, South Africa, South Korea, Taiwan, Thailand (Free) and Turkey Index Funds, the Adviser is paid management fees equal to each of those Index Fund's allocable portion of: 0.74% per annum of the aggregate net assets of those Index Funds less than or equal to $2 billion, plus 0.69% per annum of the aggregate net assets of those Index Funds between $2 billion and $4 billion, plus 0.64% per annum of the aggregate net assets of those Index Funds greater than $4 billion; provided, however, that the fee paid to the Adviser with respect to each Index Fund shall be reduced by the aggregate of such Index Funds' fees and expenses, other than (i) expenses of the Index Funds incurred in connection with the execution of portfolio securities transactions on behalf of such Index Funds, (ii) expenses incurred in connection with any distribution plan adopted by the Company in compliance with Rule 12b-1 under the 1940 Act, (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 1940 Act) deems to be an extraordinary expense and (vi) the advisory fee payable to the Adviser under the Advisory Agreement; and provided, further, that the Adviser shall reimburse the Company to the extent that the expenses of any Index Fund (other than the expenses set forth in the foregoing proviso) exceed the amount set forth above with respect to such Index Fund. The management fees are accrued daily and paid by the Company as soon as practical after the last day of each calendar quarter. The Adviser may from time to time reimburse expenses to one or more Index Funds. The Company's management fees, like those paid by most index funds, are lower than those paid by many actively 51 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 Adviser is not liable for any error of judgment or mistake of law or for any loss suffered by the Company, unless caused by the Adviser'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 Index 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 Adviser and will terminate automatically in the event of its assignment (as defined in the 1940 Act). Prior to May 8, 2000, for its investment management services to each Index Fund, except those listed below, the Adviser is paid management fees equal to each Index Funds' allocable portion of: .27% per annum of the aggregate net assets of the Index Funds of the Company, except those listed below, less than or equal to $1.7 billion, plus .15% per annum of the aggregate net assets of the Index Funds of the Company, except those listed below, between $1.7 billion and $7 billion, plus .12% per annum of the aggregate net assets of the Index Funds of the Company, except those listed below, between $7 billion and $10 billion, plus .08% per annum of the aggregate net assets of the Index Funds of the Company, except those listed below, in excess of $10 billion. For its investment management services to the Brazil (Free) Index Fund, Greece Index Fund, Indonesia (Free) Index Fund, Korea Index Fund, Portugal Index Fund, South Africa Index Fund, Thailand (Free) Index Fund, Taiwan Index Fund and Turkey Index Fund, the Adviser is paid management fees equal to each such Index Fund's allocable portion of: 0.50% per annum per such Index Fund on per Fund assets less than or equal to $100 million, plus 0.28% per annum per Index Fund on per Fund assets between $100 million and $400 million, plus 0.22% per annum per Index Fund on per Fund assets between $400 million and $600 million, plus 0.15% per annum per Index Fund on per Fund assets greater than $600 million. The management fees are accrued daily and paid by the Company as soon as practical after the last day of each calendar quarter. For its advisory services, the Company paid the following fees to the Adviser: Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Index Fund August 31, 1998 August 31, 1999 August 31, 2000 - ----------------------------------------------------------------------------- Australia $113,929 $ 135,613; $_____ Austria $ 17,769 $ 27,123 $_____ Belgium $ 80,997 $ 44,906 $_____ Brazil (Free) n/a n/a $__(1) Canada $ 56,716 $ 33,205 $_____ EMU n/a n/a $__(2) France $ 74,578 $ 137,387 $_____ Germany $118,054 $ 219,901 $_____ Hong Kong $124,506 $ 197,467 $_____ Italy $162,294 $ 186,292 $_____ Japan $433,508 $1,096,060 $_____ Malaysia (Free) $132,902 $ 176,782 $_____ Mexico (Free) $ 38,055 $ 39,012 $_____ Netherlands $ 44,756 $ 68,016 $_____ Singapore (Free) $119,392 $ 255,259 $_____ South Korea n/a n/a $__(3) Spain $ 53,561 $ 92,868 $_____ Sweden $ 35,809 $ 43,348 $_____ Switzerland $ 64,666 $ 93,758 $_____ Taiwan n/a n/a $__(4) United Kingdom $137,019 $ 245,947 $_____ _____________________ 52 (1) For the period July 14, 2000 (commencement of operations) to August 31, 2000. (2) For the period July 28, 2000 (commencement of operations) to August 31, 2000. (3) For the period May 12, 2000 (commencement of operations) to August 31, 2000. (4) For the period June 23, 2000 (commencement of operations) to August 31, 2000. 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 Index Funds. Administrator. PFPC Inc. (the "Administrator"), an indirect wholly owned ------------- subsidiary of PNC Bank Corp., acts as administration and accounting agent of the Company pursuant to an Administration and Accounting Services Agreement with the Company and is responsible for certain clerical, recordkeeping and bookkeeping services, except those to be performed by the Adviser, by Chase in its capacity as Custodian, or by PNC Bank, N.A. ("PNC") in its capacity as Transfer Agent. The 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 the Administrator is 400 Bellevue Parkway, Wilmington, DE 19809. For the administrative and fund accounting services the Administrator provides to the Company, PFPC is paid aggregate fees equal to each Index Fund's allocable portion of: .15% per annum of the average aggregate daily net assets of the Company up to $3 billion; plus .10% per annum of the average aggregate daily net assets of the Company between $3 billion and $4.5 billion, plus .095% per annum of the average aggregate daily net assets of the Company in excess of $4.5 billion. The Administrator pays Morgan Stanley & Co. Incorporated a fee of .05% of the average daily net assets of the Company for sub-administration services as described under "The Sub-Administrator" below. Prior to February 1, 2000, for the administrative and fund accounting services the Administrator provided to the Company, PFPC was paid aggregate fees equal to each Index Fund's allocable portion of: .22% per annum of the aggregate average daily net assets of the Company up to $1.5 billion; plus .15% per annum of the aggregate average daily net assets of the Company between $1.5 billion and $3 billion, plus .14% per annum of the aggregate average daily net assets of the Company between $3 billion and $5 billion, plus .13% per annum of the aggregate average daily net assets of the Company between $5 billion and $7.5 billion, plus .115% per annum of the aggregate average daily net assets of the Company between $7.5 billion and $10 billion, plus .10% per annum of the aggregate average daily net assets of the Company in excess of $10 billion. The Administrator paid Morgan Stanley & Co. Incorporated a fee of .05% of the average daily net assets of the Company for sub-administration services as described under "The Sub-Administrator" below. Pursuant to the Administration and Accounting Services Agreement, the Administrator is liable for damages arising of its failure to perform its duties due to willful misfeasance, bad faith, gross negligence or reckless disregard of such duties. The Company will indemnify the Administrator for certain liabilities, including certain liabilities arising under federal securities laws, except for liabilities arising out of the Administrator's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties. For its administrative services, the Company paid the following fees to the Administrator: Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Index Fund August 31, 1998 August 31, 1999 August 31, 2000 - ----------------------------------------------------------------------------- Australia $ 89,377 $110,319 $_____ Austria $ 14,128 $ 22,059 $_____ Belgium $ 63,121 $ 36,546 $_____ Brazil (Free) n/a n/a $__(1) Canada $ 44,201 $ 27,026 $_____ EMU n/a n/a $__(2) France $ 59,529 $111,716 $_____ Germany $ 94,141 $178,860 $_____ Hong Kong $ 98,932 $160,647 $_____ Italy $128,961 $151,590 $_____ Japan $340,915 $890,839 $_____ Malaysia (Free) $106,617 $143,744 $_____ Mexico (Free) $ 29,580 $ 31,717 $_____ Netherlands $ 35,512 $ 55,318 $_____ Singapore (Free) $ 95,590 $207,640 $_____ South Korea n/a n/a $__(3) Spain $ 42,795 $ 75,553 $_____ Sweden $ 29,928 $ 35,257 $_____ Switzerland $ 51,205 $ 76,274 $_____ Taiwan n/a n/a $__(4) United Kingdom $108,935 $200,033 $_____ 53 _____________________ (1) For the period July 14, 2000 (commencement of operations) to August 31, 2000. (2) For the period July 28, 2000 (commencement of operations) to August 31, 2000. (3) For the period May 12, 2000 (commencement of operations) to August 31, 2000. (4) For the period June 23, 2000 (commencement of operations) to 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 .05% of the Company's average daily net assets for providing such services. Morgan Stanley & Co. Incorporated may from time to time reimburse expenses to one or more Index Funds. 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, the Administrator paid the following fees to the Sub-Administrator and its affiliates: October 29, 1997to Fiscal Year Ended Fiscal Year Ended Index Fund August 31, 1998 August 31, 1999 August 31, 2000 - -------------------------------------------------------------------------------- Australia $17,644 $ 25,114 $_____ Austria $ 2,940 $ 5,023 $_____ Belgium $12,122 $ 8,316 $_____ Brazil (Free) n/a n/a $__(1) Canada $ 8,491 $ 6,149 $_____ EMU n/a n/a $__(2) France $12,573 $ 25,442 $_____ Germany $19,811 $ 40,722 $_____ Hong Kong $20,539 $ 36,568 $_____ Italy $26,776 $ 34,499 $_____ Japan $67,965 $202,974 $_____ Malaysia (Free) $22,936 $ 32,737 $_____ Mexico (Free) $ 5,620 $ 7,224 $_____ Netherlands $ 7,332 $ 12,596 $_____ Singapore (Free) $20,417 $ 47,270 $_____ South Korea n/a n/a $__(3) Spain $ 9,072 $ 17,198 $_____ Sweden $ 5,789 $ 8,027 $_____ Switzerland $10,490 $ 17,363 $_____ Taiwan n/a n/a $__(4) United Kingdom $22,664 $ 45,546 $_____ _____________________ (1) For the period July 14, 2000 (commencement of operations) to August 31, 2000. (2) For the period July 28, 2000 (commencement of operations) to August 31, 2000. (3) For the period May 12, 2000 (commencement of operations) to August 31, 2000. (4) For the period June 23, 2000 (commencement of operations) to August 31, 2000. Distributor. Effective March 28, 2000, SEI Investments Distribution ----------- Company became 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 Company which will continue for one year from its effective date, and which is renewable annually thereafter (the "Distribution Agreement"), pursuant to which it distributes Company shares. iShares will be 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 will deliver a prospectus to persons purchasing iShares in Creation Units and will maintain 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. 54 SEI Investments Distribution Company 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, 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 Index Fund the Distributor is entitled to receive a distribution fee, accrued daily and paid monthly, calculated with respect to each Index Fund at a rate set from time to time by the Board of Directors, provided that the annual rate may not exceed .25% of the average daily net assets of such Index 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 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 Index 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 any Index Fund, by a vote of a majority of the outstanding voting securities of such Index 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 Index Funds, it may continue in effect with respect to any Index 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 .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 .035% of the Company's average daily net assets; reimbursements of expenses incurred by the distributor and other persons (principally the Adviser) 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 Index Fund, at the annual rate of up to .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. 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 Index 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: Fiscal Year Ended Index Fund August 31, 2000 - --------------------------------- 55 Australia $____ Austria $____ Belgium $____ Brazil (Free) $__(1) Canada $____ EMU $__(2) France $____ Germany $____ Hong Kong $____ Italy $____ Japan $____ Malaysia (Free) $____ Mexico (Free) $____ Netherlands $____ Singapore (Free) $____ South Korea $__(3) Spain $____ Sweden $____ Switzerland $____ Taiwan $__(4) United Kingdom $____ _____________________ (1) For the period July 14, 2000 (commencement of operations) to August 31, 2000. (2) For the period July 28, 2000 (commencement of operations) to August 31, 2000. (3) For the period May 12, 2000 (commencement of operations) to August 31, 2000. (4) For the period June 23, 2000 (commencement of operations) to August 31, 2000. In the aggregate, the Distributor received $___ for the period March 29, 2000 to August 31, 2000 from the Index Funds pursuant to the Plan, retaining $____, and paying out the remainder to unaffiliated third parties. The retained amounts represent .02%, respectively, of the average daily net assets of the Index 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 28, 2000 to August 31, 2000, the Distributor paid $____; $____; and $____, 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 Index Fund based on its average daily net assets for the period. Prior to March 28, 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 the following amounts pursuant to the Plan: Fiscal Year Ended Fiscal Year Ended September 1, 1999 to Index Fund August 31, 1998 August 31, 1999 March 28, 2000 - -------------------------------------------------------------------------------- Australia $ 87,845 $100,454 Austria $ 13,513 $ 20,091 Belgium $ 62,876 $ 33,264 Canada $ 44,024 $ 24,597 France $ 56,481 $101,768 Germany $ 89,498 $162,890 Hong Kong $ 94,745 $146,272 Italy $123,496 $137,994 Japan $333,432 $811,896 Malaysia (Free) $100,121 $130,950 Mexico (Free) $ 29,617 $ 28,898 Netherlands $ 34,109 $ 50,383 56 Singapore (Free $ 90,132 $189,081 Spain $ 40,521 $ 68,791 Sweden $ 25,775 $ 32,110 Switzerland $ 49,386 $ 69,451 United Kingdom $104,206 $182,183 In the aggregate, FDI received $1,379,777, $2,291,073 and $____for the fiscal years ended August 31, 1998 and 1999 and the period September 1, 2000 to March 28, 2000, respectively, from the Index Funds pursuant to the Plan, retaining $133,964, $229,107 and $____, respectively, and paying out the remainder to unaffiliated third parties. The retained amounts represent .02%, respectively, of the average daily net assets of the Index 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 fiscal years ended August 31, 1998 and 1999 and the period September 1, 1999 to March 28, 2000, FDI paid $885,446, $1,553,929 and $____; $248,720, $347,662 and $____; and $111,647, $160,375 and $____, 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 Index Fund based on its average daily net assets for the period. Custodian and Lending Agent. Chase serves as the Custodian for the cash --------------------------- and portfolio securities of each Index Fund pursuant to a Custodian Agreement between Chase and the Company and as Lending Agent for each Index Fund. As Lending Agent, Chase causes the delivery of loaned securities from the Company to borrowers, arranges for the return of loaned securities to the Company at the termination of the loans, requests deposit of collateral, monitors daily the value of the loaned securities and collateral, requests that borrowers add to the collateral when required by the loan agreements, and provides recordkeeping and accounting services necessary for the operation of the program. Chase may from time to time reimburse expenses to one or more Index Funds. Chase, as Custodian and Lending Agent, 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 Chase is One Pierrepont Plaza, Brooklyn, New York, 11201. For its custody services to each Index Fund, Chase has been paid since _____, 2000 per annum fees based on the aggregate net assets of the Index Funds as follows: Australia Index Fund (0.05%); Austria Index Fund (0.06%); Belgium Index Fund (0.05%); Brazil (Free) Index Fund (0.20%); Canada Index Fund (0.02%); EMU Index Fund (0.09%); France Index Fund (0.05%); Germany Index Fund (0.04%); Hong Kong Index Fund (0.04%); Indonesia (Free) Index Fund (0.35%); Italy Index Fund (0.05%); Japan Index Fund (.026%); Malaysia (Free) Index Fund (0.07%); Mexico (Free) Index Fund (0.15%); Netherlands Index Fund (0.04%); Portugal Index Fund (0.35%); Singapore (Free) Index Fund (0.05%); South Africa Index Fund (0.12%); South Korea Index Fund (0.15%); Spain Index Fund (0.05%); Sweden Index Fund (0.05%); Switzerland Index Fund (0.05%); Taiwan Index Fund (0.20%); Thailand (Free) Index Fund (0.15%); Turkey Index Fund (0.35%); United Kingdom Index Fund (0.11%); and USA Index Fund (0.01%). As remuneration for its services in connection with lending portfolio securities of the Index Funds, Chase is paid by the Company, in respect of each Index Fund, 40% of the net investment income earned on the collateral for securities loaned. Transfer Agent. PFPC Inc. (the "Transfer Agent"), an indirect wholly owned -------------- subsidiary of PNC Bank Corp., provides transfer agency services pursuant to an agreement with the Company. The Transfer Agent 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 the Transfer Agent is Broad and Chestnut Streets, Philadelphia, Pennsylvania 19110. BROKERAGE ALLOCATION When selecting brokers and dealers to handle the purchase and sale of portfolio securities, the Adviser looks for prompt execution of the order at a favorable price. Generally, the Adviser 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 Index Fund is investment performance that corresponds to that of an index, 57 the Adviser 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 Adviser may select brokers who are willing to provide payments to third party service suppliers to an Index Fund, to reduce expenses of the Index Fund. The Adviser 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 Adviser 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 Adviser, 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 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 Index Fund is expected to be under 50%. See "Implementation of Policies" in the Prospectus. The overall reasonableness of brokerage commissions is evaluated by the Adviser 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, 2000, the Company paid $_______ 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 Company Secretary's position as a Managing Director of MS&Co. During the fiscal years ended August 31, 2000, 1999 and 1998, the Company paid brokerage commissions to MS&Co. in amounts of $___, $___ and $___, respectively (or __%, __% and __%, respectively, of the aggregate brokerage commissions paid in those years). ADDITIONAL INFORMATION CONCERNING ISHARES Capital Stock. The Company currently is comprised of twenty-eight series ------------- of shares of common stock, par value $.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 (Free) 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 Greece Index Fund, the iShares MSCI Hong Kong Index Fund, the iShares MSCI Indonesia (Free) Index Fund, the iShares MSCI Italy Index Fund, the iShares MSCI Japan Index Fund, the iShares MSCI Malaysia (Free) Index Fund, the iShares MSCI Mexico (Free) Index Fund, the iShares MSCI Netherlands Index Fund, the iShares MSCI Portugal Index Fund, the iShares MSCI Singapore (Free) 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, the iShares MSCI Thailand (Free) Index Fund, the iShares MSCI Turkey Index Fund, the iShares MSCI United Kingdom Index Fund and the iShares MSCI USA Index Fund. Each Index Fund has been issued a separate class of capital 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 provide that the shares of each series of common stock of the Company are redeemable, at net asset value, at the option of the Company, in whole or any part, on such terms as the Board of Directors may by resolution approve, without the consent of the holders thereof. Each iShares issued by the Company has a pro rata interest in the assets of the corresponding Index 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 Index Fund: the iShares MSCI Australia 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 (Free) 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 58 million shares; the iShares MSCI Germany Index Fund, 382.2 million shares; the iShares MSCI Greece Index Fund, 200 million shares; the iShares MSCI Hong Kong Index Fund, 191.4 million shares; the iShares MSCI Indonesia (Free) Index Fund, 200 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 (Free) Index Fund, 127.8 million shares; the iShares MSCI Mexico (Free) Index Fund, 255 million shares; the iShares MSCI Netherlands Index Fund, 255 million shares, the iShares MSCI Portugal Index Fund, 200 million shares; the iShares MSCI Singapore (Free) 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; the iShares MSCI Thailand (Free) Index Fund, 200 million shares; the iShares MSCI Turkey Index Fund, 200 million shares; the iShares MSCI United Kingdom Index Fund, 943.2 million shares; and the iShares MSCI USA Index Fund, 500 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 Index Fund, and in the net distributable assets of such Index 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 iShare 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 Index Fund it will be voted on only by that Index Fund and if a matter affects a particular Index Fund differently from other Index Funds, that Index 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 Index 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 PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809. Book Entry Only System. DTC acts as securities depositary for iShares. ---------------------- iShares of each Index 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 59 its 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 60 Creation Units. The Company issues and redeems iShares of each Index Fund -------------- only in aggregations of iShares specified for each Index Fund. The following table sets forth the number of iShares of an Index Fund that constitute a Creation Unit for such Index Fund and the value of such Creation Unit at November 30, 2000:
Value Per iShares Per Creation Index Fund Creation Unit Unit ($U.S.) ---------------------------------------------------------- Australia 200,000 $_______ Austria 100,000 $_______ Belgium 40,000 $_______ Brazil (Free) 50,000 $_______ Canada 100,000 $_______ EMU 50,000 $_______ France 200,000 $_______ Germany 300,000 $_______ Greece* 50,000 $_______ Hong Kong 75,000 $_______ Indonesia (Free)* 50,000 $_______ Italy 150,000 $_______ Japan 600,000 $_______ Malaysia (Free) 75,000 $_______ Mexico (Free) 100,000 $_______ Netherlands 50,000 $_______ Portugal* 50,000 $_______ Singapore (Free) 100,000 $_______ South Africa* 50,000 $_______ South Korea 50,000 $_______ Spain 75,000 $_______ Sweden 75,000 $_______ Switzerland 125,000 $_______ Taiwan 50,000 $_______ Thailand (Free)* 50,000 $_______ Turkey* 50,000 $_______ United Kingdom 200,000 $_______ USA* 500,000 $_______
* Estimated. 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 Index 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 an initial 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 Index Fund is any day on which (i) the New York Stock Exchange ("NYSE") and (ii) the stock exchange(s) and Company subcustodian(s) relevant to such Index Fund are open for business. As of the date of the Prospectus, the NYSE 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 Index Fund are set forth in Appendix B to this SAI. 61 Portfolio Deposit. The consideration for purchase of a Creation Unit of iShares of an Index Fund (except for the iShares MSCI South Korea Index Fund which is currently offered, and the iShares MSCI Brazil (Free) and Taiwan Index Funds which will be 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 Index 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 investment amount for shares of any Index 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 Index 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 Adviser makes available through the Distributor 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 Index 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 Index 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 Index Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by the Adviser with a view to the investment objective of the Index 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 Adviser 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 Index 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, the Distributor also makes available (i) on each Business Day, the Dividend Equivalent Payment effective through and including the previous Business Day, per outstanding iShares of each Index Fund, and (ii) on a continuous basis throughout the day, the sum of the Dividend Equivalent Payment effective through and including the close of the previous trading session in the relevant foreign market, plus the current value of the requisite Deposit Securities as in effect on such day. 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 Company and 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 62 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 give notice to the Distributor of its intent to submit an order to purchase iShares after 9:00 a.m. but not later than 4:00 p.m., Eastern time on the relevant Business Day. The Distributor shall cause the Adviser and the Custodian to be informed of such advice. The Custodian will then provide such information to the appropriate subcustodian. For each Index Fund, the Custodian shall cause the subcustodian of the Index 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. Following the notice of intention, an irrevocable order to purchase Creation Units, in the form required by the Company, must be received by the Distributor from an Authorized Participant on its own or another investor's behalf by the closing time of the regular trading session on the AMEX (currently 4:00 p.m., Eastern time) on the relevant Business Day. (The required form of an order to purchase is available on request from the Distributor.) 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. Orders must be transmitted by the Authorized Participant to the Distributor by facsimile or electronic transmission as provided in the Authorized Participant Agreement. 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 form required by the individual Authorized Participant, which form will not be the same as the form of purchase order specified by the Company, which the Authorized Participant must deliver to the Distributor. Acceptance of Purchase Order. Subject to the conditions that (i) a properly completed 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 Adviser) 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, against receipt of payment, of a Creation Unit of iShares of the Index Fund 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 Index 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 Index Fund; (b) the Deposit Securities delivered are not as specified by the Adviser, as described above; (c) acceptance of the Deposit Securities would have certain adverse 63 tax consequences to the Index 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 Adviser, 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 Adviser 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. Issuance of a Creation Unit. Except as provided herein, a Creation Unit of iShares of an Index 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, the Custodian shall notify the Distributor and the Adviser, 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 Company, 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 consisting of cash or Short-Term Investments having a value at least equal to such amount as required by the Company in accordance with its then-effective procedures, provided that such amount shall be no less than 125% of the value of the missing Deposit Securities. 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 value of the collateral. 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 an Index Fund (Creation Units of the Brazil (Free), Malaysia (Free), 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 an Index 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 Index Fund for brokerage and market impact expenses. 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. 64
Additional Variable Charge In-kind and cash for Cash Index Fund purchases Purchases* -------------------------------------------------------------------- Australia $1,750 0.60% Austria $1,600 0.67% Belgium $1,500 0.30% Brazil (Free) $4,725 ** Canada $3,250 0.30% EMU $8,000 1.05% France $3,400 0.25% Germany $2,400 0.25% Greece $3,500 1.50% Hong Kong $3,800 0.60% Indonesia (Free) $4,700 1.18% Italy $2,100 0.30% Japan $7,600 0.15% Malaysia (Free) $4,150 *** Mexico (Free) $2,200 0.50% Netherlands $1,900 0.25% Portugal $2,000 1.65% Singapore (Free) $2,500 1.60% South Africa $3,200 1.60% South Korea $4,400 *** Spain $2,300 0.25% Sweden $2,700 0.30% Switzerland $2,200 0.40% Taiwan $7,200 *** Thailand (Free) $3,300 1.41% Turkey $3,900 1.46% United Kingdom $4,750 0.25% USA $1,900 0.50%
* 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%. *** This percentage, when aggregated with the basic in-kind transaction fee, will not exceed 2.00%. 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 Y______ per US$1.
Unit Creation Calculation in Unit Creation Calculation in Daily NAV Calculation in Japanese Yen United States Dollars United States Dollars ------------------------------------------------------------------------------------------------ Execution ____ ____ ____ Commissions ____ ____ N/A Stamp Taxes 0 0 N/A Risk Premium ____ 0 N/A Accrued Income ____ ____ ____ Creation Charge ____ ____ N/A iShares Unit Value ____ ____ ____ Per iShares ____ ____ Shares 600,000
65 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 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 Index Fund (other than the Brazil (Free), Malaysia (Free), South Korea and Taiwan Index Funds, which currently redeem Creation Units of iShares solely for cash) the Adviser makes available through the Distributor 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 an Index Fund, the redemption proceeds for a Creation Unit generally consist of Deposit Securities as announced by the Distributor 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 Index Fund. 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 Index Fund redemptions redemptions* ------------------------------------------------------------------- Australia $1,750 0.60% Austria $1,600 0.67% Belgium $1,500 0.30% Brazil (Free) $4,725 ** Canada $3,250 0.30% EMU $8,000 1.05% France $3,400 0.25% Germany $2,400 0.25% Greece $3,500 1.50% Hong Kong $3,800 0.60% Indonesia (Free) $4,700 1.18% Italy $2,100 0.30% Japan $7,600 0.40% Malaysia (Free) $4,150 ** Mexico (Free) $2,200 0.50% Netherlands $1,900 0.25% Portugal $2,000 1.65% Singapore (Free) $2,500 1.30% South Africa $3,200 1.60% South Korea $4,400 **
66
Additional variable In-kind and cash charge for cash Index Fund redemptions redemptions* ------------------------------------------------------------------- Spain $2,300 0.45% Sweden $2,700 0.30% Switzerland $2,200 0.40% Taiwan $7,200 ** Thailand (Free) $3,300 1.41% Turkey $3,900 1.46% United Kingdom $4,750 0.75% USA $1,900 0.50%
* 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%. Redemption requests in respect of Creation Units of any Index 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. 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 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 duly completed request form is received by the Distributor from the Authorized Participant on behalf of itself or another redeeming investor after 9:00 a.m. and not later than 2:00 p.m. on the next following day (on which the AMEX is open for business). 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 following the day that the redemption request is received, the redemption request shall be rejected and may be resubmitted the next day that the AMEX is open for business. 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." 67 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 Index 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 an Index Fund, Appendix B 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 Index Fund, the Company will make delivery of in-kind redemption proceeds within the number of days stated in Appendix B 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 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 Index 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 Index Fund). Redemptions of iShares for Deposit Securities will be subject to compliance with applicable United States federal and state securities laws and each Index Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Index 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 (Free), Malaysia (Free), 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 B hereto where more than seven calendar days would be needed). To the extent contemplated by an Authorized Participant's agreement with the Company, 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 Distributor, on behalf of 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. The collateral is marked to market daily in accordance with the Company's procedures. 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 Authorized Participant Agreement will permit the Company to purchase the missing iShares or acquire the Portfolio Securities and the Cash Component underlying such iShares at any time and will subject 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 value of the collateral. Because the Portfolio Securities of an Index Fund may trade on the relevant exchange(s) on days that the AMEX is closed or are otherwise not Business Days for such Index Fund, stockholders may not be able to redeem 68 their shares of such Index Fund, or to purchase or sell iShares on the AMEX, on days when the net asset value of such Index 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 Index 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 Index 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 Index Fund is - --------------------------- computed by dividing the value of the net assets of such Index 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 Brazil, Malaysia (Free), South Korea and Taiwan Index Funds, the net asset value of each Index Fund is determined as of the close of the regular trading session on the New York Stock Exchange, Inc. ("NYSE") (ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open. The net asset value of each of the iShares MSCI Malaysia (Free), South Korea and Taiwan Index Funds is determined as of 8:30 a.m. (Eastern time) on each day that the NYSE is open. The net asset value of the iShares MSCI Brazil Index Fund is determined as of 5:00 p.m. (Eastern time) on each day that the NYSE is open. The Company may establish times for the computation of net asset value of one or more Index Funds in the future in connection with the possible future trading of iShares of such Index Funds on one or more foreign exchanges. In computing an Index Fund's net asset value, the Index Fund's portfolio securities are valued based on their last quoted current price. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities regularly traded in an over-the-counter market are valued at the latest quoted bid price in such market. Other portfolio securities and assets for which market quotations are not readily available are valued based on fair value as determined in good faith by the Adviser in accordance with procedures adopted by the Board. Currency values generally are converted into US dollars using the same exchange rates utilized by Morgan Stanley Capital International in the calculation of the relevant MSCI Indices (currently, exchange rates as of 4:00 p.m. London time, except that the exchange rate for the MSCI Mexico (Free) Index is that as of 3:00 p.m. Eastern time). However, the Company may use a different rate from the rate used by MSCI in the event the Adviser concludes that such rate is more appropriate and, as of the date of this SAI, is using a different rate than the MSCI in computing the net asset value of the iShares MSCI Malaysia (Free) Index Fund. Any such use of a different rate than MSCI may adversely affect an Index Fund's ability to track its benchmark MSCI Index. Continuous Offering. The method by which Creation Units of iShares are ------------------- created and traded may raise certain issues under applicable securities laws. Because new Creation Units of iShares are issued and sold by the Company 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 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 Units after placing an order with the Distributor, breaks them down into constituent iShares, and sells some or all of the iShares comprising such Creation Units directly to its 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 a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person's activities. Thus, 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 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. The Company has, however, applied to the Securities and Exchange Commission for an exemption from this prospectus delivery obligation in ordinary iShares secondary market transactions under certain circumstances, on the condition that iShares purchasers are provided with a iShares product description. If the SEC granted the Company this relief, broker-dealer firms should note that dealers who are not "underwriters" but are 69 participating in a distribution (as contrasted to ordinary secondary market transaction), 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. Firms that incur a prospectus-delivery obligation with respect to iShares are reminded that under 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 exchange is satisfied by the fact that the Index Fund's prospectus is available at the exchange (i.e., the AMEX) upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange and not with respect to "upstairs" transactions. TAXES The Company on behalf of each Index 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 Index Fund and if, pursuant to section 351 of the Internal Revenue Code, the respective Index 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 Index 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 Index Fund may be subject to foreign income taxes withheld at source. Each Index Fund will elect to "pass through" to its investors the amount of foreign income taxes paid by the Index Fund provided that the investor held the Index Fund, and the Index Fund held the security, on the dividend settlement date and for at least fourteen 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 Index 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 Index 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 Index Fund and (ii) the portion of any dividend paid by the Index Fund which represents income derived from foreign sources; the Index 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 Index 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 Index Fund's foreign income taxes. Taxes other than foreign income taxes, including any profits levy payable by the iShares Malaysia (Free) Index Fund, are not passed through to you in this way. If any Index Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies," the Index Fund will be subject to one of the following special tax regimes: (i) the Index 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 70 distribution or gain is paid out by the Index Fund as a dividend to its shareholders; (ii) if the Index Fund were able and elected to treat a passive foreign investment company as a "qualified electing fund," the Index Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Index 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 Index Fund or (iii) the Index Fund 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. An Index 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 Index 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 an Index Fund that is a foreign corporation or an individual who is a nonresident alien for U.S. tax purposes will be subject to significant adverse U.S. tax consequences. For example, dividends paid out of an Index 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 an Index 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 Index 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 an Index Fund over periods of 1, 5 and 10 years (or the life of an Index Fund, if shorter). Such total return figures will reflect the deduction of a proportional share of such Index Fund's expenses on an annual basis, and will assume that all dividends and distributions are reinvested when paid. Total return 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). The total returns for the period March 6, 1996 (commencement of operations for the initial Index Funds) to August 31, 1996 (not annualized) and for the fiscal years ended August 31, 1997, 1998, 1999 and 2000 for each Index Funds were:
Fiscal Year Fiscal Year Fiscal Year Fiscal Year March 6, 1996 to Ended Ended Ended Ended Index Fund August 31, 1996 August 31, 1997 August 31, 1998 August 31, 1999 August 31, 2000 - --------------------------------------------------------------------------------------------------------------------- Australia 3.88% 6.23% (23.11)% 32.09% ____% Austria (3.39)% 1.06% 2.16% (8.69)% ____% Belgium 5.01% 9.26% 39.42% (1.00)% ____% Brazil (Free) n/a n/a n/a n/a ____%(1) Canada 4.63% 28.50% (21.69)% 39.71% ____% EMU n/a n/a n/a n/a ____%(2) France 4.95% 16.60% 34.77% 21.01% ____% Germany 4.00% 20.51% 25.69% 7.04% ____% Hong Kong 3.22% 17.80% (54.22)% 90.51% ____%
71 Italy 4.11% 23.37% 47.66% 5.14% ____% Japan (3.11)% (11.97)% (33.38)% 58.14% ____% Malaysia (Free) 4.28% (40.20)% (73.57)% 185.81% ____% Mexico (Free) 15.93% 35.21% (44.18)% 66.92% ____% Netherlands 11.19% 28.04% 17.41% 8.98% ____% Singapore (Free) (6.73)% (23.48)% (61.29)% 144.52% ____% South Korea n/a n/a n/a n/a ____%(3) Spain 8.45% 39.15% 32.58% 13.39% ____% Sweden 14.13% 30.10% 5.48% 25.09% ____% Switzerland 2.60% 16.69% 21.24% 1.47% ____% Taiwan n/a n/a n/a n/a ____%(4) United Kingdom 10.41% 30.48% 14.98% 15.33% ____%
_____________________ (1) For the period July 14, 2000 (commencement of operations) to August 31, 2000. (2) For the period July 28, 2000 (commencement of operations) to August 31, 2000. (3) For the period May 12, 2000 (commencement of operations) to August 31, 2000. (4) For the period June 23, 2000 (commencement of operations) to August 31, 2000. As of the date of this SAI, the Greece, Indonesia (Free), Portugal, South Africa, Thailand (Free), Turkey and USA Index Funds have not commenced investment operations. Quotations of a cumulative total return will be calculated for any specified period by assuming a hypothetical investment in an Index 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 an Index 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 an Index Fund during the particular time period on which the calculations are based. Such quotations for an Index Fund will vary based on changes in market conditions and the level of such Index 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. 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 72 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 Index 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 Greece FTSE/ASE 20 Hong Kong Hang Seng Indonesia Composite Italy BCI Japan Nikkei 225 Malaysia KLSE Mexico IPC Netherlands CBS All Share Portugal Lisbon BVL General Singapore SES All South Africa Johannesburg All-Share South Korea Composite Spain MA Madrid Index Sweden Aff. General Switzerland Swiss Market Index 73 COUNTRY NATIONAL INDEX ------------------------------------------ Taiwan TWSE Thailand (Free) SET Turkey ISE National 100 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 Index 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. 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. 74 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. Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, ------- is counsel to the Company and has passed upon the validity of the Company's shares. Independent Auditors. _________________, 787 Seventh Avenue, New York, New -------------------- York 10019, serve as the independent auditors 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, 2000 (the "2000 Annual Report") are incorporated in this SAI by reference. No other parts of the 2000 Annual Report are incorporated by reference herein. The financial statements included in the 2000 Annual Report have been audited by the Company's independent auditors, ___________, whose report thereon is incorporated herein by reference. Additional copies of the 2000 Annual Report may be obtained at no charge by telephoning the Distributor at 1-800-iShares (1-800-474-2737). 75 iSHARES, INC. PART C OTHER INFORMATION ITEM 23. EXHIBITS Exhibit Number Description - ------ ----------- (a.1) Registrant's Amended and Restated Articles of Incorporation.(1) (a.2) Registrant's Articles of Amendment.(4) (a.3) Registrant's Articles Supplementary.(8) (a.4) Registrant's Articles of Amendment.(9) (b.1) Registrant's Amended By-Laws.(1) (b.2) Registrant's Amendment No. 1 to Amended By-Laws.(5) (c.) None. (d.1) Investment Management Agreement between Registrant and Barclays Global Fund Advisors.(9) (e.1) Distribution Agreement between Registrant and SEI Investments Distribution Co.(10) (e.3) Form of Authorized Participant Agreement.(10) (e.4) Authorized Participant Agreement for Merrill Lynch.(3) (e.5) Form of Sales and Investor Services Agreement.(10) (f.) None. (g.1) Custodian Agreement between Registrant and Morgan Stanley Trust Company.(3) (g.2) Amendment to Custodian Agreement.(5) (g.3) Lending Agreement between Registrant and Morgan Stanley Trust Company.(3) (g.4) Amended Appendix 2 to Custody Agreement.(8) (g.5) Form of Custody Agreement between Registrant and The Chase Manhattan Bank.(10) (g.6) Form of Securities Lending Agreement between Registrant and The Chase Manhattan Bank.(10) (h.1) Amended Administration and Accounting Services Agreement between Registrant and PFPC Inc.(6) (h.2) Transfer Agency Services Agreement between Registrant and PNC Bank, National Association.(3) (h.3) Amendment to Transfer Agency Services Agreement.(5) (h.4) Amended and Restated License Agreement between Registrant and Morgan Stanley Capital International.(8) (h.5) Sub-Administration Agreement between Registrant and Morgan Stanley Trust Company.(6) (h.6) Assignment Letter among Morgan Stanley Trust Company, Morgan Stanley & Co. Incorporated and PFPC Inc.(7) (h.7) Amended Exhibit A to Sub-Administration Agreement.(8) (h.8) License Agreement between Barclays Global Investors and Morgan Stanley Capital International Inc. (10) (h.9) Sub-License Agreement between Registrant and Barclays Global Investors. (10) (i.1) None. (j.1) None. (k.) None. (l.1) Subscription Agreement between the Registrant and Funds Distributor, Inc.(2) (l.2) Letter of Representations among the Registrant, Depository Trust Company and Morgan Stanley Trust Company. (1) (l.3) Letter of Representations between the Registrant and Depository Trust Company. (10) (m.) Form of 12b-1 Plan. (1) (n.) None. (o.) Not applicable, as Registrant is an open-end fund. (p.1) Code of Ethics of the Registrant.(9) (p.2) Code of Ethics of Barclays Global Fund Advisors.(9) ____________________________ (1) Exhibit is incorporated herein by reference to Pre-Effective Amendment No. 2, filed March 1, 1996, to the Company's initial registration statement on Form N-1A filed on September 29, 1995 (the "Registration Statement"). (2) Exhibit is incorporated herein by reference to Pre-Effective Amendment No. 3 to the Registration Statement, filed on March 6, 1999. (3) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 1 to the Registration Statement, filed on October 30, 1996. C-1 (4) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 2 to the Registration Statement, filed on December 27, 1996. (5) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 8 to the Registration Statement, filed on August 27, 1997. (6) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 10 to the Registration Statement, filed on October 29, 1997. (7) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 12 to the Registration Statement, filed on November 25, 1998. (8) Exhibit is incorporated herein by reference to Post-Effective Amendment No. 16 to the Registration Statement, filed on December 22, 1999. (9) Filed herewith. (10) To be filed by amendment. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. None. ITEM 25. INDEMNIFICATION. Incorporated herein by reference to Post-Effective Amendment No. 7 to the Registration Statement, filed on January 15, 1997. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. The Fund is advised by Barclays Global Fund Advisors ("BGFA"), a wholly owned subsidiary of Barclays Global Investors, N.A. ("BGI"), 45 Fremont Street, San Francisco, CA 94105. BGFA's business is that of a registered investment adviser to certain open-end, management investment companies and various other institutional investors. The directors and officers of BGFA consist primarily of persons who during the past two years have been active in the investment management business. Each of the directors and executive officers of BGFA will also have substantial responsibilities as directors and/or officers of BGI. To the knowledge of the Registrant, except as set forth below, none of the directors or executive officers of BGFA is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature. Name and Position Principal Business(es) During the last Two Fiscal Years - ----------------- ------------------------------------------------------- Patricia Dunn Director of BGFA and Chairman and Director of BGI Director 45 Fremont Street, San Francisco, CA 94105 Garrett F. Bouton Chairman of the Board of Directors of BGFA and Chief Chariman Operating Officer and Director of BGI 45 Fremont Street, San Francisco, CA 94105 Lawrence G. Tint Director of BGFA and Director of BGI Director 45 Fremont Street, San Francisco, CA 94105 Geoffrey Fletcher Chief Financial Officer of BGFA and BGI Chief Financial Officer 45 Fremont Street San Francisco, CA 94105 ITEM 27 PRINCIPAL UNDERWRITERS (a) The Fund's distributor, SEI Investments Distribution Co. (the "Distributor"), acts as distributor for: SEI Daily Income Trust July 15, 1982 SEI Liquid Asset Trust November 29, 1982 SEI Tax Exempt Trust December 3, 1982 SEI Index Funds July 10, 1985 C-2 SEI Institutional Managed Trust January 22, 1987 SEI Institutional International Trust August 30, 1988 The Advisors' Inner Circle Fund November 14, 1991 The Pillar Funds February 28, 1992 CUFUND May 1, 1992 STI Classic Funds May 29, 1992 First American Funds, Inc November 1, 1992 First American Investment Funds, Inc November 1, 1992 The Arbor Fund January 28, 1993 Boston 1784 Funds June 1, 1993 The PBHG Funds, Inc July 16, 1993 The Achievement Funds Trust December 27, 1994 Bishop Street Funds January 27, 1995 STI Classic Variable Trust August 18, 1995 ARK Funds November 1, 1995 Huntington Funds January 11, 1996 SEI Asset Allocation Trust April 1, 1996 TIP Funds April 28, 1996 SEI Institutional Investments Trust June 14, 1996 First American Strategy Funds, Inc October 1, 1996 HighMark Funds February 15, 1997 Armada Funds March 8, 1997 PBHG Insurance Series Fund, Inc April 1, 1997 The Expedition Funds June 9, 1997 Alpha Select Funds January 1, 1998 Oak Associates Funds February 27, 1998 The Nevis Fund, Inc June 29, 1998 CNI Charter Funds April 1, 1999 Amerindo Funds Inc July 13, 1999 Huntington VA Funds October 15, 1999 Friends Ivory Funds December 16, 1999 SEI Insurance Products Trust March 29, 2000 iShares Trust The Distributor provides numerous financial services to investment managers, pension plan sponsors, and bank trust departments. These services include portfolio evaluation, performance measurement and consulting services and automated execution, clearing and settlement of securities transactions. (b) Following is information with respect to each director, officer or partner of the Distributor. The business address of each director or officer is 1 Freedom Valley Drive, Oaks, PA 19456.
Name Position and Office with Underwriter Positions and Office with Registrant ---- ------------------------------------ ------------------------------------ Alfred P. West, Jr. Director, Chairman of the Board of Directors None Richard B. Lieb Director, Executive Vice President None Carmen V. Romeo Director None Mark J. Held President & Chief Operating Officer None Dennis J. McGonigle Executive Vice President None Robert M. Silvestri Chief Financial Officer & Treasurer None Todd Cipperman Senior Vice President & General Counsel None Leo J. Dolan, Jr. Senior Vice President None Carl A. Guarino Senior Vice President None Jack May Senior Vice President None Hartland J. McKeown Senior Vice President None Kevin P. Robins Senior Vice President None Patrick K. Walsh Senior Vice President None Wayne M. Withrow Senior Vice President None Robert Aller Vice President None
C-3
Name Position and Office with Underwriter Positions and Office with Registrant ---- ------------------------------------ ------------------------------------ John D. Anderson Vice President & Managing Director None Timothy D. Barto Vice President & Assistant Secretary None S. Courtney E. Collier Vice President & Assistant Secretary None Robert Crudup Vice President & Managing Director None Richard A. Deak Vice President & Assistant Secretary None Scott W. Dellorfano Vice President & Managing Director None Barbara Doyne Vice President None Jeff Drennen Vice President None Scott C. Fanatico Vice President & Managing Director None James R. Foggo Vice President & Assistant Secretary None Vic Galef Vice President & Managing Director None Steven A. Gardner Vice President & Managing Director None Lydia A. Gavalis Vice President & Assistant Secretary None Greg Gettinger Vice President & Assistant Secretary None Kathy Heilig Vice President None Jeff Jacobs Vice President None Samuel King Vice President None John Kirk Vice President & Managing Director None Kim Kirk Vice President & Managing Director None John Krzeminski Vice President & Managing Director None Paul Lonergan Vice President & Managing Director None Ellen Marquis Vice President None Christine M. McCullough Vice President & Assistant Secretary None Carolyn McLaurin Vice President & Managing Director None Mark Nagle Vice President None Joanne Nelson Vice President None Cynthia M. Parrish Vice President & Secretary None Rob Redican Vice President None Maria Rinehart Vice President None Steve Smith Vice President None Daniel Spaventa Vice President None Kathryn L. Stanton Vice President None Lori L. White Vice President & Assistant Secretary None
(c) Not applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS. All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder are maintained at the offices of PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809. ITEM 29. MANAGEMENT SERVICES. Not applicable. ITEM 30. UNDERTAKINGS. (a) The Company hereby undertakes to call a meeting of the shareholders for the purpose of voting upon the question of removal of any Director when requested in writing to do so by the holders of at least 10% of the Company's outstanding shares of common stock and, in connection with such meeting to comply with the provisions of Section 16(c) of the 1940 Act relating to shareholder communications. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities C-4 (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. C-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment No. 17 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilmington, and State of Delaware, on the 3rd day of November 2000. iSHARES, INC. By: /s/ Nathan Most* ----------------------------------- Nathan Most, President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 17 to the Registration Statement has been signed below by the following persons, in the capacities indicated, on the 3rd day of November 2000. Signature Title --------- ----- /s/ Nathan Most* President and Director - ---------------------------------- (Nathan Most) /s/ John B. Carroll* Director - ---------------------------------- (John B. Carroll) /s/ Timothy A. Hultquist* Director - ---------------------------------- (Timothy A. Hultquist) /s/ Lloyd N. Morrisett* Director - ---------------------------------- (Lloyd N. Morrisett) /s/ W. Allen Reed* Director - ---------------------------------- (W. Allen Reed) Treasurer (principal financial /s/ Stephen M. Wynne and accounting officer) - ---------------------------------- (Stephen M. Wynne) *By: /s/ Gary M. Gardner Attorney-In-Fact - ---------------------------------- (Gary M. Gardner) C-6 iSHARES, INC. EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (a.4) Registrant's Articles of Amendment. (d.1) Investment Management Agreement between Registrant and Barclays Global Fund Advisors. (p.1) Code of Ethics of the Registrant. (p.2) Code of Ethics of Barclays Global Fund Advisors. EX-99.A.4 2 0002.txt REGISTRANT'S ARTICLES OF AMENDMENT EXHIBIT (A.4) ARTICLES OF AMENDMENT TO CHARTER OF WEBS INDEX FUND, INC. THIS IS TO CERTIFY that WEBS INDEX FUND, INC., a Maryland corporation, having its principal office in Baltimore, Maryland (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by striking out Article SECOND of the Articles of Incorporation and inserting in lieu thereof a new Article SECOND as follows: SECOND: Name. The name of the corporation (which is hereinafter ---- called the "Corporation"): is iSHARES, INC. SECOND: The designation of each of the Corporation's series of common stock as a "WEBS Index Series" is hereby amended to be an "iShares MSCI [name] Index Fund" and the name of the "Korea WEBS Index Series" is further amended to become the "iShares MSCI South Korea Index Fund", with the effect that the name of each such series changes as follows: From: To: ---- -- Australia WEBS Index Series iShares MSCI Australia Index Fund Austria WEBS Index Series iShares MSCI Austria Index Fund Belgium WEBS Index Series iShares MSCI Belgium Index Fund Brazil (Free) WEBS Index Series iShares MSCI Brazil (Free) Index Fund Canada WEBS Index Series iShares MSCI Canada Index Fund EMU WEBS Index Series iShares MSCI EMU Index Fund France WEBS Index Series iShares MSCI France Index Fund Germany WEBS Index Series iShares MSCI Germany Index Fund Greece WEBS Index Series iShares MSCI Greece Index Fund Hong Kong WEBS Index Series iShares MSCI Hong Kong Index Fund Indonesia (Free) WEBS Index Series iShares MSCI Indonesia (Free) Index Fund Italy WEBS Index Series iShares MSCI Italy Index Fund Japan WEBS Index Series iShares MSCI Japan Index Fund Korea WEBS Index Series iShares MSCI South Korea Index Fund Malaysia WEBS Index Series iShares MSCI Malaysia Index Fund Mexico (Free) WEBS Index Series iShares MSCI Mexico (Free) Index Fund Netherlands WEBS Index Series iShares MSCI Netherlands Index Fund Portugal WEBS Index Series iShares MSCI Portugal Index Fund From: To: ---- -- Singapore WEBS Index Series iShares MSCI Singapore Index Fund South Africa WEBS Index Series iShares MSCI South Africa Index Fund Spain WEBS Index Series iShares MSCI Spain Index Fund Sweden WEBS Index Series iShares MSCI Sweden Index Fund Switzerland WEBS Index Series iShares MSCI Switzerland Index Fund Taiwan WEBS Index Series iShares MSCI Taiwan Index Fund Thailand (Free) WEBS Index Series iShares MSCI Thailand (Free) Index Fund Turkey WEBS Index Series iShares MSCI Turkey Index Fund United Kingdom WEBS Index Series iShares MSCI United Kingdom Index Fund USA WEBS Index Series iShares MSCI USA Index Fund THIRD: The foregoing amendment does not change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of the capital stock of the Corporation. FOURTH: A majority of the entire Board of Directors of the Corporation approved the foregoing amendments to the Charter of the Corporation and duly adopted a resolution in which were set forth the foregoing amendments to the Charter of the Corporation, declaring that said amendments of the Charter as proposed were advisable. FIFTH: The foregoing amendments to the Charter of the Corporation are limited to changes expressly permitted by (S)2-605(a)(1) and (a)(2) of the General Corporation Law of Maryland to be made without action by stockholders and the Corporation is registered as an open-end company under the Investment Company Act of 1940, as amended. -2- IN WITNESS WHEREOF, WEBS Index Fund, Inc. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on May 15, 2000. WEBS INDEX FUND, INC. WITNESS: /s/ John P. Falco By: /s/ Nathan Most - -------------------------------- ------------------ John P. Falco Nathan Most Assistant Secretary President THE UNDERSIGNED, President of WEBS Index Fund, Inc., who executed on behalf of the Corporation the foregoing amendments to the Charter of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing amendments to the Charter to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ Nathan Most ---------------------- Name: Nathan Most -3- EX-99.D.1 3 0003.txt INVESTMENT MANAGEMENT AGREEMENT EXHIBIT (D.1) ADVISORY AGREEMENT AGREEMENT made as of the 8th day of May, 2000 between Barclays Global Fund Advisors, a corporation organized under the laws of the State of California (the "Adviser"), and WEBS Index Fund, Inc., a Maryland corporation (the "Company"). WHEREAS, the Adviser is engaged principally in the business of rendering investment management services and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended; and WHEREAS, the Company engages in the business of an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Company is authorized to issue shares of beneficial interest in separate series with each such series representing interests in a separate portfolio of securities and other assets; and WHEREAS, the Company intends to offer shares representing interests in each of the separate portfolios identified on Schedule A hereto (each, a "Series"); and WHEREAS, the Company desires to appoint the Adviser to serve as the investment adviser with respect to each Series; and WHEREAS, the Company may, from time to time, offer shares representing interests in one or more additional portfolios (each, an "Additional Series"); and WHEREAS, the Company may desire to appoint the Adviser as the investment adviser with respect to one or more Additional Series; NOW THEREFORE, the parties hereto hereby agree as follows: 1. APPOINTMENT OF ADVISER a. Series. The Company hereby appoints the Adviser to act as investment ------ adviser for the Series listed on Schedule A for the period and on the terms herein set forth. The Adviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. b. Additional Series. In the event the Company desires to retain the ----------------- Adviser to render investment advisory services hereunder with respect to any Additional Series, it shall so notify the Adviser in writing, indicating the advisory fee to be payable with respect to the Additional Series. If the Adviser is willing to render such services for such fee and on the terms provided for herein, it shall so notify the Company in writing, whereupon such Additional Series shall become a Series hereunder. 2. DUTIES OF THE ADVISER A-1 The Adviser shall be responsible for the general management of the Company's affairs. The Adviser, at its own expense (subject to the overall supervision and review of the Board of Directors of the Company), shall (i) furnish continuously an investment program for each Series in compliance with that Series' investment objective and policies, as set forth in the then-current prospectus and statement of additional information for such Series contained in the Company's Registration Statement on Form N-lA, as such prospectus and statement of additional information is amended or supplemented from time to time, (ii) determine what investments shall be purchased, held, sold or exchanged for each Series and what portion, if any, of the assets of each Series shall be held uninvested, (iii) make changes on behalf of the Company in the investments for each Series and (iv) provide the Company with records concerning the Adviser's activities that the Company is required to maintain and render reports to the Company's officers and Board of Directors concerning the Adviser's discharge of the foregoing responsibilities. The Adviser shall furnish to the Company all office facilities, equipment, services and executive and administrative personnel necessary for managing the investment program of the Company for each Series. 3. ALLOCATION OF EXPENSES Subject to Section 4 below, the Company shall be responsible for and pay all expenses for Company operations and activities. 4. ADVISORY FEE For the services to be provided by the Adviser hereunder with respect to each Series, the Company shall pay to the Adviser an annual gross investment advisory fee equal to the amount set forth on Schedule A attached hereto; provided, however, that the fee paid to the Adviser with respect to each Series shall be reduced by the aggregate of such Series' fees and expenses, other than (i) expenses of the Series incurred in connection with the execution of portfolio securities transactions on behalf of such Series, (ii) expenses incurred in connection with any distribution plan adopted by the Company in compliance with Rule 12b-1 under the 1940 Act, (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 1940 Act) deems to be an extraordinary expense and (vi) the advisory fee payable to the Adviser hereunder; and provided, further, that the Adviser shall reimburse the Company to the extent that the expenses of any Series (other than the expenses set forth in the foregoing proviso) exceed the amount set forth in Schedule A with respect to such Series. Schedule A shall be amended from time to time to reflect the addition and/or termination of any Series as a Series hereunder and to reflect any change in the advisory fees payable with respect to any Series duly approved in accordance with Section 7(b) hereunder. All fees payable hereunder shall be accrued daily and paid as soon as practicable after the last day of each calendar quarter. A-2 In the case of commencement or termination of this Agreement with respect to any Series during any calendar quarter, the fee with respect to such Series for that quarter shall be reduced proportionately based upon the number of calendar days during which it is in effect, and the fee shall be computed upon the average daily net assets of such Series for the days during which it is in effect. 5. PORTFOLIO TRANSACTIONS In connection with the management of the investment and reinvestment of the assets of the Company, the Adviser, acting by its own officers, directors or employees, is authorized to select the brokers or dealers that will execute purchase and sale transactions for the Company. In executing portfolio transactions and selecting brokers or dealers, if any, the Adviser will use its best efforts to seek on behalf of a Series the best overall terms available. In assessing the best overall terms available for any transaction, the Adviser shall consider all factors it deems relevant, including the breadth of the market in and the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any (for the specific transaction and on a continuing basis). In evaluating the best overall terms available, and in selecting the broker or dealer, if any, to execute a particular transaction, the Adviser may also consider the brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act) provided to any Series of the Company. The Adviser may pay to a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if, but only if, the Adviser determines in good faith that such commission was reasonable in relation to the value of the brokerage and research services provided. The Company acknowledges that any such research may be useful to the Adviser in connection with other accounts managed by it. 6. LIABILITY OF ADVISER Neither the Adviser nor its officers, directors, employees, agents or controlling persons or assigns shall be liable for any error of judgment or mistake of law or for any loss suffered by the Company or its shareholders in connection with the matters to which this Agreement relates; provided, -------- however, that no provision of this Agreement shall be deemed to protect the Adviser against any liability to the Company or its shareholders to which it might otherwise be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations and duties under this Agreement. 7. DURATION AND TERMINATION OF THIS AGREEMENT a. Duration. This Agreement shall become effective with respect to each -------- Series on the date hereof and, with respect to any Additional Series, on the date specified in the written notice received by the Company from the Adviser in accordance with paragraph 1(b) hereof A-3 that the Adviser is willing to serve as Adviser with respect to such Series. Unless terminated as herein provided, this Agreement shall remain in full force and effect for one year from the date hereof with respect to each Series and, with respect to each Additional Series, for two years from the date on which such Series becomes a Series hereunder. Subsequent to such initial periods of effectiveness, this Agreement shall continue in full force and effect for periods of one year thereafter with respect to each Series so long as such continuance with respect to such Series is approved at least annually (i) by either the Directors of the Company or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of such Series, and (ii), in either event, by the vote of a majority of the Directors of the Company who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. b. Amendment. Any amendment to this Agreement shall become effective --------- with respect to a Series upon approval of the Adviser and of a majority of Directors who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting such approval and a majority of the outstanding voting securities (as defined in the 1940 Act) of that Series. c. Termination. This Agreement may be terminated with respect to any ----------- Series at any time, without payment of any penalty, by vote of the Directors or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of that Series, or by the Adviser, in each case on sixty (60) days' prior written notice to the other party; provided, that a shorter notice period shall be permitted for a Series in the event its shares are no longer listed on a national securities exchange. d. Automatic Termination. This Agreement shall automatically and --------------------- immediately terminate in the event of its "assignment" (as defined in the 1940 Act). e. Approval, Amendment or Termination by a Series. Any approval, ---------------------------------------------- amendment or termination of this Agreement by the holders of a "majority of the outstanding voting securities" (as defined in the 1940 Act) of any Series shall be effective to continue, amend or terminate this Agreement with respect to any such Series notwithstanding (i) that such action has not been approved by the holders of a majority of the outstanding voting securities of any other Series affected thereby, and (ii) that such action has not been approved by the vote of a majority of the outstanding voting securities of the Company, unless such action shall be required by any applicable law or otherwise. 8. SERVICES NOT EXCLUSIVE A-4 The services of the Adviser to the Company hereunder are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. 9. MISCELLANEOUS a. "iShares" Name. The Company shall, at the request of the Adviser, -------------- stop all use of the "iShares" name in the event that the Adviser or its affiliates is no longer the Company's investment adviser. b. Notice. Any notice under this Agreement shall be in writing, ------ addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate in writing for the receipt of such notices. c. Severability. If any provision of this Agreement shall be held or ------------ made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected. d. Applicable Law. This Agreement shall be construed in accordance with -------------- and governed by the laws of New York. e. Execution by Counterpart. This Agreement may be executed in any ------------------------ number of counterparts, all of which together shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. WEBS INDEX FUND, INC. By: /s/ Nathan Most Name: Nathan Most Title: Presiden BARCLAYS GLOBAL FUND ADVISORS By: /s/ Barclays Global Fund Advisors Name: Barclays Global Fund Advisors Title: A-5 Schedule A Advisory Fee* for the Category I Series: 0.59% per annum of the aggregate net assets of the Category I Series less than or equal to $7.0 billion plus 0.54% per annum of the aggregate net assets of the Category I Series between $7.0 billion and $11.0 billion plus 0.49% per annum of the aggregate net assets of the Category I Series in excess of $11.0 billion Category I Series: Australia WEBS Index Series Austria WEBS Index Series Belgium WEBS Index Series Canada WEBS Index Series EMU WEBS Index Series France WEBS Index Series Germany WEBS Index Series Hong Kong WEBS Index Series Italy WEBS Index Series Japan WEBS Index Series Malaysia (Free) WEBS Index Series Mexico (Free) WEBS Index Series Netherlands WEBS Index Series Singapore (Free) WEBS Index Series Spain WEBS Index Series Sweden WEBS Index Series Switzerland WEBS Index Series United Kingdom WEBS Index Series USA WEBS Index Series Advisory Fee* for Category II Series: 0.74% per annum of the aggregate net assets of the Category II Series less than or equal to $2 billion plus 0.69% per annum of the aggregate net assets of the Category II Series between $2 billion and $4 billion plus 0.64% per annum of the aggregate net assets of the Category II Series greater than $6 billion Category II Series: Brazil (Free) WEBS Index Series Greece WEBS Index Series Indonesia (Free) WEBS Index Series Portugal WEBS Index Series South Africa WEBS Index Series South Korea WEBS Index Series Thailand (Free) WEBS Index Series Taiwan WEBS Index Series Turkey WEBS Index Series ________________________ * Pursuant to Section 4 of this Advisory Agreement, the fee rates for a Series set forth in this Schedule A will be reduced, possibly to zero, by the expenses of the Series. A-6 EX-99.P.1 4 0004.txt CODE OF ETHICS OF THE REGISTRANT EXHIBIT (P1) WEBS INDEX FUND, INC. CODE OF ETHICS Effective May, 2000 WEBS Index Fund, Inc. (the WEBS Fund) is confident that its directors, officers and employees act with integrity and good faith. The WEBS Fund recognizes, however, that personal interests may conflict with the WEBS Fund's interests where officers or directors: . know about present or future portfolio transactions; or . have the power to influence portfolio transactions; and . engage in securities transactions for their personal account(s). In an effort to prevent these conflicts and in accordance with Rule 17j-1 under the Investment Company Act of 1940, as amended, (the 1940 Act), the WEBS Fund has adopted this Code of Ethics (the Code) to prohibit transactions and conduct that create conflicts of interest, and to establish reporting requirements and enforcement procedures. (Definitions of underlined terms are ---------- included in Appendix A). I. About the WEBS Fund and the Advisor. The WEBS Fund is a registered investment company that consists of multiple investment portfolios (the Funds). Barclays Global Fund Advisors (the Advisor) is the investment advisor for the Funds. The Advisor manages the Funds' assets with a view to matching the performance of each Fund's corresponding benchmark index as closely as possible. In buying and selling securities for the WEBS Funds, the Advisor employs replication and representative sampling strategies. Because of these investment methodologies, the personal securities activities of the Directors and officers of the WEBS Fund are less likely to create a conflict of interest than they may in investment companies that employ performance-based or fundamental research-driven investment or other discretionary strategies. Consequently, the WEBS Fund has considered, but not adopted, many of the recommendations of the Investment Company Institute's Advisory Group on Personal Trading. II. About this Code of Ethics A. Who is covered by the Code? All WEBS Fund officers; ------------------ All Directors, both interested and independent; and Natural persons ---------- ----------- in a control relationship to a Fund who obtain information ------- concerning recommendations about the purchase or sale of any ---------------- security by a Fund (Natural Control Persons). ------- B. What rules apply to me? This Code sets forth specific prohibitions regarding securities ---------- transactions and sets out certain reporting requirements. For the reporting requirements that apply to you, please refer to Parts A - D, as indicated below. Independent Directors Part A --------------------- Interested Directors Part B -------------------- WEBS Fund Officers Part C ------------------ Natural Control Persons Part D ------- III. Statement of General Principles. In recognition of the trust and confidence placed in the WEBS Fund by its shareholders, and because the WEBS Fund believes that its operations should benefit its shareholders, the WEBS Fund has adopted the following general principles: A. The interests of our shareholders are paramount. Shareholder interests must be placed before your own. B. You must accomplish all personal securities transactions in a manner that avoids a conflict between your personal interests and those of the WEBS Fund and its shareholders. C. You must avoid actions or activities that allow you or your family to profit or benefit from your position with the WEBS Fund, or that bring into question your independence or judgment. IV. Prohibition Against Fraud, Deceit and Manipulation. You cannot, in connection with the direct or indirect purchase or sale of a security held or to be acquired by a Fund: ------------------------------- A. employ any device, scheme or artifice to defraud the Fund; B. make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; C. engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Fund; D. engage in any manipulative practice with respect to the Fund. V. Review and Enforcement of the WEBS Fund's Code. A. Appointment of a Review Officer. A review officer (the Review Officer) will be appointed by the Chairman of the Board of Directors (Chairman) to perform the duties described in this Section V. B. The Review Officer's Duties and Responsibilities. (1) The Review Officer shall notify each person who becomes an Access Person of the WEBS Fund and is required to report under ------------- the Code of their reporting obligations, no later than 10 days before the first quarter in which such person is obligated to begin reporting. (2) The Review Officer will, on a quarterly basis, compare all reported personal securities transactions with the Funds' ---------- completed portfolio transactions and a list of securities being ---------------- considered for purchase (i.e., trade lists) by the Advisor ----------------------- during the quarter to determine whether a Code violation may have occurred. The Review Officer may request additional information or take any other appropriate measure that the Review Officer decides is necessary to aid in this determination. Before determining that a person has violated the Code, the Review Officer must give the person an opportunity to supply explanatory material. (3) If the Review Officer finds that a Code violation may have occurred, the Review Officer must create and submit a written report regarding the possible violation, together with the confidential quarterly report and any explanatory material provided by the person, to the Chairman and legal counsel (Counsel) for the WEBS Fund. The Chairman and Counsel will determine whether the person violated the Code. (4) No person is required to participate in a determination of whether he or she has committed a Code violation or discuss the imposition of any sanction against himself or herself. (5) If required, the Review Officer will submit his or her own reports (as required) to an alternate Review Officer who will fulfill the duties of the Review Officer with respect to such reports. If a securities transaction of the Review Officer is ---------- under review for a possible violation, an officer of the WEBS Fund will act for the alternate Review Officer for purposes of this Section V. C. Exceptions. In the event that a person subject to the Code believes that he or she is unable to comply with certain provisions of the Code, the person must notify the Review Officer in writing, setting forth the reasons why he or she cannot comply with the Code. The Review Officer, in his or her discretion, may exempt this person from any such provisions of the Code if the Review Officer determines that (a) the services of the person are valuable to the WEBS Fund or the Advisor; (b) the failure to grant this exemption will result in an undue burden on the person or prevent the person from being able to render services to the WEBS Fund or the Advisor; and (c) granting the exemption does not detrimentally affect the shareholders of the WEBS Fund or the Advisor. The Review Officer will prepare a report documenting the nature of any exemption granted, the persons involved and the reasons for granting such exemption. Any person granted an exemption with respect to a particular transaction must furnish the Review Officer with a written report concerning that transaction within three days of the transaction. D. Sanctions. If the Chairman and Counsel determine that a person violated the Code pursuant to paragraph B.(3) above, disciplinary action may be taken and sanctions may be imposed. VI. Recordkeeping. The WEBS Fund will maintain records as set forth below. These records will be maintained in accordance with Rule 31a-2 under the 1940 Act and the following requirements. They will be available for examination by representatives of the Securities and Exchange Commission and other regulatory agencies. A. A copy of this Code and any other code adopted by the WEBS Fund which is, or at any time within the past five years has been, in effect will be preserved in an easily accessible place. B. A record of any Code violation and of any sanctions taken will be preserved in an easily accessible place for a period of at least five years following the end of the fiscal year in which the violation occurred. C. A copy of each Quarterly, Initial and Annual Report submitted under this Code, including any information provided in lieu of such reports, will be preserved for a period of at least five years from the end of the fiscal year in which it is made, for the first two years in an easily accessible place. D. A record of all persons, currently or within the past five years, who are or were required to submit reports under this Code, and a list of those who are or were responsible for reviewing these reports, will be maintained in an easily accessible place. E. A copy of each annual issues report and accompanying verification, as required by Section VIII.C of this Code, must be maintained for at least five years from the end of the fiscal year in which it is made, for the first two years in any easily accessible place. VII. Interrelationship with Investment Adviser's Code of Ethics. A. General Principle. A person who is both an access person of the WEBS Fund and an ------------- access person of the Advisor is only required to report under ------------- and otherwise comply with the Advisor's or principal underwriter's Rule 17j-1 code of ethics, provided that such code has been adopted pursuant to and in compliance with Rule 17j-1. Such persons, however, are still subject to the principles and prohibitions contained in Sections III and IV hereof. B. Procedures. The Advisor must: (1) Submit to the Board of Directors a copy of its code of ethics adopted pursuant to Rule 17j-1; (2) Promptly furnish to the WEBS Fund, upon request, copies of any reports made under its code of ethics by any person who is also covered by the WEBS Fund's Code; and (3) Promptly report to the WEBS Fund in writing any material amendments to its code of ethics, along with the certification described under Section VIII.C hereof. VIII. Miscellaneous. A. Confidentiality. The WEBS Fund will endeavor to maintain the confidentiality of all personal securities transactions reports and any other information filed with the WEBS Fund under this Code. Such reports and related information, however, may be produced to the Securities and Exchange Commission and other regulatory agencies. B. Interpretation of Provisions. The Board of Directors may from time to time adopt such interpretations of this Code as it deems appropriate. C. Annual Issues Report and Accompanying Certification. At least annually, each of the Review Officer, the Advisor, any other investment advisor to a Fund (including any sub- advisor) and the WEBS Fund's principal underwriter (if applicable) must provide the following to the Board: (1) a report that describes any issues that arose during the previous year under the applicable code of ethics and any procedures thereto, including any material code or procedural violations and any resulting sanctions; and (2) a certification that it has adopted procedures necessary to prevent its access persons from violating its code of ethics. -------------- The Review Officer, Advisor, other advisors and principal underwriter (if applicable) may report to the Board more frequently as they deem necessary or appropriate and shall do so as requested by the Board. D. Initial and Annual Acknowledgment. The Review Officer shall promptly provide all persons covered by this Code with a copy of the Code. In addition, all persons covered by this Code must complete the Acknowledgment attached as Appendix D hereto within 10 days of becoming an access person of ------------- the WEBS Fund and must submit an Acknowledgment to the Review Officer each year thereafter. Adopted: May 2, 2000 PART A Independent Directors I. Quarterly Reports Each quarter, you must report any securities transactions, as well as any ---------- securities accounts you established during the quarter. You must submit your report to the Review Officer no later than 10 days after the end of each calendar quarter. A Quarterly Report is included as Appendix B. If you had no reportable transactions and did not open any securities accounts during the quarter, you are still required to submit a report. Please note on your report that you had no reportable items during the quarter, and return it, signed and dated. You need not submit a Quarterly Report if the report would duplicate information contained in broker trade confirmations or account statements received by the WEBS Fund, provided that all required information is contained in the broker trade confirmations or account statements and is received by the Review Officer no later than 10 days after the end of the calendar quarter. Please see the Review Officer for more information. II. What Must Be Included In Your Quarterly Reports? (A) You must report all transaction in securities that: (i) you ---------- directly or indirectly beneficially own or (ii) because of the ------------ --- transaction, you acquire direct or indirect beneficial ownership. The -------------------- report must also list each securities account you established during the quarter in which any securities were held for your direct or indirect benefit. (B) Reports of individual securities transactions are required only if ---------- you knew at the time of the transaction or, in the ordinary course of fulfilling your official duties as a Director, should have known, that during the 15 day period immediately preceding or following the date of your transaction, the same security was purchased or sold, or was -------- being considered for purchase or sale, by a Fund. ------------------------------------- Note: The "should have known" standard does not: ---- . imply a duty of inquiry; . presume you should have deduced or extrapolated from discussions or memoranda dealing with a Fund's investment strategies; or . impute knowledge from your awareness of a Fund's portfolio holdings, market considerations, benchmark index or investment policies, objectives and restrictions. III. What May Be Excluded from Your Quarterly Reports? You are not required to include the following securities, transactions or accounts on your Quarterly Reports: (A) Purchases or sales effected for any account over which you have no direct or indirect influence or control. (B) Purchases you made solely with the dividend proceeds received in a dividend reinvestment plan or that are part of an automatic payroll deduction plan, where you purchased a security issued by your -------- employer. (C) Purchases effected on the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, as long as you ---------- acquired these rights from the issuer, and sales of such rights. (D) Purchases or sales which are non-volitional, including purchases or sales upon exercise of written puts or calls and sales from a margin account to a bona fide margin call. (E) Purchases of direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high ---- quality short-term debt instruments, including repurchase agreements, ----------------------------------- and shares issued by registered, open-end investment companies other than the WEBS Fund. You may include a statement in your report that the report shall not be construed as your admission that you have any direct or indirect beneficial ---------- ownership in a security included in the report. - --------- -------- PART B Interested Directors I. Initial and Annual Report of Securities Holdings and Accounts. You must provide the Review Officer with a complete listing of your securities accounts and any securities you beneficially own as of the date you first become ---------- ------------ --- subject to the Code's reporting requirements. You must submit the initial list within 10 days of the date you first became subject to the reporting requirements. Each following year, you must submit a revised list to the Review Officer showing your securities accounts and any securities you beneficially own ---------- ------------ --- as of a date no more than 30 days before you submit the list. An Initial Report and an Annual Report are included as Appendix C. II. Quarterly Reports. Each quarter, you must report any securities transactions, as well as any ---------- securities accounts you established during the quarter. You must submit your report to the Review Officer no later than 10 days after the end of each calendar quarter. A Quarterly Report is included as Appendix B. If you had no reportable transactions and did not open any securities accounts during the quarter, you are still required to submit a report. Please note on your report that you had no reportable items during the quarter, and return it, signed and dated. You need not submit a Quarterly Report if the report would duplicate information contained in broker trade confirmations or account statements received by the WEBS Fund, provided that all required information is contained in the broker trade confirmations or account statements and is received by the Review Officer no later than 10 days after the end of the calendar quarter. Please see the Review Officer for more information. III. What Must Be Included In Your Reports? You must report all transactions in securities that: (i) you directly or ---------- indirectly beneficially own or (ii) because of the transaction, you acquire ------------ --- direct or indirect beneficial ownership. You also must list on the report each -------------------- account in which any securities were held for your direct or indirect benefit. IV. What May Be Excluded from Your Reports? You are not required to include the following securities, transactions or accounts on your reports: (A) Purchases or sales effected for any account over which you have no direct or indirect influence or control. (B) Purchases you made solely with the dividend proceeds received in a dividend reinvestment plan or that are part of an automatic payroll deduction plan, where you purchased a security issued by your -------- employer. (C) Purchases effected on the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, as long as you ---------- acquired these rights from the issuer, and sales of such rights. (D) Purchases or sales which are non-volitional, including purchases or sales upon exercise of written puts or calls and sales from a margin account to a bona fide margin call. (E) Purchases of direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high ---- quality short-term debt instruments, including repurchase agreements, ----------------------------------- and shares issued by registered, open-end investment companies. You may include a statement in your report that the report shall not be construed as your admission that you have any direct or indirect beneficial ---------- ownership in a security included in the report. - --------- -------- PART C WEBS Fund Officers I. Initial and Annual Report of Securities Holdings and Accounts. You must provide the Review Officer with a complete listing of your securities accounts and any securities you beneficially own as of the date you first became ---------- ------------ --- subject to the Code's reporting requirements. You must submit the initial list within 10 days of the date you first became subject to the reporting requirements. Each following year, you must submit a revised list to the Review Officer showing your securities accounts and any securities you beneficially own ---------- ------------ --- as of a date no more than 30 days before you submit the list. An Initial Report and an Annual Report are included as Appendix C. II. Quarterly Reports. Each quarter, you must report any securities transactions, as well as any ---------- securities accounts you established during the quarter. You must submit your report to the Review Officer no later than 10 days after the end of each calendar quarter. A Quarterly Report is included as Appendix B. If you had no reportable transactions and did not open any securities accounts during the quarter, you are still required to submit a report. Please note on your report that you had no reportable items during the quarter, and return it, signed and dated. You need not submit a Quarterly Report if the report would duplicate information contained in broker trade confirmations or account statements received by the WEBS Fund, provided that all required information is contained in the broker trade confirmations or account statements and is received by the Review Officer no later than 10 days after the end of the calendar quarter. Please see the Review Officer for more information. III. What Must Be Included In Your Reports? You must report all transactions in securities that: (i) you directly or ---------- indirectly beneficially own or (ii) because of the transaction, you acquire ------------ --- direct or indirect beneficial ownership. You also must list on the report each -------------------- account in which any securities were held for your direct or indirect benefit. IV. What May Be Excluded from Your Reports? You are not required to include the following securities, transactions or accounts on your reports: (A) Purchases or sales effected for any account over which you have no direct or indirect influence or control. (B) Purchases you made solely with the dividend proceeds received in a dividend reinvestment plan or that are part of an automatic payroll deduction plan, where you purchased a security issued by your -------- employer. (C) Purchases effected on the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, as long as you ---------- acquired these rights from the issuer, and sales of such rights. (D) Purchases or sales which are non-volitional, including purchases or sales upon exercise of written puts or calls and sales from a margin account to a bona fide margin call. (E) Purchases of direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high ---- quality short-term debt instruments, including repurchase agreements, ----------------------------------- and shares issued by registered, open-end investment companies. You may include a statement in your report that the report shall not be construed as your admission that you have any direct or indirect beneficial ---------- ownership in a security included in the report. - --------- -------- PART D Natural Control Persons I. Initial and Annual Report of Securities Holdings and Accounts. You must provide the Review Officer with a complete listing of your securities accounts and any securities you beneficially own as of the date you first became ---------- ------------ --- subject to the Code's reporting requirements. You must submit the initial list within 10 days of the date you first became subject to the reporting requirements. Each following year, you must submit a revised list to the Review Officer showing your securities accounts and any securities you beneficially own ---------- ------------ --- as of a date no more than 30 days before you submit the list. An Initial Report and an Annual Report are included as Appendix C. II. Quarterly Reports. Each quarter, you must report any securities transactions, as well as any ---------- securities accounts you established during the quarter. You must submit your report to the Review Officer no later than 10 days after the end of each calendar quarter. A Quarterly Report is included as Appendix B. If you had no reportable transactions and did not open any securities accounts during the quarter, you are still required to submit a report. Please note on your report that you had no reportable items during the quarter, and return it, signed and dated. You need not submit a Quarterly Report if the report would duplicate information contained in broker trade confirmations or account statements received by the WEBS Fund, provided that all required information is contained in the broker trade confirmations or account statements and is received by the Review Officer no later than 10 days after the end of the calendar quarter. Please see the Review Officer for more information. III. What Must Be Included In Your Reports? You must report all transactions in securities that: (i) you directly or ---------- indirectly beneficially own or (ii) because of the transaction, you acquire ------------ --- direct or indirect beneficial ownership. You also must list on the report each -------------------- account in which any securities were held for your direct or indirect benefit. IV. What May Be Excluded from Your Reports? You are not required to include the following securities, transactions or accounts on your reports: (A) Purchases or sales effected for any account over which you have no direct or indirect influence or control. (B) Purchases you made solely with the dividend proceeds received in a dividend reinvestment plan or that are part of an automatic payroll deduction plan, where you purchased a security issued by your -------- employer. (C) Purchases effected on the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, as long as you ---------- acquired these rights from the issuer, and sales of such rights. (D) Purchases or sales which are non-volitional, including purchases or sales upon exercise of written puts or calls and sales from a margin account to a bona fide margin call. (E) Purchases of direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high ---- quality short-term debt instruments, including repurchase agreements, ----------------------------------- and shares issued by registered, open-end investment companies. You may include a statement in your report that the report shall not be construed as your admission that you have any direct or indirect beneficial ---------- ownership in a security included in the report. - --------- -------- V. Pre-Approval of Investments in IPOs or Limited Offerings. You may not directly or indirectly acquire beneficial ownership in any -------------------- securities in an IPO or limited offering without obtaining prior approval from --- ---------------- the Review Officer. The Review Officer must review each request for approval and record the decision regarding the request. Each such record must include the Review Officer's reasons supporting the decision. The WEBS Fund must maintain a record of any decision, and the reasons supporting the decision, to approve these investments for at least five years after the end of the fiscal year in which the approval is granted. APPENDIX A Definitions General Note The definitions and terms used in this Code of Ethics are intended to mean the same as they do under the 1940 Act and the other federal securities laws. If a definition hereunder conflicts with the definition in the 1940 Act or other federal securities laws, or if a term used in this Code is not defined, you should follow the definitions and meanings in the 1940 Act or other federal securities laws, as applicable. Access person means any director, trustee or officer of a fund or of a fund's - ------------- investment adviser; any employee of a fund or its investment adviser (or of any company in a control relationship to the fund or investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of securities by a fund ---------------- ---------- or whose functions relate to the making of any recommendations with respect to such purchases or sales; and any natural person in a control relationship to a ------- fund or its investment adviser, who obtains information concerning recommendations made to the fund with regard to the purchase or sale of ---------------- securities by the fund. - ---------- Beneficial ownership means the same as it does under Section 16 of the - -------------------- Securities Exchange Act of 1934, as amended and Rule 16a-1(a)(2) thereunder. You should generally consider yourself the "beneficial owner" of any securities in which you have a direct or indirect pecuniary (monetary) interest. In addition, you should consider yourself the beneficial owner of securities held by your spouse, your minor children, a relative who shares your home, or other persons by reason of any contract, arrangement, understanding or relationship that provides you with sole or shared voting or investment power. Control means the same as it does under Section 2(a)(9) of the 1940 Act. - ------- Section 2(a)(9) defines "control" as the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Ownership of 25% or more of a company's outstanding voting securities is presumed to give the holder of such securities control over the company. This presumption may be countered by the facts and circumstances of a given situation. High quality short-term debt instrument means any instrument that has a maturity - --------------------------------------- at issuance of less than 366 days and that is rated in one of the two highest rating categories by a nationally recognized statistical rating organization (e.g., Moody's Investors Service). Independent Director means a director of the WEBS Fund who is not an "interested - -------------------- person" of the WEBS Fund within the meaning of Section 2(a)(19) of the 1940 Act. Interested Director means a Director of the WEBS Fund who is an "interested - ------------------- person" of the WEBS Fund within the meaning of Section 2(a)(19) of the 1940 Act. IPO (i.e., initial public offering) means an offering of securities registered - --- under the Securities Act of 1933, as amended (the "Securities Act") the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. Limited offering means an offering that is exempt from registration under the - ---------------- Securities Act pursuant to Section 4(2), Section 4(6), Rule 504, Rule 505 or Rule 506 (e.g., private placements). Purchase or sale of a security includes, among other things, the writing of an - ------------------------------ option to purchase or sell a security. -------- Security has the meaning set forth in Section 2(a)(36) of the 1940 Act, except - -------- that it does not include direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short- ------------------- term debt instruments, including repurchase agreements, shares issued by - --------------------- registered open-end investment companies or securities of an issuer whose securities trade in a country or market in which a Fund does not invest. A security held or to be acquired by a Fund means: (i) any security that within ------------------------------- -------- the most recent 15 days is or has been held by the Fund or is being or has been ----------------- considered by the Advisor for purchase by the Fund and (ii) any option to - ---------- purchase or sell, and any security convertible into or exchangeable for, a security. - -------- A security is being purchased by a Fund from the time a purchase or sale program -------- --------------- has been communicated to the person who places buy and sell orders for the Fund until the program has been fully completed or terminated. A security is being considered for purchase by a Fund when the Advisor -------- ----------------------------- identifies a security as such. For purposes of this Code, the Advisor considers securities on its "trade lists" as those "being considered for purchase." WEBS Fund officer means any person lawfully elected by the Board and authorized - ----------------- to act on behalf of the WEBS Fund. APPENDIX B Quarterly Report Name of Reporting Person: ___________________________ Calendar Quarter Ended: ______________ Date Report Due: ______ 10, ____ Date Report Submitted:_____________
Securities Transactions - ------------------------------------------------------------------------------------------------ Principal Amount, Name of Name of No. of Maturity Broker, Issuer Shares Date and Dealer or Date of and (if Interest Type of Bank Transaction Title of applicable) Rate Transaction Price Effecting Security (if Transaction applicable) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
If you have no securities transactions to report for the quarter, please check here. If you do not want this report to be construed as an admission that you have beneficial ownership of one or more securities reported above, please describe below and indicate which securities are at issue. _____ _______________________________________________________________________________ _______________________________________________________________________________ _______________ Securities Accounts If you established a securities account during the quarter, please provide the following information:
- ----------------------------------------------------------------------------------------------------------- Name of Broker, Dealer or Bank Date Account was Name(s) on and Type of Established Account - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
If you did not establish a securities account during the quarter, please check here. I certify that I have included on this report all securities transactions and accounts required to be reported pursuant to the Code of Ethics. Signature: ____________________ Date: __________________ APPENDIX C Initial and Annual Reports of Securities and Accounts INITIAL HOLDINGS REPORT Name of Reporting Person: _________________ Date Person Became Subject to the Code's Reporting Requirements: ________ Information in Report Dated As Of: ____________ Date Report Due: __________ Date Report Submitted: __________
Securities Holdings - --------------------------------------------------------------------------------------------------------- Name of Issuer and No. of Shares Principal Amount, Maturity Date and Interest Title of Security (if applicable) Rate (if applicable) - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
If you have no securities holdings to report, please check here. If you do not want this report to be construed as an admission that you have beneficial ownership of one or more securities reported above, please describe below and indicate which securities are at issue. ________________________________________________________________________________ ________________________________________________________________________________ ______
Securities Accounts - -------------------------------------------------------------------------------------------------- Name of Broker, Dealer or Bank Name(s) on and Type of Account - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
If you have no securities accounts to report, please check here. I certify that I have included on this report all securities holdings and accounts required to be reported pursuant to the Code of Ethics. Signature: ____________________ Date: __________________ APPENDIX C CONTINUED ANNUAL HOLDINGS REPORT Name of Reporting Person:________________________________ Information in Report Dated As of:____________ Date Report Due: __________ Date Report Submitted: _____________ Calendar Year Ended: December 31, _____
Securities Holdings - ----------------------------------------------------------------------------------------------------------- Name of Issuer and No. of Shares Principal Amount, Maturity Date and Interest Rate Title of Security (if applicable) (if applicable) - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
If you have no securities holdings to report for the year, please check here. If you do not want this report to be construed as an admission that you have beneficial ownership of one or more securities reported above, please describe below and indicate which securities are at issue. ________________________________________________________________________________ ________________________________________________________________________________ __________________
Securities Accounts - ---------------------------------------------------------------------------------------------------------- Name of Broker, Dealer or Bank Date Account Was Name(s) on and Type of Account Established - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
If you have no securities accounts to report for the year, please check here. I certify that I have included on this report all securities transactions and accounts required to be reported pursuant to the Code of Ethics. Signature: ____________________ Date: __________________ APPENDIX D Acknowledgment TO: Review Officer RE: Acknowledgment of Code of Ethics - -------------------------------------------------------------------------------- - ------------------------------------------ Initial Acknowledgment: Please check here if this is an initial acknowledgment. I CERTIFY THAT (1) I HAVE RECEIVED, READ AND UNDERSTAND THE CODE OF ETHICS, (2) I AM AWARE THAT I AM SUBJECT TO THE PROVISIONS OF THIS CODE, (3) I WILL COMPLY WITH THIS CODE, AND (4) I WILL REPORT ALL HOLDINGS, TRANSACTIONS AND ACCOUNTS THAT I AM REQUIRED TO REPORT PURSUANT TO THIS CODE. - -------------------------------------------------------------------------------- - --------------------------------------------- Annual Acknowledgment: Please check here if this is an annual acknowledgment. I CERTIFY THAT (1) I HAVE RECEIVED, READ AND UNDERSTAND THE CODE OF ETHICS, (2) I AM AWARE THAT I AM SUBJECT TO THE PROVISIONS OF THIS CODE, (3) I HAVE COMPLIED WITH THIS CODE AT ALL TIMES DURING THE PREVIOUS CALENDAR YEAR, AND (4) I HAVE, DURING THE PREVIOUS CALENDAR YEAR, REPORTED ALL HOLDINGS, TRANSACTIONS AND ACCOUNTS THAT I AM REQUIRED TO REPORT PURSUANT TO THIS CODE. - -------------------------------------------------------------------------------- - -------------------------------------------- Name (print): ________________________ Position: ____________________________ Signature: ___________________________ Date Submitted: ______________________ Date Due: ___________________________ EX-99.P.2 5 0005.txt CODE OF ETHICS OF BARCLAYS GLOBAL FUND ADVISORS EXHIBIT (P.2) Barclays Global Investors, N.A. And its Subsidiaries: Barclays Global Funds Advisors Barclays Global Investors Services CODE OF ETHICS Introduction Barclays Global Investors, N.A. and its subsidiaries Barclays Global Funds Advisors (BGFA) and Barclays Global Investors Services (BGIS), collectively referred to as "BGI", have adopted the following Code of Ethics regarding personal securities transaction policies and procedures intended to prevent their US officers, directors and employees from engaging in any fraudulent or manipulative acts with respect to accounts managed or advised by BGI as set forth in SEC 17 CFR 270 Rule 17j-1, SEC 17 CFR 275 Rule 204-2 and OCC Regulation 12 CFR 12.7. Policies and Procedures on Insider Trading and Chinese Walls are included in Appendix A. Definitions "Securities" are defined as any SEC registered or privately placed equity and fixed income security, future or option contract, or other related commodity derivative investment. This includes closed-end mutual funds, unit investment trusts, physical-form securities, and exchange traded funds. "Securities" do not include US Treasuries and other direct obligations of the US Government, banker's acceptance, commercial paper, and shares of registered open- end investment companies. "Employee" include any US directors, officers and employees of BGI and his/her spouse, domestic partner, minor children, a relative who shares the employee's home or other persons by reason of any contract, arrangement, understanding or relationship that provides to the employee with sole or shared voting or investment powers. "Personal Account" includes any securities account or portfolio in which securities are held for the employee in which the employee has a direct or indirect pecuniary (monetary) interest. The term includes IRA and 401(k) accounts in which securities can be purchased or sold. Prohibited Trading Activities Insider Trading - --------------- . All employees are prohibited from engaging in insider trading or tipping. Insider trading occurs when a personal securities transaction occurs on the basis of or while in possession of material, nonpublic information. Information is considered material if it could reasonably affect the employee's decision to invest (or not to invest) in a security. Nonpublic information is that which is generally not available to the ordinary 1 investors in the marketplace. Refer to Appendix A for further details on insider trading. Parallel Trading, Front Running and Shadowing Restrictions - ------------------------------------------------------------ . All employees are prohibited from conducting personal securities transactions that are considered parallel trading, front running and shadowing. Shadowing and parallel trading occur when an employee observes a BGI trade or trading pattern and places the same (or similar) trade in his/her account or passes the information to others inside or outside of the company. Front running occurs when an employee uses (or passes to others who use the information) advance knowledge of a BGI trade to enter into a personal transaction in the same security ahead of BGI's order and to capitalize on the impact of the BGI order. Restricted Trading Activities Trading in Barclays PLC Securities and Securities Underwritten by Barclays' - --------------------------------------------------------------------------- Affiliates - ---------- . All Members of the Board of Directors of BGI, members of the Management Committee, employees reporting directly to BGI's Chief Financial Officer and all employees within the U.S. and Global Finance and Treasury Groups are prohibited from trading in the securities of Barclays PLC during the period from the end of the accounting year or half year until the relevant results are announced, i.e., from January 1 to the preliminary results announcement in February and from July 1 to the interim results announcement in August. During other times, these individuals must pre- clear trades in Barclays PLC securities in accordance with the Barclays PLC policy. . Access Persons are not permitted to purchase securities underwritten by Barclays' affiliates as manager or co-manager for a period of sixty days after an offering is commenced. Requirements for All Employees Reporting of Personal Accounts and Securities Transactions - ----------------------------------------------------------- . All employees must disclose all personal accounts to US Compliance and must authorize US Compliance to receive duplicate trade confirmations and account statements. . Upon employment, new employees must sign a document stating that they understand and agree to abide by BGI's personal trading requirements, restrictions and prohibitions. Annual Certification - -------------------- . All employees must provide an annual certification of their personal accounts and securities holdings. . All employees must certify at least annually their understanding and compliance with the Code of Ethics. 2 60 Day Holding Period - ---------------------- . Employees are required to hold securities including options and futures for a minimum of 60 days, and to avoid short-term trading practices. US Compliance may pre-approve exceptions to the 60 day holding period. Pre-Clearance Prior to Transactions in IPOs, Private Placements, Options, and - ----------------------------------------------------------------------------- Futures - ------- . All employees must obtain pre-clearance for transactions in IPOs, private placements, options and futures. For options and futures, the employee must execute the transaction by the end the next business day or request another pre-clearance. Blackout Periods - ---------------- . Employees are restricted from trading securities in selected indexes during a designated "blackout" period when the specific index is undergoing a major scheduled reconstitution. US Compliance will notify employees of the "blackout" periods which will include the period 15 days before and after a major scheduled index reconstitution. Additional Requirements for Access Persons Access persons include all employees whose Group 1) participates in making securities purchase and sell recommendations or 2) may have access to timely and material information concerning BGI's securities transactions. Access Persons also include the Boards of Directors and officers of BGFA and BGIS. US Compliance will identify BGI's Access Persons who are required to submit reports under this Code of Ethics and inform them of their reporting and securities preclearance obligations. Reporting of Securities Transactions and Holdings - ------------------------------------------------- . All Access Persons must provide a listing of securities holdings to US Compliance within 10 calendar days from when a personal account is opened and provide US Compliance with transaction information until such time as US Compliance receives duplicate confirmations and statements. . All newly hired Access Persons must provide a complete listing of securities holdings on their initial day of employment. Access Persons Requiring Pre-clearance by Management and US Compliance - ---------------------------------------------------------------------- All Access Persons, whose Group directly participates in making securities purchase or sell recommendations or has timely and material knowledge of BGI's securities transactions, must pre-clear their personal securities transactions with their Group manager in addition to pre-clearance by US Compliance. The manager will verify that there is no timely or material knowledge of trades pending for specific securities within the Access Person's Group. These Groups include Portfolio Management, Trading, Trading Operations, Client Order Management, Transition Services, Index Research Group, Alpha Strategy Group and other Groups identified by US Compliance from time to time. 3 Access Persons Requiring Pre-clearance from US Compliance Only - -------------------------------------------------------------- . The following Groups have access to information relating to BGI's securities transactions. Employees within these Groups must pre-clear their securities transactions with US Compliance. These Groups include Internal Audit, US Compliance, US Risk Management, the US Executive Committee, US members of the Management Committee, BGFA and BGIS Board of Directors and officers. In addition, all BGI staff who have access to the following systems must also pre-clear trades with US Compliance: Landmark, Bulk Console, Beacon, Bidbook, Fifus, TOC, ITOC, TSC, IntelProd, Quantex and any other systems identified by US Compliance from time to time. Pre-clearance authorization is valid until the next day's closing of the relevant market. Access Persons are not required to pre-clear transactions in accounts managed by a registered investment advisor for which full discretion has been granted. Documentation of such an arrangement must be provided and an exemption must be obtained from US Compliance who will confirm the discretionary arrangement. Pre-clearance is not required for transactions in automatic dividend reinvestment plans, periodic stock purchase plans or in selling or exercising rights obtained as a shareholder in an issue. Monitoring of Personal Securities Transactions Post Trade Review - ----------------- . US Compliance will review personal securities transactions to identify violations of the Code of Ethics. Violations to this policy will be reviewed by management and disciplinary action may be taken up to and including dismissal. Adoption and Approval of BGI Code of Ethics US Compliance will present the BGI Code of Ethics for approval by the Board of Directors or Trustees of all funds for which BGFA or BGIS is the investment advisor. This will be done at the initiation of investment advisory services provided by BGFA or BGIS to the fund and no later than six months after a material change has been adopted. In connection with each approval, BGFA and BGIS will certify to the board that they have adopted procedures reasonably necessary to prevent the Access Persons from materially violating the BGI Code of Ethics. . BGFA and BGIS will provide to the fund's board a written report describing issues, material violations and sanctions, and will certify to the board that procedures have been adopted which are intended to prevent Access Persons from violating the BGI Code of Ethics. This report and certification will be submitted Code of Ethics at least annually. RecordKeeping Requirements BGI will follow the recordkeeping practices outlined below: 4 . A copy of the Code of Ethics that is in effect, or at any time within the past five years was in effect, will be maintained in an easily accessible place. . A record of any violation of the Code of Ethics, and of any action taken as a result of the violation, will be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs. . A copy of each personal account statement, trade confirmation and any information provided in lieu of a report will be retained for five years, two years in an easily accessible location. . A record of all persons, currently or within the past five years, who are or were required to make reports, and who are or were responsible for reviewing these reports will be retained in an easily accessible location. . A copy of each report submitted to a fund board pursuant to the Code of Ethics will be maintained for at least five years after the end of the fiscal year in which it is made, two years in an easily accessible location. . A record of any decision to approve and the reasons supporting the decision to approve the acquisition by employees of IPOs and private placements will be maintained for at least five years after the end of the fiscal year in which the approval is granted. 5 APPENDIX A INSIDER TRADING AND CHINESE WALL POLICY A. Introduction ------------ The continued success of Barclays depends on its relationships with its customers and on its well-deserved reputation as an institution grounded in a tradition of integrity and ethical conduct in all of its dealings. To maintain this high standard and, thus, Barclays' reputation in today's regulatory and business climate, requires strict observance of ethical behavior as well as of legal obligations created by the Federal securities laws and specific contractual undertakings of Barclays such as confidentiality agreements. This Policy emphasizes generally the importance of adhering to professional and ethical conduct and provides specific policies and, in certain instances, procedures, with respect to Personal Securities Transactions and Chinese Walls. These guidelines will help employees meet Barclays' contractual, ethical and statutory obligations. BGI employees who violate these policies and procedures will be subject to such disciplinary action as management deems appropriate, including a letter of censure or suspension, or removal from office, or summary termination of employment. B. Insider Trading --------------- All employees must strictly comply with Federal, provincial or state securities laws in transactions on behalf of Barclays and in their own personal transactions. Such securities laws prohibit trading on material non-public information ("Insider Trading") or communicating such information to others who may trade on it ("Tipping"). What constitutes material non-public information ("Inside Information") must be determined on the basis of all pertinent circumstances. First, the information must be material. Material information is generally defined as (i) information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or (ii) information that is reasonably certain to have a substantial effect on the price of a company's securities. Second, the information must be non-public. Information that has been communicated to the market place is generally public and, therefore, not Inside Information. For example, information found in a filing or a report made with the Securities and Exchange Commission or appearing in newspapers, industry journals, financial newsletters or other publications would be considered public, although information obtained by word-of-mouth or through rumors would not necessarily be public. Information that is known only inside a company or to a limited number of outsiders such as accountants, bankers, financial advisors or attorneys, is not public. The following information will generally be Inside Information if not publicly known: (a) information concerning a company, including information concerning its business, financial matters and management, such as changes in earnings or dividends, significant technical achievements, important discoveries of natural resources, the obtaining 6 or losing of major contracts, or changes in management; and (b) information concerning a company's securities, including the market for a security or its terms, such as a prospective tender offer, merger or acquisition, prospective block trade, prospective private placement or public offering, impending stock dividend or stock split or proposed recapitalization. A BGI employee who had any of the types of Inside Information described above would be guilty of Tipping if he or she (a) either communicated the Information to another person or (b) simply told another person, without explanation, to buy or sell the securities of that company, and the other person did indeed purchase such securities as a result of such Tipping. Similarly, a staff member, possessing Inside Information, would be guilty of Insider Trading if he or she bought or sold securities for his or her personal account, or for BGI's account, based on that Inside Information. C. Confidentiality And Chinese Wall Policy --------------------------------------- Beyond simply complying with the letter of the law, employees are expected to understand and observe the highest professional and ethical standards in conducting BGI's business. All BGI employees have a duty to respect the confidential nature of information received from customers and to use that information only for the purpose for which it is provided, whether or not that information is Inside Information and regardless of the basis on which confidentiality is required - whether it be statutory requirements, ethical considerations or contractual obligations. Maintaining strict standards with respect to the confidentiality of information will accomplish several goals. It will enable BGI to (a) preserve its reputation for corporate integrity, (b) maintain compliance with the Federal securities laws, and (c) reduce the occurrence of conflicts of interest both within divisions (and even within teams) as well as between separate operating entities of Barclays. Indeed, maintaining strict standards of confidentiality will enable BGI to serve the needs of its customers more effectively. In certain areas Chinese Walls will be, or have been, established to ensure that employees have adopted procedures to safeguard the confidentiality of information. The term "Chinese Wall" is a familiar one to most people. However, what it means or how it actually operates in the workplace is often misunderstood. A Chinese Wall is a barrier that controls or restricts the flow of confidential information. It is essentially a system or set of procedures designed to segregate information and prevent the communication of that information between certain people or operating areas. The procedures that comprise each Chinese Wall may vary depending on the location of the particular wall or the times when it is operative. A Chinese Wall may need to be in place only at certain times or on a constant basis. A Chinese Wall may need to be located between various operating areas, between divisions, between teams within a division and even, temporarily, between staff who are on the same team but assigned to different accounts. The existence and proper maintenance of Chinese Walls will allow Barclays to serve simultaneously the needs of customers who have competing interests. For the most part, the maintenance of Chinese Walls will reduce the occurrence of conflicts of interest within Barclays as well as reduce the possibility of abuse of Inside Information. 7 Regardless of the existence of specific Chinese Walls, the following procedures should be observed by all employees at all times: 1. Never communicate confidential information to anyone outside Barclays except for communications with auditors, approved counsel or other experts who have been specifically engaged for certain matters. Communicate confidential information inside Barclays only on a need-to- know basis. 2. Do not communicate confidential information through a Chinese Wall unless permission is obtained from the appropriate designated manager or the Manager of Compliance. 3. Never discuss confidential information in a public place such as an elevator, a restaurant or a hallway. 4. Always log off your computer before leaving the area for any length of time and at the end of the day. 5. Use systems and information solely for authorized activities. 6. Notify a supervisor of any unauthorized use or misuse of the system or information or any activity that appears questionable. 7. Maintain the secrecy of passwords and other system access identification. 8. Prevent others from using a terminal to which another employee has logged on until that employee has logged off. 9. Keep documents and papers containing confidential information in locked file cabinets or other secured facilities. Do not leave papers and documents containing confidential information exposed on desks or credenzas. 8 -----END PRIVACY-ENHANCED MESSAGE-----